CH 10

10-1
Chapter 10 Liabilities
Learning Objectives
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.
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 non-current
liabilities.
10-2
Preview of Chapter 10
Financial Accounting
IFRS Second Edition
Weygandt Kimmel Kieso
10-3
Current Liabilities
Current liability
 A debt that the company expects to pay within one
year or the operating cycle, whichever is longer.
 Most companies pay current liabilities by using current
assets.
Current liabilities include notes payable, accounts payable, unearned

revenues, and accrued liabilities such as taxes, salaries and wages, and
interest payable.
LO 1 Explain a current liability, and identify the

10-4
major types of current liabilities.
Current Liabilities
Question
The time period for classifying a liability as current is one
year or the operating cycle, whichever is:
a. longer
b. shorter
c. probable
d. possible
LO 1 Explain a current liability, and identify the

10-5
major types of current liabilities.
Current Liabilities
Notes Payable
 Recorded obligation in the form of written notes.
 Usually require the borrower to pay interest.
 Issued for varying periods of time.
 Those due for payment within one year of the statement

of financial position date are usually classified as current
liabilities.
10-6 LO 2 Describe the accounting for notes payable.

Current Liabilities
Illustration: Hong Kong National Bank agrees to lend

HK$100,000 on September 1, 2014, if C.W. Co. signs a
HK$100,000, 12%, four-month note maturing on January 1.
Instructions
a) Prepare the journal entry on September 1.
b) Prepare the adjusting journal entry on December 31,

assuming monthly adjusting entries have not been made.
c) Prepare the journal entry at maturity (January 1, 2015).

Current Liabilities

a) Prepare the journal entry on September 1.

Cash 100,000
Notes payable 100,000
b) Prepare the adjusting journal entry on Dec. 31.
Interest expense 4,000

Interest payable 4,000
HK$100,000 x 12% x 4/12 = HK$4,000

Current Liabilities

c) Prepare the journal entry at maturity (January 1, 2015).
Notes payable 100,000

Cash 104,000

Current Liabilities
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 government’s

department of revenue.
10-10 LO 3 Explain the accounting for other current liabilities.

Current Liabilities
Illustration: The March 25 cash register reading for Cooley

Grocery shows sales of NT$10,000 and sales taxes of NT$600
(sales tax rate of 6%), the journal entry is:
Cash 10,600
Sales revenue 10,000
Sales tax payable 600

Current Liabilities
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.

Current Liabilities
Illustration: Busan IPark (KOR) sells 10,000 season football

tickets at W 50,000 each for its five-game home schedule. The
club makes the following entry for the sale of season tickets (in
thousands of W):
Aug. 6 Cash 500,000

Unearned ticket revenue 500,000
As each game is completed, Busan IPark records the revenue

earned.
Sept. 7 Unearned ticket revenue 100,000

Ticket revenue 100,000

Current Liabilities
Current Maturities of Long-Term Debt

 Portion of long-term debt that comes due in the
current year.
 Considered a current liability.
 No adjusting journal entry required.

Statement Presentation and Analysis
Presentation
 Current liabilities are presented after non-current
liabilities on the statement of financial position.
 A common method of presenting current liabilities is to

list them by order of magnitude, with the largest ones
first.

Illustration 10-3

Analysis
Illustration 10-4
Liquidity refers to the
ability to pay maturing
obligations and meet
unexpected needs for
cash.
The current ratio Illustration 10-5

permits us to compare
the liquidity of different-
sized companies and of
a single company at
different times.

ANATOMY OF A FRAUD
Art was a custodial supervisor for a large school district. The district was
supposed to employ between 35 and 40 regular custodians, as well as 3 or 4
substitute custodians to fill in when regular custodians were missing. Instead, in
addition to the regular custodians, Art “hired” 77 substitutes. In fact, almost
none of these people worked for the district. Instead, Art submitted time cards
for these people, collected their checks at the district office, and personally
distributed the checks to the “employees.” If a substitute’s check was for
$1,200, that person would cash the check, keep $200, and pay Art $1,000.
Total take: $150,000
The Missing Control

Human Resource Controls. Thorough background checks should be
performed. No employees should begin work until they have been approved by
the Board of Education and entered into the payroll system. No employees
should be entered into the payroll system until they have been approved by a
supervisor. All paychecks should be distributed directly to employees at the
official school locations by designated employees.
Independent internal verification. Budgets should be reviewed monthly to
identify situations where actual costs significantly exceed budgeted amounts.
10-18
Non-Current Liabilities
Obligations that are expected to be paid after one year.
Bond Basics
 A form of interest-bearing notes payable.
 To obtain large amounts of long-term capital.
Three advantages over ordinary shares:
1. Shareholder control is not affected.
2. Tax savings result.
3. Earnings per share may be higher.
10-19 LO 4 Explain why bonds are issued, and identify the types of bonds.
Bond Basics
Effects on earnings per share—equity vs. debt.

