CHAPTER 10
LIABILITIES
LEARNING OBJECTIVES
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 IDENTITY
THE TYPES OF BONDS.
5. PREPARE THE ENTRIES FOR THE ISSUANCE OF
BONDS AND INTEREST EXPENSE.
6. DESCRIBE THE ENTRIES WHEN BONDS ARE RE-
DEEMED OR CONVERTED.
7. DESCRIBE THE ACCOUNTING FOR LONG–TERM NOTES
PAYABLE.
8. IDENTIFY THE METHODS FOR THE PRESENTATION
AND ANALYSIS OF LONG-TERM LIABILITIES.
*9. COMPUTE THE MARKET PRICE OF A BOND.
*10. APPLY THE EFFECTIVE–INTEREST METHOD OF AMOR–
TIZING BOND DISCOUNT AND BOND PREMIUM.
*11. APPLY THE STRAIGHT–LINE METHOD OF AMORTIZING
BOND DISCOUNT AND BOND PREMIUM.
CHAPTER REVIEW
Current Liabilities
1. (L.O. 1) A current liability is a debt that a company reasonably expects to pay (1) from its
payable, unearned revenues, and accrued liabilities.
Notes Payable
2. (L.O. 2) Notes payable are obligations in the form of written notes that usually
3. When an interest-bearing note is issued, the assets received generally equal the face value of
the note:
debited for accrued interest.
Sales Taxes Payable
4. (L.O. 3) A sales tax is expressed as a percentage of the sales price on goods sold to
customers. The entry by the selling company to record sales taxes is as follows:
Cash …………………………………………………………………………………… XXXX
Sales Revenue ………………………………………………………………. XXXX
Sales Taxes Payable ………………………………………………………. XXXX
Payroll and Payroll Taxes Payable
5. The amount of unpaid pay owed to employees is wages and salaries payable. Manadatory
taxes, and the state and federal unemployement taxes.
6. The payroll and payroll tax liability accounts are classified as current liabilities.
Unearned Revenues
7. Unearned Revenues (advances from customers) are recorded by a debit to Cash and a credit to
Current Maturities of Long-Term Debt
8. Another item classified as a current liability is current maturities of long-term debt. Current
one year.
Statement Presentation and Analysis
9. Current liabilities is the first category under liabilities on the balance sheet.
a. Each of the principal types of current liabilities is listed separately.
then accounts payable, regardless of amount.
10. The excess of current assets over current liabilities is working capital. The current ratio is current
assets divided by current liabilities.
Bonds
11. (L.O. 4) Long–term liabilities are obligations that are expected to be paid after one year. Long-term
12. Bonds offer the following advantages over common stock:
a. Stockholder control is not affected.
b. Tax savings result.
13. The major disadvantages resulting from the use of bonds are that interest must be paid on a
Types of Bonds
14. Secured bonds have specific assets of the issuer pledged as collateral for the bonds. A mortgage
bond is secured by real estate.
15. Unsecured bonds are issued against the general credit of the borrower; they are also called
debenture bonds.
16. A bond secured by specific assets set aside to redeem (retire) the bonds is called a sinking fund
bond.
17. Convertible bonds permit bondholders to convert the bonds into common stock at their option.
option of the issuer.
18. State laws grant corporations the power to issue bonds.
a. Within the corporation, formal approval by both the board of directors and stockholders is
usually required before bonds can be issued.
Market Value of Bonds
19. The market value (present value) of a bond is a function of three factors: (a) the dollar amounts to
be received, (b) the length of time until the amounts are received, and (c) the market rate of interest.
Bond Issues
Payable.
a. Over the term of the bonds, entries are required for bond interest.
b. At the maturity date, it is necessary to record the final payment of interest and payment of the
face value of the bonds.
21. Bonds may be issued below or above face value.
above face value, or at a premium.
Bond Issues at Discount
22. When bonds are issued at a discount,
over the life of the bonds.
Bond Issues at Premium
23. When bonds are issued at a premium,
Bonds Payable in the balance sheet.
b. Bond premium is a reduction in the cost of borrowing that should be credited to Interest
Expense over the life of the bonds.
Bond Retirements
24. (L.O. 6) When bonds are retired before maturity it is necessary to (a) eliminate the carrying
loss on redemption.
25. In recording the conversion of bonds into common stock the current market prices of the bonds
Long-term Notes Payable
26. (L.O. 7) A long-term note payable may be secured by a document called a mortgage that pledges
title to specific assets as security for a loan.
