Question

Please discuss the accrued liability with at least two examples. What is a contingent liability? What happens to your balance sheet and income statements when you failed (intentionally or unintentionally) to recognize liability at year end? Please discuss bond discount, premium and par issues. When do they issue bonds with discount? with premium? How are discount or premium amortized over the life over the bonds? How the amortization (discount or premium) affect the interest expenses? Please briefly discuss the concept of present value, future value, annuity and perpetuity.

Answer 1

Accrued liability is the liability that has already incurred but not yet paid. Examples include salaries payable, income taxes payable

Contingent liability is one which involves an equal chance or happening or not happening of the liability.

If you do not recognize liability intentionally or unintentionally the balance sheet will not tie, it may present an incorrect picture to the stockholders and provisioning may not be done correctly.

When the bonds are issued at a price less than their par value it is a discount. When the bonds are issued at a price more than their par value it is a premium. When the bonds are issued at a price at their face value it is at par.

They issue bonds at a discount when the interest rate on the bond is lesser than the market rate and they are issued at a premium when the interest rate on the bond is higher than the market rate.

Discount or premium are amortized using the straight line method over the life of the bond or using effective interest rate method.

Discount on bonds increases the interest expenses due to amortization and premium on bonds decreases the interest expenses.

Present value is the value of a future cash flow at the current discounting rate. Future value is the value of the present cash flow at a future discounting rate. Annuity is the equal sum of money paid each period using a discounting rate. Prepetuity means the cash flows will be same through out the period under consideration.