Study Study Objectives Objectives
Reporting and Analyzing Liabilities
Chapter 10-1
Chapter 10-2
Current Current Liabilities Liabilities
Current Current Liabilities Liabilities
1. Company expects to pay the debt from existing current assets or through the creation of other current liabilities.
2.
Describe the accounting for notes payable.
3.
Explain the accounting for other current liabilities.
4.
Identify the types of bonds.
5.
Prepare the entries for the issuance of bonds and interest expense.
6.
Describe the entries when bonds are redeemed.
7.
Identify the requirements for the financial statement presentation and analysis of liabilities.
8.
Apply the straight-line method of amortizing bond discount and bond premium.
9.
Apply the effective-interest method of amortizing bond discount and bond premium.
10.
Describe the accounting for long-term notes payable.
Chapter 10-3
Notes Payable
To be classified as a current liability, a debt must be expected to be paid:
Written promissory note. Interest.
a. out of existing current assets.
2. Company will pay the debt within one year or the operating cycle, whichever is longer.
Current liability if due within one year of the
b. by creating other current liabilities.
balance sheet date.
c. within 2 years.
Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, interest payable, etc. SO 1 Explain a current liability and identify the major types of current liabilities.
Explain a current liability and identify the major types of current liabilities.
Current Current Liabilities Liabilities
Question
Current liability:
Chapter 10-4
Financial Accounting, Fifth Edition
1.
d. both (a) and (b).
SO 1 Explain a current liability, and identify the major types of current liabilities.
Chapter 10-5
Chapter 10-6
SO 2 Describe the accounting for notes payable.
Current Current Liabilities Liabilities
Current Current Liabilities Liabilities
Current Current Liabilities Liabilities
Illustration: First National Bank agrees to lend $100,000 on September 1, 2010, if Cole Williams Co. signs a $100,000, 12%, four-month note maturing on January 1.
Illustration: If Cole Williams Co. prepares financial statements annually, it makes an adjusting entry at December 31 to recognize interest.
Illustration: At maturity (January 1), Cole Williams Co. must pay the face value of the note plus interest. It records payment as follows.
Dec. 31
Jan. 1
Sept. 1
* $100,000 x 12% x 4/12 = 4,000 Chapter 10-7
SO 2 Describe the accounting for notes payable.
Chapter 10-8
SO 2 Describe the accounting for notes payable.
Chapter 10-9
SO 2 Describe the accounting for notes payable.
Current Current Liabilities Liabilities
Sales Tax Payable Sales taxes are a percentage of the sales price. Retailer collects tax from the customer.
Current Current Liabilities Liabilities
Current Current Liabilities Liabilities
Illustration: March 25, cash register readings for
Sometimes companies do not ring up sales taxes separately on the cash register.
Cooley Grocery show sales of $10,000 and sales taxes of $600 (sales tax rate of 6%), the journal entry is:
Illustration: Cooley Grocery rings up total receipts of $10,600. Because the amount received from the sale is equal to the sales price 100% plus 6% of sales, (sales tax rate of 6%), the journal entry is:
Mar. 25
Retailer remits the collections to the state’s department of revenue.
Chapter 10-10
SO 3 Explain the accounting for other current liabilities.
Mar. 25
Chapter 10-11
SO 3 Explain the accounting for other current liabilities.
Current Current Liabilities Liabilities
Current Current Liabilities Liabilities
Unearned Revenue
Illustration: Superior University sells 10,000 season football tickets at $50 each for its five-game home schedule. The entry for the sales of season tickets is:
Revenues that are received before the company delivers goods or provides services. 1. Company debits Cash, and credits a current liability account (unearned revenue). 2. When the company earns the revenue, it debits the Unearned Revenue account, and credits a revenue account. Chapter 10-13
SO 3 Explain the accounting for other current liabilities.
Current Current Liabilities Liabilities Payroll and Payroll Taxes Payable The term “payroll” pertains to both: Salaries - managerial, administrative, and sales personnel (monthly or yearly rate). Wages - store clerks, factory employees, and manual laborers (rate per hour). Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay. Chapter 10-16
SO 3 Explain the accounting for other current liabilities.
Chapter 10-12
SO 3 Explain the accounting for other current liabilities.
Current Current Liabilities Liabilities Current Maturities of Long-Term Debt Portion of long-term debt that comes due in the current year. Illustration: Wendy Construction issues a five-year, interest-bearing
After the first game, Superior records the earning of revenue with the following entry.
