1. Financial Accounting, 5e California State University, Los Angeles
Weygandt, Kieso, & Kimmel
Prepared by
Kurt M. Hull, MBA CPA
California State University, Los Angeles
John Wiley & Sons, Inc. 1

2. CHAPTER 11 LIABILITIES STUDY OBJECTIVES
After studying this chapter, you should understand:
Major types of
current liabilities
Entries for bond issuance
and interest expense
Accounting for
notes payable
Entries for
bond redemption
other current liabilities
long-term notes payable
The purpose of bonds,
and major types of bonds
Presentation and analysis
of long-term liabilities

3. TYPES OF CURRENT LIABILITIES
STUDY OBJECTIVE 1
TYPES OF CURRENT LIABILITIES
Key features of a current liability:
It is expected to be paid from existing current assets or through the creation of other current liabilities
It will be paid within one year or the
operating cycle, whichever is longer.
Notes Payable
Accounts Payable
Unearned Revenues
Accrued Liabilities 2

4. Key features of a note payable: are current liabilities
STUDY OBJECTIVE 2
NOTES PAYABLE
Key features of a note payable:
Promissory note
Interest
Notes due within a year
are current liabilities 3

5. ISSUANCE DATE NOTES PAYABLE March 1 Cash 100,000 Notes Payable 100,000
General Journal
Date
Account Titles
Debit
Credit
March 1 Cash ,000
Notes Payable ,000
Assume First National Bank agrees to
lend $100,000 on March 1, 2006, if
Cole Williams Co. 12%, 4-month note.
Assets received = face value of note 4

6. Using the Cole Williams Co. data:
INTEREST FORMULA
If the loan term is expressed in days,
use the number of days divided by 365.
If loan term is expressed in months,
use the number of months divided by 12.
Using the Cole Williams Co. data:
Annual
Interest
Rate
Face Value
of Note
Time in
Terms
of One Year
Interest
$100,000 x 12% x /12 = $4,000

7. INTEREST ACCRUAL NOTES PAYABLE June 30 Interest Expense 4,000
General Journal
Date
Account Titles
Debit
Credit
June 30 Interest Expense ,000
Interest Payable ,000
If Cole Williams Co. prepares financial statements semiannually, an adjusting entry is required to recognize interest expense and interest payable of $4,000 at June 30. 5

8. MATURITY DATE NOTES PAYABLE July 1 Notes Payable 100,000
General Journal
Date
Account Titles
Debit
Credit
July Notes Payable ,000
Interest Payable ,000
Cash ,000
When the loan is paid, the FACE VALUE is
debited, any interest accrued is removed,
and cash is decreased by this combined amount. 6

9. INTEREST ACCRUAL REVIEW QUESTION Answer: $88,500 x 12% x 4/12 = $3,540
Shari Uecker Company borrows $88,500 on September 1, 2006
From Egg Harbor State Bank by signing a one year, 12% note.
What is the accrued interest at December 31, 2006?
Answer:
$88,500 x 12% x 4/12 = $3,540

10. OTHER CURRENT LIABILITIES
STUDY OBJECTIVE 3
OTHER CURRENT LIABILITIES
SALES TAXES PAYABLE
Sales tax is expressed as a stated percentage of the sales price on goods sold to customers by a retailer.
The retailer collects the tax from the customer when the sale occurs. Retailer periodically remits the collections to the state’s department of revenue.
Retailer is a collection agent
for the tax authority. 7

11. Sales tax rate = 6% SALE DATE SALES TAXES PAYABLE Mar. 25 Cash 10,600
General Journal
Date
Account Titles
Debit
Credit
Mar Cash 10,600
Sales ,000
Sales Tax Payable
On March 25th cash register readings for Cooley
Grocery show sales of $10,000 and sales taxes of $600.
Sales tax rate = 6%

12. EXTRACTING SALES TAX FROM TOTAL RECEIPTS
If Cooley Grocery “rings up” total receipts
of $10,600, and the sales tax percentage
is 6%, we can figure sales as follows:
$10,600 / 1.06 = $10,000
Total receipts – Sales = Tax collected
$10,600 - $10,000 = $600 9

