10
REPORTING AND
ANALYZING LIABILITIES
10-1
Financial Accounting, Sixth Edition
Study Objectives
10-2
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.
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.
Current Liabilities
What is a Current Liability?
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, salaries and wages, and
interest payable.
10-3
SO 1 Explain a current liability and identify the
major types of current liabilities.
Current Liabilities
Notes Payable
10-4

Written promissory note.

Require the borrower to pay interest.

Those due within one year of the balance sheet date
are usually classified as current liabilities.
SO 2 Describe the accounting for notes payable.
Current Liabilities
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2012, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1. When a
company issues an interest-bearing note, the amount of
assets it receives generally equals the note’s face value.
Sept. 1
Cash
100,000
Notes payable
10-5
100,000
SO 2 Describe the accounting for notes payable.
Current Liabilities
Illustration: If Cole Williams Co. prepares financial statements
annually, it makes an adjusting entry at December 31 to
recognize interest.
Dec. 31
Interest expense
Interest payable
4,000 *
4,000
* $100,000 x 12% x 4/12 = 4,000
10-6
SO 2 Describe the accounting for notes payable.
Current Liabilities
Illustration: At maturity (January 1), Cole Williams Co. must
pay the face value of the note plus interest. It records payment
as follows.
Jan. 1
Notes payable
Interest payable
Cash
10-7
100,000
4,000
104,000
SO 2 Describe the accounting for notes payable.
Current Liabilities
Sales Tax Payable
10-8

Sales taxes are expressed as a stated percentage of
the sales price.

Retailer collects tax from the customer.

Retailer remits the collections to the state’s
department of revenue.
SO 3 Explain the accounting for other current liabilities.
Current Liabilities
Illustration: The March 25 cash register readings for Cooley
Grocery show sales of $10,000 and sales taxes of $600 (sales
tax rate of 6%), the journal entry is:
Mar. 25
Cash
10,600
Sales revenue
Sales tax payable
10-9
10,000
600
SO 3 Explain the accounting for other current liabilities.
Current Liabilities
Sometimes companies do not ring up sales taxes separately
on the cash register.
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
Cash
10,600
Sales revenue
Sales tax payable
10,000
*
600
* $10,600 / 1.06 = 10,000
10-10
SO 3 Explain the accounting for other current liabilities.
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.
10-11
SO 3 Explain the accounting for other current liabilities.
Current Liabilities
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:
Aug. 6
Cash
500,000
Unearned ticket revenue
500,000
As each game is completed, Superior records the earning of
revenue.
Sept. 7
Unearned ticket revenue
Ticket revenue
10-12
100,000
100,000
SO 3 Explain the accounting for other current liabilities.
Current Liabilities
Current Maturities of Long-Term Debt

Portion of long-term debt that comes due in the
current year.

No adjusting entry required.
Illustration: Wendy Construction issues a five-year, interest-bearing
$25,000 note on January 1, 2011. This note specifies that each January
1, starting January 1, 2012, Wendy should pay $5,000 of the note. When
the company prepares financial statements on December 31, 2011,
$5,000
1. What amount should be reported as a current liability? _________
$20,000
2. What amount should be reported as a long-term liability? _______
10-13
SO 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.
10-14
SO 3 Explain the accounting for other current liabilities.
Current Liabilities
Illustration: Assume Cargo 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 tax payable
21,864
State tax payable
Salaries and wages payable
2,922
67,564
Record the payment of this payroll on March 7.
Mar. 7
Salaries and wages payable
Cash
10-15
67,564
67,564
SO 3
Current Liabilities
Payroll tax expense results from three taxes that
governmental agencies levy on employers.
These taxes are:
10-16

FICA tax

Federal unemployment tax

State unemployment tax
SO 3 Explain the accounting for other current liabilities.
Current 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
13,850
FICA tax payable
State unemployment tax payable
Federal unemployment tax payable
10-17
7,650
800
5,400
SO 3 Explain the accounting for other current liabilities.
Bond: Long-Term Liabilities
Bonds are a form of interest-bearing notes payable
issued by corporations, universities, and governmental
agencies.
Sold in small denominations (usually $1,000 or
multiples of $1,000).
10-18
SO 4 Identify the types of bonds.
Bond: Long-Term Liabilities
Types of Bonds
10-19

Secured

Unsecured

Convertible

Callable
SO 4 Identify the types of bonds.
Bond: Long-Term Liabilities
Issuing Procedures

Bond certificate
 Issued to the investor.
 Provides name of the company issuing bonds, face
value, maturity date, and contractual (stated)
interest rate.
10-20

Face value - principal due at the maturity.

