Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

LiabilitiesLiabilitiesotaleem.blogspot.comotaleem.blogspot.comfor more presentation(follow me)for more presentation(follow me)

Chapter 10

10-2

The Nature of LiabilitiesThe Nature of LiabilitiesDefined as debts or obligations arising from

past transactions or events.

Maturity = 1 year or less Maturity > 1 year

Current Liabilities

Noncurrent Liabilities

10-3

Estimated LiabilitiesEstimated LiabilitiesEstimated liabilities have two basic

characteristics:1.The liability is known to exist, 2.The precise dollar amount cannot be determined until a later date.

Example: An automobilewarranty obligation.

10-4

Short-term obligations to suppliers for purchases of merchandise and to others for

goods and services.

Merchandise inventory invoices

Shipping charges

Utility and phone bills

Office supplies invoices

Current Liabilities: Accounts Current Liabilities: Accounts PayablePayable

ExamplesExamples

10-5

Total Notes Payable

Current Notes Payable

Noncurrent Notes Payable

When a company borrows money, a note payable is created.

Current Portion of Notes PayableThe portion of a note payable that is due within one year,

or one operating cycle, whichever is longer.

Current Liabilities: Notes Current Liabilities: Notes PayablePayable

10-6

Accrued LiabilitiesAccrued LiabilitiesAccrued liabilities arise from the recognition of

expenses for which payment will be made in the future. Accrued liabilities are often referred to as

accrued expenses.

Examples include:1.Interest payable,2.Income taxes payable, and3.Accrued payroll liabilities.

10-7

Net Pay

Payroll LiabilitiesPayroll Liabilities

Medicare Taxes

State and Local Income TaxesFICA Taxes Federal

Income TaxVoluntary

Deductions

Gross Pay

10-8a liability account.

Cash is received

in advance.

Cash is sometimes collected from the customer before the revenue is actually earned.

Unearned RevenueUnearned Revenue

As the earnings process is completed

10-9

Relatively small debt needs can be filled from single sources.

Banks Insurance Companies Pension Plansoror oror

Long-Term LiabilitiesLong-Term Liabilities

10-10

Large debt needs are often filled by issuing bonds.

Long-Term LiabilitiesLong-Term Liabilities

10-11

With each payment, the interest portion gets smaller

and the principal portion gets larger.

Installment Notes PayableInstallment Notes Payable

Each payment covers interest for the period AND a portion of the

principal.

Long-term notes that call for a series of installment payments.

10-12

Bonds PayableBonds PayableBonds usually involve the

borrowing of a large sum of money, called principalprincipal.

The principal is usually paid back as a lump sum lump sum at the end of the bond period.

Individual bonds are often denominated with a par value, or face valueface value, of $1,000.

10-13

Bonds PayableBonds PayableBonds usually carry a stated rate of interest,

also called a contract ratecontract rate.Interest is normally paid semiannually.Interest is computed as:

Principal × Stated Rate × Time = InterestPrincipal × Stated Rate × Time = Interest

10-14

Mortgage Bonds

Convertible Bonds

Junk Bonds

Debenture Bonds

Types of BondsTypes of Bonds

10-15

End of Chapter 10End of Chapter 10