Accounting Question

Please complete Exam #3 – Ch 7-8

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Chapter 8
Accounting for and Presentation of
Stockholders’ Equity
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
1-2
LO 1
Stockholders’ Equity
Section of Balance Sheet
Stockholders’ Equity
Paid-in capital
Common stock $2 par, 244,800 shares
issued and 243,800 outstanding
Additional paid-in capital
Preferred stock, 5,000 shares outstanding
Total paid-in capital
Retained earnings
Total paid-in capital and retained earnings
Less: cost of treasury stock (1,000 shares)
Accum. Other comprehensive income
Total stockholders’ equity
McGraw-Hill/Irwin
$
$
489,600
3,322,400
500,000
4,312,000
2,828,000
7,140,000
(12,000)
50,000
7,178,000
8-2
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-3
Equity
◼ Stockholders’ Equity = claim of entity’s
owners (stockholders) on net assets
◼ Assets – Liabilities = Equity
◼ Two types of equity:
◼ Retained earnings – entity’s cumulative net
income over life of entity, less dividends
◼ Earned capital
◼ Paid-in Capital – amount invested by s/h’s
◼ Contributed capital
McGraw-Hill/Irwin
3
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1-4
Equity Terminology
◼ Stockholders’ Equity
◼ Shareholders’ Equity
◼ Owners’ Equity
◼ Equity
◼ Net Assets
◼ Fund Balance
◼ John Doe’s capital (sole proprietorship)
◼ Partners’ capital (partnership)
◼ All mean the same thing
McGraw-Hill/Irwin
4
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1-5
Nature of Stockholders’
Equity
Less
Total Stockholders’ Equity
Treasury
Stock
Paid-in Capital
Preferred
Stock
Par or
Stated
Value
McGraw-Hill/Irwin
Additional
Paid-In
Capital
Retained
Earnings
Common
Stock
Par or
Stated
Value
Additional
Paid-In
Capital
8-5
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-6
Stockholders’ Equity
◼ 1) Retained Earnings (earned capital)
◼ 2) Paid-In Capital (contributed capital)
◼ Common Stock
◼ Par Value
◼ Additional Paid-In Capital
◼ Preferred Stock
◼ Par Value
◼ Additional Paid-In Capital
◼ 3) Treasury Stock (contra-equity)
McGraw-Hill/Irwin
6
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-7
LO 1
Stockholders’ Equity
Section
Stockholders’ Equity
Paid-in capital
Common stock $1 par, 100,000 shares
issued and 95,000 outstanding
Additional paid-in capital
Total paid-in capital
Retained earnings
Total paid-in capital and retained earnings
Less: cost of treasury stock (5,000 shares)
Total stockholders’ equity
McGraw-Hill/Irwin
$
100,000
2,800,000
2,900,000
1,400,000
4,300,000
(150,000)
$ 4,150,000
8-7
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-8
Disclosure for Stock
Authorized – maximum # allowed by charter;
changes require s/h approval
◼ Issued – # issued by corp to stockholders
◼ Treasury stock – firm’s own stock that has been
bought back by stockholders (contra-equity,
reduces issued stock)
◼ Outstanding – # issued less any treasury stock
bought back by corp
◼ Example: 5,000 shares authorized, but only
4,000 shares issued less 1,000 shares treasury
stock = 3,000 shares outstanding
8
McGraw-Hill/Irwin
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
◼
1-9
Disclosure for Stock
LO 1
Issued shares
that have been
reacquired.
Treasury
Issued shares
include
outstanding
Issued
and treasury
Shares
shares.
Unissued
Outstanding
Authorized
Shares
McGraw-Hill/Irwin
Issued shares that
are owned by
stockholders.
