LIABILITIES

 Non-current liabilities:
- Provisions
- Contingent liabilities
- Bonds payable
- Long-term notes payable
- Extinguishment of non-current liabilities

 Provisions:
- Is a subset of liabilities that has an uncertain timing or amount
- Example: warranty, restructuring, onerous contracts
- Recognition criteria for provisions:
 Present obligation as a result of past event (obligating event)
 Probable outflow of resources to settle
 Amount of obligation can be reliably estimated

 Contingent liabilities are either:

a. A possible obligation whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events not wholly in control
of the entity. Example: a guarantee on a loan for another entity
b. A present obligation that fails the recognition criteria because:
- It is not probable an outflow of resources will be required to settle the
obligation, or
- The amount cannot be measured reliably
Example: a lawsuit where amount of damages is uncertain.

It is not recognized in the FS but must be disclosed in the notes to FS.

 Bonds payable issued at par value (straight line): (excel BP 1)

Santos SA issues R$100,000 in bonds dated January 1, 2022, due in five years with 9
percent interest payable annually on January 1. At the time of issue, the market rate
for such bonds is 9 percent.
Jan 1, 22 Cash 100,000
Bonds Payable 100,000
(Issuance of bonds)

Dec 31, 22 Interest Expense 9,000

Interest Payable 9,000
(Accrued interest)

Jan 1, 23 Interest payable 9,000

Cash 9,000
(Record first payment)
 Bonds payable issued at discount (straight line): (excel BP 2)
Assuming now that Santos issues R$100,000 in bonds, due in five years with 9
percent interest payable annually at year-end. At the time of issue, the market rate
for such bonds is 11 percent.
Jan 1, 22 Cash 92,608
Bonds Payable 92.608
(Issuance of bonds)

Dec 31, 22 Interest expense 10,187

Cash 9,000
Bonds payable 1,187
(Record interest)

 Bonds payable issued at discount (effective interest): (excel BP 3)

Evermaster AG issued €100,000 of 8% term bonds on January 1, 2022, due on
January 1, 2027, with interest payable each July 1 and January 1. Investors require an
effective-interest rate of 10%. Calculate the bond proceeds.
Jan 1, 22 Cash 92,278
Bonds Payable 92,278
(Issuance of bonds)

Jul 1, 22 Interest expense 4,614

Cash 4,000
Bonds payable 614
(Record interest and amortization)

Dec 31, 22 Interest expense 4,656

Interest payable 4,000
Bonds payable 656
(Accrued interest and amortization)

Jan 1, 23 Interest payable 4,000

Cash 4,000
(Record interest)

 Bonds payable issued at premium (effective interest): (excel BP 4)

Evermaster Corporation issued €100,000 of 8% term bonds on January 1, 2022, due
on January 1, 2027, with interest payable each July 1 and January 1. Investors require
an effective-interest rate of 6%. Calculate the bond proceeds.
Jan 1, 22 Cash 108,530
Bonds Payable 108,530
(Issuance of bonds)

Jul 1, 22 Interest expense 3,256

Bonds Payable 744
Cash 4,000
(Record interest and amortization)
 Dec 31, 22 Interest expense 3,234
Bonds payable 766
Interest payable 4,000
(Accrued interest and amortization)

Jan 1, 23 Interest payable 4,000

Cash 4,000
(Record interest)

 Accrued interest (effective interest):

What happens if Evermaster prepares financial statements at the end of February
2022? In this case, the company prorates the premium by the appropriate number of
months to arrive at the proper interest expense, as follows.
Feb 31, 22 Interest expense 1,581
Bonds payable 248
Interest payable 1,333

 Notes issued at face value:

Scandinavian Imports, issues a €10,000, three-year note, at face value to Bigelow
ASA. The stated rate and the effective rate were both 10 percent. Scandinavian
would record the issuance of the note as follows.
Cash 10,000
Notes payable 10,000

Scandinavian Imports would recognize the interest incurred each year as follows.
Interest Expense 1,000  10,000 x 10%
Cash 1,000

 Notes not issued at face value (zero-interest-bearing notes): (excel NP 1)

Turtle Cove Company issued the three-year, $10,000, zero-interest-bearing note to
Jeremiah Company. The implicit rate that equated the total cash to be paid ($10,000
at maturity) to the present value of the future cash flows ($7,721.80 cash proceeds
at date of issuance) was 9 percent.
Turtle Cove records issuance of the note as follows.
Cash 7,722
Notes Payable 7,722

Turtle Cove records interest expense at the end of the first year as follows.
Interest Expense 695
Notes Payable 695

 Interest-bearing notes: (excel Np 2)

Marie Co. issued for cash a €10,000, three-year note bearing interest at 10 percent
to Morgan Group. The market rate of interest for a note of similar risk is 12 percent.
In this case, because the effective rate of interest (12%) is greater than the stated
 rate (10%), the present value of the note is less than the face value. That is, the note
is exchanged at a discount.
Marie Co. records the issuance of the note as follows.
Cash 9,520
Notes Payable 9,520

Marie Co. records the following entry at the end of year 1.

Interest Expense 1,142
Cash 1,000
Notes Payable 142

 Mortgage notes payable:

A promissory note secured by a document called a mortgage that pledges title to
property as security for the loan
- Common form of long-term notes payable
- Payable in full at maturity or in installments
- Fixed-rate mortgage
- Variable-rate mortgage (floating-rate/ adjustable-rate)

 Extinguishment of non-current liabilities: (pelunasan kewajiban jangka Panjang)

Three common situations besides payment at maturity:
1. Extinguishment with cash before maturity
2. Extinguishment by transferring assets or securities; and
3. Extinguishment with modification of terms

 Extinguishment with cash before maturity:

- Net carrying value > reacquisition price = gain
- Net carrying value < reacquisition price = loss
- At time of reacquisition, unamortized premium or discount must be amortized
up to the reacquisition date