Professional Documents
Culture Documents
Chapter
10
Liabilities
Financial Accounting, IFRS Edition Weygandt Kimmel Kieso
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Study Objectives
1. 2. 3. 4. 5. 6. 7. 8.
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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. Explain why bonds are issued, and identify the types of bonds. Prepare the entries for the issuance of bonds and interest expense. Describe the entries when bonds are redeemed. Describe the accounting for long-term notes payable. Identify the methods for the presentation and analysis of noncurrent liabilities.
Liabilities
Current Liabilities
Non-Current Liabilities
Notes payable
Bond basics
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SO 1 Explain a current liability, and identify the major types of current liabilities.
Question
To be classified as a current liability, a debt must be expected to be paid: a. out of existing current assets.
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SO 1 Explain a current liability, and identify the major types of current liabilities.
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Notes payable
b) Prepare the adjusting entry on June 30.
$100,000 x 12% x 4/12 = $4,000
100,000
4,000 4,000
SO 2 Describe the accounting for notes payable.
Interest payable
Cash
4,000
104,000
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department of revenue.
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500,000
As the school completes each of the five home games, it would record the revenue earned. Sept. 7 Unearned revenue Ticket revenue 100,000 100,000
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Liquidity refers to the ability to pay maturing obligations and meet unexpected needs for cash.
The current ratio permits us to compare the liquidity of different-sized companies and of a single company at different times.
Illustration 10-5
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Question
Working capital is calculated as: a. current assets minus current liabilities. b. total assets minus total liabilities. c. non-current liabilities minus current liabilities. d. both (b) and (c).
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SO 4 Explain why bonds are issued, and identify the types of bonds.
Bond Basics
Effects on earnings per shareequity vs. debt.
Illustration 10-7
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SO 4 Explain why bonds are issued, and identify the types of bonds.
Bond Basics
Question
The major disadvantages resulting from the use of bonds are: a. that interest is not tax deductible and the principal must be repaid. b. that the principal is tax deductible and interest must be paid. c. that neither interest nor principal is tax deductible. d. that interest must be paid and principal repaid.
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SO 4 Explain why bonds are issued, and identify the types of bonds.
Bond Basics
Types of Bonds
Secured and Unsecured (debenture) bonds.
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SO 4 Explain why bonds are issued, and identify the types of bonds.
Bond Basics
Issuing Procedures
Bond contract known as a bond indenture.
Represents a promise to pay:
(1) sum of money at designated maturity date, plus (2) periodic interest at a contractual (stated) rate on the maturity amount (face value).
Paper certificate, typically a $1,000 face value. Interest payments usually made semiannually. Generally issued when the amount of capital needed is too large for one lender to supply.
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SO 4 Explain why bonds are issued, and identify the types of bonds.
Bond Basics
Issuer of Bonds
Illustration 10-8
2013
Maturity Date
DUE 2013
DUE 2013
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SO 4
Bond Basics
Bond Trading
Bonds traded on national securities exchanges.
Newspapers and the financial press publish bond prices and trading activity daily.
Read as: Outstanding 5.125%, $1,000 bonds that mature in 2014. Currently yield a 5.747% return. On this day, $33,965,000 of these bonds were traded. Closing price was 96.595% of face value, or $965.95.
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SO 4 Explain why bonds are issued, and identify the types of bonds.
Bond Basics
Determining the Market Value of Bonds
Market value is a function of the three factors that determine present value:
1. dollar amounts to be received,
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SO 4 Explain why bonds are issued, and identify the types of bonds.
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SO 4 Explain why bonds are issued, and identify the types of bonds.
Question
The rate of interest investors demand for loaning funds to a corporation is the:
a. contractual interest rate.
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SO 4 Explain why bonds are issued, and identify the types of bonds.
Question
Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that:
a. the contractual interest rate exceeds the market interest rate. b. the market interest rate exceeds the contractual interest rate. c. the contractual interest rate and the market interest rate are the same. d. no relationship exists between the two rates.
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SO 4 Explain why bonds are issued, and identify the types of bonds.
Bonds payable
100,000
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SO 4 Explain why bonds are issued, and identify the types of bonds.
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SO 4 Explain why bonds are issued, and identify the types of bonds.
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SO 4 Explain why bonds are issued, and identify the types of bonds.
6% 8%
10%
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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Bond payable
92,639
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SO 5 Prepare the entries for the issuance of bonds and interest expense.
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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Illustration 10-13
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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Question
Discount on Bonds Payable:
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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Bonds payable
108,111
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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing bonds at an amount different from face value is quite common. By the time a company prints the bond certificates and markets the bonds, it will be a coincidence if the market rate and the contractual rate are the same.
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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Illustration 10-16
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SO 5 Prepare the entries for the issuance of bonds and interest expense.
100,000
100,000
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The carrying value of the bonds is the face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date.
