Chapter 11 Appendix C and B

1
Chapter 11Appendix C and B

• Liabilities
• Including Payroll
• Including Present and Future Value Analysis

2
Current Liabilities

• Accounts Payable--Should be no problem here.
• Notes Payable--Handling similar to Notes
  Receivable.
• In our example, Jones Enterprises purchased
  merchandise from Emmet Corporation giving them a
  28,000, 12, 60-day note on December 21st.
• Compute the due date and maturity value of the
  note
• The due date is Feb 19
• The maturity value is 28,560

3
Dec 21--Date of Note

• Assuming Normal Note
• Debit Purchases (INV) 28,000
• Credit Notes Payable 28,000
• Assuming Interest in face
• Debit Purchases (INV) 28,000
• Debit Dis on Note Pay 560
• Credit Notes Payable 28,560

4
Dec 31 Adjustment10 days or 93.33 incurred

• Assuming Normal Note
• Debit Interest Expense 93.33
• Credit Interest Payable 93.33
• Assuming Interest In Face
• Debit Interest Expense 93.33
• Credit Discount on NP 93.33

5
Balance Sheet Presentation 12/31

• Assuming Normal Note
• Notes Payable 28,000
• Interest Payable 93.33
• Total 28,093.33
• Assuming Interest in Face
• Notes Payable 28,560
• Less Discount on NP (466.67)
• Total 28,093.33

6
Due Date

• Assuming Normal Note
• Debit Notes Payable 28,000.00
• Debit Interest Payable 93.33
• Debit Interest Expense 466.67
• Credit Cash 28,560.00
• Assuming Interest in Face
• Debit Notes Payable 28,560
• Credit Cash 28,560
• Debit Interest Expense 466.67
• Credit Disc. On NP 466.67

7
Accrued Liabilities

• Interest Payable
• Salaries Payable
• Income Taxes Payable
• You have made these entries many times.

8
Payroll Taxes--Appendix C--Who Pays what Tax

• Employee
• Federal Withholding
• State Withholding
• Social Security
• Medicare

• Employer
• Social Security
• Medicare
• All unemployment Taxes

Look Over Brief Exercises 2,3,and 4 in Appendix C
9
Answers to Brief Exercises 2 3

• 2. 14 regular pay, 21 overtime rate
• Gross Pay (4014) (521) 665
• Net Pay 665-95570
• 3. Debit Salaries X 665
• Credit Fed WH Pay 95
• Credit Cash 570

10
Answer to Brief Exercise 4

• 70,000 .08 5600
• 70,000 .054 3780
• 70,000 .008 560
• Debit Payroll Tax Expense 9940
• Credit Soc. Sec. Tax Pay 5600
• Credit State Unemp Tax Pay 3780
• Credit Fed. Unemp Tax Pay 560

11
Sales Taxes Payable

• Milwaukee County pay
• 5 to State
• .5 to County
• .1 to Selig
• If buy 1,000 of merchandise in Milwaukee
  actually pay 1,056.

12
Sales Taxes Payable--Brief Ex. 11-3

• What is you run a small business without a fancy
  cash register and collected 9,975 in a county
  where the tax rate is 5 total. How much do you
  owe in sales taxes?
• 9975/1.05 9500 9975-9500475

Debit Cash (A/R) 9,975 Credit Sales 9,500 Cre
dit Sales Taxes Pay 475
13
Current Liabilities

• Unearned Revenues--You remember these from
  Chapter Three
• Current Maturities
• Sally Industries signed a 50,000, 10 year 8
  loan on 1/1/1. Th loan required principal
  payments of 5,000 plus interest each January 1
  beginning in Year Two
• How should this note be shown on the December 31,
  year one balance sheet?

14
Current Maturities

• Balance Sheet Presentation
• Current Liabilities
• Interest Payable 4,000
• Current Portion of NP 5,000
• Long Term Liabilities
• Note Payable 45,000
• What would the Balance Sheet Look Like at
  December 31st year two??

15
Long-Term Liabilities

• Obligations that are expected to be paid after
  one year.
• Bond as an example
• A bond is a form of interest bearing notes
  payable issued by corporations, governing bodies.
  These, like stock, are sold in small
  denominations and are attractive to many
  investors.