Illustration 10-7
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.
Bond Basics
Types of Bonds
10-22 LO 4
Bond Basics
Issuing Procedures
 Government laws grant corporations power to issue
bonds.
 Board of directors and shareholders must approve bond
issues.
 Board of directors must stipulate number of bonds to be
authorized, total face value, and contractual interest rate.
 Terms of the bond are set forth in a legal document called
a bond indenture.
 Issuing company arranges for printing of bond
certificates.
Bond Basics
Issuing Procedures
 Represents a promise to pay:
► face value at designated maturity date, plus
► periodic interest at a contractual (stated) interest

rate on the maturity amount (face value).
 Interest payments usually made semiannually.
 Generally issued when the amount of capital needed is

too large for one lender to supply.
Bond Basics
Issuer of
Bonds Illustration 10-8
2017
Maturity
Date
DUE 2017 DUE 2017
Contractual
Interest
Rate
Face or
10-25 Par Value LO 4
Bond Basics
Bond Trading
 Bondholders can sell their bonds, at any time, at the
current market price on national securities exchanges.
 Bond prices are quoted as a percentage of the face value.
Application
(1) What is the price of a $1,000 bond trading at 95 1/4?
(2) What is the price of a $1,000 bond trading at 101 7/8?
$952.50 $1,018.75
Bond Basics
Bond Trading
 Newspapers and the financial press publish bond prices

and trading activity daily.
Illustration 10-9
Bond Basics
Bond Trading
 Newspapers and the financial press publish bond prices

and trading activity daily.
 A corporation makes journal entries only when it issues

or buys back bonds, or when bondholders exchange
convertible bonds into ordinary shares.
Bond Basics
Determining the Market Value of Bonds

Market value is a function of the three factors that determine
present value:
1. 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.
10-30
Accounting for Bond Issues
Corporation records bond transactions when it

 issues (sells),
 retires (buys back) bonds and
 when bondholders convert bonds into ordinary shares.
NOTE: If bondholders sell their bond investments to other investors,

the issuing firm receives no further money on the transaction, nor
does the issuing corporation journalize the transaction.
10-31 LO 5 Prepare the entries for the issuance of bonds and interest expense.
Issue at Par, Discount, or Premium?

Illustration 10-10
Bond
Contractual
Interest Rate
of 10%
Question
The rate of interest investors demand for loaning funds to
a corporation is the:
a. contractual interest rate.
b. face value rate.
c. market interest rate.
d. stated interest rate.
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.
Issuing Bonds at Face Value

Illustration: On January 1, 2014, Candlestick Inc. issues
€100,000, five-year, 10% bonds at 100 (100% of face value).
The entry to record the sale is:
Jan. 1 Cash 100,000
Bonds payable 100,000
Illustration: On January 1, 2014, Candlestick Inc. issues

€100,000, five-year, 10% bonds at 100 (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, 2014, assume no previous accrual.
July 1 Interest expense 5,000
Cash 5,000
(€100,000 x 10% x 6/12)
Illustration: On January 1, 2014, Candlestick Corporation

issues €100,000, five-year, 10% bonds at 100 (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, 2014, assume no previous
accrual.
Dec. 31 Interest expense 5,000
Issuing Bonds at a Discount

Illustration: On January 1, 2014, 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 92,639
Statement Presentation
Illustration 10-11
Carrying value or
book value
The issuance of bonds below face value—at a discount—causes the

total cost of borrowing to differ from the bond interest paid.
The reason: Borrower is required to pay the difference between the

issuance price and face value—the discount—at the maturity date.
Thus, the discount is considered to be an additional cost of
borrowing.
Total Cost of Borrowing
Illustration 10-12
Illustration 10-13
Issuing Bonds at a Premium

Illustration: On January 1, 2014, 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 108,111
Statement Presentation
Illustration 10-14
The sale of bonds above face value causes the total cost of borrowing
to be less than the bond interest paid.
The reason: The borrower is not required to pay the bond premium at
the maturity date of the bonds. Thus, the bond premium is considered
to be a reduction in the cost of borrowing.
Total Cost of Borrowing

Illustration 10-15
Illustration 10-16
Accounting for Bond 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 100,000
Cash 100,000
10-44 LO 6 Describe the entries when bonds are redeemed.

