Financial Accounting, 4e

Weygandt, Kieso, & Kimmel

Prepared by
Gregory K. Lowry
Mercer University
Marianne Bradford
The University of Tennessee

John Wiley & Sons, Inc.

 CHAPTER 11

LIABILITIES
After studying this chapter, you should be able to:
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 identify the
types of bonds.
 CHAPTER 11

LIABILITIES
After studying this chapter, you should be able to:
5 Prepare the entries for the issuance of bonds
and interest expense.
6 Describe the entries when bonds are redeemed
or converted.
7 Describe the accounting for long-term notes
payable.
8 Identify the methods for the financial statement
presentation and analysis of long-term
liabilities.
 PREVIEW OF CHAPTER 11
LIABILITIES

Current Liabilities Long-Term Liabilities


Notes payable 
Bond basics

Sales taxes payable 
Accounting for bond issues

Payroll and payroll taxes 
Accounting for bond retirements

Unearned revenues 
Accounting for long-term note
payable

Current maturities of long-term
debt 
Statement presentation and analysis

Statement presentation and analysis
CURRENT LIABILITIES
 A Current Liability is a debt that can reasonably be
expected to be paid:
1 from existing current assets or in the creation of
other current liabilities and
2 within one year or the operating cycle,
whichever is longer.
 Current liabilities include:
1 Notes Payable
2 Accounts Payable
3 Unearned Revenues
4 Accrued Liabilities
 NOTES PAYABLE

 Notes Payable are obligations in the form of

written promissory notes that usually require the
borrower to pay interest.
 Notes payable may be used instead of accounts
payable because it supplies documentation of the
obligation in case legal remedies are
needed to collect the debt.
 Notes due for payment within one year
of the balance sheet date are usually
classified as current liabilities.
 NOTES PAYABLE

100,000

100,000

When an interest-bearing note is issued, the assets received

generally equal the face value of the note. Assume First
National Bank agrees to lend $100,000 on March 1, 2002 if Cole
Williams Co. signs a $100,000, 12%, 4-month note. Cash is
debited and Notes Payable is credited.
 NOTES PAYABLE

4,000

4,000

Interest accrues over the life of the note and must be recorded
periodically. If Cole Williams Co. prepares financial statements
semiannually, an adjusting entry is required to recognize
interest expense and interest payable of $4,000 at June 30.
 NOTES PAYABLE

100,000

4,000

104,000

At maturity, Notes Payable is debited for the

face value of the note, Interest Payable is debited
for the amount of accrued interest, and Cash is
credited for the maturity value of the note.
 SALES TAXES PAYABLE

 Sales tax is expressed as a stated percentage of the

sales price on goods sold to customers by a retailer.
 The retailer (or selling company) collects the tax
from the customer when the sale occurs, and
periodically (usually monthly) remits the collections
to the state’s department of revenue.
 Thus, the retailer serves as a
collection agent for the taxing
authority.
 SALES TAXES PAYABLE

10,600

10,000

600

Cash register readings are used to credit Sales and Sales Taxes
Payable. If on March 25th cash register readings for Cooley Grocery
show sales of $10,000 and sales taxes of $600 (sales tax rate is 6%), the
entry is a debit to Cash for the total, and a credit to Sales for the
actual sales and Sales Taxes Payable for the amount of the sales tax.
 SALES TAXES PAYABLE
 When sales taxes are not rung up separately on the
cash register, total receipts are divided by 100% plus
the sales tax percentage to determine the sales, and the
difference is sales tax.
 If Cooley Grocery “rings up” total receipts, which are
$10,600, and the sales tax percentage is 6%, we can
figure sales as follows:

$10,600 ÷ 1.06 = $10,000

 PAYROLL AND PAYROLL
TAXES PAYABLE
 The term payroll pertains to all wages and
salaries payable owed to employees.
 Withholding taxes:
1 must be withheld from employees’ gross
pay,
2 consist of social security (FICA) taxes and
federal and state income taxes, and
3 are credited to appropriate liability
accounts.
 RECOGNIZING PAYROLL
EXPENSES AND LIABILITIES

100,000

7,250

21,864

2,922

67,964

A corporation records its payroll for the pay period ending

March 7 with the journal entry above. Salaries and Wages
Expense is debited for $100,000 in gross earnings. Specific
liability accounts are credited for the deductions made
during the pay period. Salaries and Wages Payable is
credited for $67,964 in net earnings.
 RECORDING PAYMENT
OF THE PAYROLL

