LIABILITIES. Mugan-Akman 20072 Liabilities obligations of an entity to make a future payment or to...
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Transcript of LIABILITIES. Mugan-Akman 20072 Liabilities obligations of an entity to make a future payment or to...
Mugan-Akman 2007 2
Liabilities
• obligations of an entity to make a future payment or to deliver goods or services to the third parties in the future in return for cash borrowed or service used or goods acquired
• Definite vs. estimated liabilities• classified according to their due dates
– due within one year or the operating cycle are classified as current liabilities– loans or credits that mature in more than one year are classified as long-term liabilities
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Recognition of Liabilities
• recognized when the obligation occurs for an entity
• If not recognized– Understatement of liabilities and assets– Understatement of liabilities and expenses
• to satisfy the matching and periodicity principles, adjustments are made at the end of the accounting periods
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Valuation of Liabilities
• valued at the cash amount necessary to pay back the liability or at the fair value of the goods or services to be provided
• Value – may be certain– may be estimated
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Current Liabilities
1. Short Term Bank Loans2. Current Portion of Long-term Debt3. Trade Payables
1. Accounts Payable2. Notes Payable
4. Accruals5. Unearned Revenues (deferred income)6. Payroll Liabilities7. Corporate Income Taxes8. Value Added Taxes9. Product Warranty Liability
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Notes Payable
• Classification– Purchases on credit
• Trade Payables
– Borrowing• Financial Liabilities
• Presentation• Notes with additional interest
– Notes Payable+Interest Payable
• Discounted Notes– Notes Payable-Discount on Notes Payable
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Payroll Related Liabilities
• An employee usually receives a payment that is less than the gross pay of that employee- the net pay
• Deductions:– Required deductions that must be paid by the
employee according to tax and social security regulations
– Optional deductions authorized by the employee for special purposes (such as private pension plans
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Payroll Liabilities
• Employee Income Taxes• Stamp Duty• Social Security Premiums• Unemployment Insurance
Premium
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INCOME
TAX
NAME WORKED PAY UIP SSKP EXEMPTION TAX BASE BASE TAX DUTY DEDUCTIONS PAY SSKP UIP
ALİ GELİR 30 2.000 40 280 188 9.266 1.493 224 12 556 1.444 390 60
TOTAL 2.000 40 280 188 9.266 1.493 224 12 556 1.444 390 60
TOTAL NET EMPLOYER EMPLOYERTAX CUMULATIVE INCOME STAMP
TEMPO CORPORATION
PAYROLL OF NOVEMBER 2008
DAYS GROSS EMPLOYEE EMPLOY
EE
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Payroll EntryDate Account Title and Description Debit Credit
Salary Expense 2.000SSK premiums-expense 390Unemployment Insurance Premium-expense 60 Cash 1.444 Taxes Payable-Income Taxes 224 Taxes Payable-Stamp Duty 12 SSK Premiums Payable* 770To record November payroll
30-Nov-08
cost of the employee to the employer is TL 2.450 - employee receives TL 1.444 * SSK premiums – Employer share TL 390Unemployment insurance premium- Employer share 60SSK premium-Employee share 280Unemployment insurance premium – Employee share 40 Total payable to SSK TL 770
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Corporate Income Taxes
• Corporations and limited corporations
• At a rate of 20%
• Quarterly Prepaid:
• as of March 31, June 30, September 30 and December 31
• annual corporate tax payment computed for the fiscal year and declared in April the following year
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Corporate Income Taxes-Example
During 2008:Mercan jewelry paid a total of TL 13.850 Net Income for 2008 TL 123.750 Assume Tax rate: 20%
Income Tax expense = TL 24.750. The entry at the end of the fiscal year:
Date Account Title and Description Debit CreditIncome Tax Expense 24.750 Prepaid Tax 13.850 Income Taxes Payable 10.900To record taxation on income for 2008
31-Dec-08
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Deferred Taxation
Statutory Income Statement
Income Statement in Accordance with International Accounting Standards
Net Income before Depreciation 75.000 75.000
Depreciation Expense 4.000 2.000
Net Income before Tax 71.000 73.000
Income Tax Expense 14.200 14.600
Net Income 56.800 58.400
