ch10 Intermediate Accounting

Slide
10-1
Chapter
10
Liabilities
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
10-2
Study
Study Objectives
Objectives
Slide
10-3
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.
5.
Prepare the entries for the issuance of bonds and interest

expense.
6.
Describe the entries when bonds are redeemed.
7.
Describe the accounting for long-term notes payable.
8.
Identify the methods for the presentation and analysis of noncurrent liabilities.
Liabilities
Liabilities
Current Liabilities
Notes payable
Bond basics
Sales taxes payable
Accounting for bond issues
Unearned revenues
Accounting for bond

retirements
Current maturities of longterm debt

Statement presentation
and analysis
Slide
10-4
Non-Current Liabilities
Accounting for long-term

notes payable
Statement presentation and
analysis
Section 1 Current Liabilities

What
What is
is aa Current
Current Liability?
Liability?
Current liability is debt with two key features:
1. Company expects to pay the debt from existing
current assets or through the creation of other current

liabilities.
2. Company will pay the debt within one year or the
operating cycle, whichever is longer.

Current liabilities include notes payable, accounts payable, unearned
revenues, and accrued liabilities such as taxes payable, salaries payable,
and interest payable.
Slide
10-5
SO 1 Explain a current liability, and identify the

major types of current liabilities.
What
What is
is aa Current
Current Liability?
Liability?
Question
To be classified as a current liability, a debt must be
expected to be paid:
a. out of existing current assets.
b. by creating other current liabilities.
c. within 2 years.
d. both (a) and (b).
Slide
10-6
SO 1 Explain a current liability, and identify the

major types of current liabilities.
What
What is
is aa Current
Current Liability?
Liability?
Notes Payable
Written promissory note.
Require the borrower to pay interest.
Issued for varying periods.
Slide
10-7
SO 2 Describe the accounting for notes payable.
What
What is
is aa Current
Current Liability?
Liability?
Illustration: On March 1, 2011, Cole Williams borrows
$100,000 from First National Bank on a 4-month, 12% note.
Instructions
a) Prepare the entry on March 1.
b) Prepare the adjusting entry on June 30, assuming
monthly adjusting entries have not been made.
c) Prepare the entry at maturity (July 1).
Slide
10-8
What
What is
is aa Current
Current Liability?
Liability?
a) Prepare the entry on March 1.
Cash
100,000
Notes payable
100,000
b) Prepare the adjusting entry on June 30.

$100,000 x 12% x 4/12 = $4,000
Interest expense
Interest payable
Slide
10-9
4,000
4,000
What
What is
is aa Current
Current Liability?
Liability?
c) Prepare the entry at maturity (July 1).
Notes payable
Interest payable
Cash
Slide
10-10
100,000
4,000
104,000
What
What is
is aa Current
Current Liability?
Liability?
Sales Tax Payable
Sales taxes are expressed as a stated percentage of
the sales price.
Either rung up separately or included in total
receipts.
Retailer collects tax from the customer.
Retailer remits the collections to the states
department of revenue.
Slide
10-11
SO 3 Explain the accounting for other current liabilities.
What
What is
is aa Current
Current Liability?
Liability?
Illustration: The March 25 cash register reading for Cooley
Grocery shows sales of $10,000 and sales taxes of $600 (sales
tax rate of 6%), the journal entry is:
Cash
10,600
Sales
10,000
Sales tax payable
Slide
10-12
600
What
What is
is aa Current
Current Liability?
Liability?
Unearned Revenue
Revenues that are received before the company delivers
goods or provides services.
1. Company debits Cash, and credits
a current liability
account (unearned revenue).
2. When the company earns the
revenue, it debits the
Unearned Revenue account,
and credits a revenue account.
Slide
10-13
What
What is
is aa Current
Current Liability?
Liability?
Illustration: Assume that Superior University sells 10,000
season football tickets at $50 each for its five-game home
schedule. The university makes the following entry for the sale
of season tickets:
Aug. 6
Cash
Unearned revenue
500,000
As the school completes