8-9
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-10
Common Stock
◼ Have claim to all assets that remain after
liabilities & preferred stock claims have
been satisfied
◼ No entitlement to receive dividends
◼ Right & obligation to elect board members
◼ Approve changes to corp. charter, &
approve mergers & acquisitions
◼ May have a preemptive right to buy more
McGraw-Hill/Irwin
10
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1-11
Common Stock
◼ Par Value (stated value) – nominal
amount, usually $1-$2, or less
◼ Balance sheet presentation:
◼ Common stock, $1 par value, 40,000 shs
issued = $40,000 (amount on Bal Sheet)
◼ Common stock, $2 par value, 30,000 shs
issued = $60,000 (amount on Bal Sheet)
◼ Common stock, $0.0375 par value, 323M shs
issued= $12,112,500 (amt on Bal Sheet)
McGraw-Hill/Irwin
11
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1-12
Preferred Stock
◼ No voting privileges, but less risky than
com. stock; required dividend is a stated
% of par (6% of $100 par = $6 div/yr/sh)
◼ Redemption (liquidation) value must be
met before common s/h receive anything
◼ Cumulative dividend – if any dividend
pmts are not made to preferred s/h,
dividends in arrears must be met before
common s/h can get paid any dividends
McGraw-Hill/Irwin
12
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1-13
Preferred Stock (cont’d)
◼ Participating dividend – after common s/h
have received a dividend, further
dividends are shared by preferred and
common s/h in a specified ratio
◼ Callable – redeemable w/ premium over
par
◼ Convertible – may be exchanged for
common stock at a conversion rate
McGraw-Hill/Irwin
13
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-14
Preferred Stock Dividends
◼ Ex #1:
◼ 6% $100 par cumulative preferred stock,
50,000 shs authorized, issued, &
outstanding. Dividend payable
semiannually, no dividends in arrears.
◼ Semiannual dividend payout:
◼ 6% x $100 x 50,000 shs outstanding x ½ yr
= $150,000
McGraw-Hill/Irwin
14
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-15
Preferred Stock Dividends
◼ Ex #2:
◼ $4.50, $75 par cumulative preferred stock,
50,000 shs authorized, issued, & 40,000
shs outstanding (10,000 shs treasury
stock). Dividend payable quarterly, no
dividends in arrears.
◼ Quarterly dividend payout:
◼ $4.50 x 40,000 shs outstanding x 1/4 yr =
$45,000
McGraw-Hill/Irwin
15
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-16
Preferred Stock Dividends
◼ Ex #3:
◼ 8%, $50 par cumulative preferred stock,
100,000 shs authorized, 60,000 shs
issued, & 54,000 shs outstanding (6,000
shs treasury stock). Dividend payable
annually, & dividends were not paid in
prior two years.
◼ Current year dividend payout:
◼ 8% x $50 x 54,000 shs outstanding x 3 yrs =
$648,000
McGraw-Hill/Irwin
16
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-17
LO 2
Common Stock vs
Preferred Stock
◼ Voting rights – common yes, preferred no
◼ Risk – common higher, preferred lower
◼ Dividend preference – preferred stock is
required (arrears), common is optional
◼ Liquidity preference – preferred stock gets
redemption value, common gets leftover
McGraw-Hill/Irwin
8-17
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-18
LO 2
Preferred Stock Versus
Bonds
Comparison of Preferred Stock and Bonds Payable
Similarities
Preferred Stock
Bonds Payable
Dividend is usually fixed
Interest is fixed claim to
claim to income
income
Redemption value is fixed
Maturity value is a fixed claim
claim to assets
to assets
Is usually callable and may be
Is usually callable and may be
convertible
convertible
Differences
Dividend may be skipped,
Interest must be paid or firm
even if it must be caught up
faces bankruptcy
before payments to common
Principal must be paid at
No maturity date
maturity
Dividends are not an
Interest is a tax deductible
expense and are not tax
expense
8-18
McGraw-Hill/Irwin
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
deductible
1-19
Cash Dividends
LO 3
Dividends must be
declared by the board
of directors before
they can be legally paid.
The company must have
sufficient cash and
retained earnings
to pay the dividend.
The company is not legally required to
pay dividends, but once declared, a
legal liability (Dividends Payable) is created.
Dividends are not an Expense! They are a
reduction of Retained Earnings on the BS.
McGraw-Hill/Irwin
8-19
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-20
Stock Dividends
LO 4
Distribution of additional shares of stock to
existing stockholders (proportionately).
No change in par value
of stock or in total
stockholders’ equity.
Stockholders retain
percentage ownership in the
company (preemptive right)
Reason for stock dividends:
Maintain loyalty of stockholders when corp does
not have enough cash to pay a cash dividend.
