15-1
Chapter 10
Liabilities
Learning Objectives
After studying this chapter, you should be able to:
15-2
1.
Explain a current liability, and identify the major types of current
liabilities.
2.
Describe the accounting for notes payable.
3.
Explain the accounting for other current liabilities.
4.
Explain why bonds are issued, and 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 or converted.
7.
Describe the accounting for long-term notes payable.
8.
Identify the methods for the presentation and analysis of long-term
liabilities.
Preview of Chapter 10
Financial Accounting
Eighth Edition
Weygandt Kieso Kimmel
15-3
Current Liabilities
Current liability is debt with two key features:
1. Company expects to pay the debt from existing
current assets or through the creation of other current
liabilities.
2. Company will pay the debt within one year or the
operating cycle, whichever is longer.
Current liabilities include notes payable, accounts payable, unearned
revenues, and accrued liabilities such as taxes payable, salaries payable,
and interest payable.
15-4
LO 1 Explain a current liability, and identify the
major types of current liabilities.
Current Liabilities
Question
To be classified as a current liability, a debt must be
expected to be paid:
a. out of existing current assets.
b. by creating other current liabilities.
c. within 2 years.
d. both (a) and (b).
15-5
LO 1 Explain a current liability, and identify the
major types of current liabilities.
Current Liabilities
Notes Payable
15-6

Written promissory note.

Require the borrower to pay interest.

Issued for varying periods.
LO 2 Describe the accounting for notes payable.
Current Liabilities
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2014, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1.
Instructions
a) Prepare the entry on September 1.
b) Prepare the adjusting entry on December 31, assuming
monthly adjusting entries have not been made.
c) Prepare the entry at maturity (January 1, 2015).
15-7
LO 2 Describe the accounting for notes payable.
Current Liabilities
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2014, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1.
a) Prepare the entry on September 1.
Cash
100,000
Notes payable
100,000
b) Prepare the adjusting entry on Dec. 31.
Interest expense
4,000
Interest payable
4,000
$100,000 x 12% x 4/12 = $4,000
15-8
LO 2 Describe the accounting for notes payable.
Current Liabilities
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2014, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1.
c) Prepare the entry at maturity (January 1, 2015).
Notes payable
Interest payable
Cash
15-9
100,000
4,000
104,000
LO 2 Describe the accounting for notes payable.
Current Liabilities
Sales Tax Payable
15-10

Sales taxes are expressed as a stated percentage of
the sales price.

Either rung up separately or included in total receipts.

Retailer collects tax from the customer.

Retailer remits the collections to the state’s department
of revenue.
LO 3 Explain the accounting for other current liabilities.
Current Liabilities
Illustration: The March 25 cash register reading for Cooley
Grocery shows sales of $10,000 and sales taxes of $600 (sales
tax rate of 6%), the journal entry is:
Cash
10,600
Sales revenue
Sales tax payable
15-11
10,000
600
LO 3 Explain the accounting for other current liabilities.
Current 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.
15-12
LO 3 Explain the accounting for other current liabilities.
Current Liabilities
Illustration: Assume a corporation records its payroll for the
week of March 7 as follows:
Mar. 7
Salaries and wages expense
100,000
FICA tax payable
7,650
Federal income tax payable
21,864
State income tax payable
2,922
Salaries and wages payable
67,564
Record the payment of this payroll on March 11.
Mar. 11
Salaries and wages payable
Cash
15-13
67,564
67,564
LO 3
Current Liabilities
Payroll tax expense results from three taxes that
governmental agencies levy on employers.
These taxes are:
15-14

