Liabilities Flashcards
Definite liabilities
Due at balance sheet date, current and non interest baring
Contingent liabilities
May not be due at balance sheet date
Current liabilities
will be exchanged for current asset or new current liabilities.
liquidity will go down in the current year
Noncurrent
PV of all future cash flows
Bond Amortization table
Date Int PD Int Exp Disc/amo Undisc/am Carry value
Journal Entries - Bond @ Disc
Debit Cash
Debit Bond Discount
Credit Bonds Payable
Journal Entries - Bond @ Premium
Debit Cash
Credit Bond Premium
Credit Bonds Payable
Journal entry for periodic interest bond @ disc
Debit Interest Expense
Credit Bond discount
Credit Cash
Journal for periodic int bond @ premium
Debit Interest Expense
Debit Bond premium
Credit Intrest Payable
Debenture bonds
unsecured bonds
Bond issue costs
legal, printing & promotional
capitalized as a non-current, deferred charge
Amortized over the life of the bond using SL method
Not netted against accrued interest
Net cash receipts on bond issuance
Total cash received plus accrued interest minus cost of issuance
Interest payable
Interest accrued since last pay date
Interest expense
Interest for entire period, include amortization or discount
Net cash receipts on bond issuance
Total cash received plus accrued interest minus cost of issuance
Convertible bonds book value method
transfer bond account balances to stock accounts - no gain or loss recorded
Convertible bonds market value method
At conversion - credit stock accounts for market value of stock or bonds. Close out bond account balances and record gain or loss to recognize the difference.
Warrants
1) Separate accrued interest fro proceeds
2) Allocate total bond price to bonds and warrants - before discount or premium
3) Record allocation of warrants in Owner’s Equity
Warrants issued with bonds impact on OE
Owners Equity is increased by the market value (or inferred market value) of the warrants
“In computing the gain or loss on the above bond retirement, the price paid for the bonds is compared to which of the following values?”
This question refers to the computation of the gain or loss.”In computing the gain or loss on the above bond retirement, the price paid for the bonds is compared to which of the following values?” This question refers to the computation of the gain or loss.
bond retirement questions,
you’re computing based on the time remaining on the bond. You may also need to do a fractional retirement.
Bond retirement
The gain is the difference between (1) the net bond liability less the unamortized bond issue costs and (2) the amount paid to retire the bonds:
Retire Bond with remaining unamortized premium at less than par
Gain
Retire bond with remaining discount at less than par
Loss
Retire bond with remaining unamortized premium at more than par
Loss
Retire bond with remaining discount at more than par
Gain
Bond Retirement Questions Steps
compute book value = par + unamortized premium/-remaining discount - remaining issue cost -
If it’s a fractional retirement - remember to only computer the book value for the portion retired, and only utilize premium/discount and issue cost for the portion retired. You’ll need to also utilize the remaining term.
How do you calculate the loss on the early retirement of bonds?
Cash paid - book value +unamorized bond issue costs
How do you calculate the gain on the early retirement of bonds?
Book value - cash paid - unamorized bond issue costs
Journal entry for bond in early retirement
Debit Interest expense
Recognize remaining discount/premium
Recognize unamortized issue costs
Given the interest rate, bond face value, market interest PV factor and initial interest PV factor - calculate the net bond liability for a given future year.
(Bond face value + remaining interest payments)*PV mkt interest = bond liability for given year
Debt Restructuring - settlement debtor
carry value of assets - mkt value of assets = difference is gain or loss on disposal
mkt value of assets - carry value of debt = difference is gain or loss on restructuring
Debt Restructuring - settlement creditor
carry value of investment - mkt value of investment = loss on restructure
Debt Restructure - modification of terms type 1 (sum<BV)
debtor gain = bv - sum of restructure
No interest recognized from new loan - because debtor pays less in total for the entire loan
Debt Restructure - modification of terms type 2 (sum>BV)
creditor records loan impairment, but debtor doesn’t recognize gain.
Debt restructure problem solving steps
1) Cacl BV of debt
2) determine if type 1 or type 2
3) calc total payments and compare to book value
4) determine journal entries
Debt Restructure - modification of terms type 2 (sum>BV)
Must compute new implied interest rate to determine if it is a TDR. If less than original, yes. No gain recognized. BV remains unchanged and the difference between BV and the agreed value is the interest for the term.
Debt Restructure - modification of terms type 2 (sum>BV)
Journal Entries
Debit Note Payable
Debit Interest payable
Credit new notes payable
at year end
Interest Expense
Notes payable reduction
Credit cash for payment
next year
Cr Int expense
Cr Notes Payable
Db Cash
Troubled Debt Restructuring
IFRS differences
Significant = (PV of New Debt) - (PV of Old debt) >= 10%
Insignificant = <10%
TDR implied rate of interest calculation
BV = payment(PV of $1 for 3 years at i%)
solve for i and compare to given PV of $1 %
Payroll J/E
Db Salary Exp Db Payroll Exp (see payroll exp) Cr Inc. Tax payable Cr FICA payable Cr. Medicare payable Cr. health ins payable Cr union dues payable Cr Cash (net pay)
Payroll Exp J/E
Db Payroll Exp Cr FICA tax payable Cr Medicare tax payabe Cr FUTA payable Cr SUTA payable
Bonus Calc - Bonus after tax and bonus
B = b%(Inc - T - B) T = t%(Inc-B) B = b% (Inc - (t%(Inc-B))-B)
Remember neg X neg = pos
Bonsu Calc - Bons after tax before bonus
B = b% (Inc-T) T = t% (Inc-B) B = b% (Inc - (t%(Inc-B)))
Sales Tax J/E
Db Cash
Cr Sales
Cr Sales Tax payable
Payroll liabilities
gross pay + fringe
Net Pay
gross - inc. tax - FICA - med - health ins - union dues
FICA and Medicare
Both EE and ER - same rate
FUTA & SUTA
ER only
FICA & Medicare liability calc notes
Since the firm must withhold it’s own FICA & Med plus the ees, both of these amounts are multiplied by 2 when calculating liability.