13. PAYROLL AND PAYROLL TAXES PAYABLE
Liabilities relating to employee wages and salaries include:
Wages and salaries payable
Withholding taxes
Date
Account
Debit
Credit
March 7
Salaries & Wages Expense
100,000
FICA Taxes Payable
7,650
Federal Income Taxes Payable
21,864
State Income Taxes Payable
2,922
Salaries & Wages Payable
67,564
(record payroll & w/h taxes for week of March 7)
March 11
Salaries & Wages Payable
67,564
Cash
67,564
(to record payment of March 7 payroll)

14. PAYROLL DEDUCTIONS

15. PAYROLL AND PAYROLL TAXES PAYABLE
Various payroll taxes are levied upon the employer:
Matching FICA taxes
Federal unemployment taxes
State unemployment taxes
Date
Account
Debit
Credit
March 7
Payroll Tax Expense
13,850
FICA Taxes Payable
7,650
FUTA Taxes Payable
800
SUTA Taxes Payable
5,400
(record employer’s payroll taxes for week of March 7)

16. EMPLOYER PAYROLL TAXES21

17. UNEARNED REVENUES Unearned Revenues occur when a company
receives cash before a service is rendered.
Examples:
Airline sells a ticket for future flights
Attorney receives legal fees before work is done. 10

18. UNEARNED REVENUES CASH RECEIPT
General Journal
Date
Account Titles
Debit
Credit
Aug Cash ,000
Unearned Football Ticket Revenue ,000
Superior University sells 10,000 season football
tickets at $50 each for its five-game home schedule.

19. UNEARNED REVENUES EARNINGS DATE
General Journal
Date
Account Titles
Debit
Credit
Sept Unearned Football Ticket Revenue ,000
Football Ticket Revenue ,000
As each game is completed, Unearned Football Ticket Revenue is debited for 1/5 of the unearned revenue. The earned revenue, Football Ticket Revenue, is credited. 12

20. UNEARNED AND EARNED REVENUE ACCOUNTS
Shown below are specific unearned and earned
revenue accounts in selected types of businesses.
Account Title
Type of Business
Unearned Revenue
Earned Revenue
Unearned passenger
Passenger
Airline
Ticket Revenue
Revenue
Unearned
Magazine
Subscription
Subscription
Publisher
Revenue
Revenue
Unearned Rental
Hotel
Revenue
Rental Revenue
Insurance
Unearned Premium
Company
Revenue
Premium Revenue

21. That portion of long-term debt Classified as a current liability
CURRENT MATURITIES
OF LONG-TERM DEBT
That portion of long-term debt
due within 1 year.
Classified as a current liability
on the balance sheet 13

22. FINANCIAL STATEMENT PRESENTATION14

23. WORKING CAPITAL FORMULA
The excess of current assets over current liabilities.
A measure of short-term liquidity.
Current
Assets -
Current
Liabilities =
Working
Capital
$ 16, $ 12,621 = $ 4,170

24. / = CURRENT RATIO FORMULA Current Ratio $16,791 / $12,621 = 1.33 : 1
The ratio of current assets to current liabilities.
A measure of short-term liquidity. /
Current
Liabilities =
Current
Ratio
Current
Assets
$16, / $12, = : 1

25. BONDS PAYABLE STUDY OBJECTIVE 4 A form of interest-bearing notes
payable issued by corporations,
universities, & governmental agencies.
Can be sold in small denominations
to attract many investors.
Sold to obtain long term capital.
An alternative to issuing stock.

26. ADVANTAGES OF BOND
FINANCING OVER STOCK

27. EFFECTS ON EPS
BONDS VS. STOCK

28. TYPES OF BONDS Bond Type Distinguishing characteristics Secured
Backed by specific assets
Unsecured
Backed by credit of issuer (debentures)
Term
Paid at end of specified term
Serial
Paid in installments
Registered
Issued in name of specific holder
Bearer
Not registered. (Coupon bonds)
Convertible
Can be converted to common stock
Callable
Can be retired before maturity

29. BOND ISSUANCE PROCEDURES
STUDY OBJECTIVE 5
BOND ISSUANCE PROCEDURES
Corporate bonds are traded on securities exchanges.
Bond prices are quoted as a percentage of the face value of the bond (usually $1,000).
Transactions between a bondholder and other investors are not journalized by the issuing corporation.
A corporation records entries when it issues/buys back bonds, and when bondholders convert bonds into stock.

