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Transcript of 1 Chapter 9 Current Liabilities, Contingencies, and the Time Value of Money Financial Accounting,...
1
Chapter 9
Current Liabilities,Contingencies, and the Time Value of Money
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Financial Accounting, Alternate 4e by Porter and Norton
2
Liabilities and shareholders' equityCurrent liabilities:
Notes payable $ .3Accounts payable 635.8Income taxes 16.3Other taxes 191.8Accrued interest 199.4Accrued restructuring and restaurant closing costs 328.5Accrued payroll and other liabilities 774.7Current maturities of long-term debt 275.5
Total current liabilities $2,422.3
McDonald's Corporation2002 Consolidated Balance Sheet (partial)
(in millions)
Require paymentwithin
one year
Listed in order of liquidity
3
Selected 2002 Liquidity Ratios
Current Quick Ratio Ratio
Georgia-Pacific 1.16 0.64J. C. Penney 2.00 0.76Johnson Controls 1.03 0.82McDonald's 0.71 0.49Pfizer 1.34 1.09
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
4
Accounts Payable
Purchase of inventory, goods or services on credit
2/10,n30
Discount payment terms offered to encourage early payment
5
Promissory Note
S.J.Devona
I promise to pay $1,000 plus 12% annualinterest on December 31, 2004.
Date: January 1, 2004
Signed:_________Lamanski Co.
Total repayment = $1,120 $1,000 + ($1,000 x 12%)
6
Discounted Promissory Note
In exchange for $880 received today, I promise to pay $1,000 on December 31, 2004. Date: January 1, 2004
Signed:_________Lamanski Co.
Effective interest rate on note = 13.6% ($120 interest / $880 proceeds)
7
1/1/04 12/31/04
Notes Payable $ 1,000 $ 1,000
Less: Discount on
Notes Payable 120 - 0 -
Net Liability $ 880 $ 1,000
Balance Sheet Presentation of Discounted Notes
Discount transferred to interest expense
over life of note
88
Current Maturities of Long-Term Debt
Principal repayment on borrowings due within one year of balance sheet date
Due in upcoming year
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
9
Taxes Payable
Record expense when incurred; not when paid
Record 2004 taxexpense
Taxes Paid
12/31/04 3/15/05
10
Current Liabilities on the Statement of Cash Flows
Operating Activities Net income xxx Increase in current liability + Decrease in current liability –
Investing Activities
Financing Activities Increase in notes payable + Decrease in notes payable –
1111
Contingent Liability
Obligation involving existing condition
Outcome not known with certainty
Dependent upon some future event
Actual amount is estimated
12
Accrue estimated amount if: Liability is probable Amount can be reasonably estimated
Contingent Liability
Record in year criteria are met:
Assets = Liab. + O/E + Rev. – Exp. Est. Liab. For Warranty Exp. 10,000 Warranty 10,000
Balance Sheet Income Statement
14
Recording Contingent Liabilities
Quickkey Computer sells a computer product for $5,000 with a one-year warranty. In 2004, 100 of these products were sold for a total sales revenue of $500,000.
Analyzing past records, Quickkey estimates that repairs will average 2% of total sales.
Example:
15
Recording Contingent Liabilities
Probable liability has been incurred?
Amount reasonably estimable?
Estimated Liability for Warranty $100,000
Warranty Expense $100,000
YES
YES
Record in 2004:
16
Disclosing Contingent Liabilities
IF not probable
but reasonably possible
ORamount not estimable
Disclose in footnotes
1717
Contingent Assets
Contingent gains and assets are not recorded but may be disclosed in footnotes
Conservatism principle applies
1818
Time Value of Money
Prefer payment now vs. in future due to interest factor
Applicable to both personal and business decisions
19
Simple Interest
I = P x R x T
Princi
pal a
mount
Dollar a
mount o
f
inte
rest
per
yea
r
Time
in y
ears
Inte
rest
rate
as
a per
centa
ge
2020
Example of Simple Interest
Given following data:principal amount = $ 3,000annual interest rate = 10%term of note = 2 years
Calculate interest on the note.
2121
Example of Simple Interest
Given following data:principal amount = $ 3,000annual interest rate = 10%term of note = 2 years
Calculate interest on the note.
P x R x T $ 3,000 x .10 x 2 = $ 600
2222
Compound Interest
Interest is calculated on principal plus previously accumulated interest
Compounding can occur annually, semi-annually, quarterly, etc.
23
Example of Compound Interest
Given following data:
principal amount = $ 3,000
annual interest rate = 10%
term of note = 2 years
semiannual compounding of interest
Calculate interest on note.