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Value Added Taxes• When a good is sold or service provided
– VAT is added to sales price and collected from the customer– NOT a Revenue
• When a purchase of a good or a service realized– VAT is added to the purchase price and paid to
supplier– NOT an Expense
• VAT received from customers should be reimbursed to the Tax Offices– if VAT on sales > the VAT on purchases →the entity
is required to pay the difference to the Tax Office– if VAT on purchases exceeds the VAT on sales → the
difference is carried forward to the next month
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Accounting for VAT transactions
14 April: Purchased 10 items for TL17.110 on credit including 18% VAT
20 April: Sold 22 items for TL 37.642 on credit including 18% VAT
20 May: Filed the VAT return
26 May: Paid the necessary amount
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VAT entriesDate Account Title and Description Debit Credit
Merchandise Inventory 14.500VAT Deductible 2.610 Accounts Payable 17.110To record merchandise purchased on creditAccounts Receivable 37.642 Sales 31.900 VAT Payable 5.742To record sales made on April 20VAT Payable 5.742 VAT Deductible 2.610 Cash 3.132To record VAT return filed for April; and payment for VAT
14-Apr
20-Apr
26-May
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Provisions and Contingent Liabilities
• a potential liability arising from a past transaction and that depends on a future event– could be disclosed in the body of the balance
sheet with the liabilities– could be disclosed within notes to financial
statements
• certainty of the amount and the payment date determines where they will be disclosed
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Is the amount of the liability known? YES
Recognize liabilityon the balance
sheet
NO
Can the amount of Liability be reasonablyEstimated?
YES Is the liability likely to occur? (Probable)
YES
Disclose in the notes To the financial
Statements(CONTINGENT LIABILITY)
NONO
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Product Warranty Liabilities• When goods and services are sold under warranty
coverage• A good example of provision• matching principle - warranty expenses of sales in a
period should be recorded in the same period • Subsequent expenditures of warranties are charged
against warranty liability
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Long-term Financing
• Capital or Long-term Liability• advantages of raising capital
– capital stock is not paid back by the entity – dividends are distributed only if the entity has enough
income and cash• advantages of long-term liabilities :
– Shareholder Control– Tax Effects: Interest payments on liabilities are tax
deductible– Financial leverage: Financial leverage or trading on
equity means using borrowed money to increase the rate of return to the shareholders
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Types of Long Term Liabilities
• Bank Loans
• Bonds Issued-– bond indenture – bond certificate – interest paid: quarterly, semi-annually or
annually
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Types of Long Term Liabilities
• Bank Loans
• Bonds Issued-– bond indenture – bond certificate – interest paid: quarterly, semi-annually or
annually
• Installment Loans (consumer loans)
• Lease Obligations
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Types of Bonds
• Time or Serial Bonds
• Callable Bonds
• Registered or Bearer Bonds
• Convertible Bonds
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Bond terminology
• Stated rate or coupon rate or nominal rate = contractual rate written on the face of the bond
• Face value or nominal value = value written on the face of the note
• Maturity date = date when the bonds will be paid• Life of the bond = duration of the bond• Maturity value = nominal value• Market rate or effective rate of interest or yield =
prevalent rate on the market for similar term and risk bonds
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Stated Interest and Market Interest Rate
Stated Interest Rate = Market Interest Rate
Bond is sold at Par
Stated Interest Rate < Market Interest Rate
Bond is sold at Discount
Stated interest Rate > Market Interest Rate
Bond is Sold at Premium
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Price Determination• Sumatek Corp. decided to issue TL100.000 bonds with a stated interest rate
of 11% maturing in 5 years. The interest is payable semiannually on 30 June and 31 December of each year. Interest paid every six months is TL 11.000/2 =TL 5.500.