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Question
When bonds are redeemed before maturity, the gain or loss on redemption is the difference between the cash paid and the: a. carrying value of the bonds.
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Question
Each payment on a mortgage note payable consists of:
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SO 8 Identify the methods for the presentation and analysis of non-current liabilities.
The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations.
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SO 8 Identify the methods for the presentation and analysis of non-current liabilities.
Interest expense
Indicates the companys ability to meet interest payments as they come due.
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SO 8 Identify the methods for the presentation and analysis of non-current liabilities.
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SO 8 Identify the methods for the presentation and analysis of non-current liabilities.
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Liabilities
liabilities.
Liabilities
under GAAP.
Liabilities
Liabilities
The FASB and IASB are currently involved in two projects that
have implications for the accounting for liabilities. The FASB and IASB have identified leasing as one of the most problematic areas of accounting. The joint project will initially
instead focus on the right to use the leased item. Finally, the
two standard-setting bodies are involved in a far-reaching project to significantly change the approach used to account for pensions.
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To illustrate present value concepts, assume that you are willing to invest a sum of money that will yield $1,000 at the end of one year, and you can earn 10% on your money. What is the $1,000 worth today? To compute the answer,
divide the future amount by 1 plus the interest rate ($1,000/1.10 = $909.09 OR use a Present Value of 1 table. ($1,000 X .90909) = $909.09 (10% per period, one period from now).
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Issued at a Discount
SO 9 Compute the market price of a bond.
Issued at a Premium
SO 9 Compute the market price of a bond.
Required steps:
1. Compute the bond interest expense. 2. Compute the bond interest paid or accrued. 3. Compute the amortization amount.
SO 10 Apply the effective-interest method of amortizing bond discount and bond premium.
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SO 10
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SO 10 Apply the effective-interest method of amortizing bond discount and bond premium.
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SO 10
Bonds Payable
Cash
676
5,000
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SO 10 Apply the effective-interest method of amortizing bond discount and bond premium.
Straight-Line Amortization
Amortizing Bond Discount
Appendix 10C
Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2011, for $92,639 (discount of $7,361). Interest is payable on July 1 and January 1. Illustration 10C-2
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SO 11
Straight-Line Amortization
Amortizing Bond Discount
Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2011, for $92,639 (discount of $7,361). Interest is payable on July 1 and January 1. The bond discount amortization for each interest period is $736 ($7,361/10). Journal entry on July 1, 2011, to record the interest payment and amortization of discount is as follows: July 1 Interest Expense 5,736
Bonds Payable
Cash
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736
5,000
SO 11 Apply the straight-line method of amortizing bond discount and bond premium.
Straight-Line Amortization
Amortizing Bond Premium
Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2011, for $108,111. Interest is payable on July 1 and January 1.
Illustration 10C-4
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SO 11
Straight-Line Amortization
Amortizing Bond Premium
Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2011, for $108,111 (premium of $8,111). Interest is payable on July 1 and January 1. The bond discount amortization for each interest period is $811 ($8,111/10). Journal entry on July 1, 2011, to record the interest payment and amortization of discount is as follows: July 1 Interest Expense 4,189
Bonds Payable
Cash
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811
5,000
SO 11 Apply the straight-line method of amortizing bond discount and bond premium.
Payroll-Related Liabilities
Payroll and Payroll Taxes Payable
The term payroll pertains to both:
Salaries - managerial, administrative, and sales personnel (monthly or yearly rate). Wages - store clerks, factory employees, and manual laborers (rate per hour).
Appendix 10D
SO 12 Prepare entries for payroll and payroll taxes under U.S. law.
Payroll-Related Liabilities
Illustration: Assume a corporation records its payroll for the week of March 7 as follows:
Mar. 7 Salaries and wages expense FICA tax payable Federal income tax payable State income tax payable Salaries and wages payable 100,000 7,650 21,864 2,922 67,564
67,564 67,564
SO 12 Prepare entries for payroll and payroll taxes under U.S. law.
Payroll-Related Liabilities
Payroll tax expense results from three taxes that governmental agencies levy on employers. These taxes are: FICA tax Federal unemployment tax State unemployment tax
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SO 12 Prepare entries for payroll and payroll taxes under U.S. law.
Payroll-Related Liabilities
Illustration: Based on the corporations $100,000 payroll, the company would record the employers expense and liability for these payroll taxes as follows. Payroll tax expense FICA tax payable Federal unemployment tax payable State unemployment tax payable 13,850 7,650 800 5,400
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SO 12 Prepare entries for payroll and payroll taxes under U.S. law.
Payroll-Related Liabilities
Question
Employer payroll taxes do not include: a. Federal unemployment taxes. b. State unemployment taxes. c. Federal income taxes. d. FICA taxes.
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SO 12 Prepare entries for payroll and payroll taxes under U.S. law.
Copyright
Copyright 2011 John Wiley & Sons, Inc. All rights reserved.
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