ch.9 current liabilities and time value of money

Ch.9Ch.9Current LiabilitiesCurrent Liabilities

andandTime Value of MoneyTime Value of Money

Part I: Current LiabilitiesPart I: Current Liabilities• Current liabilities:

– Require payment within one year (or one operating cycle whichever is longer)

Liabilities and shareholders' equityCurrent liabilities:

Notes payable $ 21.1 Current maturities of long-term debt 3.9

Trade accounts payable 123.7Income taxes payable 18.3Accrued expenses and other

current liabilities 134.4Total current liabilities $301.4

Jacuzzi BrandsJacuzzi BrandsPartial Balance Sheet Partial Balance Sheet –– 2004 2004

(in millions)

Requires payment within

one year

Selected 2004 Liquidity RatiosSelected 2004 Liquidity RatiosCurrentRatio

Jacuzzi Brands 1.79Sara Lee 1.06Tommy Hilfiger 3.87Boeing 0.72Nike 2.50

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

LO1

1. Accounts Payable1. Accounts Payable

Amounts owed for the purchase of inventory, goods, or services on credit

2. Note Payable (Short term)2. Note Payable (Short term)

S.J.Devona

I promise to pay $1,000 plus 12% annualinterest on December 31, 2007.

Date: January 1, 2007

Signed:_________Lamanski Co.

Total repayment = $1,120 $1,000 + ($1,000 × 12%)

Discounted Promissory NoteDiscounted Promissory Note

In exchange for $880 received today, I promise to pay $1,000 on December 31, 2007.

Date: January 1, 2007

Signed:_________Lamanski Co.

Effective interest rate on note = 13.6% ($120 interest/$880 proceeds)

3. Current Maturities of Long-Term 3. Current Maturities of Long-Term DebtDebt

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

4. Income Taxes Payable4. Income Taxes PayableRecord expense when incurred, not

when paid

Record 2007 taxexpense

Taxes Paid

12/31/07 3/15/08

LO2

5. Contingent Liabilities5. Contingent Liabilities

Obligation involving existing condition Outcome not known with

certainty Dependent upon some

future event Actual amount is

estimated

LO4

Accrue estimated amount if:• Liability is probable

• Amount can be reasonably estimated

Contingent LiabilitiesContingent Liabilities

In year criteria are met: Expense (loss) XXX

Liability XXX

Warranties

Premium or coupon offers

Lawsuits

Typical Contingent LiabilitiesTypical Contingent Liabilities

Recording Contingent LiabilitiesRecording Contingent Liabilities

Quickkey Computer sells a computer product for $5,000 with a one-year warranty. In 2007, 100 computers were sold for a total sales revenue of $500,000. Analyzing past records, Quickkey estimates that repairs will average 2% of total sales.

Example:

Recording Contingent LiabilitiesRecording Contingent Liabilities

Probable liability has been incurred?

Amount reasonably estimable?

Warranty Expense 10,000 Estimated Liability 10,000

YES

YES

Record in 2007:

Disclosing Contingent LiabilitiesDisclosing Contingent Liabilities

IF not probable

but reasonably possible

ORamount not estimable

Disclose in financial statement

notes

Contingent AssetsContingent Assets Contingent gains and assets are not

recorded but may be disclosed in financial statement notes

Conservatism principle applies

Part II: Time Value of MoneyPart II: Time Value of Money Prefer payment at the present time rather

than in the future due to the interest factor

Present and future value concepts allow people to compare the value of money at different point in time

Applicable to both personal and business decisions

• If you invest $100 now at 10% annual return. How much money would you have in your account after 100 years?

Simple v. compounding Simple v. compounding interestinterest

• Simple interest: earn interest only on the principal

• Compounding interest: earn interest on both principal and the interest earned in previous periods

Simple InterestSimple Interest

I = P × R × T

Princip

al

Dollar

amou

nt of

inter

est p

er ye

ar

Time i

n year

s

Inter

est r

ate a

s a p

erce

ntage

LO5

Simple Interest

principal amount = $ 100annual interest rate = 10%term of note = 100 years

P × R × TInterest = $100 × .10 × 100 = $ 1,000

Total = $100 + $1,000 = $1,100

Compound InterestCompound Interest Interest is calculated on principal plus previously

accumulated interest• Interest on interest

Compound interest amount always higher than simple interest due to interest on interest

Interest Compounding

principal amount = $ 100

annual interest rate = 10%

term of note = 100 years

Annual compounding of interest

LO6

• Total amount after $100 years:

100(1+.1)(1+.1)(1+.1)(1+.1)(1+.1)…

Compound Interest ComputationsCompound Interest Computations

Present value of an

annuity

Future value of an

annuity

Present value of a

single amount

Future value of a

single amount

1. Future Value of Single Amount

Known amount of single payment or

investment Future Value

+ Interest =

Future Value of a Single Amount Future Value of a Single Amount ExampleExample

If you invest $10,000 today @ 10% compound interest,

what will it be worth 3 years from now? invest

$10,000Future

Value = ?