$25,000 note on January 1, 2009. This note specifies that each January 1, starting January 1, 2010, Wendy should pay $5,000 of the note. When the company prepares financial statements on December 31, 2009, 1. What amount should be reported as a current liability? _________ 2. What amount should be reported as a long-term liability? _______
Chapter 10-14
SO 3 Explain the accounting for other current liabilities.
Current Current Liabilities Liabilities
SO 3 Explain the accounting for other current liabilities.
Current Current Liabilities Liabilities
Illustration: Assume Cargo Corporation records its payroll for the week of March 7 as follows: Mar. 7 Salaries and wages expense FICA tax payable Federal tax payable State tax payable Salaries and wages payable
Chapter 10-15
100,000
Payroll tax expense results from three taxes that governmental agencies levy on employers. These taxes are:
7,650 21,864 2,922 67,564
FICA tax Federal unemployment tax State unemployment tax
Record the payment of this payroll on March 7. Mar. 7
Chapter 10-17
SO 3 Explain the accounting for other current liabilities.
Chapter 10-18
SO 3 Explain the accounting for other current liabilities.
Current Current Liabilities Liabilities Illustration: Based on Cargo Corp.’s $100,000 payroll, the company would record the employer’s expense and liability for these payroll taxes as follows. Payroll tax expense
Bond: -Term Liabilities Long Bond: LongLong-Term Liabilities
Question
Bonds are a form of interest-bearing notes payable
Employer payroll taxes do not include: a. Federal unemployment taxes.
13,850
FICA tax payable
b. State unemployment taxes.
7,650
State unemployment tax payable Federal unemployment tax payable
Chapter 10-19
Current Current Liabilities Liabilities
c. Federal income taxes.
800
SO 3 Explain the accounting for other current liabilities.
Bond: -Term Liabilities Long Bond: LongLong-Term Liabilities
Chapter 10-20
governmental agencies. Sold in small denominations (usually $1,000 or multiples of $1,000).
d. FICA taxes.
5,400
issued by corporations, universities, and
SO 3 Explain the accounting for other current liabilities.
Bond: -Term Liabilities Long Bond: LongLong-Term Liabilities
Chapter 10-21
SO 4 Identify the types of bonds.
Bond: -Term Liabilities Long Bond: LongLong-Term Liabilities Issuer Issuer of of Bonds Bonds
Issuing Procedures
Types of Bonds
Illustration 10-3
Bond certificate
Secured
Maturity Maturity Date Date
¾ Issued to the investor.
Unsecured
¾ Provides information such as the
Convertible
9 name of the company issuing bonds,
Callable
Contractual Contractual Interest Interest Rate Rate
9 face value, 9 maturity date, and 9 contractual interest rate (stated rate).
Chapter 10-22
SO 4 Identify the types of bonds.
Bond: -Term Liabilities Long Bond: LongLong-Term Liabilities Determining the Market Value of Bonds Three factors that determine present value: 1. dollar amounts to be received, 2. length of time until the amounts are received, and
Chapter 10-23
SO 4 Identify the types of bonds.
Face Face or or Par Par Value Value
Chapter 10-24
SO 4 Identify the types of bonds.
Bond: -Term Liabilities Long Bond: LongLong-Term Liabilities
Accounting Accounting for for Bond Bond Issues Issues
Illustration: Assume that Acropolis Company on January 1, 2010, issues $100,000 of 9% bonds, due in five years, with interest payable annually at year-end.
A corporation records bond transactions when it ¾ issues or retires (buys back) bonds and ¾ when bondholders convert bonds into common stock.
Illustration 10-4 Time diagram depicting cash flows
Bonds may be issued at ¾ face value,
3. market rate of interest.
¾ below face value (discount), or The process of finding the present value is referred to as discounting the future amounts. Chapter 10-25
SO 4 Identify the types of bonds.
Illustration 10-5 Computing the market price of bonds
Chapter 10-26
¾ above face value (premium). Bond prices are quoted as a percentage of face value. SO 4 Identify the types of bonds.
Chapter 10-27
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting Accounting for for Bond Bond Issues Issues
Issuing Issuing Bonds Bonds at at Face Face Value Value
Question
Illustration: Devor Corporation issues 100, five-year, 10%, $1,000 bonds dated January 1, 2010, at 100 (100% of face value). The entry to record the sale is:
The rate of interest investors demand for loaning funds to a corporation is the: a. contractual interest rate. b. face value rate.