16
Advantages and Disadvantages of Issuing Bonds
over Stock

• Advantages
• Ability to pay it back
• Refinance if interest rates improve
• Interest paid is deductible for income tax
  purposes

• Disadvantages
• Interest must be paid to avoid default
• Dividends on stock never have to be paid
• Stock is permanent financing

17
Types of Bonds

• Mortgage--Secured by mortgage
• Debenture--non secured
• Serial--mature at various points in time
• Term-- matures at one point in time
• Callable-- Corporation can force bondholders to
  turn in their bonds
• Convertible--Bondholders can exchange bonds for
  stock
• Junk--low quality

18
Bond Pricing

• Look at Appendix B
• Bonds are priced at the present value of future
  cash flows
• First need to look at the difference between
  simple and compound interest.
• Alicia signed a 3 year,10, 10,000 note
• Simple 10,000 X 10 X 3 3,000
• Compound 1 10,000 X 10 X 1 1,000
• Compound 2 11,000 X 10 X 1 1,100
• Compound 3 12,100 X 10 X 1 1,210

19
Future value of single amount

• PV 5,000
• I 8
• N 6
• Using Calculator FV 7934
• 5,000 (FV,6N,8)

20
Future value of annuity

• PMT 3000
• I 10
• N8
• Using Calculator FV34308
• 3,000 (FVA,8N,10)

21
Present value of Single Amount

• FV 10000
• N 5
• I 6
• Using Calculator PV 7473
• 10000(PV, 5N,6)

22
Present Value of Annuity

• PMT 4,000
• N8
• I8
• Using Calculator PV22987
• 4,000 (PVA, 8N, 8)

23
Gateway Bond

• Diagram out cash payouts by Gateway
• PMT 300000.0824,000
• FV 300,000
• N10
• I 10
• 263,133

24
Gateway Bond semiannual

• Diagram out cash outflows to Gateway
• PMT 300000.081/212,000
• FV300,000
• N10220
• I6/23
• 344632

25
Accounting for a bond sold at par--On 3/1/1 sold
100,000, 6 bonds, Mature in 3 years, Interest
paid semiannually each 3/1 and 9/1
9/1
3/1
12/31
3,000
100,000

• Sale of Bond
• Debit Cash 100,000
• Credit Bonds Payable 100,000
• Interest on September 1
• Debit Interest Expense 3,000
• Credit Cash 3,000

26
Accounting for a bond sold at par--On 3/1/1 sold
100,000, 6 bonds, Mature in 3 years, Interest
paid semiannually each 3/1 and 9/1

• December 31st
• Debit Interest Expense 2,000
• Credit Interest Payable 2,000
• Reversing Entry on 1/1
• Debit Interest Payable 2,000
• Credit Interest Expense 2,000
• Entry on 3/1/2
• Debit Interest Expense 3,000
• Credit Interest Payable 3,000

27
Sale of Bonds at a Premium William on 1/1/1sold
100,000 of 11 bonds. Market was 10. Interest
paid semiannually each 6/30,12/31. Bonds Mature
in 10 years

• See if you can diagram out the cash flows. This
  is an important step
• Next need to compute the selling price of the
  bond
• N20
• I5
• PMT 5,500
• FV 100,000
• PV 106,231

28
Sale of Bonds at a Premium William on 1/1/1sold
100,000 of 11 bonds. Market was 10. Interest
paid semiannually each 6/30,12/31. Bonds Mature
in 10 years

• The entry to record the sale of the bond is
• Debit Cash 106,231
• Credit Bonds Payable 100,000
• Credit Prem. On BP 6,231
• Now we need to spread the premium over the life
  of the bond. We will use the effective interest
  method which is in the appendix

29
Sale of Bonds at a Premium William on 1/1/1sold
100,000 of 11 bonds. Market was 10. Interest
paid semiannually each 6/30,12/31. Bonds Mature
in 10 years

• An Amortization Table

Date
Cash
Interest X
Amort
Value
Cash is the amount paid out at the end of each
period
Interest Expense is computed by taking previous
Carrying Value times effective rate
Amortization is difference between Cash and Int X
Value is previous value less the Premium or plus
Discount
30
Sale of Bonds at a Premium William on 1/1/1sold
100,000 of 11 bonds. Market was 10. Interest
paid semiannually each 6/30,12/31. Bonds Mature
in 10 years

• Amortization Table
• Date Cash Interest Amort Value
• 1/1/1 106,231
• 6/30 5,500 5,312 188
  106,043
• 12/31 5,500 5,302 198 105,845
• 6/30 5,500 5,292 208
  105,637
• Debit Interest Expense 5312
• Debit Premium on B/P 188
• Credit Cash 5,500

