Long term liabilities.Last month we discussed accounting for current liabilities Current Liabilities
Usually appearing on a company's balance sheet, it represents the amount owed for interest, accounts payable, short-term loans, expenses incurred but unpaid, and other debts due within one year. , those obligations which were expected to be met within one year. The second chapter of the liability story concerns long-term liabilities Long-Term Liabilities
Recorded on the balance sheet, a company's liabilities for leases, bond repayments and other items due in more than one year.
A company's long-term liabilities are accounted for by its debt obligations to other parties which last longer than , those that will not be satisfied within the year. Often found long-term liabilities are notes, bonds and mortgages payable, lease obligations, deferred income taxes payable, pensions and unearned revenues Unearned Revenue
When an individual or company receives money for a service or product that has yet to be fulfilled.
For example, prepayment on a lease contract - the revenue is a liability until it has been earned.
See also: Earned Income, Passive Income . Care must be taken to ensure that all long-term liabilities are recorded, since the existence, terms and kinds of long-term debt Long-Term Debt
Loans and financial obligations lasting over one year.
For example debts obligations such as bonds and notes which have maturities greater than one year would be considered long-term debt. will determine how the readers of the financial statements evaluate the firm's ability to pay its current and possible future obligations. With careful attention given to long-term liabilities, the balance sheet will be a more valuable information source for all concerned.
A long-term note payable may be written in either an interest bearing or non-interest bearing form. Interest-bearing notes are recorded at face value. As payments are made on these notes, interest expense is recognized and the balance of the liability is reduced. We know that it is highly unlikely that a "rational business person" would lend money for free, and thus we assume that "non-interest-bearing" notes must include some interest in the face value! To record this type of note, the face value must be discounted to the present value. The discounted interest is shown as the contra-liability account called "Discount on Notes Payable," which is recognized as interest as periodic payments are made on the note.
Mortgages frequently arise for companies that wish to borrow money to buy land, build buildings or purchase major operating assets Operating Assets
Another term for working capital. . Mortgages differ from notes payable in that the assets purchased are usually pledged as security against the debt. And, of course, they are usually larger debts! Mortgages involve periodic payments that include both principal and interest. Because the interest is in addition to the principal, mortgages are generally recorded at their face value.
Lease obligations must be reviewed carefully to determine whether the lease is an operating lease Operating Lease
A lease contract that allows the use of an asset, but does not convey rights similar to ownership of the asset.
An operating lease is not capitalized it is accounted for as a rental expense. (in reality a short-term rental agreement A rental agreement is a contract, usually written, between the owner of a property and a renter who desires to have temporary possession of the property. As a minimum, the agreement identifies the parties, the property, the term of the rental, and the amount of rent for the term. ) or a capital lease. Short-term leases are recognized as "rental expense" as payments are made, and thus do not appear on the balance sheet. A capital lease, however, is in effect a purchase and results in the recording of an asset (the item leased) and a long-term liability to the lessor One who rents real property or Personal Property to another.
A lessor of land is a landlord. Cross-references
Landlord and Tenant.
lessor n. the owner of real property who rents it to a lessee pursuant to a written lease. . Interest is assumed to be included in the lease's face amount, and we must record the liability at the present value of the obligation. Interest will be recognized as lease payments are made.
Accounting for deferred income tax liability has been the subject of serious controversy for a number of years. FASB FASB
See: Financial Accounting Standards Board
See Financial Accounting Standards Board (FASB). #96, postponed twice and now replaced with FASB #109, was to provide comparability of financial statements with regard to this area. Instead, the four-year span between them has caused inconsistency in the way many companies have reported this complex topic. With the 12/15/92 effective date for FASB #109, comparability should soon be more achievable, and practitioners should be spared the complexity that FASB #96 threatened. For more information on this long-term liability, refer to the June 1992 NPA (1) (Numbering Plan Area) The Bellcore/Telcordia telephone area code system in use in the U.S., Canada, Alaska, Hawaii and islands in the Caribbean. See NPA code.
(2) (Network Professional Association, San Diego, CA, www.npanet. Accounting Scene article.
