Chapter 10

-Reporting and Analyzing Liabilities

Current Liabilities
What is a current liability?
o Company expects to pay the debt from existing current
assets or through the creation of other current liabilities
o Company will pay the debt within one year or, the
operating cycle, whichever is longer.
o Include: notes payable, accounts payable, unearned
revenues, and accrued liabilities such as taxes salaries and
wages, and interest
Notes Payable
o Ones due within one year are usually classified as current
liabilities
o Signing a note
Debit- cash / Credit- notes payable
o Recognizing interest
Debit- interest expense
Credit- interest payable
o Paying note at maturity
Debit- notes payable and interest payable / creditcash
Sales taxes payable
o Seller remits the collection to the states department of
revenue
o Recording sale with sales tax
Debit- cash/ credit- sales revenue and sales tax
payable
Unearned revenues
o Recording unearned
Debit- cash / Credit- unearned revenue (as a current
liability)
o When company earns the revenue, record
Debit- unearned revenue / credit sales revenue
Current maturities of long-term debt
o The portion of long-term debt that comes due un the
current year
o No adjusting entry required
Each period a portion of the debt becomes a current
liability for that period, the remaining debt stays as
long-term liability
Payroll and payroll taxes payable
o Term payroll pertains to both salaries and wages

o Determining payroll involves computing three amounts:

Gross earnings, payroll deductions, and net pay
o Payroll tax expense results from three taxes that
governmental agencies levy on employers
FICA tax
Federal unemployment tax
State unemployment tax
Sum of taxes payable is referred to as payroll
tax expense, or employers expense
o Determining Salaries and wages
Debit- salaries and wages / Credit all taxa payable
and salaries and wages payable
Bonds: Long-Term Liabilities
Types of bonds
o Secured
o Unsecured
o Convertible
o Callable
Issuing procedures
o Bond issued to investor provides name of the company
issuing bonds, face value, maturity date, and contractual
(stated) interest rate.
Determining the market price of bonds
o The current market price (present value), of a bond is a
function of three factors:
The dollar amounts to be received
The length of time until the amounts are received
The market rate of interest
o The process of finding the present value is referred to as
discounting the future amounts.
Accounting for Bond Issues
-Below face value (discount)
-Above face value (premium)
Issuing bonds at the face value
Discount or premium on bonds
Issuing bonds at a discount
o Debit- cash and discount on bonds payable / credit- bonds
payable
o Sale of bonds below face value causes the total cost of
borrowing to be more than the bond interest paid.

o The reason: Borrower is required to pay the bond discount

at the maturity date. Thus, the bond discount is
considered to be a increase in the cost of borrowing.
o Discount on bonds payable is a contra account
Issuing bonds at a premium
o debit- cash / credit bonds payable and premium on bonds
payable
o Sale of bonds above face value causes the total cost of
borrowing to be less than the bond interest paid.
o 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.
Accounting for Bond Redemptions
Redeeming bonds at maturity
o Debit- bonds payable / credit- cash
Redeeming bonds before maturity
o When a company retires bonds before maturity, it is
necessary to:
eliminate the carrying value of the bonds at the
redemption date;
record the cash paid; and
recognize the gain or loss on redemption.
o 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.
o Recording redeem before maturity
Debit- bonds payable and premium on bonds payable
and loss on bond redemption / credit- cash
o When bonds are converted into common stock
The carrying value of the bonds is transferred to
paid-in capital accounts