Intermediate Accounting

Accounting for
Liabilities

Dr. Jason R. Radam

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Source: 2009 John Wiley & Sons, Inc.
 Study
Study Objectives
Objectives
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 of liabilities.
8. Apply the straight-line method of amortizing bond discount and
bond premium.
9. Apply the effective-interest method of amortizing bond discount
and bond premium.
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10. Describe the accounting for long-term notes payable.
 Reporting
Reporting and
andAnalyzing
Analyzing Liabilities
Liabilities

Bonds: Long- Accounting for Financial

Current Accounting for
Term Bond Statement
Liabilities Bond Issues Presentation
Liabilities Retirements

What is a Types of Issuing bonds Redeeming Balance sheet

current bonds at face value bonds at presentation
liability? Issuing Discount or maturity
Notes payable procedures premium on Redeeming
VAT Payable Determining bonds bonds before
Unearned the market Issuing bonds maturity
revenues value of bonds at a discount
Current Issuing bonds
maturities of at a premium
long-term debt
Payroll and
payroll taxes
payable
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Current
Current Liabilities
Liabilities
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,
salaries and wages, and interest payable.

SO 1 Explain a current liability and identify

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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).

SO 1 Explain a current liability, and identify

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the major types of current liabilities.

Current
Current Liabilities
Liabilities
Notes Payable
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.

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SO 2 Describe the accounting for notes payable.
Current
Current Liabilities
Liabilities
Illustration: First National Bank agrees to lend
$100,000 on September 1, 2019, 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

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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

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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 100,000

Interest payable 4,000
Cash

104,000

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SO 2 Describe the accounting for notes payable.
Current
Current Liabilities
Liabilities
VAT Payable
VAT is a tax which is levied as a percentage of
selling price of the product or service
The seller can shift the burden of paying VAT
to the customers
The seller remits the collections to the state’s
bureau of internal revenue.

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SO 3 Explain the accounting for other current liabilities.
Current
Current Liabilities
Liabilities
Illustration: March 25, cash register readings for
Cooley Grocery show sales of P56,000 and VAT of P6,720
(VAT is 12% of sales). The journal entry is:

Mar. 25 Cash 62,720

Sales 56,000
Output tax

6,720
Output tax is reported as a current liability (called
VAT payable when input tax is deducted)

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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

P56,000. Because the amount received from the sale is
equal to the sales price 100% plus 12% of sales,
(VAT rate of 12%), the journal entry is:

Mar. 25 Cash 56,000

Sales 50,000 *

Output tax
* P56,000 / 1.12 = 50,000
6,000
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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.

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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

Superior records the earning of revenue with the

500,000
following entry.

Sept. 7 Unearned ticket revenue 500,000

Ticket revenue

500,000
SO 3 Explain
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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 Corporation issues a five-year, interest-bearing

P250,000 note on January 1, 2019. This note specifies that each January
1, starting January 1, 2020, Wendy should pay P50,000 of the note.
When the company prepares financial statements on December 31, 2019,
P50,000
1. What amount should be reported as a current liability? _________
2. What amount should be reported as a long-term liability? P200,000
_______
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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.
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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
SSS payable
Philhealth payable 7,650
Withholding tax payable 21,864 2,922
Salaries and wages payable 67,564

Record the payment of this payroll on March 7.

Mar. 7 Salaries and wages payable 67,564
Cash
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67,564SO 3 Explain the accounting for other current liabilities.
Current
Current Liabilities
Liabilities
Illustration: Based on Cargo Corp.’s P100,000 payroll,
the company would record the employer’s expense and
liability for these payroll contributions as follows.

Salaries and wages expense 13,850

SSS payable
Philhealth payable 7,650
Pag-ibig payable 3,400 2,800

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SO 3 Explain the accounting for other current liabilities.
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).