Statement Presentation and Analysis
27. (L.O. 8) Long-term liabilities are reported in a separate section of the balance sheet immediately
following current liabilities.
28. The debt to assets ratio measures the percentage of the total assets provided by creditors. It is
29. Times Interest earned provides an indication of the company’s ability to meet interest payments
as they become due. It is computed by dividing income before interest expense and income taxes
by interest expense.
Present Value Variables
*30. (L.O. 9) The present value is based on three variables: (1) the dollar amount to be received
(future amount), (2) the length of time until the amount is received (number of periods), and
(3) the interest rate (the discount rate).
PV = FV ÷ (1 + i)
PV = present value
FV = future value
i = interest rate
*31. The present value of 1 may also be determined through tables that show the present value of 1
for n periods.
Present Value of an Annuity
*32. In computing the present value of an annuity, it is necessary to know (1) the discount rate, (2) the
number of interest periods, and (3) the amount of the periodic receipts or payments. When the
future receipts are the same in each period, there are two other ways to compute the present
value. First, the annual cash flow can be multiplied by the sum of the three present value factors.
Second, annuity tables may be used.
Time Periods and Discounting
*33. Present value computations may also be done over shorter periods of time such as monthly,
quarterly, or semiannually. When the time frame is less than one year, it is necessary, to convert
the annual interest rate to the applicable time frame.
Computing the Present Value of a Bond
*34. The present value (or market price) of a bond is a function of three variables: (1) the payment
Effective-Interest Method
method. Under this method,
a. Interest Expense is computed first by multiplying the carrying value of the bonds at the
beginning of the period by the effective interest rate.
b. The credit to Cash (or Interest Payable) is computed by multiplying the face value of the
bonds by the contractual interest rate.
*36. The effective-interest method produces a periodic interest expense equal to a constant percentage
of the carrying value of the bonds. When the amounts of bond interest expense are materially
different under the two methods, the effective-interest method is required under generally accepted
accounting principles.
Straight-Line Method
each interest period. The formula is:
Bond Discount ÷ Number of Interest Periods = Bond Discount Amortization
Bond discount amortization is recorded by debiting Interest Expense and crediting Discount on
Bonds Payable.
LECTURE OUTLINE
A. Accounting for Current Liabilities.
1. A current liability is a debt that a company:
a. Reasonably expects to pay from its existing current assets or through
the creation of other current liabilities.
longer.
2. Current liabilities include notes payable, accounts payable, unearned
revenues, and accrued liabilities such as taxes, salaries and wages, and
interest payable.
a. Companies record obligations in the form of written notes as notes
the face value of the note. Interest accrues over the life of the note,
and the company must periodically record that accrual.
b. Sales taxes are expressed as a percentage of the sales price. The
selling company collects the tax from the customer when the sale
department of revenue.
c. Several liabilities related to the payroll function are classified as
current liabilities.
(1) The liability incurred for unpaid employee earnings is called
Salaries and Wages Payable.
Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only) 10-9
(2) Related liabilities include various amounts withheld from
employees’ paychecks such as income tax, FICA (social
security), and other voluntary deductions such as insurance, or
union dues.
(3) The employer also incurs liabilities for payroll taxes such as
federal and state unemployment taxes and the employer’s
share of FICA taxes.
d. Cash received from customers before goods are delivered or services
and credits an earned revenue account.
e. At the balance sheet date, all obligations due within one year are
classified as current, and all other obligations are long-term.
Companies often identify current maturities of long-term debt in the
balance sheet as long-term debt due within one year.
3. Statement Presentation and Analysis.
the largest ones first.
b. As a matter of custom, many companies show notes payable and
accounts payable first.
c. The excess of current assets over current liabilities is working capital,
which is a measure of liquidity. Liquidity is the ability to pay maturing
obligations and meet unexpected needs for cash.
B. Why Issue Bonds?
1. Bonds are sold in small denominations (usually $1,000), and as a result,
they attract many investors.
a. Stockholder control is not affected.
b. Tax savings result.
c. Earnings per share may be higher.
3. One disadvantage in using bonds is that the company must pay interest
on a periodic basis. Also, the company must repay the principal at the due
date.
C. Types of Bonds.
monly issued include:
a. Secured bonds have specific assets of the issuer pledged as collateral
for the bonds. Unsecured bonds are issued against the general credit
of the borrower.
b. Bonds secured by specific assets set aside to redeem (retire) the
bonds are called sinking fund bonds.