For example, if the employer withheld $50 of CPP from Employee what is an estimated liability A’s gross pay, the employer would have to pay CPP of $50. Therefore, the total amount of CPP being paid to the government regarding Employee A is $100 (calculated as the employee’s portion of $50 plus the employer’s portion of $50). The interest expense recorded on the income statement would be $89 ($80 + 9).
Employer’s Entries to Pay the Payroll Deductions
The interest amount paid and received by the bond-holder will net to two months. This makes intuitive sense given that the bonds have only been held for two months making interest for two months the correct amount. A contract called a bond indenture is prepared between the corporation and the future bondholders. It specifies the terms with which the corporation will comply, such as how much interest will be paid and when. Another of these terms may be a restriction on further borrowing by the corporation in the future.
- The amortization of premiums and discounts is an intermediate financial accounting topic and is not covered here.
- For example, in a $30 million serial bond issue, $10 million worth of the bonds may mature each year for three years.
- Historical data indicates that warranty costs average 2% of the cost of sales.
- The $75,000 notes payable, due March 31, 2023 is a long-term liability since it is to be repaid beyond one year of the balance sheet date.
However, the vendors’ invoices have not yet been received and the exact amount is not yet known. The company is required to estimate the amount since the estimated amount is far better than implying that no liability is owed and that no expense was incurred. Many of the accrual adjusting entries require estimated amounts. Throughout the next year, as warranty claims come in and are addressed, they would decrease this liability and record the corresponding expense.
It’s impossible to know whether the company should report a contingent liability of $250,000 based solely on this information. The company should rely on precedent and legal counsel to ascertain the likelihood of damages. The spot rate is 102, so the amount to be paid is $510,000 () and, therefore, represents the fair value or present value of the bond issuance on the purchase date. The following three scenarios demonstrate how PV analysis is used to determine the issue price of a $100,000 bond.
The difference between the face value of the bond ($1,000) and the selling price of the bond ($991) is $9. On the maturity date of December 31, 2023, the interest expense of $80 is paid, bondholders are repaid, and the premium is written off as a reduction of interest expense. The corporation issuing bonds may be required to restrict its retained earnings. The restriction of dividends means that dividends declared cannot exceed a specified balance in retained earnings. This protects bondholders by limiting the amount of dividends that can be paid.
Liability: Definition, Types, Example, and Assets vs. Liabilities
Note that the bond interest on November 1 is for the amount the bondholder is entitled to, which is two months’ of interest. It is important to classify liabilities correctly otherwise decision makers may make incorrect conclusions regarding, for example, the organization’s liquidity position. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
For example, in a $30 million serial bond issue, $10 million worth of the bonds may mature each year for three years. Most bond issues are sold in their entirety when market conditions are favourable. However, more bonds can be authorized in a particular bond issue than will be immediately sold.
Estimated Liabilities
The term can also refer to a legal obligation or an action you’re obligated to take. It might signal weak financial stability if a company has had more expenses than revenues for the last three years because it’s been losing money for those years. Liability may also refer to the legal liability of a business or individual. Many businesses take out liability insurance in case a customer or employee sues them for negligence.
The Reporting Requirements of Contingent Liabilities
Companies operating in the United States rely on the guidelines established in the generally accepted accounting principles (GAAP). A contingent liability is defined under GAAP as any potential future loss that depends on a “triggering event” to become an actual expense. Two classic examples of contingent liabilities include a company warranty and a lawsuit against the company. Both represent possible losses and both depend on some uncertain future event. Paul’s Roofing Corporation paid monthly corporate income tax instalments of $500 commencing February 15, 2018.
The stated rate of 8% is less than the market rate of 9%, resulting in a present value less than the face amount of $500,000. Since the market rate is greater, the investor would not be willing to purchase bonds paying less interest at the face value. The bond issuer must, therefore, sell these at a discount in order to entice investors to purchase them.
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