24
Compound Interest Periods
Year 1 Year 2
10% annually 10% annually
5% + 5%semiannually
5% + 5%semiannually
4 periods @ 5% semi-annual interest
25
Example of Compound Interest
Period Beginning Interest Ending Principal at 5% Balance
1 $ 3,000 $ 150 $ 3,150
2 3,150 158 3,308
3 3,308 165 3,473
4 3,473 174 3,647
26
Comparing Interest Methods
Simple annual interest: $3,000 x .10 x 2 = $ 600Semiannual compounding:
1 $ 150 2 158 3 165 4 174
Total $ 647
27
Compound Interest Computations
Present value of an
annuity
Future value of an
annuity
Present value of a
single amount
Future value of a
single amount
28
Future Value of Single Amount
Known amount of single payment or deposit Future Value
+ Interest =
29
Future Value of a Single Amount Example
If you invest $10,000 today @ 10% compound interest, what will it be worth 3 years from now?
invest
$10,000 Future Value?
+ Interest @ 10% per year
Yr. 1 Yr. 2 Yr. 3
30
Future Value of a Single Amount Example - Using Formulas
nFV = p (1 + i)
3 = $10,000 (1.10)
= $13,310
31
FV = Present Value x FV Factor = $ 10,000 X (3 periods @ 10%)
Future Value of a Single Amount Example - Using Tables
FV??$10,000 PV
Yr. 1 Yr. 2 Yr. 3
32
(n) 2% 4% 6% 8% 10% 1 1.020 1.040 1.060 1.080 1.10 2 1.040 1.082 1.124 1.166 1.210
3 1.061 1.125 1.191 1.260 1.3314 1.082 1.170 1.262 1.360 1.464
5 1.104 1.217 1.338 1.470 1.611 6 1.126 1.265 1.419 1.587 1.772 7 1.149 1.316 1.504 1.714 1.949 8 1.172 1.369 1.594 1.851 2.144
Future Value of $1
33
FV = Present Value x FV Factor = $ 10,000 X (3 periods @ 10%) = $ 10,000 X 1.331 = $ 13,310
Future Value of a Single Amount Example - Using Tables
FV = $13,310$10,000 PV
Yr. 1 Yr. 2 Yr. 3
35
Present Value of a Single Amount Example
If you will receive $10,000 in three years, what is it worth today (assuming you could invest at 10% compound interest)?
Present Value? $ 10,000
Discount @ 10%
Yr. 1 Yr. 2 Yr. 3
36
Present Value of a Single Amount Example - Using Formulas
-nPV = payment x (1 + i)
-3 = $10,000 x (1.10)
= $7,513
37
PV = Future Value x PV Factor = $ 10,000 X (3 periods @ 10%)
Present Value of a Single Amount Example - Using Tables
FV=$10,000PV ??
Yr. 1 Yr. 2 Yr. 3
38
Present Value of $1
(n) 2% 4% 6% 8% 10%
1 .9804 .9615 .9434 .9259 .9090 2 .9612 .9246 .8900 .8573 .8265 3 .9423 .8890 .8396 .7938 .7513 4 .9238 .8548 .7921 .7350 .6830 5 .9057 .8219 .7473 .6806 .6209
39
PV = Future Value x PV Factor = $ 10,000 X (3 periods @ 10%)
= $ 10,000 X .7513 = $ 7,513
Present Value of a Single Amount Example - Using Tables
FV=$10,000 PV = $7,513
Yr. 1 Yr. 2 Yr. 3
41
If we invest $3,000 each year for four years at 10% compound interest, what will it be worth 4 years from now?
Future Value of Annuity Example
$0 $3,000 $3,000 $3,000 $3,000
Yr. 1 Yr. 2 Yr. 3 Yr. 4
FV ??
42
$0 $3,000 $3,000 $3,000 $3,000
Yr. 1 Yr. 2 Yr. 3 Yr. 4
FV ??
FV = Payment x FV Factor = $ 3,000 x (4 periods @ 10%)
Future Value of Annuity Example
43
Future Value of Annuity of $1
(n) 2% 4% 6% 8% 10% 12% 1 1.000 1.000 1.000 1.000 1.000 1.000 2 2.020 2.040 2.060 2.080 2.100 2.120 3 3.060 3.122 3.184 3.246 3.310 3.374 4 4.122 4.246 4.375 4.506 4.641 4.779 5 5.204 5.416 5.637 5.867 6.105 6.353
44
FV = Payment x FV Factor = $ 3,000 x (4 periods @ 10%) = $ 3,000 x 4.641 = $ 13,923
$0 $3,000 $3,000 $3,000 $3,000
Yr. 1 Yr. 2 Yr. 3 Yr. 4
FV = $13,923
Future Value of Annuity Example
45
Present Value of an Annuity
Periods1 2 3 4
PresentValue ?
