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Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only) 10-17
2. Bond interest expense is computed by adding (subtracting) the bond
discount (premium) amortization per period to (from) the interest to be paid.
3. The bond discount or premium amortization each period is computed by
dividing the total bond discount (premium) by the number of interest periods.
4. Over the term of the bonds, the balance in Discount (Premium) on Bonds
Payable will decrease annually by the same amount until it has a zero
balance at the bonds’ maturity date.
IFRS
A Look at IFRS
IFRS and GAAP have similar definitions of liabilities. IFRSs related to reporting
and recognition of liabilities are found in IAS 1 (revised) (“Presentation of Financial
Statements”) and IAS 37 (“Provisions, Contingent Liabilities, and Contingent
Assets”). The general recording procedures for payroll are similar although
differences occur depending on the types of benefits that are provided in different
countries. For example, companies in other countries often have different forms
of pensions, unemployment benefits, welfare payments, and so on. The account-
ing for various form of compensation plans under IFRS is found in IAS 19
“Employee Benefits” and IFRS 2 (“Share-based Payments”), IAS 19 addresses
the accounting for a wide range of compensation elements, including wages,
bonuses, post-employment benefits, and compensated absences. Both of these
standards were recently amended, resulting in significant convergence between
IFRS and GAAP.
KEY POINTS
The basic definition of a liability under GAAP and IFRS is very similar. In a
more technical way, 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
practices or customs.
IFRS requires that companies classify liabilities as current or non-current
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.
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. (This is evident in the Zetar financial statements in
Appendix F.)
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.
IFRS requires use of the effective-interest method for amortization of bond
discounts and premiums. GAAP also requires the effective-interest method,
except that it 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.
The accounting for convertible bonds differs between 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.
Assume that Harris Corp. issues convertible 7% bonds with a face value of
$1,000,000 and receives $1,000,000. Comparable bonds without a
conversion feature would have required a 9% rate of interest. To determine
how much of the proceeds would be allocated to debt and how much to
equity, the promised payments of the bond obligation would be discounted
at the market rate of 9%.
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.
20 MINUTE QUIZ
Circle the correct answer.
True/False
True False
2. With an interest-bearing note, the amount of cash received upon issuance of the note will
True False
3. An unearned revenue arises when payment is accepted in advance of the goods being
delivered.
True False
4. If the market rate of interest is higher than the contractual rate, the bonds will sell at a
premium.
True False
5. The amount that must be invested today at current interest rates in order to receive a
True False
6. When bonds are issued at face value, the debit to Cash is equal to the credit to Bonds
Payable.
True False
7. Bonds with a higher contractual interest rate than the market rate for similar bonds will
probably sell at a discount.
True False
8. The sale of bonds above face value causes the total cost of borrowing to be more than
the bond interest paid.
True False
True False
*10. Under the effective-interest method, the amortization of a bond discount will result in an
increasing interest expense each year over the life of the bond.
True False
Multiple Choice
1. The account Unearned Subscription Revenue
a. is considered a miscellaneous revenue account.
b. has a normal debit balance.
d. is a current liability.
2. The total cost of borrowing on a 10-year, 9%, $1,000 bond that sold for $960 is
a. $960.
b. $940.
c. $860.
d. $870.
3. If bonds payable are issued at a discount, the contractual interest rate is
d. changed to reflect the market rate of interest.
4. A $2,000,000 bond issue with a carrying value of $2,080,000 is called at 103 and retired.
Which of the following is true?
a. A gain of $80,000 is recorded.
b. A loss of $20,000 is recorded.
c. A gain of $20,000 is recorded.
d. No gain or loss is recorded.
calculated by multiplying the
a. face value of the bonds at the beginning of the period by the contractual interest
rate.
rate.
c. face value of the bonds at the beginning of the period by the effective-interest rate.
d. carrying value of the bonds at the beginning of the period by the effective-interest
rate.
ANSWERS TO QUIZ
True/False
Multiple Choice