67,964

67,964

The entry to record payment of the March 7 payroll is

a debit to Salaries and Wages Payable and a credit to
Cash. When currency is used in payment, one check
is prepared for the amount of net earnings ($67,964).
 ILLUSTRATION 11-2
PAYROLL DEDUCTIONS
S O C IA L S E C U R IT Y
2 2 5 -6 1 -9 7 2 6
T H IS N U M B E R H A S B E E N E S T A B L IS H E D F O R

John E dw ard D oe

S IG N A T U R E

Federal State &

FICA City
Income
Taxes Income
Tax Taxes Net
Pay

Insurance,
Pensions, Gross
&/or Union Pay Charity
Dues
 EMPLOYER
PAYROLL TAXES
Payroll Tax Expense for businesses and educational
institutions results from 3 taxes levied on employers by
governmental agencies.
1 The employer must match each employee’s FICA
contribution – resulting in payroll tax expense to the
employer.
2 Federal unemployment taxes (FUTA) provide benefits
for a limited time period to employees who lose their
jobs through no fault of their own. FUTA is a tax borne
entirely by the employer.
3 State unemployment taxes (SUTA) also provide
benefits to employees who lose their jobs and are borne
entirely by the employer.
 RECORDING EMPLOYER
PAYROLL TAXES
The entry to record the payroll tax expense associated with
the March 7 payroll results in a debit to Payroll Tax
Expense for $13,450, a credit to FICA Taxes Payable for
$7,250 ($100,000 X 7.25%), a credit to FUTA Payable for
$800 ($100,000 X 0.8%), and a credit to SUTA Payable for
$5,400 ($100,000 X 5.4%).

13,450

7,250

800

5,400
 UNEARNED REVENUES
 Unearned Revenues (advances from customers) occur
when a company receives cash before a service is
rendered.
 Examples are when an airline sells a ticket for future
flights or when an attorney receives legal fees before
work is done.
 UNEARNED REVENUES
How do companies account for unearned
revenues that are received before goods are
delivered or services are rendered?
1 When the advance is received, Cash is
debited, and a current liability account
identifying the source of the unearned
revenue is credited.
2 When the the revenue is earned, the
unearned revenue account is debited, and
an earned revenue account is credited.
 UNEARNED REVENUES

500,000

500,000

If Superior University sells 10,000 season football tickets at $50

each for its five-game home schedule, the entry for the sale of
the tickets is a debit to Cash for the advance received, and a
credit to Unearned Football Ticket Revenue, a current liability.
 UNEARNED REVENUES

100,000

100,000

As each game is completed, the Unearned Football Ticket Revenue

account is debited for 1/5 of the unearned revenue, and the earned
revenue, Football Ticket Revenue, is credited.
 ILLUSTRATION 11-4
UNEARNED AND EARNED REVENUE ACCOUNTS

Shown above are specific unearned and earned

revenue accounts used in selected types of businesses.
CURRENT MATURITIES OF
LONG-TERM DEBT
 Another item classified as a current liability
is current maturities of long-term debt.
 Current maturities of long-term debt are
often identified on the balance sheet as
long-term debt due within one year.
 FINANCIAL STATEMENT
PRESENTATION
 Current liabilities are the first category
under liabilities on the balance sheet.
 Each of the principal types of current
liabilities is listed separately.
 Current liabilities are usually in order of
magnitude with the largest obligations
being listed first. However, many
companies, as a matter of custom, show
notes payable and accounts payable first
regardless of amount.
 ILLUSTRATION 11-5
BALANCE SHEET PRESENTATION
OF CURRENT LIABILITIES
LANDS’ END, INC.
Balance Sheet
January 26,2001
(in millions)
Current Assets $321.7
Property, plant and equipment (net) 185.3
Intangibles, net 0.6
Total Assets $507.6
Liabilities and Stockholders’ Equity
Line of credit $ 16.9
Accounts payable 96.2
Reserve for returns 9.1
Accrued liabilities 41.1
Accred profit sharing 2.4
Income taxes payable 13.2
Total current liabilities 178.9
Noncurrent liabilities 14.5
Total liabilities 193.4
Shareholders’ equity 314.2
Total liabilities and stockholders’ equity $507.6
 ILLUSTRATION 11-6
WORKING CAPITAL FORMULA AND COMPUTATION