FICA tax

Federal unemployment tax

State unemployment tax
LO 3 Explain the accounting for other current liabilities.
Current Liabilities
Illustration: Based on the corporation’s $100,000 payroll, the
company would record the employer’s expense and liability
for these payroll taxes as follows.
Payroll tax expense
13,850
FICA tax payable
Federal unemployment tax payable
State unemployment tax payable
15-15
7,650
800
5,400
LO 3 Explain the accounting for other current liabilities.
Current Liabilities
Question
Employer payroll taxes do not include:
a. Federal unemployment taxes.
b. State unemployment taxes.
c. Federal income taxes.
d. FICA taxes.
15-16
LO 3 Explain the accounting for other current liabilities.
15-17
Current Liabilities
Unearned Revenue
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.
15-18
LO 3 Explain the accounting for other current liabilities.
Current Liabilities
Illustration: Assume that Superior University sells 10,000
season football tickets at $50 each for its five-game home
schedule. The university makes the following entry for the sale
of season tickets:
Aug. 6
Cash
Unearned revenue
500,000
500,000
As the school completes each of the five home games, it would
record the revenue earned.
Sept. 7
15-19
Unearned revenue
Ticket revenue
100,000
100,000
LO 3 Explain the accounting for other current liabilities.
Current Liabilities
Current Maturities of Long-Term Debt
15-20

Portion of long-term debt that comes due in the
current year.

No adjusting entry required.
LO 3 Explain the accounting for other current liabilities.
Statement Presentation and Analysis
Illustration 10-5
15-21
LO 3
Current Liabilities
Question
Working capital is calculated as:
a. current assets minus current liabilities.
b. total assets minus total liabilities.
c. long-term liabilities minus current liabilities.
d. both (b) and (c).
15-22
LO 3 Explain the accounting for other current liabilities.
Statement Presentation and Analysis
Analysis
Illustration 10-6
Liquidity refers to the
ability to pay maturing
obligations and meet
unexpected needs for
cash.
The current ratio
permits us to compare
the liquidity of differentsized companies and of
a single company at
different times.
15-23
Illustration 10-7
LO 3 Explain the accounting for other current liabilities.
ANATOMY OF A FRAUD
Art was a custodial supervisor for a large school district. The district was
supposed to employ between 35 and 40 regular custodians, as well as 3 or 4
substitute custodians to fill in when regular custodians were missing. Instead, in
addition to the regular custodians, Art “hired” 77 substitutes. In fact, almost
none of these people worked for the district. Instead, Art submitted time cards
for these people, collected their checks at the district office, and personally
distributed the checks to the “employees.” If a substitute’s check was for
$1,200, that person would cash the check, keep $200, and pay Art $1,000.
Total take: $150,000
The Missing Control
Human Resource Controls. Thorough background checks should be
performed. No employees should begin work until they have been approved by
the Board of Education and entered into the payroll system. No employees
should be entered into the payroll system until they have been approved by a
supervisor. All paychecks should be distributed directly to employees at the
official school locations by designated employees.
Independent internal verification. Budgets should be reviewed monthly to
identify situations where actual costs significantly exceed budgeted amounts.
15-24
Long-Term Liabilities
Bond Basics

A form of interest-bearing notes payable.

To obtain large amounts of long-term capital.
Three advantages over common stock:
1. Stockholder control is not affected.
2. Tax savings result.
3. Earnings per share may be higher.
15-25
LO 4 Explain why bonds are issued, and identify the types of bonds.
Bond Basics
Effects on earnings per share—stocks vs. bonds.
Illustration 10-9
15-26
LO 4 Explain why bonds are issued, and identify the types of bonds.
Current Liabilities
Question
The major disadvantages resulting from the use of bonds
are:
a. that interest is not tax deductible and the principal
must be repaid.
b. that the principal is tax deductible and interest must be
paid.
c. that neither interest nor principal is tax deductible.
d. that interest must be paid and principal repaid.
15-27
LO 4 Explain why bonds are issued, and identify the types of bonds.
Bond Basics
Secured and Unsecured (debenture) bonds.
♦

Term and Serial bonds.
♦

Bonds issued in the name of the owner.

Convertible and Callable bonds.

15-28
Bonds that mature at a single specified future date.
Registered and Bearer (or coupon) bonds.
♦
♦
Have specific assets of issuer pledged as collateral for the bonds.
Bonds that can be converted into common stock at the
bondholder’s option.
Bond Basics
Types of Bonds
15-29
LO 4
Bond Basics
Issuing Procedures
15-30

State laws grant corporations the power to issue bonds.

Board of directors and stockholders must approve bond
issues.

