Chapter 10

10
REPORTING AND
ANALYZING LIABILITIES

10-1

Accounting, Fourth Edition


Study
Study Objectives
Objectives

10-2

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.

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.

Identify the requirements for the financial statement presentation
and analysis of liabilities.


Reporting
Reporting and
and Analyzing
Analyzing Liabilities
Liabilities

Current
Liabilities
What is a
current
liability?
Notes payable
Sales taxes
payable

Unearned
revenues
Current
maturities of
long-term debt
Payroll and
payroll taxes
payable
10-3

Bonds: LongTerm
Liabilities

Financial
Statement
Presentation
and Analysis

Accounting
for Bond
Issues

Accounting
for Bond
Retirements

Types of
bonds

Issuing bonds

at face value

Balance sheet
presentation

Issuing
procedures

Discount or
premium on
bonds

Redeeming
bonds at
maturity
Redeeming
bonds before
maturity

Off-balancesheet financing

Determining
the market
value of bonds

Issuing bonds
at a discount
Issuing bonds
at a premium

Analysis


Current
Current Liabilities
Liabilities
What is a Current Liability?
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, salaries and wages, and
interest payable.
10-4

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


Current
Current Liabilities
Liabilities
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).

10-5

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


Current
Current Liabilities
Liabilities
Notes Payable

10-6



Written promissory note.



Require the borrower to pay interest.



Those due within one year of the balance sheet date
are usually classified as current liabilities.

SO 2 Describe the accounting for notes payable.

Current
Current Liabilities
Liabilities
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2012, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1. When a
company issues an interest-bearing note, the amount of
assets it receives generally equals the note’s face value.
Sept. 1

Cash

100,000

Notes payable
100,000

10-7

SO 2 Describe the accounting for notes payable.


Current
Current Liabilities
Liabilities
Illustration: If Cole Williams Co. prepares financial statements
annually, it makes an adjusting entry at December 31 to
recognize interest.

Dec. 31

Interest expense

4,000 *

Interest payable
4,000

* $100,000 x 12% x 4/12 = 4,000
10-8

SO 2 Describe the accounting for notes payable.


Current
Current Liabilities
Liabilities
Illustration: At maturity (January 1), Cole Williams Co. must
pay the face value of the note plus interest. It records payment
as follows.
Jan. 1

Notes payable
Interest payable

100,000
4,000

Cash

104,000

10-9

SO 2 Describe the accounting for notes payable.


Current
Current Liabilities
Liabilities
Sales Tax Payable

10-10



Sales taxes are expressed as a stated percentage of
the sales price.



Retailer collects tax from the customer.



Retailer remits the collections to the state’s
department of revenue.

SO 3 Explain the accounting for other current liabilities.

Current
Current Liabilities
Liabilities
Illustration: The March 25 cash register readings for Cooley
Grocery show sales of $10,000 and sales taxes of $600 (sales
tax rate of 6%), the journal entry is:
Mar. 25

Cash

10,600

Sales revenue
Sales tax payable

10,000

600

10-11

SO 3 Explain the accounting for other current liabilities.


Current
Current Liabilities
Liabilities
Sometimes companies do not ring up sales taxes separately
on the cash register.

Illustration: Cooley Grocery rings up total receipts of $10,600.
Because the amount received from the sale is equal to the
sales price 100% plus 6% of sales, (sales tax rate of 6%), the
journal entry is:
Mar. 25

Cash

10,600
*

Sales revenue
Sales tax payable

10,000

* $10,600 / 1.06 = 10,000

600

10-12

SO 3 Explain the accounting for other current liabilities.


Current
Current Liabilities
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.

10-13

SO 3 Explain the accounting for other current liabilities.


Current
Current Liabilities
Liabilities
Illustration: Superior University sells 10,000 season football
tickets at $50 each for its five-game home schedule. The entry
for the sales of season tickets is:
Aug. 6

Cash

500,000

Unearned ticket revenue
As each game500,000
is completed, Superior records the earning of
revenue.

Sept. 7

Unearned ticket revenue

100,000

Ticket revenue
10-14

100,000

SO 3 Explain the accounting for other current liabilities.


Current
Current Liabilities
Liabilities
Current Maturities of Long-Term Debt


Portion of long-term debt that comes due in the
current year.



No adjusting entry required.

Illustration: Wendy Construction issues a five-year, interest-bearing
$25,000 note on January 1, 2011. This note specifies that each January
1, starting January 1, 2012, Wendy should pay $5,000 of the note. When

the company prepares financial statements on December 31, 2011,

$5,000
1. What amount should be reported as a current liability? _________
$20,000
2. What amount should be reported as a long-term liability? _______
10-15

SO 3 Explain the accounting for other current liabilities.


Current
Current Liabilities
Liabilities
Payroll and Payroll Taxes Payable
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.

10-16

SO 3 Explain the accounting for other current liabilities.


Current
Current Liabilities

Liabilities
Illustration: Assume Cargo 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 tax payable

21,864

State tax payable
Salaries and wages payable

2,922
67,564

Record the payment of this payroll on March 7.
Mar. 7

Salaries and wages payable
Cash

10-17

67,564
67,564
SO 3


Current
Current Liabilities
Liabilities
Payroll tax expense results from three taxes that
governmental agencies levy on employers.
These taxes are:

10-18



FICA tax



Federal unemployment tax



State unemployment tax

SO 3 Explain the accounting for other current liabilities.

Current
Current Liabilities
Liabilities
Illustration: Based on Cargo Corp.’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
State unemployment tax payable
Federal unemployment tax payable

10-19

7,650
800
5,400

SO 3 Explain the accounting for other current liabilities.


Current
Current Liabilities
Liabilities
Question
Employer payroll taxes do not include:
a. Federal unemployment taxes.
b. State unemployment taxes.

c. Federal income taxes.
d. FICA taxes.

10-20

SO 3 Explain the accounting for other current liabilities.


10-21


Bond:
Bond: Long-Term
Long-Term Liabilities
Liabilities
Bonds are a form of interest-bearing notes payable
issued by corporations, universities, and governmental
agencies.
Sold in small denominations (usually $1,000 or multiples
of $1,000).

10-22

SO 4 Identify the types of bonds.


Bond:
Bond: Long-Term
Long-Term Liabilities
Liabilities

Types of Bonds

10-23



Secured



Unsecured



Convertible



Callable

SO 4 Identify the types of bonds.


10-24


Bond:
Bond: Long-Term
Long-Term Liabilities
Liabilities

Issuing Procedures


Bond certificate
 Issued to the investor.
 Provides name of the company issuing bonds, face
value, maturity date, and contractual (stated)
interest rate.

10-25



Face value - principal due at the maturity.



Maturity date - date final payment is due.



Contractual interest rate – rate to determine cash
interest paid, generally semiannually.
SO 4 Identify the types of bonds.