Prepare the entry Devor would make to accrue interest on December 31.
c. market interest rate. d. stated interest rate.
Chapter 10-28
Chapter 10-29
Issuing Issuing Bonds Bonds at at Face Face Value Value
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting Accounting for for Bond Bond Issues Issues
Market Interest
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting Accounting for for Bond Bond Issues Issues
Assume Contractual Rate of 10%
Prepare the entry Devor would make to pay the interest on Jan. 1, 2011.
Chapter 10-30
Question Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that:
Bonds Sold At
8%
a. the contractual interest rate exceeds the market interest rate.
10%
b. the market interest rate exceeds the contractual interest rate.
12%
c. the contractual interest rate and the market interest rate are the same. d. no relationship exists between the two rates.
Chapter 10-31
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Chapter 10-32
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Issuing Bonds Bonds at at aa Discount Discount
Issuing Issuing Bonds Bonds at at aa Discount Discount
Illustration: Assume that on January 1, 2010, Candlestick Inc. sells $100,000, five-year, 10% bonds at 98 (98% of face value) with interest payable on January 1. The entry to record the issuance is:
Statement Presentation
Chapter 10-33
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Issuing Bonds Bonds at at aa Discount Discount
Question Illustration 10-7 Statement presentation of discount on bonds payable
Discount on Bonds Payable: a. has a credit balance. b. is a contra account. c. is added to bonds payable on the balance sheet. d. increases over the term of the bonds.
Illustration 10-8 Computation of total cost of borrowing—bonds issued at discount
Chapter 10-34
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Chapter 10-35
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Chapter 10-36
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Issuing Bonds Bonds at at aa Premium Premium
Issuing Issuing Bonds Bonds at at aa Premium Premium
Illustration: Assume that the Candlestick Inc. bonds previously described sell at 102 rather than at 98. The entry to record the sale is:
Statement Presentation
Accounting Accounting for for Bond Bond Retirements Retirements Redeeming Bonds at Maturity Illustration 10-11 Statement presentation of premium on bonds payable
Candlestick records the redemption of its bonds at maturity as follows:
Illustration 10-12 Computation of total cost of borrowing—bonds issued at premium
Chapter 10-37
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting Accounting for for Bond Bond Retirements Retirements Redeeming Bonds before Maturity
Chapter 10-38
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting Accounting for for Bond Bond Retirements Retirements
Question
Illustration: Assume at the end of the fourth period, Candlestick Inc., having sold its bonds at a premium, retires the bonds at 103 after paying the annual interest. Assume that the carrying value of the bonds at the redemption date is $100,400 (principal $100,000 and premium $400). Candlestick records the redemption at the end of the fourth interest period (January 1, 2014) as:
When bonds are redeemed before maturity, the gain or loss on redemption is the difference between the cash paid and the:
2. record the cash paid; and 3. recognize the gain or loss on redemption.
a. carrying value of the bonds. b. face value of the bonds. c. original selling price of the bonds.
The carrying value of the bonds is the face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date. SO 6 Describe the entries when bonds are redeemed.
Accounting Accounting for for Bond Bond Retirements Retirements
d. maturity value of the bonds. Chapter 10-41
SO 6 Describe the entries when bonds are redeemed.
Financial Financial Statement Statement Analysis Analysis and and Presentation Presentation Balance Sheet Presentation
Question
SO 6 Describe the entries when bonds are redeemed.
Accounting Accounting for for Bond Bond Retirements Retirements
1. eliminate the carrying value of the bonds;
Chapter 10-40
Chapter 10-39
Illustration 10-15
Chapter 10-42
SO 6 Describe the entries when bonds are redeemed.
Financial Financial Statement Statement Analysis Analysis and and Presentation Presentation Analysis Illustration 10-16
When bonds are converted into common stock: a. a gain or loss is recognized. b. the carrying value of the bonds is transferred to paid-in capital accounts. c. the market price of the stock is considered in the entry. d. the market price of the bonds is transferred to paid-in capital.
Chapter 10-43
SO 6 Describe the entries when bonds are redeemed.
Chapter 10-44
SO 7 Identify the requirements for the financial statement presentation and analysis of liabilities.
