Understanding Different Types of Liabilities and Bonds in Financial Accounting, Quizzes of Financial Accounting

Download Understanding Different Types of Liabilities and Bonds in Financial Accounting and more Quizzes Financial Accounting in PDF only on Docsity! TERM 1 Types of Liabilities DEFINITION 1 ....Reported on Balance Sheet Fixed payment dates and amounts Fixed payment amount with flexible payment dates Obligation with estimated amounts and payment dates Prepayments requiring delivery of future goods or services ....Not Reported on Balance Sheet Executory contracts Contingent obligations report if Amount known Probable that liability has been incurred TERM 2 Current Liabilities DEFINITION 2 Accounts payable Notes payable (and Interest payable) Wages and related payroll items Income taxes Advances from customers TERM 3 Notes Payable DEFINITION 3 Difference between Account Payable and Note Payable Interest bearing notes & non-interest bearing notes Loans often have covenants such as: Minimum Debt:Equity ratio Minimum equity Working capital ratio Debt (and/or interest) coverage ratio TERM 4 Constructive Liabilities DEFINITION 4 Events within Management control Debit Estimated Loss (Income Statement) Credit Estimated Liability (Balance Sheet) Subject to change TERM 5 Warranties DEFINITION 5 Requires Estimation at time of sale Debit Warranty Expense Credit Estimated Warranty Liability TERM 6 Long Term Liabilities: Mortgages DEFINITION 6 Long term loan secured (collateralized) by real estate Amortization schedule purpose is to have even payment over entire life of loan that repays entire loan Monthly payments based on: Term and Interest rate TERM 7 Long Term Liabilities: Bonds DEFINITION 7 Bond Terms...Indenture (The loan agreement), may be collateralized, Debenture - Not Collateralized Types of Bonds Coupon, Serial, Convertible, Zero Coupon, and Callable TERM 8 Bond Issuance DEFINITION 8 Issuance price = PV of annuity of interest payments PLUS PV of return of principal at future time ...Par at face amount ...Discount BELOW FACE amount because market rate of interest is HIGHER than coupon rate ...Premium ABOVE FACE amount because market rate of interest is LOWER than coupon rate TERM 9 Bond Issuance at Par DEFINITION 9 This means that Face (or Contract or Coupon) Amount of interest is the same as the Market Rate of interest. Journal Entries: At issuance (Debit Cash and Credit Bonds Payable) and When Interest is Paid (Debit Interest Expense and Credit Cash) TERM 10 Bond Issuance at Discount DEFINITION 10 This means that Face Amount of interest is the Lower than the Market Rate of Interest Journal Entries: At issuance (Debit Cash and Discount on Bonds Payable and Credit Bonds Payable) and When Interest is Paid (Debit Interest Expense and Credit Cash and Discount on Bonds Payable)