+ Interest @ 10% per year

Year 1 Year 2 Year 3

Future Value of a Single Amount Future Value of a Single Amount Example Example –– Using Formulas Using Formulas

FV = p(1 + i)n

= $10,000(1.10)3

= $13,310

FV = Present value × table factor = $10,000 × (3 periods @ 10%)

Future Value of a Single Amount Future Value of a Single Amount Example Example –– Using Tables Using Tables

FV = ??PV = $10,000


(n) 2% 4% 6% 8% 10% 12% 15% 1 1.020 1.040 1.060 1.080 1.100 1.120 1.150 2 1.040 1.082 1.124 1.166 1.210 1.254 1.323 3 1.061 1.125 1.191 1.260 1.331 1.405 1.5214 1.082 1.170 1.262 1.360 1.464 1.574 1.749

5 1.104 1.217 1.338 1.470 1.611 1.762 2.011 6 1.126 1.265 1.419 1.587 1.772 1.974 2.313 7 1.149 1.316 1.504 1.714 1.949 2.211 2.660 8 1.172 1.369 1.594 1.851 2.144 2.476 3.059

Future Value of $1Future Value of $1

FV = Present value × table factor = $10,000 × (3 periods @ 10%) = $10,000 × 1.331 = $13,310

Future Value of a Single Amount Future Value of a Single Amount Example Example –– Using Tables Using Tables

PV = $10,000

Yr. 1 Yr. 2 Yr. 3

FV = $13,310

2. Present Value of Single Amount

Discount

Known amount of single

payment in futurePresent Value

Present Value of a Single Amount Present Value of a Single Amount ExampleExample

If you will receive $10,000 in three years, what is it worth today (assuming you could invest at 10% compound interest)?

$10,000

Discount @ 10%


Present Value = ?

Present Value of a Single Amount Present Value of a Single Amount Example Example –– Using Formulas Using Formulas

PV = Future value × (1 + i)–n

= $10,000 × (1.10)–3

= $7,513

PV = Future value × table factor = $10,000 × (3 periods @ 10%)

Present Value of a Single Amount Present Value of a Single Amount Example Example –– Using Tables Using Tables

FV = $10,000PV = ??


(n) 2% 4% 6% 8% 10% 12% 15% 1 0.980 0.962 0.943 0.926 0.909 0.893 0.870 2 0.961 0.925 0.890 0.857 0.826 0.797 0.756 3 0.942 0.889 0.840 0.794 0.751 0.712 0.6584 0.924 0.855 0.792 0.735 0.683 0.636 0.572

5 0.906 0.822 0.747 0.681 0.621 0.567 0.497 6 0.888 0.790 0.705 0.630 0.564 0.507 0.432 7 0.871 0.760 0.665 0.583 0.513 0.452 0.376 8 0.853 0.731 0.627 0.540 0.467 0.404 0.327

Present Value of $1Present Value of $1

PV = Future value × table factor = $10,000 × (3 periods @ 10%) = $10,000 × 0.751 = $7,510

Present Value of a Single Amount Present Value of a Single Amount Example Example –– Using Tables Using Tables

PV = $7,510

Yr. 1 Yr. 2 Yr. 3

FV = $10,000

PracticePractice• If Johnson Company promises to pay

you $10,000,000 eight years from now, how much that promised payment worth now if the appropriate interest rate is 12%?

Periods

FutureValue = ?

+ Interest

3. Future Value of an Annuity

1 2 3 4

$0 $3,000 $3,000 $3,000 $3,000

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 an Annuity ExampleFuture Value of an Annuity Example

$0 $3,000 $3,000 $3,000 $3,000

Year 1 Year 2 Year 3 Year 4

FV = ??

$0 $3,000 $3,000 $3,000 $3,000


FV = ??


