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Lecture 9

MGT120H5 Lecture 9: Lecture 9 (Chapter 8+9) .pdf


Department
Management
Course Code
MGT120H5
Professor
Catherine Seguin
Lecture
9

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Chapter 8/9 (lecture 9)!
Short-Term Investment and Receivables!
March 18th, 2014!
Review of Chapter 7!
-Cost of Property, Plant and Equipment!
-Capital versus Operating Expenditure!
-Depreciation – Straight-line (assuming it wears out overtime), Units of
Production(delivery fan, over use) and Diminishing balance (more so in the earlier
years - ignore residual value) !
-Additional depreciation topics Intangible Assets (lacks physical form, useful to the
company) !
Chapter 8: Liabilities !
Current: one year, long term: mortgage like: 25 years !
-Liabilities and Debts !
-Borrowing is one way a company finances its operations !
-Liabilities are classified as current or long-term !
Current Liabilities!
-Current liabilities are obligations due within one year or within the company’s normal
operating cycle if it is longer. !
-Examples: accounts payable, short-term notes payable, taxes payable, current
portion of long- term debt, accrued expenses, unearned revenue, etc.!
BS: Portion of long term debt, and what is owning !
Accrued expenses: salaries!
Unearned revenue: cash , and service in the future !
Current Liabilities That Must Be Estimated!
Estimated Warranty Payable - not extended warranty. !
Assume that Black & Decker made sales of $200,000 subject to product warranties.!
Black & Decker estimates that 3% of the products it sells this year will require repair or
replacement.!
What is the estimated warranty expense?!
Estimated Warranty payable !
$200,000 × 0.03 = $6,000 $200,000 × 0.03 = $6,000!
JE: !
Warranty Expense!!!6,000!
!Estimated Warranty Payable ! ! 6,000!
to accrue warranty expense !
Contingent Liabilities!
They are a potential liability that depends on a future event arising out of past events!
Examples: Lawsuits in progress,guarantees of a subsidiary’s debt, audit by Canada
Revenue Agency, must provide to the public !
These liabilities are disclosed in the notes to the financial statements (if it is likely that
they will become actual liabilities).!
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Question #1!
On January 1, a company signs a $200,000, 4% 9-month note. Interest is due at
maturity. What is the adjusting entry required if the company prepares financial
statements on June 30.!
a. Dr Interest expense; Cr Interest payable, $4,000!
b. Dr Interest expense; Cr Cash, $4,000!
c. Dr Interest expense; Cr Cash, $6,000!
d. Dr Interest expense; Cr Interest payable, $6,000!
Solution: A!
200,000 x 4% 6/12 = $4,000!
Bonds: An intro !
-A bond is an interest bearing long-term note payable !
-bonds are groups of notes payable issued to multiple lenders called bondholders !
-principal, interest rate, payment dates !
Issue Shares !
Cash! ! xx!
!Capital Stk (equity) !! xx!
-creates no liabilities or interest expense !
-less risky to the issuing corporation !
issue bonds !
Cash! ! xx !
! Bonds payable (liability) !xx!
-does not dilute share ownership or control of the corporation !
-results in higher earnings per share because the earnings on borrowed money
usually exceeds interest expense !
(EPS)Earnings per share: !Net income - preferred stock dividend !
!!!!!# of common shares !
this tells you how much each share is earning (public company discloses on income
statement - share holders interest) !
Financing Operations with bonds or shares !
-Suppose a corporation needs $500,000 for expansion.!
-It has net income of $300,000 and 100,000 common shares outstanding.!
Management is considering two financing plans:!
-Plan 1 is to issue $500,000 of 10% bonds payable.!
-Plan 2 is to issue 50,000 common shares for $500,000.!
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