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SO 4 Identify the types of bonds.
Bond:
Bond: Long-Term
Long-Term Liabilities
Liabilities

Types of Bonds
Secured
Unsecured
Convertible
Callable

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SO 4 Identify the types of bonds.
Bond:
Bond: Long-Term
Long-Term Liabilities
Liabilities
Issuing Procedures
Bond certificate
 Issued to the investor.
 Provides information such as the
 name of the company issuing bonds,
 face value,
 maturity date, and
 contractual interest rate (stated rate).
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.
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SO 4 Identify the types of bonds.
Bond:
Bond: Long-Term
Long-Term Liabilities
Liabilities
Issuer
Issuer of
of
Bonds
Bonds
Illustration 10-3

Maturity
Maturity
Date
Date

Contractual
Contractual
Interest
Interest
Rate
Rate

Face
Face or
or 22
Par
Par Value
Value SO 4 Identify the types of bonds.
Bond:
Bond: Long-Term
Long-Term Liabilities
Liabilities
Determining the Market Value of Bonds
Market value is a function of the three factors that
determine present value:
1. the dollar amounts to be received,
2. the length of time until the amounts are received, and
3. the market rate of interest.

The process of finding the present value is

referred to as discounting the future amounts.

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SO 4 Identify the types of bonds.
 Bond:
Bond: Long-Term
Long-Term Liabilities
Liabilities
Illustration: Assume that Acropolis Company on January 1,
2019, issues $100,000 of 9% bonds, due in five years, with
interest payable annually at year-end.

Illustration 10-4
Time diagram
depicting cash
flows

Illustration 10-5
Computing the
market price of
bonds

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SO 4 Identify the types of bonds.
Accounting
Accounting for
for Bond
Bond Issues
Issues
A corporation records bond transactions when it
 issues or retires (buys back) bonds and
 when bondholders convert bonds into common stock.

Bonds may be issued at

 face value,
 below face value (discount), or
 above face value (premium).
Bond prices are quoted as a percentage of face value.

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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting
Accounting for
for Bond
Bond Issues
Issues
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.

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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing
Issuing Bonds
Bonds at
at Face
Face Value
Value
Illustration: Devor Corporation issues 100, five-year, 10%,
$1,000 bonds dated January 1, 2019, at 100 (100% of face
value). The entry to record the sale is:

Jan. 1 Cash 100,000

Bonds payable 100,000

Prepare the entry Devor would make to accrue interest on

December 31.

Dec. 31 Interest expense 10,000

Interest payable 10,000

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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing
Issuing Bonds
Bonds at
at Face
Face Value
Value
Prepare the entry Devor would make to pay the interest on
Jan. 1, 2020.

Jan. 1 Interest payable 10,000

Cash 10,000

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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting
Accounting for
for Bond
Bond Issues
Issues
Assume Contractual Rate of 10%
Market Interest Bonds Sold At

8% Premium

10% Face Value

12% Discount

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SO 5 Prepare the entries for the issuance of bonds and interest expense.
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:
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.
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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing
Issuing Bonds
Bonds at
at aa Discount
Discount
Illustration: Assume that on January 1, 2019, Candlestick
Inc. sells $100,000, five-year, 10% bonds at 98 (98% of face
value) with interest payable on January 1. The entry to
record the issuance is:

Jan. 1 Cash 98,000

Discount on bonds payable 2,000
Bonds payable 100,000

Illustration 10-8
Computation of total cost of
borrowing—bonds issued at
discount

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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing
Issuing Bonds
Bonds at
at aa Discount
Discount
Statement Presentation
Illustration 10-7
Statement presentation of
discount on bonds payable

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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing
Issuing Bonds
Bonds at
at aa Discount
Discount
Question
Discount on Bonds Payable:
a. has a credit balance.
b. is a contra account.
c. is added to bonds payable on the balance
sheet.
d. increases over the term of the bonds.