500,000 each of the five home games, it would
record the revenue earned.
Sept. 7
Slide
10-14
Unearned revenue
Ticket revenue
100,000
SO 3
100,000
Explain the accounting for other current liabilities.
What
What is
is aa Current
Current Liability?
Liability?
Unearned Revenue
Slide
10-15
Illustration 10-2
Unearned and earned
revenue accounts
What
What is
is aa Current
Current Liability?
Liability?
Current Maturities of Long-Term Debt
Portion of long-term debt that comes due in the
current year.
No adjusting entry required.
Slide
10-16
Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Presentation
Slide
10-17
Illustration 10-3
Statement of financial position presentation
of current liabilities (in thousands)
Statement
Presentation and
and Analysis
Analysis
Analysis
Illustration 10-4
The current ratio permits

us to compare the liquidity
of different-sized
companies and of a single
company at different
times.
Slide
10-18
Liquidity refers to the

ability to pay maturing
obligations and meet
unexpected needs for
cash.
Illustration 10-5
Statement
Presentation and
and Analysis
Analysis
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).
Slide
10-19
Section 2 Non-Current Liabilities

Bond
Bond Basics
Basics
Bonds are a form of interest-bearing notes payable.
Three advantages over ordinary shares:
1. Stockholder control is not affected.
2. Tax savings result.
3. Earnings per share may be higher.
Slide
10-20
SO 4 Explain why bonds are issued, and identify the types of bonds.
Bond
Bond Basics
Basics
Effects on earnings per shareequity vs. debt.
Illustration 10-7
Slide
10-21
Bond
Bond Basics
Basics
Question
The major disadvantages resulting from the use of bonds
are:
Slide
10-22
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.
Bond
Bond Basics
Basics
Types of Bonds
Secured and Unsecured (debenture) bonds.
Term and Serial bonds.
Registered and Bearer (or coupon) bonds.
Convertible and Callable bonds.
Slide
10-23
Bond
Bond Basics
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.
Slide
10-24
Bond
Bond Basics
Basics
Issuer
Issuer of
of
Bonds
Bonds
Illustration 10-8
Maturity
Maturity
Date
Date
2013
DUE 2013
DUE 2013
Contractual
Contractual
Interest
Interest
Rate
Rate
Slide
10-25
Face
Face or
or
Par
Par Value
Value
SO 4
Bond
Bond Basics
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.
Slide
10-26
Bond
Bond Basics
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,
2. length of time until the amounts are received, and
3. market rate of interest.
The features of a bond (callable, convertible, and so on) affect the
market rate of the bond.
Slide
10-27
Slide
10-28
Accounting
Accounting for
for Bond
Bond Issues
Issues
Question
The rate of interest investors demand for loaning funds to
a corporation is the:
Slide
10-29
a.
contractual interest rate.
b.
face value rate.
c.
market interest rate.
d.
stated interest rate.
Accounting
Accounting for
for Bond
Bond Issues
Issues
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:
Slide
10-30
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.

Accounting
Accounting for
for Bond
Bond Issues
Issues
Issuing Bonds at Face Value
Illustration: On January 1, 2011, Candlestick
Corporation issues $100,000, five-year, 10% bonds at 100
(100% of face value). The entry to record the sale is:
Jan. 1
Cash
Bonds payable
Slide
10-31
100,000
100,000
Issuing
Issuing Bonds
Bonds at
at Face
Face Value
Value
(100% of face value). Assume that interest is
payable semiannually on January 1 and July 1. Prepare
the entry to record the payment of interest on July 1, 2011,
assume no previous accrual.
July 1
Bond interest expense

Cash
Slide
10-32
5,000
5,000
Issuing
Issuing Bonds
Bonds at
at Face
Face Value
Value
(100% of face value). Assume that interest is
payable semiannually on January 1 and July 1. Prepare
the entry to record the accrual of interest on December 31,
2011, assume no previous accrual.
Dec. 31
Bond interest expense