Redeeming Bonds before Maturity

When bonds are retired before maturity, it is necessary to:
1. eliminate carrying value of bonds at redemption date;
2. record cash paid; and
3. recognize gain or loss on redemption.
The carrying value of the bonds is the face value of the bonds
adjusted for the bond discount or bond premium amortized up to the
redemption date.

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.
b. face value of the bonds.
c. original selling price of the bonds.
d. maturity value of the bonds.

Illustration: 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, 2018):

Loss on bond redemption 1,377
Cash 103,000

Accounting for Long-Term Notes Payable
May be secured by a mortgage that pledges title to specific

assets as security for a loan.
Typically, terms require borrower to make installment

payments over the term of the loan. Each payment consists of
 interest on the unpaid balance of the loan and
 a reduction of loan principal.
Companies initially record mortgage notes payable at face

value.
10-48 LO 7 Describe the accounting for long-term notes payable.

Accounting for Other Long-Term Liabilities
Illustration: Mongkok Technology Inc. issues a HK$500,000,

12%, 20-year mortgage note on December 31, 2014. The terms
provide for semiannual installment payments of HK$33,231. The
installment payment schedule for the first two years is as follows.
Illustration 10-17

Illustration: Mongkok Technology Inc. issues a HK$500,000,

12%, 20-year mortgage note on December 31, 2014. The terms
provide for semiannual installment payments of HK$33,231. The
installment payment schedule for the first two years is as follows.
Dec. 31 Cash 500,000

Mortgage payable 500,000
Jun. 30 Interest expense 30,000

Mortgage payable 3,231
Cash 33,231

Question
Each payment on a mortgage note payable consists of:
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.

10-52
Presentation
Illustration 10-18
LO 8 Identify the methods for the presentation

10-53
and analysis of non-current liabilities.
Analysis
Two ratios that provide information about debt-paying
ability and long-run solvency are:
 Debt to Total Assets Ratio
 Times Interest Earned Ratio
LO 8 Identify the methods for the presentation

10-54
and analysis of non-current liabilities.
Analysis
Illustration: LG’s (KOR) had total liabilities of 39,048 billion, total
assets of 64,782 billion, interest expense of 778 billion, income
taxes of 1,092 billion, and net income of 2,967 billion.
Illustration 10-19
LG has a relatively high debt to total assets percentage of 60.3%. Its

interest coverage of 6.22 times is considered safe.
10-55
LO 8
10-56
APPENDIX 10A PRESENT VALUE CONCEPTS RELATED TO BOND PRICING
Present Value of Face Value

Illustration: Assume that you are willing to invest a sum of
money that will yield HK$1,000 at the end of one year, and you
can earn 10% on your money. What is the HK$1,000 worth
today?
To compute the answer,
1. divide the future amount by 1 plus the interest rate

(HK$1,000/1.10 = HK$909.09 OR
2. use a Present Value of 1 table. (HK$1,000 X .90909) =

HK$909.09 (10% per period, one period from now).
10-57 LO 9 Compute the market price of a bond.

1. divide the future amount by 1 plus the interest rate

(HK$1,000/1.10 = HK$909.09.
Illustration 10A-1

2. use a Present Value of 1 table. (HK$1,000 X .90909)

= HK$909.09 (10% per period, one period from now).

The future amount (HK$1,000), the interest rate (10%), and

the number of periods (1) are known
Illustration 10A-2

If you are to receive the single future amount of HK$1,000 in

two years, discounted at 10%, its present value is
HK$826.45 [($1,000 1.10) 1.10].
Illustration 10A-3

To compute the answer using a Present Value of 1 table.

(HK$1,000 X .82645) = HK$826.45 (10% per period, two
periods from now).

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.