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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing
Issuing Bonds
Bonds at
at aa Premium
Premium
Illustration: Assume that the Candlestick Inc. bonds
previously described sell at 102 rather than at 98. The
entry to record the sale is:

Jan. 1 Cash 102,000

Bonds payable 100,000
Premium on bonds payable 2,000

Illustration 10-12
Computation of total cost of
borrowing—bonds issued at
premium

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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing
Issuing Bonds
Bonds at
at aa Premium
Premium
Statement Presentation
Illustration 10-11
Statement presentation of
premium on bonds payable

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SO 5 Prepare the entries for the issuance of bonds and interest expense.
Accounting
Accounting for
for Bond
Bond Retirements
Retirements
Redeeming Bonds at Maturity
Candlestick records the redemption of its bonds at maturity
as follows:

Bonds payable 100,000

Cash 100,000

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SO 6 Describe the entries when bonds are redeemed.
Accounting
Accounting for
for Bond
Bond Retirements
Retirements
Redeeming Bonds before Maturity
When a company retires 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.
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SO 6 Describe the entries when bonds are redeemed.
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:
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.

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SO 6 Describe the entries when bonds are redeemed.
Accounting
Accounting for
for Bond
Bond Retirements
Retirements
Illustration: Assume at the end of the fourth period,
Candlestick Inc., having sold its bonds at a premium, retires
the bonds at 103 after paying the annual interest. Assume
that the carrying value of the bonds at the redemption
date is $100,400 (principal $100,000 and premium $400).
Candlestick records the redemption at the end of the fourth
interest period (January 1, 2020) as:

Bonds payable 100,000

Premium on bonds payable 400
Loss on bond redemption 2,600
Cash 103,000
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SO 6 Describe the entries when bonds are redeemed.
Accounting
Accounting for
for Bond
Bond Retirements
Retirements
Question
When bonds are converted into common stock:

a. a gain or loss is recognized.

b. the carrying value of the bonds is
transferred to paid-in capital accounts.
c. the market price of the stock is
considered in the entry.
d. the market price of the bonds is
transferred to paid-in capital.
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SO 6 Describe the entries when bonds are redeemed.
Financial
Financial Statement
Statement Presentation
Presentation
Balance Sheet Presentation
Illustration 10-15

SO 7 Identify the requirements for the financial statement

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presentation and analysis of liabilities.

Straight-Line
Straight-Line Amortization
Amortization Appendix 10A

Amortizing Bond Discount and Premium

To follow the matching principle, companies allocate
bond discount and bond premium to expense in each
period in which the bonds are outstanding.
Illustration 10A-1

SO 8 Apply the straight-line method of amortizing

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bond discount and bond premium.

Straight-Line
Straight-Line Amortization
Amortization Appendix 10A

Amortizing Bond Discount

Illustration: Candlestick, Inc., sold $100,000, five-
year, 10% bonds on January 1, 2019, for $98,000
(discount of $2,000). Interest is payable on January 1
of each year. Prepare the entry to accrue interest at
Dec. 31, 2019.

Dec. 31 Interest expense 10,400

Discount on bonds payable
Interest payable
400
10,000
SO 8 Apply the straight-line method of amortizing
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bond discount and bond premium.

Straight-Line
Straight-Line Amortization
Amortization Appendix 10A

Amortizing Bond Discount

Illustration 10A-2

SO 8 Apply the straight-line method of amortizing

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bond discount and bond premium.

Straight-Line
Straight-Line Amortization
Amortization Appendix 10A

Amortizing Bond Premium

Illustration: Candlestick, Inc., sold $100,000, five-
year, 10% bonds on January 1, 2019, for $102,000
(premium of $2,000). Interest is payable on January 1
of each year. Prepare the entry to accrue interest at
Dec. 31, 2019.

Dec. 31 Interest expense 9,600

Premium on bonds payable 400
Interest payable

10,000
SO 8 Apply the straight-line method of amortizing
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bond discount and bond premium.