Board of directors must stipulate number of bonds to be
authorized, total face value, and contractual interest rate.

Bond contract known as a bond indenture.

Paper certificate, typically a $1,000 face value.
LO 4 Explain why bonds are issued, and identify the types of bonds.
Bond Basics
Issuing Procedures

15-31
Represents a promise to pay:
►
sum of money at designated maturity date, plus
►
periodic interest at a contractual (stated) rate on the
maturity amount (face value).

Interest payments usually made semiannually.

Generally issued when the amount of capital needed is
too large for one lender to supply.
LO 4 Explain why bonds are issued, and identify the types of bonds.
Bond Basics
Issuer of
Bonds
Illustration 10-10
Maturity
Date
2017
DUE 2017
DUE 2017
Contractual
Interest
Rate
15-32
Face or
Par Value
LO 4
Bond Basics
Determining the Market Value of Bonds
Market value is a function of the three factors that determine
present value:
1. dollar amounts to be received,
2. length of time until the amounts are received, and
3. market rate of interest.
The features of a bond (callable, convertible, and so on) affect the
market rate of the bond.
15-33
LO 4 Explain why bonds are issued, and identify the types of bonds.
Accounting for Bond Issues
Corporation records bond transactions when it

issues (sells),

retires (buys back) bonds and

when bondholders convert bonds into common stock.
NOTE: If bondholders sell their bond investments to other investors,
the issuing firm receives no further money on the transaction, nor
does the issuing corporation journalize the transaction.
15-34
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
Issue at Par, Discount, or Premium?
Illustration 10-12
Bond
Contractual
Interest Rate
of 10%
15-35
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
Question
The rate of interest investors demand for loaning funds to
a corporation is the:
a. contractual interest rate.
b. face value rate.
c. market interest rate.
d. stated interest rate.
15-36
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
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:
a. the contractual interest rate exceeds the market interest
rate.
b. the market interest rate exceeds the contractual interest
rate.
c. the contractual interest rate and the market interest rate
are the same.
d. no relationship exists between the two rates.
15-37
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
Issuing Bonds at Face Value
Illustration: On January 1, 2014, Candlestick Corporation
issues $100,000, five-year, 10% bonds at 100 (100% of face
value). The entry to record the sale is:
Jan. 1
Cash
Bonds payable
15-38
100,000
100,000
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at Face Value
Illustration: On January 1, 2014, Candlestick Corporation
issues $100,000, five-year, 10% bonds at 100 (100% of face
value). Assume that interest is payable semiannually on
January 1 and July 1. Prepare the entry to record the payment
of interest on July 1, 2014, assume no previous accrual.
July 1
Interest expense
Cash
15-39
5,000
5,000
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at Face Value
Illustration: On January 1, 2014, Candlestick Corporation
issues $100,000, five-year, 10% bonds at 100 (100% of face
value). Assume that interest is payable semiannually on
January 1 and July 1. Prepare the entry to record the accrual
of interest on December 31, 2014, assume no previous
accrual.
Dec. 31
Interest expense
Interest payable
15-40
5,000
5,000
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
Issuing Bonds at a Discount
Illustration: On January 1, 2014, Candlestick, Inc. sells
$100,000, five-year, 10% bonds for $92,639 (92.639% of face
value). Interest is payable on July 1 and January 1. The entry
to record the issuance is:
Jan. 1
Cash
Discount on bonds payable
Bond payable
15-41
92,639
7,361
100,000
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Discount
Statement Presentation
Illustration 10-13
Carrying value or
book value
Sale of bonds below face value causes the total cost of borrowing to
be more than the bond interest paid.
The reason: Borrower is required to pay the bond discount at the
maturity date. Thus, the bond discount is considered to be a