FV = Payment × table factor = $3,000 × (4 periods @ 10%)

(n) 2% 4% 6% 8% 10% 12% 15% 1 1.000 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 2.150 3 3.060 3.122 3.184 3.246 3.310 3.374 3.4734 4.122 4.246 4.375 4.506 4.641 4.779 4.993

5 5.204 5.416 5.637 5.867 6.105 6.353 6.742 6 6.308 6.633 6.975 7.336 7.716 8.115 8.754 7 7.434 7.898 8.394 8.923 9.487 10.089 11.067 8 8.583 9.214 9.897 10.637 11.436 12.300 13.727

Future Value of Annuity of $1Future Value of Annuity of $1


$0 $3,000 $3,000 $3,000 $3,000


FV = $13,923PV = Payment × table factor = $3,000 × (4 periods @ 10%) = $3,000 × 4.641 = $13,923

4. Present Value of an Annuity4. Present Value of an Annuity

1 2 3 4

$0 $500 $500 $500 $500

Periods

A

FEDERAL RESERVE NOTE

THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

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12

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ONE DOLLARONE DOLLAR

WASHINGTON, D.C.

THIS NOTE IS LEGAL TENDER

FOR ALL DEBTS, PUBLIC AND PRIVATE

SERIES

1985

H 293

A



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12

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12

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WASHINGTON, D.C.



SERIES

1985

H 293

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12

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WASHINGTON, D.C.



SERIES

1985

H 293

A



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SERIES

1985

H 293

Discount

PresentValue = ?

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?

Present Value of an Annuity Present Value of an Annuity ExampleExample

$0 $4,000 $4,000 $4,000 $4,000


PV = ??

$0 $4,000 $4,000 $4,000 $4,000


PV = ??


PV = Payment × table factor = $4,000 × (4 periods @ 10%)

(n) 2% 4% 6% 8% 10% 12% 15% 1 0.980 0.962 0.943 0.926 0.909 0.893 0.870 2 1.942 1.886 1.833 1.783 1.736 1.690 1.626 3 2.884 2.775 2.673 2.577 2.487 2.402 2.2834 3.808 3.630 3.465 3.312 3.170 3.037 2.855

5 4.713 4.452 4.212 3.993 3.791 3.605 3.352 6 5.601 5.242 4.917 4.623 4.355 4.111 3.784 7 6.472 6.002 5.582 5.206 4.868 4.564 4.160 8 7.325 6.733 6.210 5.747 5.335 4.968 4.487

Present Value of Annuity of $1Present Value of Annuity of $1


$0 $4,000 $4,000 $4,000 $4,000


PV = $12,680PV = Payment × table factor = $4,000 × (4 periods @ 10%) = $4,000 × 3.170 = $12,680


you $1,000,000 each and every year for eight years, how much that promised payments worth now if the appropriate interest rate is 12%?


you $10,000,000 eight years from now and $1,000,000 each year for eight years, how much would you be willing to pay for those promises if the appropriate interest rate is 12%?

Appendix AAppendix A(FYI only)(FYI only)

Accounting Tools: Accounting Tools: Payroll Accounting Payroll Accounting

Calculation of Gross WagesCalculation 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

LO8

Calculation of Net PayCalculation of Net PayGross wagesLess: Income tax (federal, state, local) FICA—Employee’s share Voluntary deductions

(includes health insurance, retirement

contributions, savings plans, charitable

contributions, union dues, etc.)= Net pay

Payroll AccountingPayroll Accounting

Example:

Gross wages for Kori Company for July are $100,000. The following amounts have been withheld from employees’ paychecks:

Income Tax $20,000FICA 7,650United Way Contributions 5,000Union Dues 3,000

Payroll AccountingPayroll AccountingJournal entry:July 31 Salary Expense 100,000

Income Tax Payable 20,000FICA Payable 7,650United Way Payable 5,000Union Dues Payable

3,000Salary Payable 64,350

To record July salary and deductions.

Employer Payroll TaxesEmployer Payroll Taxes Not deducted from paycheck –

employer pays taxes per employee, in addition to salary• FICA—Employer’s share• Unemployment tax

Assuming Kori Company’s unemployment tax rate is 3%.

Employer payroll taxesEmployer payroll taxes

July 31 Payroll Tax Expense 10,650FICA Payable

7,650Unemployment Tax Payable

3,000To record employer’s payroll taxes.

ch.9 current liabilities and time value of money

Documents

year slide

lo4 slide

lo2 slide

credit slide

lo1 slide

total current liabilities

time value of money

year warranty