30. DETERMINING MARKET VALUE OF BONDS
The present value (PV) of a bond
is a function of three factors:
1. Dollar amount
2. Time
3. Market rate of interest
The process of determining
the PV is discounting.

31. ISSUING BONDS AT FACE VALUE
Assume that Devor Corporation issues
year, 9% $1,000 bonds dated
January 1, 2006, at 100 (100% of face value).
The entry to record the sale is:
Date
Account
Debit
Credit
Jan 1
Cash
1,000,000
Bonds payable
1,000,000
(record sale of bonds at face value)
1000 bonds x $1000 = $1,000,000

32. BOND INTEREST PAYMENT $1,000,000 x 9% x 6/12 = $45,000
Assume that interest is payable semi-annually
on January 1 and July 1. Next payment
Is due July 1, The entry is:
Date
Account
Debit
Credit
July 1
Bond Interest Expense
45,000
Cash
45,000
(record semi-annual bond interest payment)
$1,000,000 x 9% x 6/12 = $45,000

33. BOND INTEREST ACCRUAL $1,000,000 x 9% x 6/12 = $45,000
Assume that interest is payable semi-annually
on January 1 and July 1. Next payment
Is due July 1, At December 31, 2005
the entry to accrue interest is:
Date
Account
Debit
Credit
Dec 31
Bond Interest Expense
45,000
Bond Interest Payable
45,000
(record sale of bonds at face value)
$1,000,000 x 9% x 6/12 = $45,000

34. INTEREST RATES AND BOND PRICES
Market Rates Bonds Sell at:
Issued
when: 8%
Premium
BOND
CONTRACTUAL
INTEREST
RATE 10%
10%
Face Value
Discount
12%

35. ISSUING BONDS AT A DISCOUNT
On January 1, 2006, Candlestick, Inc. sells
$100,000, 5-year, 10% bonds for $92,639 with
interest payable on payable on July 1 & January 1. The entry to record the issuance is:
Date
Account
Debit
Credit
Jan 1
Cash
92,639
Discount on Bonds Payable
7,361
Bonds Payable
100,000
(record issuance of bonds at a discount)
Market value of bonds = $92,639

36. FINANCIAL STATEMENT PRESENTATION--DISCOUNT
Discount on Bonds Payable is a contra account, which
is deducted from bonds payable on the balance sheet:
CANDLESTICK, INC.
Balance Sheet (partial)
Long -
term liabilities
Bonds payable
$100,000
Less:
Discount on Bond Payable
$7,361
$92,639
Carrying value of bonds = $92,639

37. TOTAL COST OF BORROWING BONDS ISSUED AT A DISCOUNT
The the discount is an additional cost of borrowing that is recorded as bond interest expense over the life of the bonds.
The total cost of borrowing for Candlestick, Inc., is computed as follows:
Bonds Issued at a Discount
Semiannual Interest Payments
($100,000*10%*.5=$5,000; $5,000*10)
$50,000
Add: Bond Discount ($100,000-$92,639)
$7,361
Total Cost of Borrowing
$57,361

38. ISSUING BONDS AT A PREMIUM
On January 1, 2006, Candlestick, Inc. sells
$100,000, 5-year, 10% bonds for $108,111 with
interest payable on payable on July 1 & January 1. The entry to record the issuance is:
Date
Account
Debit
Credit
Jan 1
Cash
108,111
Premium on Bonds Payable
8,111
Bonds Payable
100,000
(record issuance of bonds at a premium)
Market value of bonds = $108,111

39. FINANCIAL STATEMENT PRESENTATION—PREMIUM
Premium on Bonds Payable is added to
bonds payable on the balance sheet:
CANDLESTICK, INC.
Balance Sheet (partial)
Long -
term liabilities
Bonds payable
$100,000
Add: Premium on Bonds Payable $ 8,
111 $
108,111
Carrying value of bonds = $108,111

40. TOTAL COST OF BORROWING BONDS ISSUED AT A PREMIUM
The premium is considered to be a reduction
in the cost of borrowing that should
be credited to Bond Interest Expense
over the life of the bonds.
Bonds Issued at a Premium
Semiannual Interest Payments
($100,000*10%*.5=$5,000; $5,000*10)
$50,000
Less: Bond Premium ($108,111-$100,000)
$8,111
Total Cost of Borrowing
$41,889