Current Current Working

Assets Liabilities Capital

$321.7 - $178.9 = $142.8

The excess of current assets over current liabilities

is working capital. The formula for the computation
of Lands’ End working capital is shown above.
 ILLUSTRATION 11-7
CURRENT RATIO AND COMPUTATION

Current Current Current

Assets Liabilities Ratio

$321.7 ÷ $178.9 = 1.8:1

The current ratio permits us to compare the liquidity of
different sized companies and of a single company at
different times. The current ratio is determined by
dividing current assets by current liabilities. The formula
for the computation of Lands’ End current ratio is shown
above.
 LONG-TERM LIABILITIES

 Long-term liabilities are obligations that

are expected to be paid after one year and
are usually in the form of bonds or long-
term notes.
 Bonds are a form of interest bearing notes
payable issued by
1 corporations,
2 universities, and
3 governmental agencies.
 BOND BASICS
 Why issue bonds? Other long-term
financing – with notes payable and
leasing – are rarely sufficient to
furnish the funds needed for plant
expansion and major projects.
 Corporate management usually
decides whether to issue bonds (debt
financing) or common stock (equity
financing).
 ILLUSTRATION 11-8
ADVANTAGES OF BOND FINANCING
OVER COMMON STOCK
From the standpoint of the corporation seeking long-term financing,
bonds offer the following advantages over common stock.

TAX BILL

STOCK
 ILLUSTRATION 11-9
EFFECTS ON EARNINGS PER SHARE
– STOCKS VS. BONDS
Microsystems, Inc. is considering two plans for financing the
construction of a new $5 million plant:
1 Plan A involves the issuance of 200,000 shares of common stock at
the current market price of $25 per share.
2 Plan B involves the issuance of $5 million, 12% bonds at face value.
Microsystems currently has 100,000 shares of common stock
outstanding. Income before interest and taxes will be $1.5 million on
the new plant; income taxes are expected to be 30%.
 TYPES OF BONDS
 Secured and Unsecured Bonds
1 Secured bonds have specific assets of the issuer
pledged as collateral.
2 Unsecured bonds are issued against the general
credit of the borrower.
 Term and Serial Bonds
1 Term bonds mature at a single specify
future date.
2 Serial bonds mature in installments.
 TYPES OF BONDS
 Registered and Bearer Bonds
1 Registered bonds are issued in the name of the
owner.
2 Bearer (or coupon) bonds are not registered
and require holders to send in coupons to
receive interest payments.
 Convertible and Callable Bonds
1 Convertible bonds can be converted into
common stock at the bondholder’s option.
2 Callable bonds are subject to retirement at a
stated dollar amount prior to maturity at the
option of the issuer.
 ISSUING PROCEDURES

 In authorizing the bond issue – the

board of directors must stipulate
1 the total number of bonds to be
authorized, total face value, and
2 the contractual interest rate.
 The face value is the amount of
principal due at the maturity date.
 ISSUING PROCEDURES
 The contractual interest rate (or stated rate) is the
rate used to determine the amount of cash interest
the borrower pays and the investor receives.
 A bond indenture is a legal document that sets
forth the terms of the bond issue.
 A bond certificate provides such information as:
1 name of the issuer,
2 face value of the bonds,
3 contractual interest rate, and
4 maturity date of the bonds.
 ILLUSTRATION 11-11
MARKET INFORMATION FOR BONDS
 Corporate bonds are traded on national securities markets like
capital stock.
 Bond prices are quoted as a percentage of the face value of the
bond, which is usually $1,000.
 Bond prices and trading activity are published daily in newspapers
and the financial press.
 The illustration below indicates that K-Mart has outstanding 83/8%,
$1,000 bonds maturing in 2017 and currently yielding a 8.4%
return.
 In addition, 35 bonds were traded on this day; and at the close of
trading, the price was 100 1/4% of face value, or $1002.50 in this
case.