Assume that you will receive HK$1,000 cash annually for

three years and the interest rate is 10%.
Illustration 10A-5


Illustration 10A-6


HK$1,000 annual payment x 2.48685 = HK$2,486.85

Computing the Present Value of a Bond
Selling price of a bond is equal to the sum of:

 Present value of the face value of the bond discounted
at the investor’s required rate of return
PLUS
 Present value of the periodic interest payments

discounted at the investor’s required rate of return

Computing the Market Price of a Bond
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


and July 1.
Illustration 10A-9


and July 1.
Illustration 10A-10


and July 1.
Illustration 10A-11

APPENDIX 10B EFFECTIVE-INTEREST METHOD OF BOND AMORTIZATION
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 under the effective-interest method:

Illustration 10B-1
LO 10 Apply the effective-interest method of amortizing

10-72
bond discount and bond premium.
Effective-Interest Method of Bond Amortization
Amortizing Bond Discount

Illustration: Candlestick, Inc. issues €100,000 of 10%, five-year
bonds on January 1, 2014, for €92,639, with interest payable each
July 1 and January 1. This results in a discount of €7,361.
Illustration 10B-2
10-73 LO 10

July 1 and January 1. This results in a discount of €7,361.
Journal entry on July 1, 2014, to record the interest payment and

amortization of discount is as follows:
July 1 Interest Expense 5,558

Bonds Payable 558
Cash 5,000

10-74
Amortizing Bond Premium

July 1 and January 1. This results in a premium of €8,111.
Illustration 10B-4

10-75

July 1 and January 1. This results in a premium of €8,111.

amortization of premium is as follows:

Bonds Payable 676
Cash 5,000

10-76
APPENDIX 10C STRAIGHT-LINE AMORTIZATION

The effective-interest method is the method required by IFRS to
determine amortized cost. Under U.S. GAAP, companies are
allowed to use straight-line amortization when the results do
not differ materially from the effective-interest method.
Illustration 10C-1
10-77 LO 11
APPENDIX 10C STRAIGHT-LINE AMORTIZATION

Illustration: Candlestick, Inc., sold €100,000, five-year, 10%
bonds on January 1, 2014, for €92,639 (discount of €7,361).
Interest is payable on July 1 and January 1.
Illustration 10C-2
10-78 LO 11

bonds on January 1, 2014, 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).

amortization of discount is as follows:

Bonds Payable 736
Cash 5,000
LO 11 Apply the straight-line method of amortizing

10-79

bonds on January 1, 2014, for €108,111 (premium of €8,111).
Interest is payable on July 1 and January 1.
Illustration 10C-4

10-80

bonds on January 1, 2014, for €108,111 (premium of €8,111).
Interest is payable on July 1 and January 1. The bond premium
amortization for each interest period is €811 (€8,111÷10).

amortization of premium is as follows:

Bonds Payable 811
Cash 5,000

10-81
APPENDIX 10D PAYROLL-RELATED LIABILITIES
Every employer incurs liabilities relating to employees’

salaries and wages.
Salaries and Wages Payable — amounts owed to

employees.
Withholding taxes (U.S. federal and state income

taxes, and Social Security taxes) — amounts owed to
the governmental taxing authorities.
Determining the payroll involves computing three amounts: (1)

gross earnings, (2) payroll deductions, and (3) net pay.
10-82 LO 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 100,000

FICA tax payable 7,650
Federal income tax payable 21,864
State income tax payable 2,922
Salaries and wages payable 67,564
Record the payment of this payroll on March 11.

Mar. 11 Salaries and wages payable 67,564
Cash 67,564
10-83 LO 12
Payroll tax expense results from three taxes that

governmental agencies levy on employers.
These taxes are:

 FICA tax
 Federal unemployment tax
 State unemployment tax
Illustration: Based on the corporation’s $100,000 payroll, the

company would record the employer’s expense and liability
for these payroll taxes as follows.
Payroll tax expense 13,850

FICA tax payable 7,650
Federal unemployment tax payable 800
State unemployment tax payable 5,400
Question
Employer payroll taxes do not include:
a. Federal unemployment taxes.
b. State unemployment taxes.
c. Federal income taxes.
d. FICA taxes.
Another Perspective
Key Points
 The basic definition of a liability under GAAP and IFRS is very
similar. Liabilities may be legally enforceable via a contract or law
but need not be; that is, they can arise due to normal business
practice or customs.
 Both GAAP and IFRS classify liabilities as current or non-current on
the face of the statement of financial position. IFRS specifically
states, however, that industries where a presentation based on
liquidity would be considered to provide more useful information
(such as financial institutions) can use that format instead.
10-87
Another Perspective
Key Points
 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.
 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.
 The basic calculation for bond valuation is the same under GAAP
and IFRS. In addition, the accounting for bond liability transactions is
essentially the same between GAAP and IFRS.
10-88
Another Perspective
Key Points
 IFRS requires use of 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 accounting for convertible bonds differs between IFRS and
GAAP. GAAP requires that the proceeds from the issuance of
convertible debt be shown solely as debt. Unlike GAAP, IFRS splits
the proceeds from the convertible bond between an equity
component and a debt component. The equity conversion rights are
reported in equity.
10-89
Another Perspective
Key Points
 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.
 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.
10-90
Another Perspective
Looking to the Future

