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ACCT 1201 (41)

ACCT Chapter 9 Condensed (Day 2).docx

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ACCT 1201
Ronen Gal-or

Chapter 9 Condensed (Day 2) I. Liabilities Defined and Classified II. Quick Ratio III. Short-Term Liabilities A. Income Taxes Payable B. Accrued Compensation C. Payroll Taxes Payable D. Notes Payable E. Current Portion of Long-Term Debt F. Deferred Revenues IV. Contingent Liabilities V. Working Capital Management VI. Long-Term Notes Payable and Bonds VII. Lease Liabilities VIII. Present Value Concepts IX. Future Value Concepts VI. Long-Term Notes Payable and Bonds A. Private placement (often called note payable) – long-term debt raised directly from financial service organizations (example: Banks, Trusts) Chapter 4 example, where Facebook loaned money to MySpace B. Bonds – publicly traded debt With bonds you are acting as a bank – the big difference is the public aspect i. Bondholders can sell their bonds to other investors prior to maturity ii. Bonds Covered in Chapter 10 VII. Lease Liabilities A. Operating Lease - does not meet any of the four criteria (see below) established by GAAP and does not cause the recording of an asset and liability i. No liability is recorded when an operating lease is created ii. Instead, company records rent expense as it uses the asset Dr. Rent Expense Don’t need to know this Cr. Cash $100 today is not the same as $100 one year from now, because you can invest it B. Capital lease – meets at least one of the four criteria established by GAAP and results in the recording of an asset and liability: i. The lease term is 75% or more of the asset’s expected economic life ii. Ownership of the asset is transferred to the lessee at the end of the lease term. iii. Bargain Purchase Option - The lease contract permits the lessee to purchase the asset at a price that is lower than its fair market value iv. The present value of the lease payments is 90% or more of the fair market value of the asset when the lease is signed 1 When a company enters into a capital lease: Dr. Leased Equipment Cr. Lease Payable VIII. Present Value Concepts A. Present Value - current value of an amount to be received in the future; the difference between the current and future value is due to interest. B. Nature of Interest i. Interest is payment for the use of another person’s money. It is the difference between the amount borrowed (principal) and the amount repaid or collected. ii. Three elements of a financing transaction  Principal (P): The original amount borrowed  Interest rate (i): annual percentage of the principal  Time (n): the number of years/periods that the principal is borrowed C. In a present value problem, you know the dollar amount of a cash flow that will occur in the future and need to determine its value now D. Present Value of a Single Amount: n Present Value = Future Value ÷ (1 + i ) Formula is not difficult to use; however, most analysts use present value tables, calculators, or Excel Example: On 7/1/01, MySpace borrowed $60,000 and signed a note to Facebook. The stated interest rate on the note is 10%. Both the principal and the interest are due on 6/30/02. The entries for MySpace are: Inception (7/31/01) – MySpace borrows $60,000 and signs note payable 7/1/01 Dr. Cash $60,000 Cr. Notes Payable $60,000 Adjusting Entry (12/31/01) to recognize Interest Expense Incurred Interest Expense = $60,000 * .1 * (6/12) = $3,000 12/31/01 Dr. Interest Expense $3,000 Cr. Interest Payable $3,000 Conclusion (6/30/02) – MySpace pays the interest and principle on the loan 6/30/02 Dr. Notes Payable $60,000 Cr. Cash $60,000 6/30/02 Dr. Interest Payable $3,000 Dr. Interest Expense $3,000 Cr. Cash $6,000 2 Present Value = $60,000 Future Value = $66,000 1. Using the Present Value Formula how do we find the Present Value if we were only given the Future Va
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