1. Accounting, Fifth Edition10
REPORTING
AND ANALYZING LIABILITIES
Accounting, Fifth Edition

2. 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.
Identify the types of bonds.
Prepare the entries for the issuance of bonds and interest expense.
Describe the entries when bonds are redeemed.
Identify the requirements for the financial statement presentation and analysis of liabilities.*
*Self-study topics

3. Current Liabilities What is a Current Liability? Two key features:
Company expects to pay the debt from existing current assets or through the creation of other current liabilities.
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.
LO 1 Explain a current liability and identify the major types of current liabilities.

4. Current Liabilities Question
To be classified as a current liability, a debt must be expected to be paid:
out of existing current assets.
by creating other current liabilities.
within 2 years.
both (a) and (b).
LO 1 Explain a current liability and identify the major types of current liabilities.

5. Current Liabilities – Unearned Revenue
Revenues that are received before the company delivers goods or provides service.
Company debits Cash, and credits a current liability account (Unearned Revenue).
When the company earns the revenue, it debits the Unearned Revenue account, and credits a revenue account.
LO 3 Explain the accounting for other current liabilities.

6. Current Liabilities - Unearned Revenue
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:
Unearned ticket revenue ,000
Cash 500,000
Aug. 6
As each game is completed, Superior records the earning of revenue.
Ticket revenue ,000
Unearned ticket revenue 100,000
Sept. 7
LO 3 Explain the accounting for other current liabilities.

7. Current Liabilities - Sales Tax Payable
Sales taxes are expressed as a stated percentage of the sales price.
Selling company
collects tax from the customer.
remits the collections to the state’s department of revenue.
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
Sales revenue 10,000
Cash 10,600
Sales tax payable
LO 3 Explain the accounting for other current liabilities.

8. Current Liabilities Notes Payable Written promissory note.
Usually require the borrower to pay interest.
Those due within one year of the balance sheet date are usually classified as current liabilities.
LO 2 Describe the accounting for notes payable.

9. Current Liabilities - Notes Payable
Illustration: First National Bank agrees to lend $100,000 on September 1, 2014, if Cole Williams Co. signs a $100,000, 12%, four-month note maturing on January 1.
Notes payable ,000
Cash 100,000
Sept. 1
Illustration: On Dec 31, an adjusting entry is booked to recognize the accrued interest.
Interest payable ,000
Interest expense 4,000 *
Dec. 31
* $100,000 x 12% x 4/12 = 4,000
LO 2 Describe the accounting for notes payable.

10. Current Liabilities - Notes Payable
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 ,000
LO 2 Describe the accounting for notes payable.

11. Current Liabilities – Current Portion 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, 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,
What amount should be reported as a current liability? ___________
What amount should be reported as a long-term liability? _________
LO 3 Explain the accounting for other current liabilities.

12. Long-Term Notes 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
interest on the unpaid balance of the loan and
a reduction of loan principal.
Companies initially record mortgage notes payable at face value.
LO 10 Describe the accounting for long-term notes payable.

13. Long-Term Notes Payable
Appendix 10C
Illustration: Porter Technology Inc. issues a $500,000, 12%, 20-year mortgage note on December 31, The terms provide for semiannual installment payments of $33,231.
Illustration 10C-1
LO 10 Describe the accounting for long-term notes payable.

14. Long-Term Notes Payable
Appendix 10C
Illustration: Porter Technology records the mortgage loan and first installment payment as follows:
Dec. 31
Cash 500,000
Mortgage payable 500,000
Jun. 30
Interest expense 30,000
Mortgage payable 3,231
Cash 33,231
LO 10 Describe the accounting for long-term notes payable.

15. BE10-2, 3 & 4, p 542

16. Current Liabilities – Payroll & 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.
LO 3 Explain the accounting for other current liabilities.

