Current Liabilities
Obligations due to be paid or settled within one year or the company’s operating cycle, whichever is longer
Purpose of Deductions from Gross Pay
Required under labor contracts
Gross Pay
Total compensation an employee earns before deductions
Interest on a note
Principal x Interest x Fraction of the Year the note is outstanding
Estimated Liability
Obligation of an uncertain amount that can be reasonably estimated
Examples of estimated liabilities
Health Benefits, Vacation Benefits, Bonus Plans, Warranties
Contingent Liability
Obligation to make a future payment if, and only if, an uncertain future event occurs
Probable and Reasonable
Record Liability
Reasonabily possible
Disclose in Notes
Future event is remote
No disclosure
Short Term Notes Payable
A written promissory note to pay a specified amount on a stated future date within one year
Note given to replace accounts payable
Accounts Payable
Cash
Notes Payable
Journal Entry- sales tax on sales revenue
Cash
Sales
Sales Tax Payable
Cost of Sales
Inventory
Bonds Payable
Written promise to pay the bond’s par (or face) value and interest at a stated contract rate; often issued in denominations of $1,000
Mortgages Payable
Legal loan agreement that protects a lender by giving the lender the right to be paid from the cash proceeds from the sale of a borrower’s assets identified in the mortgage
Premium on Bond
Contract Rate > Market Rate
Discount on Bond
Contract Rate < Market Rate
Bonds Indenture
Contract between the bond issuer and the bondholders; identifies the parties’ rights and obligations
Par value of bond
Amount the bond issuer agrees to pay at maturity and the amount on which cash interest payments are based; also called face amount or face value of a bond
Bond Certificate
Document containing bond specifics such as issuer’s name, bond par value, contract interest rate, and maturity date
Bond issuance
Sale of bonds, usually in the denominations of $1000 or $5000
Issuing a par value bond
Cash
Bonds Payable
Issuing discount bond
Cash
Discount on Bonds Payable
Bonds Payable
Issuing premium bond
Cash
Premium on Bonds Payable
Bonds Payable
Interest Payment on par value bond
Bonds interest expense
Cash
Principal x Rate x Time
Interest payment on discounted bond
Bond interest expense
Discount on Bonds Payable
Cash
Calculation of interest expense
Total bond interest expense / Number of interest periods
Interest payment on premium bonds
Bond interest expense
Premium on Bonds Payable
Credit Cash
Allocate discount (straight line method)
- Total payments + discount = Total bond interest expense
- Total bond interest expense / number of periods
Allocate premium (straight line method)
- Total payments - premium = Total bond interest expense
- Total bond interest expense / number of periods
Market Rate
Interest rate that borrowers are willing to pay and lenders are willing to accept for a specific lending agreement given the borrowers’ risk level
Stated rate of interest
Interest rate specified in a bond indenture (or note); multiplied by the par value to determine the interest paid each period; also called coupon rate, stated rate, or nominal rate
Advantages of corporations
- Separate Legal Entity
- Limited Liability
- Ownership is transferrable
- Unlimited Life
Disadvantages of corporations
- Government regulation
- Corporate taxation
Common stock
Corporation’s basic ownership share; also generically called capital stock.
Preferred stock
Stock with a priority status over common stockholders in one or more ways, such as paying dividends or distributing assets
Cumulative
Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid
Cash dividends
Corporation’s distribution of cash to its owners
Stated value stock
No-par stock assigned a stated value per share; this amount is recorded in the stock account when the stock is issued
Par value
Value assigned a share of stock by the corporate charter when the stock is authorized
No-par value stock
Stock class that has not been assigned a par (or stated) value by the corporate charter
Authorized stock
Total amount of stock that a corporation’s charter authorizes it to issue
Treasury stock
Corporation’s own stock that it reacquired and still holds
Rights of common shareholders
- vote
- purchase proportional share
- receive same dividend
- share assets
Journal entry for issuing par value common stock
Cash
Common Stock
Journal entry for issuing par value stock at a premium
Cash
Common Stock
Paid in capital in excess of par value, c/s
Journal entry for issuing no par value stock
Cash
Common stock, no par value
Journal entry for issuing stated value stock
Cash
Common Stock
Paid-in capital in excess of stated value, c/s
Issuance of preferred stock
Cash
Preferred stock
Paid in capital in excess of par value, preferred stock
Date of Declaration - Cash Dividend
Retained Earnings
Common Dividend Payable
Date of Payment - Cash Dividend
Common Dividend Payable
Cash
Operating activities
Transactions and events that affect net income
- Expenses, sale of inventory, sale of goods
Investing activities
Purchase and sales of long-term assets
Financing activities
Transactions that affect long-term liabilities and equity