Financial accounting 9th kieso kimmel chapter 10

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Preview of Chapter Financial Accounting Ninth Edition Weygandt Kimmel Kieso 10-1 Preview of Chapter 10 Financial Accounting Ninth Edition Weygandt Kimmel Kieso 10-2 10 Liabilities Learning Objectives After studying this chapter, you should be able to: [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 10-3 [8] Identify the methods for the presentation and analysis of long-term liabilities Current Liabilities A current liability is debt that a  company expects to pay 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 and wages payable, and interest payable 10-4 LO Current Liabilities Question To be classified as a current liability, a debt must be expected to be paid within: a one year b the operating cycle c years d (a) or (b), whichever is longer 10-5 LO 10 Liabilities Learning Objectives After studying this chapter, you should be able to: [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 10-6 [8] Identify the methods for the presentation and analysis of long-term liabilities Current Liabilities Notes Payable 10-7  Written promissory note  Frequently issued to meet short-term financing needs  Requires the borrower to pay interest  Issued for varying periods LO Current Liabilities Illustration: First National Bank agrees to lend $100,000 on September 1, 2015, if Cole Williams Co signs a $100,000, 12%, four-month note maturing on January Instructions a) Prepare the entry on September 1st b) Prepare the adjusting entry on December 31st, assuming monthly adjusting entries have not been made c) Prepare the entry required on January 1, 2016, the maturity date 10-8 LO Current Liabilities Illustration: First National Bank agrees to lend $100,000 on September 1, 2015, if Cole Williams Co signs a $100,000, 12%, four-month note maturing on January a) Prepare the entry on September 1st Cash 100,000 Notes Payable 100,000 b) Prepare the adjusting entry on December 31st Interest Expense 4,000 Interest Payable 4,000 $100,000 x 12% x 4/12 = $4,000 10-9 LO Current Liabilities Illustration: First National Bank agrees to lend $100,000 on September 1, 2015, if Cole Williams Co signs a $100,000, 12%, four-month note maturing on January 1, 2016 c) Prepare the entry at maturity Notes Payable 100,000 Interest Payable 4,000 Cash 104,000 10-10 LO APPENDIX 10B Amortizing Bond Premium Effective-Interest Method Amortizing Bond Premium Illustration: Candlestick, Inc issues $100,000 of 10%, five-year bonds on January 1, 2015, for $108,111, with interest payable each July and January This results in a premium of $8,111 Illustration 10B-4 10-92 LO 10 APPENDIX 10B Amortizing Bond Premium Effective-Interest Method Illustration: Candlestick, Inc issues $100,000 of 10%, five-year bonds on January 1, 2015, for $108,111, with interest payable each July and January This results in a premium of $8,111 Journal entry on July 1, 2015, to record the interest payment and amortization of premium is as follows: July Interest Expense Premium on Bonds Payable 4,324 676 Cash 5,000 10-93 LO 10 APPENDIX 10C Straight-Line Amortization Amortizing Bond Discount Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2015, for $92,639 (discount of $7,361) Interest is payable on July and January Illustration 10C-2 10-94 LO 11 Apply the straight-line method of bond discount and bond premium APPENDIX 10C Straight-Line Amortization Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2015, for $92,639 (discount of $7,361) Interest is payable on July and January The bond discount amortization for each interest period is $736 ($7,361÷10) Journal entry on July 1, 2015, to record the interest payment and amortization of discount is as follows: July Interest Expense 5,736 Discount on Bonds Payable 736 Cash 5,000 10-95 LO 11 APPENDIX 10C Straight-Line Amortization Amortizing Bond Premium Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2015, for $108,111 (premium of $8,111) Interest is payable on July and January Illustration 10C-4 10-96 LO 11 APPENDIX 10C Straight-Line Amortization Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2015, for $108,111 (premium of $8,111) Interest is payable on July and January Journal entry on July 1, 2015, to record the interest payment and amortization of discount is as follows: July Interest Expense Premium on Bonds Payable 4,189 811 Cash 5,000 10-97 LO 11 Key Points 10-98  The basic definition of a liability under GAAP and IFRS is very similar 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 LO 12 Compare the accounting for liabilities under GAAP and IFRS Key Points 10-99  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 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  The basic calculation for bond valuation is the same under GAAP and IFRS In addition, the accounting for bond liability transactions is essentially the same between GAAP and IFRS LO 12 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 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 10-100 97,000 LO 12 Key Points  10-101 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 LO 12 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 10-102 LO 12 IFRS Self-Test Questions The accounting for bonds payable is: 10-103 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 LO 12 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 10-104 LO 12 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 10-105 LO 12 Copyright “Copyright © 2014 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.” 10-106 ...Preview of Chapter 10 Financial Accounting Ninth Edition Weygandt Kimmel Kieso 10- 2 10 Liabilities Learning Objectives After studying this chapter, you should be able to:... maturity Notes Payable 100 ,000 Interest Payable 4,000 Cash 104 ,000 10- 10 LO 10 Liabilities Learning Objectives After studying this chapter, you should be able to: [1] Explain a current liability,... the journal entry is: Mar 25 Cash 10, 600 * Sales revenue Sales tax payable 10, 000 * $10, 600 ÷ 1.06 = $10, 000 600 10- 14 LO Accounting for Current Liabilities Payroll and Payroll Taxes Payable The
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