increase in the cost of borrowing.
15-42
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Discount
Total Cost of Borrowing
Illustration 10-14
Illustration 10-15
15-43
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Discount
Question
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.
15-44
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
Issuing Bonds at a Premium
Illustration: On January 1, 2014, Candlestick, Inc. sells
$100,000, five-year, 10% bonds for $108,111 (108.111% of
face value). Interest is payable on July 1 and January 1. The
entry to record the issuance is:
Jan. 1
Cash
Bonds payable
Premium on bond payable
15-45
108,111
100,000
8,111
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Premium
Statement Presentation
Illustration 10-16
Sale of bonds above face value causes the total cost of borrowing
to be less than the bond interest paid.
The reason: The borrower is not required to pay the bond premium at
the maturity date of the bonds. Thus, the bond premium is
considered to be a reduction in the cost of borrowing.
15-46
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Premium
Total Cost of Borrowing
Illustration 10-17
Illustration 10-18
15-47
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Retirements
Redeeming Bonds at Maturity
Assuming that the company pays and records separately the
interest for the last interest period, Candlestick records the
redemption of its bonds at maturity as follows:
Bond payable
Cash
15-48
100,000
100,000
LO 6 Describe the entries when bonds are redeemed or converted.
Accounting for Bond Retirements
Redeeming Bonds before Maturity
When bonds are retired before maturity, it is necessary to:
1. eliminate carrying value of bonds at redemption date;
2. record cash paid; and
3. recognize gain or loss on redemption.
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.
15-49
LO 6 Describe the entries when bonds are redeemed or converted.
Accounting for Bond Retirements
Question
When bonds are redeemed before maturity, the gain or
loss on redemption is the difference between the cash
paid and the:
a. carrying value of the bonds.
b. face value of the bonds.
c. original selling price of the bonds.
d. maturity value of the bonds.
15-50
LO 6 Describe the entries when bonds are redeemed or converted.
Accounting for Bond Retirements
Illustration: Assume Candlestick, Inc. has sold its bonds at a
premium. At the end of the eighth period, Candlestick retires
these bonds at 103 after paying the semiannual interest. The
carrying value of the bonds at the redemption date is $101,623.
Candlestick makes the following entry to record the redemption
at the end of the eighth interest period (January 1, 2018):
Bonds payable
Premium on bonds payable
1,623
Loss on bond redemption
1,377
Cash
15-51
100,000
103,000
LO 6 Describe the entries when bonds are redeemed or converted.
Accounting for Bond Retirements
Converting Bonds into Common Stock
Until conversion, the bondholder receives interest on the
bond.
For the issuer, the bonds sell at a higher price and pay a
lower rate of interest than comparable debt securities without
the conversion option.
Upon conversion, the company transfers the carrying value of
the bonds to paid-in capital accounts. No gain or loss is
recognized.
15-52
LO 6 Describe the entries when bonds are redeemed or converted.
Accounting for Bond Retirements
Illustration: On July 1 Saunders Associates converts
$100,000 bonds sold at face value into 2,000 shares of $10 par
value common stock. Both the bonds and the common stock
have a market value of $130,000. Saunders makes the
following entry to record the conversion:
Bonds payable
15-53
100,000
Common stock (2,000 x $10)
20,000
Paid-in capital in excess of par value
80,000
LO 6 Describe the entries when bonds are redeemed or converted.
Accounting for Bond Retirements
Question
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.
15-54
LO 6 Describe the entries when bonds are redeemed or converted.
Accounting for Long-Term Notes Payable
May be secured by a mortgage that pledges title to specific
assets as security for a loan.
Typically, terms require borrower to make installment
payments over the term of the loan. Each payment consists of