17. FICA – Social Security* State and Local Income Taxes**
Current Liabilities – Payroll Deductions
FICA – Social Security*
FICA Medicare**
Federal Income Tax**
State and Local Income Taxes**
Voluntary Deductions
Gross Pay
Net Pay
Gross pay is the amount you actually earn during a pay period. Out of your gross pay, amounts are withheld for social security (FICA) taxes, Medicare taxes, and federal income taxes. If you live in a state or locality that has an income tax, additional amounts will be withheld. In addition to this mandatory withholding, you may elect to have amounts withheld from your gross pay. For example, you may be eligible to participate in a contributory retirement plan or a medical reimbursement plan.
Your gross pay less all withholdings, mandatory and voluntary, is your net pay. This is the amount of cash you can put in the bank.
* capped, see next slide
** no cap, the more you
make the more you pay
9-17 2 2

18. 1.45% of all wages earned in the year.
Current Liabilities – FICA Payroll Deductions
Federal Insurance Contributions Act (FICA)
FICA Taxes — Soc. Sec.
FICA Taxes — Medicare
6.2% of the first : $118,500 or $7,347 cap
1.45% of all wages earned in the year.
The rate of withholding for FICA taxes and Medicare taxes varies from year to year, but in 2008, the FICA rate was six point two percent on the first one hundred two thousand dollars of gross pay. The Medicare rate of one point forty-five percent was applied on all of your gross pay in 2008, as well.
Your employer is required to match the amounts withheld for FICA and Medicare on a dollar for dollar basis. For every ten dollars withheld from your paycheck, your employer must pay ten dollars on your behalf to the Internal Revenue Service.
Employers must pay withheld taxes to the Internal Revenue Service (IRS).
9-18 2 2

19. History of Social Security
Enacted in 1935 by FD Roosevelt as a result of the 1930s Depression.
First payment made in 1940.
Major changes/additions:
1956: Disability Insurance added.
1964: Food stamp program, Medicare, Medicaid, School Breakfast Program
1970s: WIC, Cost of living adjustments automatic, Earned Income Tax Credit
1980s: Low=income Home Energy Assistance.
1990s: Temp Assistance for Needy Families

20. History of Social Security

21. Current Liabilities - Payroll
Illustration: Assume Cargo Corporation records its payroll for the week of March 7 as follows:
Salaries and wages expense 100,000
Federal income tax payable 21,864
FICA tax payable 7,650
State income tax payable 2,922
Salaries and wages payable 67,564
Mar. 7
Record the payment of this payroll on March 7.
Cash 67,564
Salaries and wages payable 67,564
Mar. 7
LO 3

22. Federal and State Unemployment Taxes
Current Liabilities – Employer Payroll Taxes
FICA Social Security
FICA -Medicare
Federal and State Unemployment Taxes
Employers pay amounts equal to that withheld from the employee’s gross pay.
Your employer must match your contributions for FICA and Medicare taxes.
9-22 2 2

23. Current Liabilities – Payroll Taxes
Payroll tax expense results from three taxes that governmental agencies levy on employers.
These taxes are:
FICA tax
Federal unemployment tax
State unemployment tax
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
State unemployment taxes payable 800
FICA tax payable 7,650
Federal unemployment taxes payable 5,400
LO 3 Explain the accounting for other current liabilities.

24. Current Liabilities – Payroll Tax Summary
EmployEE
EmployER
FICA – Social Security X
(2016 Cap: $118,500)
FICA - Medicare
Federal, State & Local INCOME Taxes No
Voluntary Deductions
FUTA & SUTA (Unemployment Taxes)
$7,000 Cap

25. BE10-5, 6 & 7, p 542

26. Financial Statement Analysis and Presentation
Balance Sheet Presentation
Illustration 10-15
LO 7

27. Financial Statement Analysis and Presentation
Illustration 10-16
LO 7

28. Financial Statement Analysis and Presentation
Liquidity
Illustration 10-17
Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.
LO 7 Identify the requirements for the financial statement presentation and analysis of liabilities.

29. Financial Statement Analysis and Presentation
Solvency
Illustration 10-18
Solvency ratios measure the ability of a company to survive over a long period of time.
LO 7

30. Different Ways to Finance a Company
Borrowing from a Bank (Ch 10): Notes Payable – More expensive and restrictive than bonds.
Selling Stock (Ch 11): Gives up ownership shares, but does NOT require interest or principal repayments.
Issuing Bonds (Ch 10): Easier to deal with than bank loans, require interest & principal repayment.

