10 REPORTING AND ANALYZING LIABILITIES 10-1 Accounting, Fourth Edition Study Study Objectives Objectives 10-2 Explain a current liability and identify the major types of current liabilities Describe the accounting for notes payable Explain the accounting for other current liabilities Identify the types of bonds Prepare the entries for the issuance of bonds and interest expense Describe the entries when bonds are redeemed Identify the requirements for the financial statement presentation and analysis of liabilities Reporting Reporting and and Analyzing Analyzing Liabilities Liabilities Current Liabilities What is a current liability? Notes payable Sales taxes payable Unearned revenues Current maturities of long-term debt Payroll and payroll taxes payable 10-3 Bonds: LongTerm Liabilities Financial Statement Presentation and Analysis Accounting for Bond Issues Accounting for Bond Retirements Types of bonds Issuing bonds at face value Balance sheet presentation Issuing procedures Discount or premium on bonds Redeeming bonds at maturity Redeeming bonds before maturity Off-balancesheet financing Determining the market value of bonds Issuing bonds at a discount Issuing bonds at a premium Analysis Current Current Liabilities Liabilities What is a Current Liability? Two key features: Company expects to pay the debt from existing current assets or through the creation of other current liabilities 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 10-4 SO Explain a current liability and identify the major types of current liabilities Current Current Liabilities 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 years d both (a) and (b) 10-5 SO Explain a current liability, and identify the major types of current liabilities Current Current Liabilities Liabilities Notes Payable 10-6  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 Describe the accounting for notes payable Current Current Liabilities 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 When a company issues an interest-bearing note, the amount of assets it receives generally equals the note’s face value Sept Cash 100,000 Notes payable 100,000 10-7 SO Describe the accounting for notes payable Current Current Liabilities 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 4,000 * Interest payable 4,000 * $100,000 x 12% x 4/12 = 4,000 10-8 SO Describe the accounting for notes payable Current Current Liabilities 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 Notes payable Interest payable 100,000 4,000 Cash 104,000 10-9 SO Describe the accounting for notes payable Current Current Liabilities Liabilities Sales Tax Payable 10-10  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 Explain the accounting for other current liabilities 10-49 Financial Financial Statement StatementAnalysis Analysis and and Presentation Presentation Off-Balance-Sheet Financing 10-50  Contingencies  Leasing ► Operating lease ► Capital lease SO Identify the requirements for the financial statement presentation and analysis of liabilities 10-51 Straight-Line Amortization appendix 10A Amortizing Bond Discount To follow the matching principle, companies allocate bond discount to expense in each period in which the bonds are outstanding Illustration 10A-1 10-52 SO Apply the straight-line method of amortizing bond discount and bond premium Straight-Line Amortization appendix 10A Amortizing Bond Discount Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2012, for $98,000 (discount of $2,000) Interest is payable on January of each year Prepare the entry to accrue interest at Dec 31, 2012 Dec 31 Interest expense 10,400 Discount on bonds payable Interest payable 400 10,000 10-53 SO Apply the straight-line method of amortizing bond discount and bond premium Straight-Line Amortization appendix 10A Amortizing Bond Discount Illustration 10A-2 10-54 SO Apply the straight-line method of amortizing bond discount and bond premium Straight-Line Amortization appendix 10A Amortizing Bond Premium Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2012, for $102,000 (premium of $2,000) Interest is payable on January of each year Prepare the entry to accrue interest at Dec 31, 2012 Dec 31 Interest expense Premium on bonds payable 9,600 400 Interest payable 10,000 10-55 SO Apply the straight-line method of amortizing bond discount and bond premium Straight-Line Amortization appendix 10A Amortizing Bond Premium Illustration 10A-4 10-56 SO Apply the straight-line method of amortizing bond discount and bond premium appendix 10B Effective Interest Amortization Under the effective-interest method, the amortization of the discount or premium results in interest expense equal to a constant percentage of the carrying value Required steps: Compute the bond interest expense Compute the bond interest paid or accrued Compute the amortization amount Illustration 10B-1 10-57 Effective Interest Amortization appendix 10B Amortizing Bond Discount Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2012, for $98,000 The effective-interest rate is 10.53% and interest is payable on Jan of each year Prepare the bond discount amortization schedule 10-58 SO Apply the effective-interest method of amortizing bond discount and bond premium Effective Interest Amortization appendix 10B Amortizing Bond Discount 10-59 Illustration 10B-2 SO Apply the effective-interest method of amortizing bond discount and bond premium Effective Interest Amortization appendix 10B Amortizing Bond Discount Illustration: Candlestick, Inc records the accrual of interest and amortization of bond discount on Dec 31, as follows: Dec 31 Interest expense 10,319 Discount on bonds payable Interest payable 319 10,000 10-60 SO Apply the effective-interest method of amortizing bond discount and bond premium Effective Interest Amortization appendix 10B Amortizing Bond Premium Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2012, for $102,000 The effective-interest rate is 9.48% and interest is payable on Jan of each year Prepare the bond premium amortization schedule 10-61 SO Apply the effective-interest method of amortizing bond discount and bond premium Effective Interest Amortization appendix 10B Amortizing Bond Premium Illustration 10B-4 10-62 SO Apply the effective-interest method of amortizing bond discount and bond premium Effective Interest Amortization appendix 10B Amortizing Bond Premium Illustration: Candlestick, Inc records the accrual of interest and amortization of premium discount on Dec 31, as follows: Dec 31 Interest expense Premium on bonds payable 9,670 330 Interest payable 10,000 10-63 SO Apply the effective-interest method of amortizing bond discount and bond premium ... Notes payable Interest payable 100 ,000 4,000 Cash 104 ,000 10- 9 SO Describe the accounting for notes payable Current Current Liabilities Liabilities Sales Tax Payable 10- 10  Sales taxes are expressed... 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, 000 600 10- 11 SO Explain the accounting... 6%), the journal entry is: Mar 25 Cash 10, 600 * Sales revenue Sales tax payable 10, 000 * $10, 600 / 1.06 = 10, 000 600 10- 12 SO Explain the accounting for other current liabilities Current Current