Finally, a company's obligation to its pension plan can represent a major portion of long-term liabilities. FASB #87 requires that firms with a pension plan report a minimum pension liability that is at least equal to the unfunded accumulated benefit obligation Accumulated Benefit Obligation (ABO)
An approximate measure of the liability of a pension plan in the event of a termination at the date the calculation is performed. Related: Projected benefit obligation. . To calculate the unfunded ABO ABO
See: Accumulated Benefit Obligation , one first determines the ABO, an estimate of the present value of future benefits based on current salary levels of those eligible for the plan. From this ABO is subtracted the fair market value of the pension plan assets. Clearly numerous audiences are interested in careful reporting of this obligation, including government bodies, unions, employees, potential investors or creditors and, of course, company management.
On page 8 are problems that deal with liabilities and their reporting. Try your hand at them! The answers will be printed in February.
Scenario for January Quiz
After reviewing Carvel's balance sheet, the loan officer for First National Bank decided that, due to the large amount of the loan request, the company's financial statements should be reviewed before the bank would approve the application. During the review, the following information was discovered.
1. No interest had been recorded on either the short-term or the long-term note payable. The short-term note is an 8% note that has been outstanding for 6 months, and 3 months' interest has accrued on the long-term note which bears interest at 10%.
2. Accrued wages totaling $2,000 should have been recorded at year-end. (Ignore any payroll taxes Payroll Tax
Tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee. In most countries, including the U.S., both state and federal authorities collect some form of payroll tax. or withholdings.)
3. Sales Revenue account balance at year-end revealed a $3,600 payment from a customer for merchandise to be delivered in 1993.
4. No entry was made to record income taxes for 1992. The auditor determines that Carvel carvel: see caravel. is subject to a 20% tax rate for 1992. The company had originally computed net income of $48,000, which was added to the Retained Earnings Retained Earnings
The percentage of net earnings not paid out in dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders equity on the balance sheet. account balance.
January Quiz I. Given the following amounts taken from the adjusted trial balance of ABC Corp., prepare the liabilities section of the balance sheet: Accounts Payable $36,000 Property Taxes Payable 6,300 Short-term Notes Payable 44,000 Mortgage Payable (due within one year) 28,000 Mortgage Payable (due after one year) 300,000 Accrued Interest on Mortgage Payable 3,000 Lease Obligations (due within one year) 58,000 Lease Obligations (due after one year) 414,000 Rent Payable 70,000 Income Taxes Payable 50,000 Federal & State Unemployment Taxes Payable 16,000 Deferred Income Taxes Payable 105,000
TABULAR DATA OMITTED
Revise the balance sheet to reflect the newly discovered information. If you were the loan officer, would you approve the application?
Answers to December Quiz
The liabilities for Zworykin TV Repair are as follows: Trade accounts payable $3,160.00 Notes payable 5,000.00 Property tax liability 4,620.00 Sales tax payable ($88.548 x .05) 4,427.00 FICA tax payable ($20,400 x .0765 x 2) 3,121.20 Federal unemployment tax payable ($14,000 x .008) 112.00 State unemployment tax payable ($14,000 x .054) 756.00 Federal income tax withholding 952.00 Total liabilities $22,148.20
Other liabilities other liabilities
Small and relatively insignificant liabilities. For financial reporting purposes, firms often combine small liabilities into this single category rather than listing each liability separately. may exist for which no documentation was provided. There may be bank loans, missing invoices or accrued liabilities Accrued liabilities are liabilities which have occurred, but have not been paid or logged under accounts payable during an accounting period; in other words, obligations for goods and services provided to a company for which invoices have not yet been received. . As an example, is Sophie's mom charging interest on the note? Tony should be questioned about these possibilities, and perhaps a conversation should be held with Tony's bank. Also, Tony may owe penalties arising from his failure to remit To transmit or send. To relinquish or surrender, such as in the case of a fine, punishment, or sentence.
An individual, for example, might remit money to pay bills.
TO REMIT. To annul a fine or forfeiture.
2. his taxes on a timely basis. State and federal officials should be contacted to determine if such penalties are forthcoming.
This is an ideal opportunity to assist Tony in basic accounting!