31. Advantages Disadvantages
Bonds – A Borrowing/Lending Arrangement
Advantages
Disadvantages
Bonds do not affect stockholder control.
Interest on bonds is tax deductible.
Can increase return on equity.
Bonds require payment of both periodic interest and par value at maturity.
Can decrease return on equity.

32. Bond: Long-Term Liabilities
Types of Bonds – p.512 & 513
Secured
Unsecured
Convertible
Callable
LO 4 Identify the types of bonds.

33. Bond: Long-Term Liabilities
Issuing Procedures
Alternative Terminology The
contractual rate is often referred
to as the stated rate.
Bond certificate
Issued to the investor.
Provides name of the company issuing bonds, face value, maturity date, and contractual (stated) interest 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.
LO 4 Identify the types of bonds.

34. Bond: Long-Term Liabilities
Illustration 10-3
LO 4

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

36. Issuing Bonds at Face Value (Honda)
Illustration: Devor Corporation issues 100, five-year, 10%, $1,000 bonds dated January 1, 2014, at 100 (100% of face value). The entry to record the sale is:
1/1/14 Cash 100,000
Bonds payable 100,000
Prepare the entry Devor would make to accrue interest on December 31. ($100,000 x 10% x 12/12)
12/31/14 Interest expense 10,000
Interest payable 10,000
Prepare the entry Devor makes on Jan. 1, 2015 to pay the interest.
1/1/15 Interest payable 10,000
Cash 10,000
LO 5 Prepare the entries for the issuance of bonds and interest expense.

37. Bond: Long-Term Liabilities
Determining the Market Value of Bonds
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, and
the market rate of interest.
The process of finding the present value is referred to as discounting the future amounts.
LO 4 Identify the types of bonds.

38. Accounting for Bond Issues
Issue at Par, Discount, or Premium?
Illustration 10-6
Helpful Hint Bond prices vary inversely with changes in the market interest rate. As market interest rates decline, bond prices increase. When a bond is issued, if the market interest rate is below the contractual rate, the bond price is higher than the face value.
LO 5

39. Bond at Par Value (Honda):
Bond Issuance Journal Entries
Cash $1,000,000
Bond Payable $1,000,000
Bond has a 5-yr term & pays interest 2x per year
Bond at Par Value (Honda):
Discounted Bond (Hyundai)
Premium Bond (Porsche)
Cash $926,405 Disc on Bond* 73,595 Bond Payable $1,000,000
Cash $1,081,105 Prem on Bond* 81,105 Bond Payable 1,000,000
*The Bond’s Discount or Premium accounts are Contra Liability accounts.

40. Bond: Long-Term Liabilities
Illustration: Assume that Acropolis Company on January 1, 2014, 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
LO 4 Identify the types of bonds.

41. Basics of Bond Valuation
The value of a bond investment is based on the SUM of
Stream of interest payments made/received over the the life of the bond Use the market rate interest and Table B3.
PLUS
Single lump sum payment (par value) made at the bond’s maturity. Use the market rate interest and Table B1.

42. Must have 3 components to calculate the 4th.
Components of Time Value Calculations
PV – Present Value, what is it worth today?
FV – Future Value, what is it worth in the future?
n – number of periods (i.e. months, quarter, year)
i – interest rate % earned for each n
Must have 3 components to calculate the 4th.