Maturity date - date final payment is due.

Contractual (stated) interest rate – rate to determine
cash interest paid, generally semiannually.
SO 4 Identify the types of bonds.
Bond: Long-Term Liabilities
Illustration 10-3
10-21
SO 4
Bond: Long-Term Liabilities
Determining the Market Value of Bonds
Market value is a function of the three factors that determine
present value:
1. the dollar amounts to be received,
2. the length of time until the amounts are received, and
3. the market rate of interest.
The process of finding the present value is
referred to as discounting the future amounts.
10-22
SO 4 Identify the types of bonds.
Bond: Long-Term Liabilities
Illustration: Assume that Acropolis Company on January 1,
2012, issues $100,000 of 9% bonds, due in five years, with
interest payable annually at year-end.
Illustration 10-4
Time diagram
depicting cash
flows
Illustration 10-5
Computing the
market price of
bonds
10-23
SO 4 Identify the types of bonds.
Accounting for Bond Issues
A corporation records bond transactions when it

issues or retires (buys back) bonds and

when bondholders convert bonds into common stock (if
they are convertible).
Bonds may be issued at

face value,

below face value (discount), or

above face value (premium).
Bond prices are quoted as a percentage of face value.
10-24
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at Face Value
Illustration: Devor Corporation issues 100, five-year, 10%,
$1,000 bonds dated January 1, 2012, at 100 (100% of face
value). The entry to record the sale is:
Jan. 1
Cash
100,000
Bonds payable
100,000
Prepare the entry Devor would make to accrue interest on
December 31.
Dec. 31
Interest expense
Interest payable
10-25
10,000
10,000
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at Face Value
Prepare the entry Devor would make to pay the interest on Jan.
1, 2013.
Jan. 1
Interest payable
Cash
10-26
10,000
10,000
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
Assume Contractual Rate of 10%
10-27
Market Interest
Bonds Sold At
8%
Premium
10%
Face Value
12%
Discount
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Discount
Illustration: Assume that on January 1, 2012, 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:
Jan. 1
Cash
Discount on bonds payable
Bonds payable
98,000
2,000
100,000
Illustration 10-8
Computation of total cost of
borrowing—bonds issued at
discount
10-28
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Discount
Statement Presentation
Illustration 10-7
Statement presentation of
discount on bonds payable
10-29
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Premium
Illustration: Assume that the Candlestick Inc. bonds previously
described sell at 102 rather than at 98. The entry to record the
sale is:
Jan. 1
Cash
Bonds payable
Premium on bonds payable
102,000
100,000
2,000
Illustration 10-12
Computation of total cost of
borrowing—bonds issued at
premium
10-30
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Premium
Statement Presentation
Illustration 10-11
Statement presentation of
premium on bonds payable
10-31
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Retirements
Redeeming Bonds at Maturity
Candlestick records the redemption of its bonds at maturity as
follows:
Bonds payable
Cash
10-32
100,000
100,000
SO 6 Describe the entries when bonds are redeemed.
Accounting for Bond Retirements
Redeeming Bonds at Maturity
When a company retires bonds before maturity, it is
necessary to:
1. eliminate the carrying value of the bonds at the redemption
date;
2. record the cash paid; and
3. recognize the 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.
10-33
SO 6 Describe the entries when bonds are redeemed.
Accounting for Bond Retirements
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, 2016) as:
Bonds payable
100,000
Premium on bonds payable
Loss on bond redemption
Cash
10-34
400
2,600
103,000
SO 6 Describe the entries when bonds are redeemed.
Financial Statement Analysis and Presentation
Analysis
Illustration 10-16
10-35
SO 7
Financial Statement Analysis and Presentation
Liquidity
Illustration 10-17
Liquidity ratios measure the short-term ability of a company to pay
its maturing obligations and to meet unexpected needs for cash.
10-36
SO 7 Identify the requirements for the financial statement
presentation and analysis of liabilities.
Financial Statement Analysis and Presentation
Solvency
10-37
Solvency ratios measure the ability of a company to survive over a
long period of time.
SO 7
Financial Statement Analysis and Presentation
Off-Balance-Sheet Financing
10-38

Contingencies

Leasing
►
Operating lease
►
Capital lease
SO 7 Identify the requirements for the financial statement
presentation and analysis of liabilities.