31
Sale of Bonds at a Discount Samuels issued
200,000 of 8 bonds. These 6-year bonds pay
interest each October 31, and April 30. The
bonds were sold to yield 10 on May 1

• See if you can diagram out the cash flows. This
  is an important step
• Next need to compute the selling price of the
  bond
• N12
• I5
• PMT 8,000
• FV 200,000
• PV 182,273

32
Sale of Bonds at a Discount Samuels issued
200,000 of 8 bonds. These 6-year bonds pay
interest each October 31, and April 30. The
bonds were sold to yield 10on May 1

• The entry to record the sale of the bond is
• Debit Cash 182,273
• Debit Disc. On B/P 17,727
• Credit Bonds Payable 200,000
• On the balance sheet shown as
• Bonds Payable 200,000
• Less Discount 17,727
• Bonds 182,273

33
Sale of Bonds at a Discount Samuels issued
200,000 of 8 bonds. These 6-year bonds pay
interest each October 31, and April 30. The
bonds were sold to yield 10 on May 1

• An Amortization Table

Date
Cash
Interest X
Amort
Value
Cash is the amount paid out at the end of each
period
Interest Expense is computed by taking previous
Carrying Value times effective rate
Amortization is difference between Cash and Int X
Value is previous value less the Premium or plus
Discount
34
Sale of Bonds at a Discount Samuels issued
200,000 of 8 bonds. These 6-year bonds pay
interest each October 31, and April 30. The
bonds were sold to yield 10on May 1

• Amortization Table--Ignore 12/31
• Date Cash Interest Amort Value
• 5/1 182273
• 10/31 8000 9114 1114 183387
• 12/31
• 4/30 8000 9170 1170
  184557
• 10/31 8000 9227 1227
  185784
• 12/31
• 4/30 8000 9290 1290
  187074

35
Sale of Bonds at a Discount Samuels issued
200,000 of 8 bonds. These 6-year bonds pay
interest each October 31, and April 30. The
bonds were sold to yield 10on May 1

• Amortization Table--Do 12/31
• Date Cash Interest Amort Value
• 5/1 182273
• 10/31 8000 9114 1114 183387
• 12/31
• 4/30 8000 9170 1170
  184557
• Cash 8,0002/62,667
• Interest 91702/6 3057
• Amort 11702/6 390

36
Sale of Bonds at a Discount Samuels issued
200,000 of 8 bonds. These 6-year bonds pay
interest each October 31, and April 30. The
bonds were sold to yield 10on May 1

• Amortization Table--Do 12/31
• Date Cash Interest Amort Value
• 5/1 182273
• 10/31 8000 9114 1114 183387
• 12/31 2667 3057 390
  XXXXX
• 4/30 8000 9170 1170
  184557
• See if you can do the next 12/31
• 2667, 3097 and 430

37
Sale of Bonds at a Discount Samuels issued
200,000 of 8 bonds. These 6-year bonds pay
interest each October 31, and April 30. The
bonds were sold to yield 10on May 1

• 10/1/1 Debit Interest Exp....... 9114
• Credit Cash 8,000
• Credit Disc. On 1,114
• 12/31/1Debit Interest Exp........... 3057
• Credit Interest Pay 2,667
• Credit Disc. On
  390
• 1/1/2 Reverse

38
Sale of Bonds at a Discount Samuels issued
200,000 of 8 bonds. These 6-year bonds pay
interest each October 31, and April 30. The
bonds were sold to yield 10on May 1

• 4/30/2 Debit Interest Exp...... 9170
• Credit Cash 8000
• Credit Disc. On 117
• Notice that there is a difference between
  interest expense and cash paid in interest each
  period.

39
Installment Loan--Mortgage

• You should be able to compute the annual payment
  or 13,147. With the use of a calculator I would
  expect you to be able to handle monthly payment
• Debit Home 120,000
• Credit Cash 100,000
• Credit Mortgage Payable

40
Installment Loan-Mortgage

• Again need an amortization table--separating
  payments into principal and interest
• Cash Interest Princ. Balance
• 100,000
• 13147 10,000 3,147 96,391
• 13147 9,685 3,462 93,391
• 13147 9,338 3,809 89,582

41
Installment Loan-Mortgage

• Debit Interest Expense 10,000
• Debit Mortgage Payable 3,147
• Credit Cash 13,147
• Debit Interest Expense 9,685
• Debit Mortgage Payable 3,462
• Credit Cash 13,147