43. Calculating the Present Value of a Bond
Calculate the issue price of Rose Inc. bonds.
Par Value = $1,000,000
Issue Price = ?
Stated Interest Rate = 10% (to determine interest payment)
Market Interest Rate = 12% (to determine selling price)
Interest Dates = 6/30 and 12/31
Bond Date = Jan. 1, 2015
Maturity Date = Dec. 31, 2019 (5 years)
In our previous examples, we provided the selling price of the bonds. But how did we determine those prices? To compute the price of a bond, we apply present value concepts.
We know the following information related to the bond:
Par value to be received at maturity.
Interest payments determined using the stated interest rate.
Number of interest payment periods.
Market rate of interest.
Let’s see how we use this information to determine the price of a bond.
10-43

44. App D, Table 3 – Single Payment/Receipt
Table B PV Unknown
FV Known: $1,000,000
What is the value TODAY of $1,000,000 5 years from now, assuming the yearly market interest rate is 12% and interest payments are made TWO times per year?
(n=10, 5 yrs x 2 pymts per year)
(i = 6%, 12%/2 pymts per year)
Using Table 3: 6% (n) column, 10 (i) row =
* $1,000,000 = $558,390

45. Present Value of DISCOUNT Bond
Using Table 3, what is the value TODAY of a $1,000,000 five years from now? Because interest payments are made 2x a year:
Divide market interest rate by two or 6% (Market rate 12% ÷ 2)
Multiply the years to maturity by the # of interest payments per year (2 x 5 years = 10)
Using Table 3, look at the 6% column and the 10 (n) periods.
Multiply that factor by the future single lump sum payment.
The price of the bond is made up of two factors:
 The present value of the par value paid at maturity.
 The present value of the series of interest payments over the life of the bond.
For Rose, the par value is one million dollars. To find the present value of the par value, we can use the Present Value of One Table or a calculator. The future value is one million dollars, the time is ten periods, and the market interest rate for each semiannual period is six percent. If we use the Present Value of One Table, we find an interest factor of When we multiply this interest factor times the par value of one million dollars, we get the present value.
To find the present value of the interest payments, we can use the Present Value of an Annuity of One Table or a calculator. The annuity is fifty thousand dollars, the time is ten periods, and the market interest rate for each semiannual period is six percent. If we use the Present Value of an Annuity of One Table, we find an interest factor of When we multiply this interest factor times the interest annuity of fifty thousand dollars, we get the present value.
If we add the two present value amounts calculated together, we get the selling price of the bond.
10-45

46. App D, Table 4 – Multiple Payments/Receipts
$50,000
$50,000
$50,000
$50,000
$50,000
PV Unknown
FV known:
10 checks X $50,000
What is the value TODAY of ten $50,000 checks received every 6 months for the next 5 years?
(n=10, 10 checks or 5 yrs x 2 pymts per year)
(i = 6%, 12%/2 pymts per year)
Using Table 4: 6% (n) column, 10 (i) row =
* $50,000 = $368,005

47. Present Value of DISCOUNT Bond
Using Table 2, what is the value TODAY of the multiple (annuity) interest checks? Interest payments are made 2x a year:
Calculate the $ amount of each interest check:
$1,000,000 x 10% (stated rate) x ½ = $50,000
Divide market interest rate by two or 6% (Market rate 12% ÷ 2) [i}
Multiply the years to maturity by the # of interest payments per year (2 x 5 years = 10) [n].
Using Table 4, look at the 6% (i) column and the 10 (n) periods.
Multiply that factor by the amount of EACH interest check.
The value today of ten - $50,000 checks received over the next five years is $368,005.
The price of the bond is made up of two factors:
 The present value of the par value paid at maturity.
 The present value of the series of interest payments over the life of the bond.
For Rose, the par value is one million dollars. To find the present value of the par value, we can use the Present Value of One Table or a calculator. The future value is one million dollars, the time is ten periods, and the market interest rate for each semiannual period is six percent. If we use the Present Value of One Table, we find an interest factor of When we multiply this interest factor times the par value of one million dollars, we get the present value.
To find the present value of the interest payments, we can use the Present Value of an Annuity of One Table or a calculator. The annuity is fifty thousand dollars, the time is ten periods, and the market interest rate for each semiannual period is six percent. If we use the Present Value of an Annuity of One Table, we find an interest factor of When we multiply this interest factor times the interest annuity of fifty thousand dollars, we get the present value.
If we add the two present value amounts calculated together, we get the selling price of the bond.
10-47