Discount$0 $500 $500 $500 $500
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
46
Present Value of an Annuity Example
What is the value today of receiving $4,000 at the end of the next 4 years, assuming you can invest at 10% compound annual interest?
PV ??
Yr. 1 Yr. 2 Yr. 3 Yr. 4
$0 $4,000 $4,000 $4,000 $4,000
47
Present Value of an Annuity Example
Yr. 1 Yr. 2 Yr. 3 Yr. 4
PV ??
$0 $4,000 $4,000 $4,000 $4,000
PV = Payment x PV Factor = $ 500 x (4 periods @ 10%)
48
Present Value of Annuity of $1
(n) 2% 4% 6% 8% 10%
1 0.980 0.962 0.943 0.926 0.909 2 1.942 1.886 1.833 1.783 1.735 3 2.884 2.775 2.673 2.577 2.487 4 3.808 3.630 3.465 3.312 3.170 5 4.713 4.452 4.212 3.992 3.791
49
Present Value of an Annuity Example
Yr. 1 Yr. 2 Yr. 3 Yr. 4
P.V. = $12,680
$0 $4,000 $4,000 $4,000 $4,000
PV = Payment x PV Factor = $ 4,000 x (4 periods @ 10%)
= $ 4,000 x 3.170 = $ 12,680
50
Solving for Unknowns
Assume that you have just purchased a new car for $14,420. Your bank has offered you a 5-year loan, with annual payments of $4,000 due at the end of each year. What is the interest ratebeing chargedon the loan?
51
Solving for Unknowns
Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5
discount discount discount discount discount
PV = $14,420
PV = Payment x PV factor
PV factor = PV / Payment rearrange equation to solve for unknown
52
Solving for Unknowns
Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5
discount discount discount discount discount
PV = $14,420
PV factor = PV / Payment = $14,420 / $4,000 = 3.605
5353
Present Value of an Annuity Table
(n) 10% 11% 12% 15% 1 0.909 0.901 0.893 0.870 2 1.736 1.713 1.690 1.626 3 2.487 2.444 2.402 2.283 4 3.170 3.102 3.037 2.855 5 3.791 3.696 3.605 3.352
PV factor of 3.605 equates to an interest rate of 12%.
55
Calculation of Gross Wages
Hourly Multiply the number of
hours worked times employee’s hourly rate
Salaried Paid at a flat rate per
week, month, or year, regardless of hours
56
Calculation of Net Pay
Gross wages- Income tax (federal, state, local)- FICA - Voluntary deductions
(includes health insurance, retirement contributions, savings plans, charitable contributions, union dues)
= Net pay
57
Employer Payroll Taxes
Not deducted from paycheck – employer pays taxes per employee, in addition to salary FICA – employer’s share Unemployment tax
58
Payroll Accounting
Example:
Gross wages for Kori Company for July are $100,000. The following amounts have been withheld from employees’ paychecks:
Kori Company’s unemployment tax rate is 6%. Show the effects of these transactions on the accounting equation.
Income Tax $20,000FICA 7,650United Way contributions 5,000Union dues 3,000
59
Payroll Accounting
Record July salary and deductions:
Assets = Liab. + O/E + Rev. – Exp. Salary Pay. 64,350 Salary Exp.
(100,000) Inc. Tax Pay. 20,000
FICA Pay. 7,650 United Way Pay. 5,000 Union Dues Pay. 3,000
60
Payroll Accounting
Record payment of employee salaries:
Assets = Liab. + O/E + Rev. – Exp.Cash (64,350) Salary Pay. (64,350)
Record employer’s payroll taxes:
Assets = Liab. + O/E + Rev. – Exp. FICA Pay. 7,650 Payroll Tax Exp.
(13,650) Unemploy.
Tax Pay. 6,000
61
Compensated Absences
Employee absences for which the employee will be paid Vacation, illness, holidays
Accrued as a liability if The services have been rendered The rights (days) accumulate Payment is probable and can be
reasonably estimated
63
Using Excel Functions
Many functions built into Excel, including PV and FV calculations
Click on Paste or Insert button for list
64
FV Function in Excel
Find the FV of a 10% note payable for $2,000, due in 2 years and compounded annually
Example:
Answer:$2,420
65
PV Function in Excel
How much should you invest now at 10% (compounded annually) in order to have $2,000 in 2 years?
Example:
Answer:$1,653
(rounded)