interest on the unpaid balance of the loan and

a reduction of loan principal.
Companies initially record mortgage notes payable at face
value.
15-55
LO 7 Describe the accounting for long-term notes payable.
Accounting for Other Long-Term Liabilities
Illustration: Porter Technology Inc. issues a $500,000, 12%, 20year mortgage note on December 31, 2014. The terms provide for
semiannual installment payments of $33,231 (not including real
estate taxes and insurance). The installment payment schedule for
the first two years is as follows.
Illustration 10-19
15-56
LO 7 Describe the accounting for long-term notes payable.
Accounting for Other Long-Term Liabilities
Illustration: Porter Technology Inc. issues a $500,000, 12%, 20year mortgage note on December 31, 2014. The terms provide for
semiannual installment payments of $33,231 (not including real
estate taxes and insurance). The installment payment schedule for
the first two years is as follows.
Dec. 31
Cash
500,000
Mortgage payable
Jun. 30
Interest expense
Mortgage payable
Cash
15-57
500,000
30,000
3,231
33,231
LO 7 Describe the accounting for long-term notes payable.
Accounting for Other Long-Term Liabilities
Question
Each payment on a mortgage note payable consists of:
a. interest on the original balance of the loan.
b. reduction of loan principal only.
c. interest on the original balance of the loan and
reduction of loan principal.
d. interest on the unpaid balance of the loan and
reduction of loan principal.
15-58
LO 7 Describe the accounting for long-term notes payable.
15-59
Statement Presentation and Analysis
Presentation
Illustration 10-20
15-60
LO 8 Identify the methods for the presentation
and analysis of long-term liabilities.
Statement Presentation and Analysis
Analysis
Two ratios that provide information about debt-paying
ability and long-run solvency are:
15-61

Debt to Total Assets Ratio

Times Interest Earned Ratio
LO 8 Identify the methods for the presentation
and analysis of long-term liabilities.
Statement Presentation and Analysis
Analysis
Illustration: Kellogg had total liabilities of $8,925 million, total assets
of $11,200 million, interest expense of $295 million, income taxes of
$476 million, and net income of $1,208 million.
The higher the percentage of debt to total assets, the greater the risk
that the company may be unable to meet its maturing obligations.
15-62
LO 8
Statement Presentation and Analysis
Analysis
Illustration: Kellogg had total liabilities of $8,925 million, total assets
of $11,200 million, interest expense of $295 million, income taxes of
$476 million, and net income of $1,208 million.
Times interest earned indicates the company’s ability to meet interest
payments as they come due.
15-63
LO 8
15-64
APPENDIX 10A
PRESENT VALUE CONCEPTS RELATED TO BOND PRICING
Present Value of Face Value
Illustration: Assume that you are willing to invest a sum of
money that will yield $1,000 at the end of one year, and you can
earn 10% on your money. What is the $1,000 worth today?
To compute the answer,
1. divide the future amount by 1 plus the interest rate
($1,000/1.10 = $909.09 OR
2. use a Present Value of 1 table. ($1,000 X .90909) = $909.09
(10% per period, one period from now).
15-65
LO 9 Compute the market price of a bond.
Present Value of Face Value
To compute the answer,
1. divide the future amount by 1 plus the interest rate
($1,000/1.10 = $909.09.
Illustration 10A-1
15-66
LO 9 Compute the market price of a bond.
Present Value of Face Value
To compute the answer,
2. use a Present Value of 1 table. ($1,000 X .90909) =
$909.09 (10% per period, one period from now).
15-67
LO 9 Compute the market price of a bond.
Present Value of Face Value
The future amount ($1,000), the interest rate (10%), and the
number of periods (1) are known
Illustration 10A-2
15-68
LO 9 Compute the market price of a bond.
Present Value of Face Value
If you are to receive the single future amount of $1,000 in
two years, discounted at 10%, its present value is $826.45
[($1,000 1.10) 1.10].
Illustration 10A-3
15-69
LO 9 Compute the market price of a bond.
Present Value of Face Value
To compute the answer using a Present Value of 1 table.
($1,000 X .82645) = $826.45 (10% per period, two periods
from now).
15-70
LO 9 Compute the market price of a bond.
Present Value of Interest Payments (Annuities)
In addition to receiving the face value of a bond at maturity,
an investor also receives periodic interest payments
(annuities) over the life of the bonds.
To compute the present value of an annuity, we need to
know:
1) interest rate,
2) number of interest periods, and
3) amount of the periodic receipts or payments.
15-71
LO 9 Compute the market price of a bond.
Present Value of Interest Payments (Annuities)
Assume that you will receive $1,000 cash annually for three
years and the interest rate is 10%.
Illustration 10A-5
15-72
LO 9 Compute the market price of a bond.
Present Value of Interest Payments (Annuities)
Assume that you will receive $1,000 cash annually for three
years and the interest rate is 10%.
Illustration 10A-6
15-73
LO 9 Compute the market price of a bond.
Present Value of Interest Payments (Annuities)
Assume that you will receive $1,000 cash annually for three
years and the interest rate is 10%.
$1,000 annual payment x 2.48685 = $2,486.85
15-74
LO 9 Compute the market price of a bond.
Computing the Present Value of a Bond
Selling price of a bond is equal to the sum of:

Present value of the face value of the bond discounted
at the investor’s required rate of return
PLUS

15-75
Present value of the periodic interest payments
discounted at the investor’s required rate of return
LO 9 Compute the market price of a bond.
Computing the Present Value of a Bond
Assume a bond issue of 10%, five-year bonds with a face value
of $100,000 with interest payable semiannually on January 1
and July 1.
Illustration 10A-8
15-76
LO 9 Compute the market price of a bond.
Computing the Present Value of a Bond
Assume a bond issue of 10%, five-year bonds with a face value
of $100,000 with interest payable semiannually on January 1
and July 1.
Illustration 10A-9
15-77
LO 9 Compute the market price of a bond.
Computing the Present Value of a Bond
Assume a bond issue of 10%, five-year bonds with a face value
of $100,000 with interest payable semiannually on January 1
and July 1.
Illustration 10A-10
15-78
LO 9 Compute the market price of a bond.
Computing the Present Value of a Bond
Assume a bond issue of 10%, five-year bonds with a face value
of $100,000 with interest payable semiannually on January 1
and July 1.
Illustration 10A-11
15-79
LO 9 Compute the market price of a bond.
APPENDIX 10B
EFFECTIVE-INTEREST METHOD OF BOND AMORTIZATION
Under the effective-interest method, the amortization of
bond discount or bond premium results in period interest
expense equal to a constant percentage of the carrying value
of the bonds.
Required steps:
1. Compute the bond interest expense.
2. Compute the bond interest paid or accrued.
3. Compute the amortization amount.
15-80
LO 10 Apply the effective-interest method of amortizing
bond discount and bond premium.
Effective-Interest Method of Bond Amortization
Amortizing Bond Discount
Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year
bonds on January 1, 2014, for $92,639, with interest payable each
July 1 and January 1. This results in a discount of $7,361.
Illustration 10B-2
15-81
LO 10 Apply the effective-interest method of amortizing
bond discount and bond premium.
Amortizing Bond Discount
Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year
bonds on January 1, 2014, for $92,639, with interest payable each
July 1 and January 1. This results in a discount of $7,361.
Journal entry on July 1, 2014, to record the interest payment and
amortization of discount is as follows:
July 1
Interest Expense
Cash
5,000
Discount on Bonds Payable
15-82
5,558
558
LO 10 Apply the effective-interest method of amortizing
bond discount and bond premium.
Amortizing Bond Premium
Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year
bonds on January 1, 2014, for $108,111, with interest payable each
July 1 and January 1. This results in a premium of $8,111.
Illustration 10B-4
15-83
LO 10 Apply the effective-interest method of amortizing
bond discount and bond premium.
Amortizing Bond Premium
Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year
bonds on January 1, 2014, for $108,111, with interest payable each
July 1 and January 1. This results in a premium of $8,111.
Journal entry on July 1, 2014, to record the interest payment and
amortization of premium is as follows:
July 1
Interest Expense
Premium on Bonds Payable
Cash
15-84
4,324
676
5,000
LO 10 Apply the effective-interest method of amortizing
bond discount and bond premium.
APPENDIX 10B
STRAIGHT-LINE AMORTIZATION
Amortizing Bond Discount
Illustration: Candlestick, Inc., sold $100,000, five-year, 10%
bonds on January 1, 2014, for $92,639 (discount of $7,361).
Interest is payable on July 1 and January 1.
Illustration 10C-2
15-85
LO 11 Apply the straight-line method of amortizing
bond discount and bond premium.
Amortizing Bond Discount
Illustration: Candlestick, Inc., sold $100,000, five-year, 10%
bonds on January 1, 2014, for $92,639 (discount of $7,361).
Interest is payable on July 1 and January 1. The bond discount
amortization for each interest period is $736 ($7,361/10).
Journal entry on July 1, 2014, to record the interest payment and
amortization of discount is as follows:
July 1
Interest Expense
5,736
Discount on Bonds Payable
Cash
15-86
736
5,000
LO 11 Apply the straight-line method of amortizing
bond discount and bond premium.
Amortizing Bond Premium
Illustration: Candlestick, Inc., sold $100,000, five-year, 10%
bonds on January 1, 2014, for $108,111 (premium of $8,111).
Interest is payable on July 1 and January 1.
Illustration 10C-4
15-87
LO 11 Apply the straight-line method of amortizing
bond discount and bond premium.
Amortizing Bond Discount
Illustration: Candlestick, Inc., sold $100,000, five-year, 10%
bonds on January 1, 2014, for $108,111 (premium of $8,111).
Interest is payable on July 1 and January 1. The bond premium
amortization for each interest period is $811 ($8,111/10).
Journal entry on July 1, 2014, to record the interest payment and
amortization of premium is as follows:
July 1
Interest Expense
4,189
Premium on Bonds Payable
Cash
15-88
811
5,000
LO 11 Apply the straight-line method of amortizing
bond discount and bond premium.
Key Points
15-89