48. Present Value of DISCOUNT Bond
Today’s MARKET is paying 12% on Bonds, but our is only paying 10%. We are therefore selling a DISCOUNT (Hyundai) bond. The only way someone will buy our bond is if we sell it for LESS than $1,000,000.
The price of the bond is made up of two factors:
 The present value of the par value paid at maturity.
 The present value of the series of interest payments over the life of the bond.
For Rose, the par value is one million dollars. To find the present value of the par value, we can use the Present Value of One Table or a calculator. The future value is one million dollars, the time is ten periods, and the market interest rate for each semiannual period is six percent. If we use the Present Value of One Table, we find an interest factor of When we multiply this interest factor times the par value of one million dollars, we get the present value.
To find the present value of the interest payments, we can use the Present Value of an Annuity of One Table or a calculator. The annuity is fifty thousand dollars, the time is ten periods, and the market interest rate for each semiannual period is six percent. If we use the Present Value of an Annuity of One Table, we find an interest factor of When we multiply this interest factor times the interest annuity of fifty thousand dollars, we get the present value.
If we add the two present value amounts calculated together, we get the selling price of the bond.
10-48

49. Present Value of PREMIUM Bond
Using Table 3, what is the value TODAY of a $1,000,000 five years from now? Because interest payments are made 2x a year:
Divide market interest rate by two or 4% (Market rate 8% ÷ 2)
Multiply the years to maturity by the # of interest payments per year (2 x 5 years = 10)
Using Table 3, look at the 4% column and the 10 (n) periods.
Multiply that factor by the future single lump sum payment.
The price of the bond is made up of two factors:
 The present value of the par value paid at maturity.
 The present value of the series of interest payments over the life of the bond.
For Rose, the par value is one million dollars. To find the present value of the par value, we can use the Present Value of One Table or a calculator. The future value is one million dollars, the time is ten periods, and the market interest rate for each semiannual period is six percent. If we use the Present Value of One Table, we find an interest factor of When we multiply this interest factor times the par value of one million dollars, we get the present value.
To find the present value of the interest payments, we can use the Present Value of an Annuity of One Table or a calculator. The annuity is fifty thousand dollars, the time is ten periods, and the market interest rate for each semiannual period is six percent. If we use the Present Value of an Annuity of One Table, we find an interest factor of When we multiply this interest factor times the interest annuity of fifty thousand dollars, we get the present value.
If we add the two present value amounts calculated together, we get the selling price of the bond.
10-49

50. Present Value of PREMIUM Bond
Using Table 2, what is the value TODAY of the multiple (annuity) interest checks? Interest payments are made 2x a year:
Calculate the $ amount of each interest check:
$1,000,000 x 10% (stated rate) x ½ = $50,000
Divide market interest rate by two or 4% (Market rate 8% ÷ 2) [i}
Multiply the years to maturity by the # of interest payments per year (2 x 5 years = 10) [n].
Using Table 4, look at the 4% (i) column and the 10 (n) periods.
Multiply that factor by the amount of EACH interest check.
The value today of ten - $50,000 checks received over the next five years is $405,545.
The price of the bond is made up of two factors:
 The present value of the par value paid at maturity.
 The present value of the series of interest payments over the life of the bond.
For Rose, the par value is one million dollars. To find the present value of the par value, we can use the Present Value of One Table or a calculator. The future value is one million dollars, the time is ten periods, and the market interest rate for each semiannual period is six percent. If we use the Present Value of One Table, we find an interest factor of When we multiply this interest factor times the par value of one million dollars, we get the present value.
To find the present value of the interest payments, we can use the Present Value of an Annuity of One Table or a calculator. The annuity is fifty thousand dollars, the time is ten periods, and the market interest rate for each semiannual period is six percent. If we use the Present Value of an Annuity of One Table, we find an interest factor of When we multiply this interest factor times the interest annuity of fifty thousand dollars, we get the present value.
If we add the two present value amounts calculated together, we get the selling price of the bond.
10-50