Chapter 10-45
SO 7 Identify the requirements for the financial statement presentation and analysis of liabilities.
Appendix 10B
Effective-Interest Amortization Effective Effective-Interest Amortization
Effective-Interest Amortization Effective Effective-Interest Amortization
Appendix 10B
Appendix 10B
Amortizing Bond Discount
Amortizing Bond Discount
Required steps:
Effective-Interest Amortization Effective Effective-Interest Amortization
Illustration 10B-2
1. Compute the bond interest expense.
Illustration: Candlestick, Inc., sold $100,000, five-year,
2. Compute the bond interest paid or accrued.
10% bonds on January 1, 2010, for $98,000. The effective-interest rate is 10.53% and interest is payable
3. Compute the amortization amount.
on Jan. 1 of each year. Prepare the bond discount Illustration 10B-1
Chapter 10-46
amortization schedule.
SO 9 Apply the effectiveeffective-interest method of amortizing bond discount and bond premium.
Chapter 10-47
Effective-Interest Amortization Effective Effective-Interest Amortization
Appendix 10B
Effective-Interest Amortization Effective Effective-Interest Amortization
Appendix 10B
Amortizing Bond Discount
Amortizing Bond Premium
Illustration: Candlestick, Inc. records the accrual of interest and amortization of bond discount on Dec. 31, as follows:
Illustration: Candlestick, Inc., sold $100,000, five-year,
Chapter 10-48
SO 9 Apply the effectiveeffective-interest method of amortizing bond discount and bond premium.
Effective-Interest Amortization Effective Effective-Interest Amortization
Appendix 10B
Amortizing Bond Premium Illustration 10B-4
effective-interest rate is 9.48% and interest is payable on Jan. 1 of each year. Prepare the bond premium
Dec. 31
Chapter 10-49
10% bonds on January 1, 2010, for $102,000. The
amortization schedule.
SO 9 Apply the effectiveeffective-interest method of amortizing bond discount and bond premium.
Effective-Interest Amortization Effective Effective-Interest Amortization
Appendix 10B
Amortizing Bond Premium
SO 9 Apply the effectiveeffective-interest method of amortizing bond discount and bond premium.
Chapter 10-50
Long-Term Notes Long Long-Term Notes Payable Payable
Appendix 10C
Long-Term Notes Payable
Illustration: Candlestick, Inc. records the accrual of interest and amortization of premium discount on Dec. 31, as follows:
May be secured by a mortgage that pledges title to
Dec. 31
of the loan. Payment consists of
specific assets as security for a loan. Typically requires installment payments over the term
Chapter 10-51
SO 9 Apply the effectiveeffective-interest method of amortizing bond discount and bond premium.
Long-Term Notes Long Long-Term Notes Payable Payable
Appendix 10C
Illustration: Porter Technology Inc. issues a $500,000, 12%, 20-year mortgage note on December 31, 2010. The terms provide for semiannual installment payments of $33,231. Illustration 10C-1
1. interest on the unpaid balance and 2. a reduction of loan principal. Companies initially record mortgage notes payable at face value. Chapter 10-52
SO 9 Apply the effectiveeffective-interest method of amortizing bond discount and bond premium.
Chapter 10-53
SO 10 Describe the accounting for long-term notes payable.
Chapter 10-54
SO 10 Describe the accounting for long-term notes payable.
Long-Term Notes Long Long-Term Notes Payable Payable
Appendix 10C
Illustration: Porter Technology records the mortgage loan and first installment payment as follows:
Long-Term Notes Long Long-Term Notes Payable Payable
Appendix 10C
Copyright Copyright
Question
“Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted
Each payment on a mortgage note payable consists of:
Dec. 31
in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is
a. interest on the original balance of the loan.
unlawful. Request for further information should be addressed
b. reduction of loan principal only. Jun. 30
Chapter 10-55
SO 10 Describe the accounting for long-term notes payable.
Chapter 10-56
to the Permissions Department, John Wiley & Sons, Inc. The
c. interest on the original balance of the loan and reduction of loan principal.
purchaser may make back-up copies for his/her own use only
d. interest on the unpaid balance of the loan and reduction of loan principal.
responsibility for errors, omissions, or damages, caused by the
SO 10 Describe the accounting for long-term notes payable.
and not for distribution or resale. The Publisher assumes no use of these programs or from the use of the information contained herein.” Chapter 10-57