Bond interest payable
Slide
10-33
5,000
5,000
Accounting
Accounting for
for Bond
Bond Issues
Issues
Assume Contractual Rate of 8%
Slide
10-34
Market Interest
Bonds Sold At
6%
Premium
8%
Face Value
10%
Discount
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting
Accounting for
for Bond
Bond Issues
Issues
Issuing Bonds at a Discount
Illustration: On January 1, 2011, Candlestick, Inc. sells
$100,000, five-year, 10% bonds for $92,639 (92.639% of
face value). Interest is payable on July 1 and January 1.
The entry to record the issuance is:
Jan. 1
Cash
Bond payable
Slide
10-35
92,639
92,639
Issuing
Issuing Bonds
Bonds at
at aa Discount
Discount
Slide
10-36
Illustration 10-11
Statement presentation of
bonds issued at a discount
Issuing
Issuing Bonds
Bonds at
at aa Discount
Discount
Total Cost of Borrowing
Illustration 10-12
Illustration 10-13
Slide
10-37
Issuing
Issuing Bonds
Bonds at
at aa Discount
Discount
Question
Discount on Bonds Payable:
Slide
10-38
a.
has a credit balance.
b.
is a contra account.
c.
is added to bonds payable on the statement of

financial position.
d.
increases over the term of the bonds.
Accounting
Accounting for
for Bond
Bond Issues
Issues
Issuing Bonds at a Premium
Illustration: On January 1, 2011, Candlestick, Inc. sells
$100,000, five-year, 10% bonds for $108,111 (108.111% of
face value). Interest is payable on July 1 and January 1.
The entry to record the issuance is:
Jan. 1
Cash
Bonds payable
Slide
10-39
108,111
108,111
Issuing
Issuing Bonds
Bonds at
at aa Premium
Premium
Illustration 10-14
Statement presentation of
bonds issued at a premium
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.
Slide
10-40
Issuing
Issuing Bonds
Bonds at
at aa Premium
Premium
Total Cost of Borrowing
Illustration 10-15
Illustration 10-16
Slide
10-41
Accounting
Accounting for
for Bond
Bond Retirements
Retirements
Redeeming Bonds at Maturity
Assuming that the company pays and records separately
the interest for the last interest period, Candlestick records
the redemption of its bonds at maturity as follows:
Bond payable
Cash
Slide
10-42
100,000
100,000
SO 6 Describe the entries when bonds are redeemed.
Accounting
Accounting for
for Bond
Bond Retirements
Retirements
Redeeming Bonds before Maturity
When retiring bonds 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
unamortized bond discount or plus unamortized bond premium at the
redemption date.
Slide
10-43
Accounting
Accounting for
for Bond
Bond Retirements
Retirements
Question
When bonds are redeemed before maturity, the gain or

loss on redemption is the difference between the cash
paid and the:
Slide
10-44
a.
carrying value of the bonds.
b.
face value of the bonds.
c.
original selling price of the bonds.
d.
maturity value of the bonds.
Accounting
Accounting for
for Bond
Bond Retirements
Retirements
Illustration: Assume Candlestick, Inc. has sold its bonds at a
premium. At the end of the eighth period, Candlestick retires
these bonds at 103 after paying the semiannual interest. The
carrying value of the bonds at the redemption date is $101,623.
Candlestick makes the following entry to record the redemption
at the end of the eighth interest period (January 1, 2015):
Bonds payable
Loss on redemption
Cash
Slide
10-45
101,623
1,377
103,000
Accounting
Accounting for
for Long-Term
Long-Term Notes
Notes Payable
Payable
Long-Term Notes Payable
May be secured by a mortgage that pledges title to
specific assets as security for a loan.
Typically, terms require the borrower to make installment
payments over the term of the loan. Payment consists of
1. interest on the unpaid balance of the loan and
2. a reduction of loan principal.
Companies initially record mortgage notes payable at

