69. Current & long term Liab.

Ethical reporting of Liab requires that they be properly recognized, valued, classified, & disclosed. A liability should be recognized (recorded) at the time it is incurred. However, for accrued & estimated Liab, it is necessary to make adjusting entries at the end of an accounting period. Contracts representing future obligations are not recorded as Liab until they become current obligations.

Current Liab are valued at the actual or estimated amount of money necessary to satisfy the obligation or at the fair market value of the goods or services that must be delivered.

Current Liab are obligations expected to be satisfied within one year or the normal operating cycle, whichever is longer. They are normally paid out of current assets or with cash generated from operations. Long-term Liab are obligations due beyond one year or the normal operating cycle.Supplemental disclosure of some Liab may be required in the notes to the financial statements—for example, when a company has special credit arrangements that can influence potential investors’ decisions.

1. Definitely determinable Liab are obligations that can be measured exactly. They include accounts payable, bank loans & commercial paper, notes payable, accrued Liab, dividends payable, sales & excise taxes payable, current portions of long-term debt, payroll Liab, & unearned revenues.

2. Estimated Liab are definite obligations, but the amount of the obligations must be estimated at the balance sheet date because the exact figure will not be known until a future date. Examples of estimated Liab are corporate income taxes, property taxes, promotional costs, product warranties, & vacation pay.

Businesses are required to disclose contingent Liab & commitments in the notes to their financial statements.

a A contingent liability is a potential liability that may or may not become an actual liability. The uncertainty about its outcome is settled when a future event does or does not occur. Contingent Liab arise from things like pending lawsuits, tax disputes, & failure to follow government regulations. Two conditions must be met before a contingency is entered in the accounting records: the liability must be probable, & it can be reasonably estimated.

b. A commitment is a legal obligation that does not qualify for recognition as a liability. Leases & purchase agreements are the most common examples of commitments.

Payables turnover= COGS + - change in INV/ Av Acc Pay № of times the Comp pays Acc Pay during acc period

Days pay = 365 / Pay turnover How long it takes to pay

Long-term liabilities are obligations that are expected to be paid after one year and are often in the form of bonds or long-term notes.

Long-term debt must be paid at maturity and usually requires periodic payments of interest.

Debt financing is not always in a company’s best interest.It may entail the following:

Financial risk. A high level of debt exposes a company to financial risk. A company whose plans for earnings do not pan out, whose operations are subject to the ups and downs of the economy, or whose cash flow is weak may be unable to pay the principal amount of its debt at the maturity date or even to make periodic interest payments. Creditors can then force the company into bankruptcy

Negative financial leverage. Financial leverage can work against a company if the earnings from its investments do not exceed its interest payments

A bond is a security, usually long term, representing money that a corporation borrows from the investing public.4 types:

• Secured bonds have specific assets of the issuer pledged as collateral for the bonds.

• Unsecured bonds are issued against the general credit of the borrower.

• Convertible bonds can be converted into common stock at the bondholder’s option.

• The conversion often gives bondholders an opportunity to benefit if the market price of the common stock increases substantially.

• For the issuer, the bonds sell at a higher price and pay a lower rate of interest than comparable debt securities that do not have a conversion option.

• Callable bonds are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer.

• Registered bonds are issued in the names of the bondholders. pays interest by check on the interest payment date. Most bonds today are registered.

• Coupon bonds are not registered with the organization. Instead, they bear coupons stating the amount of interest due and the payment date. The bondholder removes the coupons from the bonds on the interest payment dates and presents them at a bank for collection

Discounts and Premiums

• If the market interest rate fluctuates from the face interest rate before the issue date, the issue price of bonds will not equal their face value. This fluctuation in market interest rate causes the bonds to sell at either a discount or a premium:

• A discount equals the excess of the face value over the issue price. The is sueprice will be less than the face value when the market interest rate is higher than the face interest rate.

• A premium equals the excess of the issue price over the face value. The issue price will be more than the face value when the market interest rate is lower than the face interest rate

Long-term notes payable.Are similar to short-term interest-bearing notes payable except that the terms of the notes exceed one year.

Mortgage notes payable are widely used in the purchase of homes by individuals and in the acquisition of plant assets by many companies. Like some other long-term notes payable, the mortgage may stipulate either a fixed or an ad justable interest rate.

Long-Term Leases

A company can obtain an operating asset in three ways:1. By borrowing money and buying the asset2. By renting the asset on a short-term lease3. By obtaining the asset on a long-term leaseThe first two methods do not create accounting problems.

The 3 method is one of the fastest-growing ways of financing plant assets in the United States today. A long-term lease on a plant asset has several advantages. It requires no immediate cash payment, the rental payment is deducted in full for tax purposes, and it costs less than a short-term lease. Acquiring the use of plant assets under long-term leases does create several accounting challenges.

Pension Liabilities

There are 2 kinds of pension plans:Defined contribution plan.Under a defined contribution plan, the employer makes a fixed annual contribution, usually a percentage of the employee’s gross pay; the amount of the contribution is specified in an agreement between the company and the employees. Retirement payments vary depending on how much the employee’s retirement account earns. Employ-ees usually control their own investment accounts, can make additional contributions of their own, and can transfer the funds if they leave the company. Defined benefit plan.Under a defined benefit plan, the employer contributes an amount annually required to fund estimated future pension liability arising from employment in the current year. The exact amount of the liability will not be known until the retirement and death of the current employees. Although the amount of future benefits is fixed, the annual contributions vary depending on assumptions about how much the pension fund will earn.

Other Post-Retirement Benefits

Many companies provide retired employees not only with pensions but also with health care and other benefits.