Liabilities are defined by the IASB as a present obligation of the
entity arising from past events, the settlement of which is expected
to result in an outflow from the entity of resources embodying
economic benefits. Liabilities may be legally enforceable via a
contract or law but need not be; that is, they can arise due to normal
business practice or customs.

IFRS requires that companies classify liabilities as current or noncurrent on the face of the statement of financial position (balance
sheet), except in industries where a presentation based on liquidity
would be considered to provide more useful information (such as
financial institutions). When current liabilities (also called short-term
liabilities) are presented, they are generally presented in order of
liquidity.
Key Points
15-90

Under IFRS, liabilities are classified as current if they are expected
to be paid within 12 months.

Similar to GAAP, items are normally reported in order of liquidity.
Companies sometimes show liabilities before assets. Also, they will
sometimes show non-current (long-term) liabilities before current
liabilities.

Under IFRS, companies sometimes will net current liabilities against
current assets to show working capital on the face of the statement
of financial position. (This is evident in the Zetar financial statements
in Appendix C.)

The basic calculation for bond valuation is the same under GAAP
and IFRS.
Key Points

IFRS requires use of the effective-interest method for
amortization of bond discounts and premiums. GAAP allows use
of the straight-line method where the difference is not material.
Under IFRS, companies do not use a premium or discount
account but instead show the bond at its net amount. For
example, if a $100,000 bond was issued at 97, under IFRS a
company would record:
Cash
97,000
Bonds payable
15-91
97,000
Key Points

15-92
The accounting for convertible bonds differs across IFRS and
GAAP, Unlike GAAP, IFRS splits the proceeds from the
convertible bond between an equity component and a debt
component. The equity conversion rights are reported in equity.
Looking to the Future
The FASB and IASB are currently involved in two projects, each of
which has implications for the accounting for liabilities. One project is
investigating approaches to differentiate between debt and equity
instruments. The other project, the elements phase of the conceptual
framework project, will evaluate the definitions of the fundamental
building blocks of accounting. The results of these projects could
change the classification of many debt and equity securities.
15-93
IFRS Self-Test Questions
Which of the following is false?
a)
Under IFRS, current liabilities must always be presented
before noncurrent liabilities.
b) Under IFRS, an item is a current liability if it will be paid
within the next 12 months.
c)
Under IFRS, current liabilities are shown in order of liquidity.
d) Under IFRS, a liability is only recognized if it is a present
obligation.
15-94
IFRS Self-Test Questions
The accounting for bonds payable is:
a)
essentially the same under IFRS and GAAP.
b) differs in that GAAP requires use of the straight-line method
for amortization of bond premium and discount.
c)
the same except that market prices may be different because
the present value calculations are different between IFRS
and GAAP.
d) not covered by IFRS.
15-95
IFRS Self-Test Questions
The joint projects of the FASB and IASB could potentially:
a)
change the definition of liabilities.
b) change the definition of equity.
c)
change the definition of assets.
d) All of the above.
15-96
Copyright
“Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.”
15-97