Financial accounting chapter 10 liabilities kế toán nợ

Learning Objectives After studying this chapter, you should be able to: 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. Explain why bonds are issued, and identify the types of bonds. Prepare the entries for the issuance of bonds and interest expense. Describe the entries when bonds are redeemed. Describe the accounting for longterm notes payable. Identify the methods for the presentation and analysis of noncurrent 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.

7 Describe the accounting for long-term notes payable.

8 Identify the methods for the presentation and analysis of non-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

LO 1 Explain a current liability, and identify the

major types of current liabilities.

Current liabilities include notes payable, accounts payable, unearned

revenues, and accrued liabilities such as taxes, salaries and wages, and

interest payable.

Current Liabilities

The time period for classifying a liability as current is one

year or the operating cycle, whichever is:

LO 1 Explain a current liability, and identify the

major types of current liabilities.

Current Liabilities

10-4 LO 2 Describe the accounting for notes payable.

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

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)

LO 2 Describe the accounting for notes payable.

Current Liabilities

b) Prepare the adjusting journal entry on Dec 31

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

a) Prepare the journal entry on September 1

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

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

10-8 LO 3 Explain the accounting for other 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

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:

LO 3 Explain the accounting for other current liabilities.

Current Liabilities

10-10 LO 3 Explain the accounting for other 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):

LO 3 Explain the accounting for other current liabilities.

Unearned ticket revenue500,000

Aug 6

Ticket revenue100,000

Unearned ticket revenue 100,000Sept 7

As each game is completed, Busan IPark records the revenue

earned

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

LO 3 Explain the accounting for other current liabilities.

Current Liabilities

 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

Presentation

Statement Presentation and Analysis

LO 3 Explain the accounting for other current liabilities.

Liquidity refers to the

ability to pay maturing obligations and meet unexpected needs for

cash.

The current ratio

permits us to compare

the liquidity of

different-sized companies and of

a single company at

different times.

Illustration 10-5 Illustration 10-4

LO 3 Explain the accounting for other current liabilities.Analysis

Statement Presentation and Analysis

 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.

LO 4 Explain why bonds are issued, and identify the types of bonds.

Non-Current Liabilities

Bond Basics

Obligations that are expected to be paid after one year.

c that neither interest nor principal is tax deductible

d that interest must be paid and principal repaid

Question

LO 4 Explain why bonds are issued, and identify the types of bonds.

Bond Basics

Types of Bonds

LO 4

Bond Basics

 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

 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

Issuing Procedures

LO 4 Explain why bonds are issued, and identify the types of bonds.

Maturity Date

Maturity Date Illustration 10-8

Contractual Interest Rate

Contractual Interest Rate

Face or Par Value

Face or Par Value

DUE 2017 DUE 2017

2017

LO 4

Issuer of Bonds

Issuer of Bonds

Bond Basics

Bond Trading

Bond Basics

 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

LO 4 Explain why bonds are issued, and identify the types of bonds.

Bond Trading

Bond Basics

 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

 Newspapers and the financial press publish bond prices

and trading activity daily

LO 4 Explain why bonds are issued, and identify the types of bonds.

Illustration 10-9

Bond Trading

Bond Basics

 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

 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

LO 4 Explain why bonds are issued, and identify the types of bonds.

Determining the Market Value of Bonds

The features of a bond (callable, convertible, and so on) affect the

market rate of the bond.

Bond Basics

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

LO 4 Explain why bonds are issued, and identify the types of bonds.

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.

Accounting for Bond Issues

LO 5 Prepare the entries for the issuance of bonds and interest expense.

Issue at Par, Discount, or Premium?

Accounting for Bond Issues

LO 5 Prepare the entries for the issuance of bonds and interest expense.

Illustration 10-10

Bond Contractual

Interest Rate

of 10%

10-29 LO 5 Prepare the entries for the issuance of bonds and interest expense.

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

Accounting for Bond Issues

Question

10-30 LO 5 Prepare the entries for the issuance of bonds and interest expense.

Karson Inc issues 10-year bonds with a maturity value of

$200,000 If the bonds are issued at a premium, this indicates

c the contractual interest rate and the market interest rate

are the same

d no relationship exists between the two rates.

Question

Accounting for Bond Issues

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:

LO 5 Prepare the entries for the issuance of bonds and interest expense.

Issuing Bonds at Face Value

Accounting for Bond Issues

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

LO 5 Prepare the entries for the issuance of bonds and interest expense.

Issuing Bonds at Face Value

(€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

LO 5 Prepare the entries for the issuance of bonds and interest expense.

Issuing Bonds at Face Value

10-34 LO 5 Prepare the entries for the issuance of bonds and interest expense.

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:

Accounting for Bond Issues

Issuing Bonds at a Discount

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

10-36 LO 5 Prepare the entries for the issuance of bonds and interest expense.

Total Cost of Borrowing

Illustration 10-12

Illustration 10-13

Issuing Bonds at a Discount

10-37 LO 5 Prepare the entries for the issuance of bonds and interest expense.

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:

Accounting for Bond Issues

Issuing Bonds at a Premium

Statement Presentation

LO 5 Prepare the entries for the issuance of bonds and interest expense.

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.

Illustration 10-14

Issuing Bonds at a Premium

10-39 LO 5 Prepare the entries for the issuance of bonds and interest expense.

Total Cost of Borrowing

Illustration 10-15

Illustration 10-16

Issuing Bonds at a Premium

10-40 LO 6 Describe the entries when bonds are redeemed.

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:

Accounting for Bond Retirements

Redeeming Bonds at 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.

LO 6 Describe the entries when bonds are redeemed.

Accounting for Bond Retirements

Redeeming Bonds before Maturity

10-42 LO 6 Describe the entries when bonds are redeemed.

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

Accounting for Bond Retirements

Question

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):

LO 6 Describe the entries when bonds are redeemed.

Accounting for Bond Retirements

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

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

Accounting for Long-Term Notes Payable

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.

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

Illustration 10-17

Accounting for Other Long-Term Liabilities

10-46 LO 7 Describe the accounting for long-term notes payable.

Accounting for Other Long-Term Liabilities

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.

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

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

Accounting for Other Long-Term Liabilities

Question