McGraw-Hill/Irwin
8-20
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-21
Stock Dividends
◼ Ex:
◼ 5% stock dividend → issuance of 5%
more of previously owned shares
◼ If stockholder owned 100 shares already,
then the 5% stock dividend would give
him an additional 5 shares, for 105 total
◼ (100 x .05 = 5 shares additional)
McGraw-Hill/Irwin
21
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-22
Stock Split
LO 4
Distribution of additional shares of stock to
existing stockholders while reducing the par
value proportionately
Par value decreases
# of shares outstanding
increases
Reason for stock split:
➢ Lower market price of common stock
to appeal to more buyers
➢ Thwart a hostile takeover
McGraw-Hill/Irwin
8-22
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-23
Stock Split
◼ Ex #1:
◼ 10,000 shares of $6 par stock = $60,000
value of stock on balance sheet
◼ Stock split 2:1
◼ 20,000 shares of $3 par stock = $60,000
new value of stock on balance sheet
◼ Total stock value does not change, but the
par value decreased by 1/2 and the # of
shares doubled (x 2)
McGraw-Hill/Irwin
23
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-24
Stock Split
◼ Ex #2:
◼ 25,000 shares of $6 par stock = $150,000
value of stock on balance sheet
◼ Stock split 3:1
◼ 75,000 shares of $2 par stock = $150,000
new value of stock on balance sheet
◼ Total stock value does not change, but the
par value decreased by 1/3 and the # of
shares tripled (x 3)
McGraw-Hill/Irwin
24
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-25
LO 2
Retained Earnings
Represents the cumulative earnings of a
corporation less the cumulative dividends paid
since the business started operations.
Retained earnings are NOT cash!
Beg RE + net inc (loss) – dividends = End RE
Beg Ret Earnings $100,000
+ Net Income $50,000
– Dividends Paid ($25,000)
McGraw-Hill/Irwin
8-25
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-26
LO 2
Retained Earnings
Beginning Retained Earnings $2,600,000
+ Net Income $390,000
– Cash Dividends – Preferred Stock ($30,000)
– Cash Dividends – Common Stock ($60,000)
– 2% stock dividend on Common stock ($72,000)
= Ending Retained Earnings $2,828,000
McGraw-Hill/Irwin
8-26
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-27
LO 2
Additional Paid-in Capital
• Represents the excess of the amount
received from the sale of preferred or
common stock over par (or stated)
value.
• Cash Paid less Par Value =
Additional Paid-in Capital
• May also be called Capital in Excess of
McGraw-Hill/Irwin
8-27
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-28
LO 2
Additional Paid-in Capital
• Ex #1:
• 5,000 shs issued at $1 par value were
sold for $6,000 cash
• Balance Sheet presentation:
• Common stock, $1 par value, 5,000
shs issued = $5,000 (on Bal Sheet)
• Additional Paid-in-Capital = $1,000
($6,000 cash paid – $5,000 par)
McGraw-Hill/Irwin
8-28
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-29
LO 2
Additional Paid-in Capital
• Ex #2:
• 3,000 shs issued at $2 par value were
sold for $8,000 cash
• Balance Sheet presentation:
• Common stock, $2 par value, 3,000
shs issued = $6,000 (on Bal Sheet)
• Additional Paid-in-Capital = $2,000
($8,000 cash paid – $6,000 par)
McGraw-Hill/Irwin
8-29
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-30
Accumulated Other
Comprehensive Income
LO 5
A new category in stockholders’ equity called
accumulated other comprehensive income (loss)
includes the following unrealized changes to
stockholders’ equity:
1. Cumulative foreign currency translation adjustments;
2. Unrealized gains or losses on available-for-sale
investments;
3. Changes during the period in certain pension or other
postretirement benefit items; and
4. Gains or losses on certain derivative instruments.
McGraw-Hill/Irwin
8-30
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-31
Treasury Stock
◼ Shares of a firm’s previously issued stock
that have been reacquired by the firm
◼ Contra-equity account (negative balance)
◼ Reasons to purchase treasury stock:
◼ Low market price, & company wants to shrink
the supply of its own stock in the market
◼ Thwart a hostile takeover by another corp.