Present Value of the Maturity Value (Principal) (100.000 x 0,558; n=10 i=6%)(Table1) = TL 55.800Present Value of Interest Payments (5.500 x 7,360; n=10 i=6%)(Table 2) = 40.480Price of the Bond TL 96.280
If the market rate on 1 January 2004, was 10%
If the market rate on 1 January 2004, was 12%
Present Value of the Maturity Value (Principal) (100.000 x 0,614; n=10 i=5%)(Table 1) = TL 61.400Present Value of Interest Payments (5.500 x 7,722; n=10 i=5%)(Table 2) = 42.471Price of the Bond TL 103.871
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Bond Interest ExpenseBonds Sold Bonds Sold Bonds Sold
at Discount at Par at Premium
Principal Payment at Maturity TL 100.000 TL 100.000 TL 100.000Total Interest Paid in Cash (TL 100.000*11% /year*5 years)Total Cash Payments until Maturity TL 155.000 TL 155.000 TL 155.000Total Cash Received at the Issue Date 96.280 100.000 103.871Total Interest Expense of the Bond Issue TL 58.720 TL 55.000 TL 51.129
55.000 55.000 55.000
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Bonds issued at par • Sumatek Corp. ,TL100.000 bonds, 11%,5yrs
Date Account Title and Description Debit Credit
Cash Bonds Payable 100.000To record bonds issued at par
1-Jan-04 100.000
30 June 2004 , the first interest payment date, the Company will pay TL5.500
Date Account Title and Description Debit CreditInterest Expense Cash 5.500To record interest paid on bonds
30-Jun-04 5.500
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Accounting for Discounts on Bonds PayableThe market interest rate on 1 January 2004 - 12% and the TL 100.000 bonds were issued at TL 96.280 or at 96.28
Date Account Title and Description Debit Credit
Cash 96.280Unamortized Bond Discount 3.720 Bonds Payable 100.000To record bonds issued at market rate of 12%
1-Jan-04
partial balance sheet of Sumatek Corp. after the issue of the bonds will show
(in TL )
Bonds Payable 100.000
Less: Unamortized Bond Discount 3.720
Net Bonds Payable (Outstanding Debt) 96.280
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Effective Interest Method of Amortization of Bond Discounts
• acceptable method of amortizing the bond discounts
• interest expense of each period is computed using the market interest rate over the carrying value of the bonds
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Amortization of Bond Discount (Effective Interest) Interest
Payment
Periods
Total
Interest
Expense (A)
Interest Paid in
Cash (B)
Amortization
of Discount
(C )
Unamortized
Discount (D)
Carrying
Value of
Bonds (E)
((E)*12%/2) (100.000*11%/2) (A-B) (3.720-C) 100.000-(D)
Issue Date 0 0 0 3.720 96.280
1 5.777 5.500 277 3.443 96.557
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Amortization of Bond Discount (Effective Interest) ((E)*12%/2) (100.000*11%/2) (A-B) (3.720-C) 100.000-(D)
Issue Date 0 0 0 3.720 96.280
1 5.777 5.500 277 3.443 96.557
2 5.793 5.500 293 3.150 96.850
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Amortization of Bond Discount (Effective Interest)
Interest Payment Periods
Total Interest Expense (A)
Interest Paid in Cash (B)
Amortization of Discount
(C )
Unamortized Discount (D)
Carrying Value of
Bonds (E)
((E)*12%/2) (100.000*11%/2) (A-B) (3.720-C) 100.000-(D)
Issue Date 0 0 0 3.720 96.280
1 5.777 5.500 277 3.443 96.557
2 5.793 5.500 293 3.150 96.850
3 5.811 5.500 311 2.839 97.161
4 5.830 5.500 330 2.509 97.491
5 5.849 5.500 349 2.160 97.840
6 5.870 5.500 370 1.789 98.211
7 5.893 5.500 393 1.397 98.603
8 5.916 5.500 416 980 99.020
9 5.941 5.500 441 539 99.461
10 6.039 5.500 539 0 100.000
Total (*) 58.720 55.000 (**) 3.720
(*) Equals to total interest expense over the life of the bond (rounded)(**) Rounded
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Accounting for Premiums on Bonds PayableSumatek Corp. issued TL100.000 bonds, stated interest rate of 11% maturing