Straight-Line
Straight-Line Amortization
Amortization Appendix 10A

Amortizing Bond Premium

Illustration 10A-2

SO 8 Apply the straight-line method of amortizing

46

bond discount and bond premium.

Effective-Interest Amortization
Effective-Interest AmortizationAppendix 10B

Under the effective-interest method, the amortization

of the discount or premium results in interest expense
equal to a constant percentage of the carrying value.
Required steps:

1. Compute the bond interest expense.

2. Compute the bond interest paid or accrued.
3. Compute the amortization amount.
Illustration 10B-1

47
Effective-Interest Amortization
Effective-Interest AmortizationAppendix 10B

Amortizing Bond Discount

Illustration: Candlestick, Inc., sold $100,000, five-year,
10% bonds on January 1, 2019, for $98,000. The
effective-interest rate is 10.53% and interest is payable
on Jan. 1 of each year. Prepare the bond discount
amortization schedule.

SO 9 Apply the effective-interest method of amortizing

48

bond discount and bond premium.

Effective-Interest Amortization
Effective-Interest AmortizationAppendix 10B

Amortizing Bond Discount

Illustration 10B-2

SO 9 Apply the effective-interest method of amortizing

49

bond discount and bond premium.

Effective-Interest Amortization
Effective-Interest AmortizationAppendix 10B

Amortizing Bond Discount

Illustration: Candlestick, Inc. records the accrual of

interest and amortization of bond discount on Dec. 31,
as follows:

Dec. 31 Interest expense 10,319

Discount on bonds payable 319
Interest payable

10,000

SO 9 Apply the effective-interest method of amortizing

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bond discount and bond premium.

Effective-Interest Amortization
Effective-Interest AmortizationAppendix 10B

Amortizing Bond Premium

Illustration: Candlestick, Inc., sold $100,000, five-year,
10% bonds on January 1, 2019, for $102,000. The
effective-interest rate is 9.48% and interest is payable on
Jan. 1 of each year. Prepare the bond premium
amortization schedule.

SO 9 Apply the effective-interest method of amortizing

51

bond discount and bond premium.

Effective-Interest Amortization
Effective-Interest AmortizationAppendix 10B

Amortizing Bond Premium

Illustration 10B-4

SO 9 Apply the effective-interest method of amortizing

52

bond discount and bond premium.

Effective-Interest Amortization
Effective-Interest AmortizationAppendix 10B

Amortizing Bond Premium

Illustration: Candlestick, Inc. records the accrual of

interest and amortization of premium discount on Dec.
31, as follows:

Dec. 31 Interest expense 9,670

Premium on bonds payable 330
Interest payable

10,000

SO 9 Apply the effective-interest method of amortizing

53

bond discount and bond premium.

Long-Term
Long-Term Notes
Notes Payable
Payable Appendix 10C

Long-Term Notes Payable

May be secured by a mortgage that pledges title to
specific assets as security for a loan.
Typically, the terms require the borrower to make
installment payments over the term of the loan. Each
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.
54
SO 10 Describe the accounting for long-term notes payable.
Long-Term
Long-Term Notes
Notes Payable
Payable Appendix 10C

Illustration: Porter Technology Inc. issues a $500,000,

12%, 20-year mortgage note on December 31, 2019. The
terms provide for semiannual installment payments of
$33,231.
Illustration 10C-1

55
SO 10 Describe the accounting for long-term notes payable.
Long-Term
Long-Term Notes
Notes Payable
Payable Appendix 10C

Illustration: Porter Technology records the mortgage

loan and first installment payment as follows:

Dec. 31 Cash 500,000

Mortgage notes payable 500,000

Jun. 30 Interest expense 30,000

Mortgage notes payable 3,231
Cash 33,231

56
SO 10 Describe the accounting for long-term notes payable.
Long-Term
Long-Term Notes
Notes Payable
Payable Appendix 10C

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.
57
SO 10 Describe the accounting for long-term notes payable.
 End
Endof
ofTopic
Topic

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