◼ Reduces # of shares of stock issued
◼ Issued – treasury stock = outstanding
McGraw-Hill/Irwin
31
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-32
Nature of Stockholders’
Equity
Less
Total Stockholders’ Equity
Treasury
Stock
Paid-in Capital
Preferred
Stock
Par or
Stated
Value
McGraw-Hill/Irwin
Additional
Paid-In
Capital
Retained
Earnings
Common
Stock
Par or
Stated
Value
Additional
Paid-In
Capital
8-32
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-33
LO 1
Stockholders’ Equity
Section of Balance Sheet
Stockholders’ Equity
Paid-in capital
Common stock $2 par, 244,800 shares
issued and 243,800 outstanding
Additional paid-in capital
Preferred stock, 5,000 shares outstanding
Total paid-in capital
Retained earnings
Total paid-in capital and retained earnings
Less: cost of treasury stock (1,000 shares)
Accum. Other comprehensive income
Total stockholders’ equity
McGraw-Hill/Irwin
$
$
489,600
3,322,400
500,000
4,312,000
2,828,000
7,140,000
(12,000)
50,000
7,178,000
8-33
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-34
LO 7
McGraw-Hill/Irwin
Statement of Changes in
Stockholders’ Equity
8-34
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-35
Not-for-Profit and
Governmental Organizations
◼ No owners in these organizations
◼ Owners’ equity is called Fund Balance
◼ Operating (current) Fund
◼ Restricted Fund
◼ Endowment Fund
◼ Loan Fund
◼ Plant Fund
◼ Debt Retirement Fund
◼ Same concept as equity
McGraw-Hill/Irwin
35
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-36
Proprietorships and
Partnerships
LO 8
Proprietorships (single owner) and partnerships
(two or more owners) do not issue stock.
Proprietorship
Owner’s equity:
John Jones, Capital
John Jones, Drawing
Owners equity:
Partnership
$ 562,500
(41,200)
$ 521,300
Drawing accounts are
distributions to owners
similar to dividends.
Owners’ equity
John Jones, Capital
John Jones, Drawing
Ralph Smith, Capital
Ralph Smith, Drawing
Mary West, Capital
Mary West, Drawings
Owners’ equity:
$ 125,000
(12,000)
125,000
(12,000)
250,000
(20,000)
$ 456,000
Net income and drawing accounts are transferred to
capital accounts at the end of the period.
McGraw-Hill/Irwin
8-36
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-37
End of Chapter 8
McGraw-Hill/Irwin
8-37
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 7
Accounting for and Presentation of
ST & LT Liabilities
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
1-2
LO 1
Nature of Liabilities
◼ Liabilities are obligations that represent
“probable future sacrifice of economic
benefits.”
◼ The term accrued expenses is often used
on the balance sheet to describe liabilities.
◼ Current liabilities (ST) are those liabilities
that will be paid within one year of the
current balance sheet date. Non-current
(LT) liabilities will be paid after one year.
McGraw-Hill/Irwin
7-2
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-3
LO 1
Examples of Liabilities
Current (ST) liabilities include:
• Accounts payable
• Short-term debt (notes, bonds payable)
• Current maturities of long-term debt
• Unearned revenue or deferred credits
• Other accrued liabilities (interest, wages, taxes)
Noncurrent (LT) liabilities include:
• Long-term debt (bonds & notes payable)
• Deferred tax liabilities
McGraw-Hill/Irwin
7-3
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-4
Current Maturities on
Long-Term Debt
LO 2
Any portion of long-term debt that is to be
repaid within a year of the balance sheet date is
reclassified from the noncurrent liability section
to the current liability section under the title,
current maturities of long-term debt.
McGraw-Hill/Irwin
7-4
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-5
LO 2
Interest Calculation Methods
Straight Interest
Interest = Principal × Rate × Time in years
= $20,000 × 0.12 (or 12%) × 1
= $ 2,400 per year or $200 per month
If principal borrowed for 3 months,
Interest expense would be $200 x 3 = $600
or $20,000 x 12% x 3/12 = $600
Annual Percentage Interest Rate (APR)
APR = Interest Paid ÷ Money available × Time
= $2,400 ÷ $20,000 × 1
= 12% (or 0.12)
McGraw-Hill/Irwin
7-5
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-6
Unearned Revenue or
Deferred Revenue
LO 3
Unearned revenue is created when customers pay for
services or products before delivery.
On January 1, 2019, Matrix, Inc. receives $2,400 cash as
an advance payment one a one-year building lease. A
$2,400 accrued liability is booked on Jan 1st, as Matrix
owes
the customer $2,400 of building space (for 1 year).
Cash
received
for one-year
subscription
1/1/13
< – – – – –12-month lease – – – – – >
1/31/13
Month end
2/28/13
Month end
3/31/13
Month end
Our goal is to recognize $200 of
revenue per month as the lease is
used up, reducing the liability.
McGraw-Hill/Irwin
7-6
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-7
LO 3
Unearned Revenue or
Deferred Revenue (cont’d)
Unearned revenue is created when customers pay for
services or products before delivery.
Each month, $200 ($2,400 / 12 months) of the revenue is
booked, and at the same time $200 of the offsetting
accrued liability is reduced.
