Ch.9 Current Liabilities and Time Value of Money

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Ch.9Current LiabilitiesandTime Value of Money
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Part I Current Liabilities

• Current liabilities
• Require payment within one year (or one operating
  cycle whichever is longer)

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Jacuzzi BrandsPartial Balance Sheet 2004
(in millions)

• Liabilities and shareholders' equity
• Current liabilities
• Notes payable 21.1
• Current maturities of long-term debt
  3.9
• Trade accounts payable 123.7
• Income taxes payable 18.3
• Accrued expenses and other
• current liabilities 134.4
• Total current liabilities
  301.4

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Selected 2004 Liquidity Ratios

• Current
• Ratio
• Jacuzzi Brands 1.79
• Sara Lee 1.06
• Tommy Hilfiger 3.87
• Boeing 0.72
• Nike 2.50

LO1
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1. Accounts Payable

• Amounts owed for the purchase of inventory,
  goods, or services on credit

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2. Note Payable (Short term)
I promise to pay 1,000 plus 12 annual interest
on December 31, 2007. Date January 1,
2007 Signed_________
Lamanski Co.
S.J.Devona
Total repayment 1,120 1,000 (1,000 12)
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Discounted Promissory Note
In exchange for 880 received today, I promise to
pay 1,000 on December 31, 2007. Date January
1, 2007 Signed_________
Lamanski Co.
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3. Current Maturities of Long-Term Debt

• Principal repayment on borrowings due within one
  year of balance sheet date

Due in upcoming year
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4. Income Taxes Payable

• Record expense when incurred, not when paid

12/31/07
3/15/08
Record 2007 tax expense
Taxes Paid
LO2
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5. Contingent Liabilities

• Obligation involving
• existing condition
• Outcome not known with certainty
• Dependent upon some future event
• Actual amount is estimated

LO4
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Contingent Liabilities

• Accrue estimated amount if
• Liability is probable
• Amount can be reasonably estimated

In year criteria are met Expense (loss) XXX
Liability XXX
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Typical Contingent Liabilities

• Warranties
• Premium or coupon offers
• Lawsuits

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Recording Contingent Liabilities
Example

• Quickkey Computer sells a computer product for
  5,000 with a one-year warranty. In 2007, 100
  computers were sold for a total sales revenue of
  500,000.
• Analyzing past records, Quickkey estimates that
  repairs will average 2 of total sales.

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Recording Contingent Liabilities
Probable liability has been incurred? Amount
reasonably estimable?
YES
YES
Record in 2007
Warranty Expense 10,000 Estimated
Liability 10,000
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Disclosing Contingent Liabilities
IF not probable but reasonably
possible OR amount not estimable
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Contingent Assets

• Contingent gains and assets are not recorded but
  may be disclosed in financial statement notes

• Conservatism principle applies

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Part II Time Value of Money

• Prefer payment at the present time rather than in
  the future due to the interest factor
• Present and future value concepts allow people to
  compare the value of money at different point in
  time

• Applicable to both personal and business decisions

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• If you invest 100 now at 10 annual return. How
  much money would you have in your account after
  100 years?

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Simple v. compounding interest

• Simple interest earn interest only on the
  principal
• Compounding interest earn interest on both
  principal and the interest earned in previous
  periods

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Simple Interest
I P R T
Principal
Dollar amount of interest per year
Time in years
Interest rate as a percentage
LO5
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Simple Interest
principal amount 100 annual
interest rate 10 term of note
100 years P
R T Interest 100 .10
100 1,000 Total 100 1,000 1,100
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Compound Interest

• Interest is calculated on principal plus
  previously accumulated interest
• Interest on interest
• Compound interest amount always higher than
  simple interest due to interest on interest

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Interest Compounding
principal amount 100 annual
interest rate 10 term of note
100 years Annual compounding of
interest
LO6
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• Total amount after 100 years
• 100(1.1)(1.1)(1.1)(1.1)(1.1)

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Compound Interest Computations
Present value of a single amount
Future value of a single amount
Present value of an annuity
Future value of an annuity
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1. Future Value of Single Amount
Known amount of single payment or investment
Future Value
Interest
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Future Value of a Single Amount Example

• If you invest 10,000 today _at_ 10 compound
  interest,
• what will it be worth 3 years from now?

invest 10,000
Future Value ?
Year 1
Year 2
Year 3
Interest _at_ 10 per year
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Future Value of a Single Amount Example Using
Formulas
FV p(1 i)n 10,000(1.10)3 13,310
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Future Value of a Single Amount Example Using
Tables
Year 1
Year 2
Year 3
PV 10,000
FV ??

• FV Present value table factor
• 10,000 (3 periods _at_ 10)

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Future Value of 1

• (n) 2 4 6 8 10 12 15
• 1 1.020 1.040 1.060 1.080 1.100 1.120 1.150
• 2 1.040 1.082 1.124 1.166 1.210 1.254 1.323
• 3 1.061 1.125 1.191 1.260 1.331 1.405 1.521
• 4 1.082 1.170 1.262 1.360 1.464 1.574 1.749
• 5 1.104 1.217 1.338 1.470 1.611 1.762 2.011
• 6 1.126 1.265 1.419 1.587 1.772 1.974 2.313
• 7 1.149 1.316 1.504 1.714 1.949 2.211 2.660
• 8 1.172 1.369 1.594 1.851 2.144 2.476 3.059

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Future Value of a Single Amount Example Using
Tables
Yr. 1
Yr. 2
Yr. 3
PV 10,000
FV 13,310

• FV Present value table factor
• 10,000 (3 periods _at_ 10)
• 10,000 1.331
• 13,310

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2. Present Value of Single Amount
Known amount of single payment in future
Present Value
Discount
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Present Value of a Single Amount Example

• If you will receive 10,000 in three years, what
  is it worth today (assuming you could invest at
  10 compound interest)?