face value.
Slide
10-46
SO 7 Describe the accounting for long-term notes payable.
Accounting
Accounting for
for Long-Term
Long-Term Notes
Notes Payable
Payable
Illustration: Porter Technology Inc. issues a $500,000, 12%, 20year mortgage note on December 31, 2011. The terms provide for
semiannual installment payments of $33,231 (not including real
estate taxes and insurance). The installment payment schedule for
the first two years is as follows.
Illustration 10-17
Slide
10-47
Accounting
Accounting for
for Long-Term
Long-Term Notes
Notes Payable
Payable
Illustration: Porter Technology Inc. issues a $500,000, 12%, 20year mortgage note on December 31, 2011. The terms provide for
semiannual installment payments of $33,231 (not including real
estate taxes and insurance). The installment payment schedule for
the first two years is as follows.
Dec. 31
Cash
500,000
Mortgage notes payable

Jun. 30
Interest expense
Mortgage notes payable
Cash
Slide
10-48
500,000
30,000
3,231
33,231
Accounting
Accounting for
for Long-Term
Long-Term Notes
Notes Payable
Payable
Question
Each payment on a mortgage note payable consists of:
Slide
10-49
a.
interest on the original balance of the loan.
b.
reduction of loan principal only.
c.
interest on the original balance of the loan and

reduction of loan principal.
d.
interest on the unpaid balance of the loan and

reduction of loan principal.
Slide
10-50
Statement
Presentation and
and Analysis
Analysis
Presentation
Illustration 10-18
Slide
10-51
SO 8 Identify the methods for the presentation and

analysis of non-current liabilities.
Statement
Presentation and
and Analysis
Analysis
Analysis
Two ratios that provide information about debt-paying
ability and long-run solvency are:
1.
Debt to total
assets
Total debt
=
Total assets
The higher the percentage of debt to total assets, the

greater the risk that the company may be unable to meet
its maturing obligations.
Slide
10-52

Statement
Presentation and
and Analysis
Analysis
Analysis
2.
Times
Interest
Earned
Income before income taxes

and interest expense
=
Interest expense
Indicates the companys ability to meet interest payments

as they come due.
Slide
10-53

Statement
Presentation and
and Analysis
Analysis
Analysis
Illustrate: LGs (KOR) had total liabilities of W39,048
billion, total assets of W64,782 billion, interest expense of
W778 billion, income taxes of W1,092 billion, and net
income of W2,967 billion.
Illustration 10-19
Slide
10-54

Slide
10-55
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences
Liabilities
IFRS reserves the use of the term contingent liability to refer

only to possible obligations that are not recognized in the
financial statements but may be disclosed if certain criteria are
met. Under GAAP, contingent liabilities are recorded in the
financial statements if they are both probable and can be
reasonably estimated. If only one of these criteria is met, then
the item is disclosed in the notes.
Slide
10-56
IFRS uses the term provisions to refer to liabilities of uncertain

timing or amount. Examples of provisions would be provisions
for warranties, employee vacation pay, or anticipated losses.
Under GAAP, these are considered recordable contingent
liabilities.
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences
Liabilities
Both GAAP and IFRS classify liabilities industries where a

presentation based on liquidity would be considered to provide
more useful information (such as financial institutions) can use
that format instead.
Under IFRS, companies sometimes show liabilities before
assets. Also, they will sometimes show non-current liabilities
before current liabilities. Neither of these presentations is used
under GAAP.
Slide
10-57
Under IFRS, companies sometimes will net current liabilities

against current assets to show working capital on the face of
the statement of financial position. This practice is not used
under GAAP.
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences
Liabilities
IFRS requires the effective-interest method for amortization of

bond discounts and premiums. GAAP allows use of the
straight-line method where the difference is not material.
GAAP often uses a separate Discount or Premium account to
account for bonds payable. IFRS records discounts or
premiums as direct increases or decreases to Bonds Payable.
The GAAP accounting for leases is much more rules-based,
with specific bright-line criteria (such as the 90% of fair value
test) to determine if a lease arrangement transfers the risks and
rewards of ownership; IFRS is more conceptual in its
provisions.
Slide
10-58
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Looking to the Future
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
focus primarily on lessee accounting. One of the first areas to
be studied is, What are the assets and liabilities to be
recognized related to a lease contract? The main issue is
whether the focus should remain on the leased item or should
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.
Slide
10-59
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
Present Value of Face Value
Appendix 10A
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,
Slide
10-60
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).
SO 9 Compute the market price of a bond.
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
divide the future amount by 1 plus the interest rate