in 5 years on 1 January 2004. The interest on the bonds are payable semiannually on 30 June and 31 December each year. The market interest rate on 1 January 2004 was 10% and the bonds were issued at TL 103.871
Date Account Title and Description Debit Credit
Cash 103.871 Bonds Payable 100.000 Unamortized Bond Premium 3.871To record bonds issued at market rate of 10%
1-Jan-04
partial balance sheet
(in TL )
Bonds Payable 100.000
Plus: Unamortized Premium 3.871Net Bonds Payable (Outstanding Debt) 103.871
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Amortization of Bond Premium
Principal Payment at Maturity TL 100.000Total Interest Paid in Cash (100.000*11%*5) 55.000Total Cash Payments till Maturity TL 155.000
Total Cash Received at the Issue Date 103.871Total Interest Expense of the Bond Issue TL 51.129
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Effective Interest Method of Amortization
of Bond Premiums Total Interest
ExpenseInterest Paid in
CashAmortization of Premium
Unamortized Premium
Carrying Value of Bonds
(A) (B) (C) (D) (E)((E)*10%/2) (100.000*11%/2) (B-A) (3,871-C) 100.000+(D)
Issue Date 0 0 0 3.871 103.8711 5.194 5.500 306 3.565 103.565
Interest Payment Periods
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Effective Interest Method of Amortization
of Bond Premiums Total Interest
ExpenseInterest Paid in
CashAmortization of Premium
Unamortized Premium
Carrying Value of Bonds
(A) (B) (C) (D) (E)((E)*10%/2) (100.000*11%/2) (B-A) (3,871-C) 100.000+(D)
Issue Date 0 0 0 3.871 103.8711 5.194 5.500 306 3.565 103.5652 5.178 5.500 322 3.243 103.243
Interest Payment Periods
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Effective Interest Method of Amortization
of Bond Premiums Total Interest
ExpenseInterest Paid in
CashAmortization of Premium
Unamortized Premium
Carrying Value of Bonds
(A) (B) (C) (D) (E)((E)*10%/2) (100.000*11%/2) (B-A) (3,871-C) 100.000+(D)
Issue Date 0 0 0 3.871 103.8711 5.194 5.500 306 3.565 103.5652 5.178 5.500 322 3.243 103.2433 5.162 5.500 338 2.905 102.9054 5.145 5.500 355 2.550 102.5505 5.128 5.500 372 2.178 102.1786 5.109 5.500 391 1.787 101.7877 5.089 5.500 411 1.376 101.3768 5.069 5.500 431 945 100.9459 5.047 5.500 453 492 100.492
10 5.008 5.500 492 0 100.000Total 51.129 55.000 3.871
Interest Payment Periods
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Installment (consumer) Loans
Principal Loan amount: TL 30.000
Loan period: 2 years
Monthly installments: TL 2.174
Annual Interest Rate 60%
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Repayment Schedule of Consumer Loan
Period Installment
Outstanding Balance at the Beginning
Interest Expense
Principal Payment
Outstanding Balance After Payment of the Installment
0 - - - - 30.000 1 2.174 30.000 1.500 674 29.326 2 2.174 29.326 1.466 708 28.618 3 2.174 28.618 1.431 743 27.875 4 2.174 27.875 1.394 780 27.095 5 2.174 27.095 1.355 819 26.276
22 2.174 5.925 296 1.878 4.047 23 2.174 4.047 202 1.972 2.076 24 2.174 2.076 104 2.076 (0)
Total 52.176
30.000 * .05= TL 1.500
29.326 * .05= TL 1.466
Mugan-Akman 2007 44
• operating or a capital (finance) lease
• Capital Lease– Significant risks and benefits of the
ownership belong to lessee
• Present Value of Future Lease Payments- – Recorded as a Liability– Recorded as an asset and depreciated
Lease Obligations
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PeriodLease Payment
Interest at each Period
Repayment of Principle
Balance of Lease Obligation
0 - - - 42.680 1 8.000 4.268 3.732 38.948 2 8.000 3.895 4.105 34.843 3 8.000 3.484 4.516 30.327 4 8.000 3.033 4.967 25.360 5 8.000 2.536 5.464 19.896 6 8.000 1.990 6.010 13.885 7 8.000 1.389 6.611 7.274 8 8.000 727 7.274 (0)
For example: 8,000 per year for 8 years at 10% interest rate
Net Present Value of Future Lease Payments at the date of the lease agreement is TL 42.680
10% * 42.680