41. REVIEW QUESTION BONDS SOLD AT A PREMIUM
On January 1, Dias Corporation issued $1,000,000, 14%,
5-year bonds with interest payable on July 1 and January 1.
the bonds sold for $1,098,540. The market rate of interest
was 12%. On the first interest date, using the effective
interest method, what is the debit to bond interest expense?
Answer:
$1,098,540 x 6% = $65,192

42. STUDY OBJECTIVE 6 REDEEMING BONDS AT MATURITY
Book value of the bonds at maturity
will equal their face value.
The entry to record the redemption
of the Candlestick bonds at maturity is:
Date
Account
Debit
Credit
Maturity date
Bonds Payable
100,000
Cash
100,000
(record payment of bonds at maturity)
This assumes all interest has been paid to maturity.
The entry will be the same regardless of whether
The bonds were issued at face value, discount, or premium

43. REDEEMING BONDS BEFORE MATURITY
Assume the bonds were sold at a premium.
At the end of the eight interest period,
Candlestick retires the bonds for $103,000.
Carrying value on date of redemption is $106,123
The entry to retire the bonds is:
Date
Account
Debit
Credit
Jan 1
Bonds Payable
100,000
Premium on Bonds Payable
1,623
Loss on Bond Redemption
1,377
Cash
103,000
(record redemption and loss prior to maturity)
Loss calculation:
Cash paid – carrying value
$103,000 - $106,123

44. CONVERTING BONDS TO COMMON STOCK
Market prices of the bonds and the stock are ignored.
The carrying value of the bonds is transferred to capital.
No gain or loss is recognized.
On July 1 Saunders Associates converts $100,000
bonds sold at face value into 2,000 shares
of $10 par value common stock. Both the bonds and
the common stock have a market value of $130,000.
The entry to record the conversion is:
Date
Account
Debit
Credit
July 1
Bonds Payable
100,000
Common Stock
20,000
Paid in capital in excess of par
80,000
(record bond conversion)

45. STUDY OBJECTIVE 7 LONG-TERM NOTES PAYABLE
Terms exceed one year.
May be secured by a specific assets (mortgage).
Mortgage N/P are recorded initially at face value.
Subsequent entries required for installment payments.
Porter Technology Inc. issues a $500,000, 12%, 20-year
mortgage note on December 31, 2006, to build a research lab.
The terms provide for semiannual installment payment of $33,231.
The installment payment schedule for the first year is shown below:
(B)
(C)
(D)
Semiannual
(A)
Interest
Reduction
Principal
Interest
Cash
Expense
Of Principal
Balance
Period
Payment
(D) x 6%
(A) – (B)
(D) –(C)
Issue date $500,000
, $30, $3, ,769
2 $33, , , ,344

46. LONG-TERM NOTES PAYABLE JOURNAL ENTRIES
The entries to record the issuance
and first interest payment are:
Date
Account
Debit
Credit
Dec 31
Cash
500,000
Mortgage Notes Payable
500,000
(record mortgage loan)
June 30
Interest Expense
30,000
Mortgage Notes Payable
3,231
Cash
33,231
(record first installment payment)

47. STUDY OBJECTIVE 8 PRESENTATION & ANALYSIS
The long-term liabilities for LAX
Corporation are shown below:
LAX Corporation
Balance Sheet (partial)
Long-term liabilities
Bonds payable 10% due in 2012
$1,000,000
Less: Discount on bonds payable
80,000
$920,000
Mortgage notes payable, 11%, due in 2018
and secured by plant assets
500,000
Lease liability
540,000
Total long-term liabilities
$1,960,000

48. DEBT TO TOTAL ASSETS RATIO
Measures the percentage of total assets provided
by creditors, indicating the degree of leverage.
Data from Johnson & Johnson’s
2003 annual report appears below:
TOTAL DEBT DEBT TO TOTAL ASSETS = ———————— TOTAL ASSETS
44.3% = $21, / $48,263

49. TIMES INTEREST EARNED RATIO
Indicates the company’s ability to meet
interest payments as they come due.
Johnson & Johnson’s 2003
annual report data is used below:
TIMES INT INCOME BEFORE INC. TAXES & INTEREST EXPENSE EARNED = ——————————————————————————— INTEREST EXPENSE
50.8 times = ($ $ $207)
$207

50. COPYRIGHT
Copyright © 2006 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may 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. 33