($1,000/1.10 = $909.09.
Illustration 10A-1
Slide
10-61
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
use a Present Value of 1 table. ($1,000 X .90909) =

$909.09 (10% per period, one period from now).
TABLE 10A-1
Slide
10-62
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
The future amount ($1,000), the interest rate (10%), and the
number of periods (1) are known
Illustration 10A-2
Slide
10-63
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
If you are to receive the single future amount of $1,000 in
two years, discounted at 10%, its present value is $826.45
[($1,000 1.10) 1.10].
Illustration 10A-3
Slide
10-64
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
To compute the answer using a Present Value of 1 table.
($1,000 X .82645) = $826.45 (10% per period, two periods
from now).
TABLE 10A-1
Slide
10-65
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
Present Value of Interest Payments (Annuities)
In addition to receiving the face value of a bond at maturity,
an investor also receives periodic interest payments
(annuities) over the life of the bonds.
To compute the present value of an annuity, we need to
know:
1) interest rate,
2) number of interest periods, and
3) amount of the periodic receipts or payments.
Slide
10-66
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
Assume that you will receive $1,000 cash annually for three
years and the interest rate is 10%.
Illustration 10A-5
Slide
10-67
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
Illustration 10A-6
Slide
10-68
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
TABLE 10A-2
$1,000 annual payment x 2.48685 = $2,486.85

Slide
10-69
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
Computing the Present Value of a Bond
The selling price of a bond is equal to the sum of:
1) The present value of the face value of the bond
discounted at the investors required rate of return
PLUS
2) The present value of the periodic interest payments
discounted at the investors required rate of return
Slide
10-70
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
Assume a bond issue of 10%, five-year bonds with a face
value of $100,000 with interest payable semiannually on
January 1 and July 1.
Illustration 10A-8
Slide
10-71
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
Illustration 10A-9
Contractual Rate = Discount Rate

Slide
10-72
Issued at Face Value

Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
Illustration 10A-10
Contractual Rate < Discount Rate

Slide
10-73
Issued at a Discount
Present
Present Value
Value Concepts
Concepts Related
Related to
to Bond
Bond Pricing
Pricing
Illustration 10A-11
Contractual Rate > Discount Rate

Slide
10-74
Issued at a Premium
Effective-Interest
Effective-Interest Method
Method of
of Bond
Bond Amortization
Amortization
Appendix 10B
Under the effective-interest method, the amortization of

bond discount or bond premium results in period interest
expense equal to a constant percentage of the carrying value
of the bonds.
Required steps:
1. Compute the bond interest expense.
2. Compute the bond interest paid or accrued.
3. Compute the amortization amount.
Slide
10-75
SO 10 Apply the effective-interest method of amortizing

bond discount and bond premium.
Effective-Interest
Method of
of Bond
Bond Amortization
Amortization
Amortizing Bond Discount
Assume Candlestick, Inc. issues $100,000 of 10%, five-year bonds
on January 1, 2011, for $92,639, with interest payable each July 1
and January 1.
Illustration 10B-2
Slide
10-76
SO 10
Effective-Interest
Method of
of Bond
Bond Amortization
Amortization
and January 1.
Journal entry on July 1, 2011, to record the interest payment and
amortization of discount is as follows:
July 1
Interest Expense
Cash
5,000
Bonds Payable
Slide
10-77
5,558
558

Effective-Interest
Method of
of Bond
Bond Amortization
Amortization
Amortizing Bond Premium
and January 1.
Illustration 10B-4
Slide
10-78
SO 10
Effective-Interest
Method of
of Bond
Bond Amortization
Amortization
and January 1.
amortization of premium is as follows:
July 1
Interest Expense
Bonds Payable
Cash
Slide
10-79
4,324
676
5,000