Cash received
for one-year
subscription
1/1/13
< – – – – –12-month lease – – – – – >
1/31/13
Month end
2/28/13
Month end
3/31/13
Month end
The accrued liability of $2,400 is
booked on Jan 1st, and will reduce by
$200 each month to $0 on Dec 31st.
McGraw-Hill/Irwin
7-7
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-8
LO 3
Unearned Revenue or
Deferred Revenue (cont’d)
Month
Jan
Feb
Mar
Apr
May
June
Cash received
July
for one-year
Aug
subscription
Sept
Oct
Nov
Dec
McGraw-Hill/Irwin
Beg Liability
$2,400
$2,200
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
Reduction
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
End Liab
$2,200
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
Revenue
Earned
200
$
400
$
600
$
800
$
1,000
$
1,200
$
1,400
$
1,600
$
1,800
$
2,000
$
2,200
$
2,400
$
7-8
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-9
Payroll Deductions
◼ Gross Pay less deductions = Net Pay
◼ FICA tax 7.65% (Soc. Sec. & Medicare)
◼ Federal income taxes
◼ State income taxes
◼ FUTA & SUTA taxes (unemployment)
◼ Voluntary deductions:
◼ Health insurance (& vision, dental, life, etc)
◼ Retirement (401K, 403B)
◼ Charitable contributions (United Way, etc)
◼ Involuntary deductions:
McGraw-Hill/Irwin
9
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1-10
Payroll Deductions
(cont’d)
◼ Gross Pay less deductions = Net Pay
◼ $40,000 Gross Pay
◼ -$15,000 Deductions (withholdings, taxes)
◼ $25,000 Net Pay
◼ $25,000 Net Pay booked as ST Liability:
◼ Wages Payable, Salaries Payable, etc.
◼ $15,000 Deductions booked as ST Liab:
◼ Payroll Withholdings Payable, Fed Inc Tax Liab,
State Inc Tax Liab, FICA Tax Liab, etc.
McGraw-Hill/Irwin
10
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-11
Noncurrent Liabilities
LO 6
Long-Term Debt
Interest payments on debt are an
expense on the Inc Statement
(Interest Exp)
Principal payments are not an
expense, they reduce the Liability
on the Balance Sheet
Long-term debt can include mortgage payable,
bonds payable, notes payable, etc.
McGraw-Hill/Irwin
7-11
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-12
LO 7
Bonds Payable – Terminology
Interest 10%
6/30 & 12/31
Face Value $1,000
BOND PAYABLE
Maturity Date 12/31/17
Bond Date 1/1/13
Face value is the amount an investor will receive at maturity.
Bond date is the date the bond was issued.
Stated interest rate is typically an annual rate.
Interest payment dates are dates when an investor is paid interest.
Maturity date is the date when the face value of the bond is
repaid to an investor.
McGraw-Hill/Irwin
7-12
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-13
LO 8
Issuance of Bonds Payable at
a Discount or a Premium
Market Rate Effect of Bond
Selling Prices
Above the market rate
A premium
Equal to the market rate
Face amount (at par)
Below the market rate
A discount
In the previous example, par value was illustrated
because the Stated Rate was equal to the Market Rate
McGraw-Hill/Irwin
7-13
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-14
Bonds Payable
◼ Bonds Issued at a Premium:
◼ Market interest rate less than Bond’s stated
interest rate (investors are willing to pay a
premium, such as 102% or 101%)
◼ Bonds Issued at a Discount:
◼ Market interest rate higher than Bond’s stated
interest rate (investors will only buy at a
discount, such as 98% or 99%)
◼ Investor received regular interest
payments & face value at bond maturity
McGraw-Hill/Irwin
14
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-15
LO 9
Other Noncurrent Liabilities
Obligations relating to pension plans and other
employee benefit plans, including deferred
compensation and bonus plans.
Expenses relating to these
plans are accrued and
reflected in the income
statement of the fiscal
period in which the benefits
are earned by the
employees.
McGraw-Hill/Irwin
Some companies pay
postretirement
benefits. Postretirement
benefits are measured
in a different manner.
7-15
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LO 10
Other Noncurrent Liabilities
Contingent Liabilities
Potential claims on the resources of a
company arising from pending litigation,
environmental hazards, casualty losses to
property, product warranties, or unsettled
disputes with the Internal Revenue Service.
If a potential liability is Probable and
Estimable, it must be booked as a liability,
otherwise a f/s note describing the issue is
sufficient
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End of Chapter 7
McGraw-Hill/Irwin
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.