The FASB and IASB are currently involved in two projects, each of
which has implications for the accounting for liabilities. One project is
investigating approaches to differentiate between debt and equity
instruments. The other project, the elements phase of the conceptual
framework project, will evaluate the definitions of the fundamental
building blocks of accounting. The results of these projects could
change the classification of many debt and equity securities.
10-91
Another Perspective
GAAP Self-Test Questions
Which of the following is false?
a) Under GAAP, current liabilities are presented before non-

current liabilities.
b) Under GAAP, an item is a current liability if it will be paid within

the next 12 months or the operating cycle, whichever is longer.
c) Under GAAP, current liabilities are shown in order of

magnitude.
d) Under GAAP, a liability is only recognized if it is a present

obligation.
10-92
Another Perspective
Which of the following is true regarding accounting for amortization

of bond discount and premium?
a) Both IFRS and GAAP must use the effective-interest method.
b) GAAP must use the effective-interest method, but IFRS may

use either the effective-interest method or the straight-line
method.
c) IFRS is required to use the effective-interest method.
d) GAAP is required to use the straight-line method.
10-93
Another Perspective

The joint projects of the FASB and IASB could potentially:
a) change the definition of liabilities.
b) change the definition of equity.
c) change the definition of assets.
d) All of the above.
10-94
Copyright
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Reproduction or translation of this work beyond that permitted in
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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.”
10-95

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10-1

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

Current liabilities include notes payable, accounts payable, unearned

LO 1 Explain a current liability, and identify the

LO 1 Explain a current liability, and identify the

 Usually require the borrower to pay interest.

 Issued for varying periods of time.

 Those due for payment within one year of the statement

10-6 LO 2 Describe the accounting for notes payable.

Illustration: Hong Kong National Bank agrees to lend

a) Prepare the journal entry on September 1.

b) Prepare the adjusting journal entry on December 31,

c) Prepare the journal entry at maturity (January 1, 2015).

10-7 LO 2 Describe the accounting for notes payable.

Illustration: Hong Kong National Bank agrees to lend

a) Prepare the journal entry on September 1.

b) Prepare the adjusting journal entry on Dec. 31.

Interest expense 4,000

10-8 LO 2 Describe the accounting for notes payable.

Illustration: Hong Kong National Bank agrees to lend

c) Prepare the journal entry at maturity (January 1, 2015).

Notes payable 100,000

10-9 LO 2 Describe the accounting for notes payable.

Sales Tax Payable

 Either rung up separately or included in total receipts.

 Retailer collects tax from the customer.

 Retailer remits the collections to the government’s

10-10 LO 3 Explain the accounting for other current liabilities.

Illustration: The March 25 cash register reading for Cooley

10-11 LO 3 Explain the accounting for other current liabilities.

1. Company debits Cash, and credits

2. When the company earns the

10-12 LO 3 Explain the accounting for other current liabilities.

Illustration: Busan IPark (KOR) sells 10,000 season football

Aug. 6 Cash 500,000

As each game is completed, Busan IPark records the revenue

Sept. 7 Unearned ticket revenue 100,000

10-13 LO 3 Explain the accounting for other current liabilities.

Current Maturities of Long-Term Debt

 Considered a current liability.

 No adjusting journal entry required.

10-14 LO 3 Explain the accounting for other current liabilities.

 A common method of presenting current liabilities is to

10-15 LO 3 Explain the accounting for other current liabilities.

10-16 LO 3 Explain the accounting for other current liabilities.

The current ratio Illustration 10-5

10-17 LO 3 Explain the accounting for other current liabilities.

Total take: $150,000

The Missing Control

Obligations that are expected to be paid after one year.

 To obtain large amounts of long-term capital.

Three advantages over ordinary shares:

1. Shareholder control is not affected.

2. Tax savings result.

3. Earnings per share may be higher.

Effects on earnings per share—equity vs. debt.

a. that interest is not tax deductible and the principal

b. that the principal is tax deductible and interest must be

c. that neither interest nor principal is tax deductible.

d. that interest must be paid and principal repaid.

► face value at designated maturity date, plus

► periodic interest at a contractual (stated) interest

 Interest payments usually made semiannually.