Current Net
Bonds Yield Volume Close Change
KMart 8 3/817 8.4 35 100 1/4 +7/8
 DETERMINING THE
MARKET VALUE OF BONDS
 The market value (present value) of a bond is
a function of three factors:
1 the dollar amounts to be received,
2 the length of time until the amounts are
received, and
3 the market rate of interest.
 The market interest rate is the rate investors
demand for loaning funds to the corporation.
 The process of finding the present value is
referred to as discounting the future amounts.
 ILLUSTRATION 11-13
COMPUTING THE MARKET PRICE OF BONDS

On January 1, 2002, Kell Company issues $100,000 of

9% bonds, due in 5 years, with interest payable
annually at year-end. Each purchaser of the bonds
would receive the following 2 cash payments:
1 $100,000 principal to be paid at maturity and
2 Five $9,000 interest payments ($100,000 X 9%) over
the term of the bonds.
The present values of these amounts are shown below.
ACCOUNTING FOR BOND ISSUES
ISSUING BONDS AT FACE VALUE

Devor Corporation issues 1,000, 10 year, 9% bonds dated

January 1, 2002, at 100 (100% of face value). The entry to
record the sale is:

1,000,000

1,000,000
ACCOUNTING FOR BOND ISSUES
ISSUING BONDS AT FACE VALUE

Bonds payable are reported in the long-term liabilities

section of the balance sheet since the maturity date is
January 1, 2012 (more than 1 year away). The entry for
the interest payment on July 1, 2002, assuming no previous
accrual of interest, is:

45,000

45,000
ACCOUNTING FOR BOND ISSUES
ISSUING BONDS AT FACE VALUE

At December 31, an adjusting entry is required to

recognize the $45,000 of interest expense incurred
since July 1. Bond interest payable is classified as
a current liability, since it is scheduled for
payment within the next year. The entry is:

45,000

45,000
 ILLUSTRATION 11-14
INTEREST RATES AND BOND PRICES

Market
Interest Rate Bonds Sell at

8% Premium

Bond
Contractual Issued when
10% Face Value
Interest
Rate 10%

12% Discount
ACCOUNTING FOR BOND ISSUES
ISSUING BONDS AT A DISCOUNT

If the market interest rate is greater than the contractual

interest rate, the issuing corporation will sell the bonds at
a price less than face value – at a discount. At January 1,
2002, Candlestick, Inc. sells $100,000, 5-year, 10% bonds
for $92,639 with interest payable on July 1 and January 1.
The entry to record the issuance is:

92,639

7,361

100,000
 ILLUSTRATION 11-15
STATEMENT PRESENTATION OF
DISCOUNT ON BONDS PAYABLE

 Discount on Bonds Payable

1 has a debit balance,
2 is a contra account, and
3 is deducted from Bonds Payable on the balance sheet,
as shown below.
 The $92,639 represents the carrying value (or book
value) of the bonds, which – on the date of issuance – is
equal to the market value of the bonds.

Long-term liabilities
Bonds payable $ 100,000
Less: Discount on bonds payable 7,361 $ 92,639
ILLUSTRATION 11-16
TOTAL COST OF BORROWING
– BONDS ISSUED AT A DISCOUNT

The difference between the issuance price and the

face value of the bonds – the discount – is an
additional cost of borrowing that should be recorded
as bond interest expense over the life of the bonds.
The total cost of borrowing $92,639 for Candlestick,
Inc. is $57,361, computed as follows:
ILLUSTRATION 11-17
ALTERNATIVE COMPUTATION OF TOTAL COST OF
BORROWING – BONDS ISSUED AT A DISCOUNT

Alternatively – the total cost

of borrowing can be
determined as follows:
 ILLUSTRATION 11-18
FORMULA FOR STRAIGHT-LINE METHOD OF BOND
DISCOUNT FORMULA FOR AMORTIZATION

 Bond discount should be allocated systematically to

each accounting period benefiting from the use of the
cash proceeds.
 The straight-line method of amortization allocates the
same amount to interest expense in each interest
period.
 The amount is determined as shown below:

Number of Bond
Bond Interest Discount
Discount Periods Amortization
ACCOUNTING FOR BOND ISSUES
ISSUING BONDS AT A DISCOUNT

In this example, the bond discount amortization

is $736 ($7,361 ÷ 10). The entry to record the
payment of bond interest and the amortization
of bond discount on July 1, 2002 is:

5,736

736

5,000
ACCOUNTING FOR BOND ISSUES
ISSUING BONDS AT A DISCOUNT

The December 31 adjusting entry is shown below. The

interest has to be accrued and the discount amortized,
since payment will not be made until the next year.

5,736

736

5,000
ACCOUNTING FOR BOND ISSUES
ISSUING BONDS AT A PREMIUM

If the market interest rate is less than the contractual

interest rate, the issuing corporation will sell the bonds at
a price greater than face value – at a premium. At
January 1, 2002, Candlestick, Inc. sells $100,000, 5-year,
10% bonds for $108,111 with interest payable on July 1
and January 1. The entry to record the issuance is:

108,111

100,000

8,111
 ILLUSTRATION 11-20
STATEMENT PRESENTATION OF
BOND PREMIUM

 Premium on Bonds Payable

1 has a credit balance and
2 is added to Bonds Payable on the balance sheet, as
shown below.
 The $108,111 represents the carrying value (or book
value) of the bonds, which – on the date of issuance – is
equal to the market value of the bonds.
 ILLUSTRATION 11-21
TOTAL COST OF BORROWING
– BONDS ISSUED AT A PREMIUM

The difference between the issuance price and the face

value of the bonds – the premium – is a reduction in the
cost of borrowing that should be recorded as a decrease in
bond interest expense over the life of the bonds. The total
cost of borrowing $108,111 for Candlestick, Inc. is
$41,889, computed as follows:
 ILLUSTRATION 11-22
ALTERNATIVE COMPUTATION OF TOTAL COST OF
BORROWING – BONDS ISSUED AT A PREMIUM

Alternatively – the total

cost of borrowing can be
determined as follows:
Bonds Issued at a Premium
Principal at maturity $ 1,000,000
Add: Semiannual interest payments ($5,000 X 10) 50,000
Cash to be paid to bondholders 150,000
Less: Cash received from bondholders 108,111
Total cost of borrowing $ 41,889
ACCOUNTING FOR BOND ISSUES
ISSUING BONDS AT A PREMIUM

In this example, the bond premium amortization

is $811 ($8,111 ÷ 10). The entry to record the
payment of bond interest and the amortization
of bond premium on July 1 is:

4,189

811

5,000
ACCOUNTING FOR BOND ISSUES
ISSUING BONDS AT A PREMIUM

The December 31 adjusting entry is shown below. The

interest to be paid on January 1 must be accrued.

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Dec 31 Bond Interest Expense 4,189

811
Premium on Bonds Payable
Bond Interest Payable 5,000

(To record accrued bond

interest and amortization of
bond premium)
ACCOUNTING FOR BOND ISSUES
ISSUING BONDS BETWEEN INTEREST DATES

 When bonds are issued between interest

payment dates, the issuer requires the
investor to pay the market price for the
bonds plus accrued interest since the last
interest date.
 At the next interest date, the corporation
will return the accrued interest to the
investor by paying the full amount of
interest due on the outstanding bonds.
ACCOUNTING FOR BOND ISSUES
ISSUING BONDS BETWEEN INTEREST DATES

Deer Corporation sells $1,000,000, 9% bonds at face value

plus accrued interest on March 1. Interest is payable
semiannually on July 1 and January 1. The accrued
interest is $15,000 ($1,000,000 X 9% X 2/12). The
proceeds on the sale of the bonds total $1,015,000, and the
entry to record the issuance is:

1,015,000

1,000,000

15,000
ACCOUNTING FOR BOND ISSUES
ISSUING BONDS BETWEEN INTEREST DATES

At the first interest date, the bond interest payable balance

must be eliminated and interest expense for 4 months
(March 1 – June 30) must be recognized. Interest expense
is $30,000 ($1,000,000 X 9% X 4/12). The entry on July 1
to record the $45,000 interest payment is:

15,000

30,000

45,000
ACCOUNTING FOR BOND RETIREMENTS
REDEEMING BONDS AT MATURITY

Regardless of the issuance price of the bonds, the book

value of the bonds at maturity will equal their face value.
The entry to record the redemption of the Deer Corp.
bonds at maturity, assuming that the interest for the last
interest period is paid and recorded separately, is:

1,000,000

1,000,000
 ACCOUNTING FOR BOND RETIREMENTS
REDEEMING BONDS BEFORE MATURITY

 A corporation may decide to retire bonds before maturity

to lower interest expense and remove debt from its balance
sheet.
 Debt should be retired early only if the corporation has
sufficient cash resources.
 When bonds are retired before maturity, it is necessary to:
1 eliminate the carrying value of the bonds at the
redemption date,
2 record the cash paid, and
3 recognize the gain or loss on redemption.
 The carrying value of the bonds is the face value of the
bonds less (plus) unamortized bond discount (premium) at
the redemption date.
ACCOUNTING FOR BOND RETIREMENTS
REDEEMING BONDS BEFORE MATURITY

Candlestick, Inc. – at the end of the eighth period (having

sold its bonds at a premium) – retires its bonds at 103 after
paying the semiannual interest. The carrying value of the
bonds at the redemption date is $101,623. Gains or losses
on early bond redemption are reported in the income
statement as extraordinary items as required by GAAP:

100,000

1,623

1,377

103,000
ACCOUNTING FOR BOND RETIREMENTS
CONVERTING BONDS INTO COMMON STOCK

When the conversion of bonds into common stock is

recorded, the current market values of the bonds
and stock are ignored. On July 1, Saunders
Associates converts $100,000 of bonds sold at face
value into 2,000 shares of $10 par value common
stock. Both the bonds and the stock have a market
value of $130,000, which is not considered in making
the entry.

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
July 1 Bonds Payable 100,000

Common Stock 20,000

Paid in Capital in Excess of Par Value 80,000

 ACCOUNTING FOR
LONG-TERM NOTES PAYABLE

 Long-term notes payable are similar to

short-term interest-bearing notes payable except
that the terms of the notes exceed one year.
 A long-term note may be secured by a document
called a mortgage that pledges title to specific
assets as security (collateral) for a loan.
 Mortgage notes payable are widely used in:
1 the purchase of homes by individuals and
2 the acquisition of plant assets by many small
and some large companies.
 ILLUSTRATION 11-25
MORTGAGE INSTALLMENT PAYMENT SCHEDULE
 Each mortgage installment payment consists of:
1 interest on the unpaid balance of the loan and
2 a reduction of loan principal.
 Porter Technology Inc. issues a $500,000, 12%, 20-year mortgage
note on December 31, 2002 to finance the construction of new
research laboratory.
 The installment payment schedule for the first 2 years is:
 ACCOUNTING FOR
LONG-TERM NOTES PAYABLE
The entries to record the mortgage loan and
the first installment payment are as follows:

500,000

500,000

30,000

3,231

33,231

In the balance sheet, the reduction in principal for the next year
is reported as a current liability, and the remaining unpaid
principal balance is classified as a long-term liability.
 ILLUSTRATION 11-26
BALANCE SHEET PRESENTATION OF
LONG-TERM LIABILITIES
Long-term liabilities
Bonds payable– 10% due in 2009 $1,000,000
Less: Discount on bonds payable 80,000 $ 920,000
Mortgage notes payable, 11%, due in 2015 and secured by plant assets 500,000
Lease liability 540,000
Total long-term liabilities $ 1,960,000

 Long-term liabilities are reported in a separate section of

the balance sheet immediately following current
liabilities, as shown above.
 Summary data may alternatively be presented in the
balance sheet with detailed data shown in a supporting
schedule.
 The current maturities of long-term debt should be
reported under current liabilities if they are to be paid
from current assets.
 STATEMENT PRESENTATION AND
ANALYSIS OF
LONG-TERM LIABILITIES
 Long-term creditors and stockholders are interested
in a company’s long-run solvency – particularly its
ability to pay interest as it comes due and to repay
the face value of the debt at maturity.
 Debt to total assets and times interest earned are two
ratios that provide information about debt-paying
ability and long-run solvency.
 The debt to total assets ratio measures the
percentage of the total assets provided by creditors.
 The times interest earned ratio provides an
indication of the company’s ability to meet interest
payments as they come due.
 ILLUSTRATION 11-27
DEBT TO TOTAL ASSETS AND TIMES
INTEREST EARNED RATIOS WITH
COMPUTATIONS
Lands’ End annual report disclosed total liabilities of $193.4
million, total assets of $507.6 million, interest expense of
$1.5 million, income taxes of $20.4 million, and net income
of $34.7 million. Kellogg’s debt to total assets ratio and
times interest earned ratio are shown below:

Debt to
Total Debt Total Assets
Total Assets

$193.4 ÷ $507.6 = 38 %

$34.7 + $20.4 + $1.5 ÷ $1.5

Income before
= 37.7 times
Income Taxes Interest Times Interest
and Interest Expense Earned
Expense
 COPYRIGHT

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CHAPTER 11

LIABILITIES