REPORTING AND ANALYZING LIABILITIES

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Chapter 10
REPORTING AND ANALYZING LIABILITIES
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Chapter 10 Reporting and Analyzing Liabilities

• 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.
• Identify the types of bonds.
• Prepare the entries for the issuance of bonds and
  interest expense.
• Describe the entries when bonds are redeemed.

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Current Liabilities

• Current liabilities are debts which can
  reasonably be expected to be paid
• From existing current assets or through the
  creation of other current liabilities, and
• Within 1 year or the operating cycle, whichever
  is longer
• Debts that do not meet both criteria are
  Long-Term Liabilities

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Types of Current Liabilities

• Notes Payable
• Accounts Payable
• Unearned Revenues
• Accrued Liabilities
• Taxes
• Salaries and Wages
• Interest

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Notes Payable

• Notes payable are
• Obligations in the form of written notes
• Often used instead of accounts payable they give
  written documentation if needed for legal
  remedies
• Used for short-term and long-term financing needs
• Most often interest-bearing, requiring the
  borrower to pay interest

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Journal
On 9/1/07 First National Bank lends 100,000 to
Cole Williams Co. on a four-month, 12 note
maturing 1/1/08. Sept 1 Cash 100,000
Notes Payable 100,000 (To record issuance
of 12, 4-month note to bank)

Dec 31 Interest Expense
4,000 Interest Payable 4,000 (To accrue
interest for 4 months on note. Interest accrues
over life of the note and must be recorded
periodically.) 100,000 x .12 x 4\12 months
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Journal
Jan 1 Notes Payable 100,000
Interest Payable
4,000 Cash
104,000 (To
record payment of 1st National Bank
interest-bearing note and accrued interest at
maturity.)
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Sales Taxes Payable

• Are collected from customers
• Are expressed as a of sales price
• Are required by state law.
• Remitted to the state monthly
• Usually rung separately from sales on the cash
  register.

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Journal
Mar 25 Cash 10,600
Sales 10,000 Sales Taxes
Payable 600 (To record daily sales and sales
taxes).
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Payroll Taxes

• Various payroll taxes are required by law to be
  withheld from employees gross pay
• Social Security (FICA) taxes withheld, employer
  and employee make equal contributions
• Federal income taxes
• State income taxes (if applicable)

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Journal
Mar 7 Salaries and Wages Expense
100,000 FICA Taxes Payable (employees share)
7,250 Federal Income Taxes Payable
21,864 States Income Taxes Payable
2,922 Salaries and Wages Payable
67,964 Mar 7 Salaries and Wages Payable
67,964 Cash
67,964
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Journal
Employers incur a second type of payroll-related
activity. 1) Employers share of FICA 2) Federal
unemployment 3) State unemployment
Mar 7 Payroll Tax Expense
13,450 FICA Taxes Payable (employers
share) 7,250 Federal Unemployment Taxes
Payable 800 State Unemployment Taxes
Payable 5,400
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Unearned Revenue

• Unearned revenue is cash received before service
  or product is delivered (that is, before revenue
  is earned)
• Recorded as a liability until it is earned

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Unearned Revenues

• Examples of unearned revenues
• Magazine subscriptions
• Rent received in advance
• Customer deposits for future service
• Sale of airline tickets for future travel
• Sale of season tickets to sporting events
• 
  

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Journal
Aug 6 Cash
500,000 Unearned Ticket Revenue
500,000 (To record sale of 10,000
tickets at 50 each)
As each game is completed
Sept 7 Unearned Ticket Revenue 100,000
Ticket Revenue
100,000 (To record ticket
revenue earned)
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Current Maturities of Long-Term Debt

• Current maturities of long-term debt
• The portion of long-term debt due within the
  current year or operating cycle
• Classified as a current liability
• No adjusting entry is necessary

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Bonds

• Bonds
• A form of long-term, interest-bearing note
  payable issued by corporations, universities and
  governmental agencies
• Sold in small denominations, (usually multiples
  of 1,000) which makes them attractive to
  investors
• Are in the form of a legal document that
  indicates the name of the issuer, the face value
  of the bonds, the contractual interest rate, and
  the maturity date

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Accounting for Bond Issues

• Bonds may be issued at
• Face value when
• stated rate market rate
• Below face value (discount) when
• stated rate lt market rate must discount price to
  get investors to buy
• Above face value (premium) when
• stated rate gt market rate all investors want to
  own so the price is bid up

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Bond Terms

• Face Value the amount of principal due at the
  maturity date of the bond
• Discount when a bond is sold for less than its
  face value (the difference between the face value
  of a bond and its selling price)
• Premium - when a bond is sold for more than its
  face value (the difference between the selling
  price and the face value of a bond)

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Selling Bonds at Discount

• On January 1, 2007, Candlestick, Inc., sells
  100,000, 5-year, 10 bonds at 98 with interest
  payable on January 1.
• Jan 1
• Cash 98,000
• Discount on Bonds Payable
  2,000 Bonds Payable
  100,000
• (To record sale of bonds at a discount)
• The discount account is a contra account to the
  bond payable, not an asset account.

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Selling Bonds at Premium

• On January 1, 2007, Candlestick, Inc., sells
  100,000, 5-year, 10 bonds at 102 with interest
  payable on January 1.
• Jan 1
• Cash 102,000 Bonds
  Payable 100,000
• Premium Bonds Payable
  2,000
• (To record sale of bonds at a premium)
• Premium is added to bonds payable on the balance
  sheet

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Amortizing Bond Discount/Premium

• Candlestick, Inc. would amortize the 2,000
  discount/premium as follows
• 2,000 5 Interest Periods
• 400 Annually

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Bond Retirements

• Bonds may be redeemed at maturity or before
  maturity

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Redeeming Bonds Before Maturity

• A company may decide to retire bonds before
  maturity to
• reduce interest cost
• remove debt from its balance sheet
• A company should retire debt early only if it has
  sufficient cash resources

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Redeeming Bonds Before Maturity

• When bonds are retired before maturity, it is
  necessary to
• Eliminate the carrying value of the bonds at the
  redemption date
• Record the cash paid
• Recognize the gain or loss on redemption
• The carrying value of the bonds is the bond
  payable plus the premium or minus the discount