CHAPTER
7
Accounting for and Presentation
of Liabilities
CHAPTER OUTLINE:
I. Current Liabilities
A. Short–term debt
2. Interest calculation methods (Business in Practice)
3. Interest accrual
B. Current maturities of long–term debt
C. Accounts payable
D. Unearned revenue or deferred credits
E. Payroll tax and other withholdings
F. Other accrued liabilities
II. Noncurrent Liabilities
A. Long-term debt
2. Accounting for bonds payable
3. Bond discount or premium
4. Bond characteristics, classifications, and terminology
a. By how interest is paid
b. By security
c. By how principal is paid
B. Deferred tax liabilities
1. An application of the accrual and matching concepts
C. Other noncurrent liabilities
1. Pension plan obligations
3. Estimated liabilities for lawsuits, warranties, etc.
Chapter 7 Accounting for and Presentation of Liabilities
TEACHING/LEARNING OBJECTIVES:
Principal:
1. To have the student understand that a principal concern about the liability section of the
2. To have the student understand the nature of a bond payable, and to learn why the market
value of a bond moves inversely with changes in interest rates.
3. To have the student understand the concept of financial leverage.
Supporting:
4. To have the student understand different interest calculation methods.
6. To have the student understand the characteristics of a bond.
8. To have the student understand the nature of the liability for deferred income taxes, and to be
able to relate it to the difference between book and tax depreciation.
TEACHING OBSERVATIONS/ASSIGNMENT SUGGESTIONS:
1. A review of the accrual and matching concepts in the context of liabilities and expenses should
7-28, are concerned with the opposite issue—reducing “unearned revenue” liabilities for the
Instructor’s Manual / Solutions Manual
TEACHING OBSERVATIONS/ASSIGNMENT SUGGESTIONS: (continued)
2. The discussion of interest calculation methods is an opportunity to apply the present value
concept introduced in the Chapter 6 Appendix. See Exercises 7-5 and 7-6.
3. Financial leverage should be put into a context that the student understands. For example,
4. The coverage of bonds can be related both to students’ future investment opportunities, and to
5. In our opinion, present value tables should be used to explain bond premium and discount.
Students are frequently confused about whether to use the stated rate or the market interest rate
6. Have students review the liability section of the balance sheet of the annual report that they
8. Problem 7-28 (optional continuation) provides an opportunity to illustrate the use of present
value analysis in a management decision-making context.
Chapter 7 Accounting for and Presentation of Liabilities
ASSIGNMENT OVERVIEW:
NO.
DIFFICULTY &
TIME ESTIMATE
OTHER
COMMENTS
M7.1.
Easy, 3-5 min.
Basic unearned revenues entries.
M7.2.
Easy, 3-5 min.
Basic payroll entry.
M7.3.
Easy, 3-5 min.
Basic warranties entries.
M7.4.
Easy, 3-5 min.
Basic conceptual bond exercise.
E7.5.
Easy, 5-8 min.
Straight-forward notes payable—discount basis.
E7.6.
Med., 7-10 min.
Stress that the $6,000 discount represents only 5/12 of the year.
E7.7.
Easy, 5-8 min.
Emphasize the matching concept.
E7.8.
Easy, 5-8 min.
Alternative to E7.7.
E7.9.
Easy, 3-5 min.
Straight-forward.
E7.10.
Med., 5-8 min.
Good in-class demonstration exercise. Emphasize the financial
E7.11.
3
Med., 7-10 min.
Emphasize the liability-revenue relationship rather than the
specific account titles.
E7.12.
Easy, 3-5 min.
Good in-class demonstration exercise.
E7.13.
Med., 7-10 min.
Easy way to introduce bonds.
E7.14.
Med., 7-10 min.
See E7.13. Good homework assignment.
E7.15.
Med., 10-12 min.
Explain that you still have to “price” the bond with present
value analysis; however, the remaining bond term is less.
E7.16.
Med., 10-12 min.
See E7.15. Good in-class demonstration or homework exercise.
E7.17.
Easy, 3-5 min.
Straight-forward conceptual bonds problem.
E7.18.
Easy, 3-5 min.
See E7.17.
E7.19.
Med, 5-8 min.
Good theory question.
E7.20.
Med., 5-8 min.
E7.21.
Easy-Med., 5-8 min
Excellent exercise for self-study / review.
E7.23.
Easy-Med., 5-8 min.
See E7.21.
E7.24.
Easy-Med., 5-8 min.
See E7.21.
P7.25.
Med., 5-8 min.
Straight-forward.
P7.26.
12-15 min.
provides an opportunity to reinforce present value concepts.
P7.28.
Med., 10-15 min.
1) accrued payroll (i.e., gross pay to employees), versus
Distinguish clearly between the entries for:
2) accrued payroll taxes (i.e., employer taxes).
delve into bond details. Needs instructor support/clarification.
P7.30.
Hard, 12-15 min.
Group learning problem. See P7.29.
P7.31.
Med., 10-15 min.
Have students review Exhibit 7-3 before attempting this problem.
P7.32.
Med., 10-15 min.
Good homework assignment.
Easy, 5-10 min.
Focus company—basic review of note disclosures.
C7.34.
Med., 10-12 min.
Group learning problem. Good homework assignment.
C7.35.
Hard, 12–15.
Group learning problem. Real world financial reporting!
Instructor’s Manual / Solutions Manual
SOLUTIONS:
M7.2.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Wages Payable Wages
M7.1.
a.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
December 1, 2016:
1. Dr. Cash ………………………………………………………………..……… 25,800
2. Dr. Unearned Rent Revenue …………………………………….……… 8,600
M7.3.
a.
b.
Warranty Expense = ($2,600,000 sales * 1.5% estimated warranty expense) = $39,000
Estimated Warranty Liability, 1/1/16 balance ……………………………..……… $25,000
Less: Actual warranty costs during 2016 ………………………………………………. ( ? )
M7.4.
a.
Annual interest payment = $12 million * 7% = $840,000
b.
The bonds were issued at a discount because market interest rates were more than the
E7.6.
a.
Discount = Principal (Maturity value) – Proceeds
E7.5.
a.
Discount basis means interest is paid in advance.
Proceeds = Face amount of note – Interest
= $1,200,000 – ($1,200,000 * 9% * 6/12)
= $1,200,000 – $54,000 = $1,146,000
E7.6.
(continued)
1. On August 1, 2016 to record loan proceeds:
Cash Notes Payable
2. On September 30, 2016 (and each month-end) to record interest expense:
3. On December 31, 2016 to record principal repayment:
1. August 1, 2016
Dr. Cash ………………………………………………………………………………. 456,000
2. September 30, 2016
3. December 31, 2016
Dr. Notes Payable ……………………………………………………….……… 480,000
E7.7.
a.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Payroll Taxes Payroll Tax
Payable Expense
E7.8.
a.
The amount is estimated based on prior year taxes, or based on the known assessed
valuation and expected tax rate.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
E7.8.
(continued)
c.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
E7.9.
a.
Warranty Expense = ($3,600,000 sales * 0.4% estimated warranty expense) = $14,400
E7.10.
a.
2016 estimated warranty expense = $6,900,000 * 0.3% = $20,700
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses