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BUSI 1003 (12)
Chapter 8

Chapter 8

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Carleton University
BUSI 1003
Patti Proulx

Chapter 8 - Liabilities and Stockholders’ Equity ● Financing Operations: Businesses might finance their operations through 1 of 2 ways: a. Debt Financing - Includes all liabilities owed by a business b. Equity Financing - Investments from owners of the business. Stock is issued to represent ownership interest in a corporation ● Liabilities: Debts or obligations arising from past transactions that will be paid with assets or services ○ Current Liabilities - Obligations due within one year or within the company’s normal operating cycle, whichever is longer ○ Measured at cash equivalent ● Accounts Payable - Also called Trade accounts Payable ○ Obligations to pay for goods and services used in the basic operating activities of the business ○ Inexpensive way to finance activities of a business. Generally, there is no interest until 30 days after the invoice. ● Notes Payable - Sometimes called IOUs ○ Promissory notes are used to settle an account payable or when a business lends money to an individual or another business ○ Interest is accrued using the formula for “Simple Interest” ■ To the lender, interest is a revenue ■ To the borrower, interest is an expense ○ Interest = Principal x Annual Interest Rate x Time Period to Accrue for ○ A business may sign a promissory note to settle an Account Payable ● Income Tax Payable ○ Corporations must pay provincial and federal income tax on their income ● Contingent Liabilities: Potential liabilities that arise because of events or transactions that have already occurred ○ Product Warranty Payable ■ Manufacturers often offer a warranty on their products ■ It is “likely” that they will have to honour this warranty and the amount “can be estimated” based on prior experience. Therefore, manufacturers need to record this liability ■ Often expressed as a percentage of sales ■ As repairs are made, can reduce warranty payable account ○ Recording Payroll ● Long Term Liabilities ○ Bonds ■ Notes payable issued to multiple lenders (bondholders) ■ Certificate that is issued shows: Interest rate (face rate or coupon rate), Principal, Maturity Date, Interest dates ■ Bond Interest Rates: ● Face Rate/Coupon Rate - Interest is paid at the rate specified on the bond ● Market Rate/Yield/Effective Interest Rate - The interest rate the bond will yield after selling at a discount or premium ■ Bonds Not Issued at Face Value: ● Discount on Bonds Payable ○ Market rate of interest > contract rate ○ Buyers are not willing to pay face value for the bonds ● Premium on Bonds Payable ○ Market rate of interest < contract rate ○ Buyers are willing to pay more than face value for their bonds ● The Corporate Form of Organization ○ Profit/Not for profit ○ Private/Public Corporation ● Characteristics of a Corporation ○ Separate Legal Existence
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