Straight-Line
Straight-Line Amortization
Amortization
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
Slide
10-80
SO 11
Straight-Line
Amortization
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).
July 1
Interest Expense
Bonds Payable
Cash
Slide
10-81
5,736
736
5,000
SO 11 Apply the straight-line method of amortizing

Straight-Line
Amortization
1, 2011, for $108,111. Interest is payable on July 1 and January 1.
Illustration 10C-4
Slide
10-82
SO 11
Straight-Line
Amortization
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).
July 1
Interest Expense
Bonds Payable
Cash
Slide
10-83
4,189
811
5,000
SO 11 Apply the straight-line method of amortizing

Payroll-Related
Payroll-Related Liabilities
Liabilities
Payroll and Payroll Taxes Payable
Appendix 10D
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).
Determining the payroll involves computing three amounts:
(1) gross earnings, (2) payroll deductions, and (3) net pay.
Slide
10-84
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
Record the payment of this payroll on March 11.

Mar. 11 Salaries and wages payable
Cash
Slide
10-85
67,564
67,564
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
Slide
10-86
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
13,850
FICA tax payable

Federal unemployment tax payable
State unemployment tax payable
Slide
10-87
7,650
800
5,400
Payroll-Related
Liabilities
Question
Employer payroll taxes do not include:
Slide
10-88
a.
Federal unemployment taxes.
b.
State unemployment taxes.
c.
Federal income taxes.
d.
FICA taxes.
Copyright
Copyright
Copyright 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
Slide
10-89

ch10 Intermediate Accounting

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ch10 Intermediate Accounting

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Explain a current liability, and identify the major types of current

Describe the accounting for notes payable.

Explain the accounting for other current liabilities.

Prepare the entries for the issuance of bonds and interest

Describe the entries when bonds are redeemed.

Describe the accounting for long-term notes payable.

Sales taxes payable

Accounting for bond issues

Accounting for bond

Current maturities of longterm debt

Accounting for long-term

Section 1 Current Liabilities

current assets or through the creation of other current

operating cycle, whichever is longer.

SO 1 Explain a current liability, and identify the

SO 1 Explain a current liability, and identify the

SO 2 Describe the accounting for notes payable.

SO 2 Describe the accounting for notes payable.

b) Prepare the adjusting entry on June 30.

SO 2 Describe the accounting for notes payable.

SO 3 Explain the accounting for other current liabilities.

Sales tax payable

SO 3 Explain the accounting for other current liabilities.

SO 3 Explain the accounting for other current liabilities.

As the school completes

Explain the accounting for other current liabilities.

SO 3 Explain the accounting for other current liabilities.

SO 3 Explain the accounting for other current liabilities.

SO 3 Explain the accounting for other current liabilities.

The current ratio permits

Liquidity refers to the

SO 3 Explain the accounting for other current liabilities.

SO 3 Explain the accounting for other current liabilities.

Section 2 Non-Current Liabilities

that interest is not tax deductible and the principal

that the principal is tax deductible and interest must

that neither interest nor principal is tax deductible.

that interest must be paid and principal repaid.

Paper certificate, typically a $1,000 face value.

Read as: Outstanding 5.125%, $1,000 bonds that mature in 2014.

contractual interest rate.

face value rate.

market interest rate.

stated interest rate.

the contractual interest rate exceeds the market

the market interest rate exceeds the contractual

the contractual interest rate and the market interest

no relationship exists between the two rates.

Bond interest expense

Bond interest expense

Discount on Bonds Payable:

has a credit balance.

is added to bonds payable on the statement of

increases over the term of the bonds.

Issuing bonds at an amount different from face value is quite

SO 6 Describe the entries when bonds are redeemed.

SO 6 Describe the entries when bonds are redeemed.

When bonds are redeemed before maturity, the gain or

carrying value of the bonds.

face value of the bonds.

original selling price of the bonds.

maturity value of the bonds.