Present Value ?
10,000
Year 1
Year 2
Year 3
Discount _at_ 10
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Present Value of a Single Amount Example Using
Formulas
PV Future value (1 i)n 10,000
(1.10)3 7,513
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Present Value of a Single Amount Example Using
Tables
Year 1
Year 2
Year 3
PV ??
FV 10,000

• PV Future value table factor
• 10,000 (3 periods _at_ 10)

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Present Value of 1

• (n) 2 4 6 8 10 12 15
• 1 0.980 0.962 0.943 0.926 0.909 0.893 0.870
• 2 0.961 0.925 0.890 0.857 0.826 0.797 0.756
• 3 0.942 0.889 0.840 0.794 0.751 0.712 0.658
• 4 0.924 0.855 0.792 0.735 0.683 0.636 0.572
• 5 0.906 0.822 0.747 0.681 0.621 0.567 0.497
• 6 0.888 0.790 0.705 0.630 0.564 0.507 0.432
• 7 0.871 0.760 0.665 0.583 0.513 0.452 0.376
• 8 0.853 0.731 0.627 0.540 0.467 0.404 0.327

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Present Value of a Single Amount Example Using
Tables
Yr. 1
Yr. 2
Yr. 3
PV 7,510
FV 10,000

• PV Future value table factor
• 10,000 (3 periods _at_ 10)
• 10,000 0.751
• 7,510

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3. Future Value of an Annuity
Periods
Interest
Future Value ?
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Future Value of an Annuity Example

• If we invest 3,000 each year for four years at
  10 compound interest, what will it be worth 4
  years from now?

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Future Value of an Annuity Example

• FV Payment table factor
• 3,000 (4 periods _at_ 10)

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Future Value of Annuity of 1

• (n) 2 4 6 8 10 12 15
• 1 1.000 1.000 1.000 1.000 1.000 1.000 1.000
• 2 2.020 2.040 2.060 2.080 2.100 2.120 2.150
• 3 3.060 3.122 3.184 3.246 3.310 3.374 3.473
• 4 4.122 4.246 4.375 4.506 4.641 4.779 4.993
• 5 5.204 5.416 5.637 5.867 6.105 6.353 6.742
• 6 6.308 6.633 6.975 7.336 7.716 8.115 8.754
• 7 7.434 7.898 8.394 8.923
  9.487 10.089 11.067
• 8 8.583 9.214 9.897 10.637
  11.436 12.300 13.727

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Future Value of an Annuity Example
Year 1 Year 2 Year 3 Year 4
0 3,000 3,000 3,000
3,000
FV 13,923

• PV Payment table factor
• 3,000 (4 periods _at_ 10)
• 3,000 4.641
• 13,923

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4. Present Value of an Annuity
Periods
Discount
Present Value ?
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Present Value of an Annuity Example

• What is the value today of receiving 4,000 at
  the end of the next 4 years, assuming you can
  invest at 10 compound annual interest?

Year 1 Year 2 Year 3 Year 4
0 4,000 4,000 4,000
4,000
PV ??
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Present Value of an Annuity Example
Year 1 Year 2 Year 3 Year 4
0 4,000 4,000 4,000
4,000
PV ??

• PV Payment table factor
• 4,000 (4 periods _at_ 10)

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Present Value of Annuity of 1

• (n) 2 4 6 8 10 12 15
• 1 0.980 0.962 0.943 0.926 0.909 0.893 0.870
• 2 1.942 1.886 1.833 1.783 1.736 1.690 1.626
• 3 2.884 2.775 2.673 2.577 2.487 2.402 2.283
• 4 3.808 3.630 3.465 3.312 3.170 3.037 2.855
• 5 4.713 4.452 4.212 3.993 3.791 3.605 3.352
• 6 5.601 5.242 4.917 4.623 4.355 4.111 3.784
• 7 6.472 6.002 5.582 5.206 4.868 4.564 4.160
• 8 7.325 6.733 6.210 5.747 5.335 4.968 4.487

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Present Value of an Annuity Example
Year 1 Year 2 Year 3 Year 4
0 4,000 4,000 4,000
4,000
PV 12,680

• PV Payment table factor
• 4,000 (4 periods _at_ 10)
• 4,000 3.170
• 12,680

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Appendix A(FYI only)

• Accounting Tools Payroll
  Accounting

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Calculation of Gross Wages

• Hourly
• Multiply the number of hours worked times
  employees hourly rate
• Salaried
• Paid at a flat rate per week, month, or year,
  regardless of hours

LO8
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Calculation of Net Pay

• Gross wages
• Less Income tax (federal, state, local)
• FICAEmployees share
• Voluntary deductions
• (includes health insurance, retirement
• contributions, savings plans, charitable
  
• contributions, union dues, etc.)
• Net pay

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Payroll Accounting
Example

Gross wages for Kori Company for July are
100,000. The following amounts have been
withheld from employees paychecks
Income Tax 20,000 FICA 7,650 United
Way Contributions 5,000 Union Dues 3,000
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Payroll Accounting

• Journal entry
• July 31 Salary Expense 100,000
• Income Tax Payable 20,000
• FICA Payable 7,650
• United Way Payable 5,000
• Union Dues Payable 3,000
• Salary Payable 64,350
• To record July salary and deductions.

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Employer Payroll Taxes

• Not deducted from paycheck employer pays taxes
  per employee, in addition to salary
• FICAEmployers share
• Unemployment tax
• Assuming Kori Companys unemployment tax rate is
  3.

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Employer payroll taxes

• July 31 Payroll Tax Expense 10,650
• FICA Payable
  7,650
• Unemployment Tax Payable 3,000
• To record employers payroll taxes.