51. Present Value of PREMIUM Bond
Today’s MARKET is paying 8% on Bonds, and ours is paying 10%. We are therefore selling a PREMIUM (Porsche) bond. The only way someone will sell our bond is if we sell it for MORE than $1,000,000.
The price of the bond is made up of two factors:
 The present value of the par value paid at maturity.
 The present value of the series of interest payments over the life of the bond.
For Rose, the par value is one million dollars. To find the present value of the par value, we can use the Present Value of One Table or a calculator. The future value is one million dollars, the time is ten periods, and the market interest rate for each semiannual period is six percent. If we use the Present Value of One Table, we find an interest factor of When we multiply this interest factor times the par value of one million dollars, we get the present value.
To find the present value of the interest payments, we can use the Present Value of an Annuity of One Table or a calculator. The annuity is fifty thousand dollars, the time is ten periods, and the market interest rate for each semiannual period is six percent. If we use the Present Value of an Annuity of One Table, we find an interest factor of When we multiply this interest factor times the interest annuity of fifty thousand dollars, we get the present value.
If we add the two present value amounts calculated together, we get the selling price of the bond.
10-51

52. Appendix D Tables Appendix D Tables
Table 1 & 3: Single payments/Receipts
Table 2 & 4: Multiple payments/receipts
Table 1 & 2: Future Value (FV) unknown
Table 3 & 4: Present Value unknown
Using a financial calculator is an option. See explanation in Appendix D (D-14).

53. Bond Valuation Practice Problems
BED-13 & 14, p D-19
What is the market/discount rate? How does this compare to the stated rate? Is this bond a discount, premium or par value bond? If it is a:
Discount – selling price will be less than.
Par – selling price will be equal.
Premium – selling price will be more than.
Determine
Lump sum payment (single payment at end of bond term)
$ amount of each interest check (use stated rate)
How many interest payments will be made each year?
Using 2) and 3) above, determine the n and i for the problem.
Use App D tables 3 & 4 to calculate the selling value of the bond. The sum of the totals from the Table 3 & 4 calculations will determine the selling price.

54. Accounting for Bond Issues
Net Carrying Value of Bond = Bond Payable – Unamortized Discount
Bond Payable + Unamortized Premium
In almost all cases, the stated (contract) rate and the market rate of interest will not agree. When these two interest rates are different, it might make sense to you for us to just change our stated rate to equal the market rate and then everything would be fine. Well, we can’t do that. Remember that the bond certificate lists all of the specifics about the bond including the interest rate. Because we have to print the bond certificates in advance, we are stuck having to pay the interest printed on the bond certificate.
The only thing that is not printed on the bond certificate is the selling price. So, the issuing company and the bond investors come to an agreement on the selling price that incorporates the difference in the stated interest rate and the market interest rate.
10-54

55. Bonds – Effective Int Exp Journal Entry
Par Value Bond
Interest Exp* $50,000
Cash* $50,000
**Bond is a 5-yr bond with interest payment 2x per year.
Premium Bond
Discounted Bond
Interest Exp ,584
($926,405 x [12%/2])
Cash ,000
($1,000,000 x [10%/2])
Disc on BP** ,584
Interest Exp. $43,244
($1,081,105 * [8%/2})
Prem on BP** 6,756
Cash* ,000
($1,000,000 x [10%/2])
* Par value x Interest rate % x 1/# pymts per year
** The amortization of the Discount or Premium is calculated using the Effective Interest Rate method. See following slide for calculation.
NOTE: The carrying value of the bond must be equal to the par value at maturity. In other words, the discount or premium must be ZERO at maturity.

56. Effective Interest Amortization
Appendix 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.
Compute the bond interest expense.
Compute the bond interest paid or accrued.
Compute the amortization amount.
Illustration 10B-1 ** * * *
* Number stays constant over life of bond.
** DISCOUNT Bond = Face Amount of Bond – Unamortized Discount OR
PREMIUM Bond = Face Amount of Bond + Unamortized Premium
LO 9

57. Appendix 10B – Discount Bond
Effective Interest Amortization a b c d e
Interest Period
Interest Paid
Interest Exp
Discount Amort
Unamor Discount
Bond Carry Val
5% * $1,000,000
(12%/2) * e (prev carry value)
b-a
d-c
$1,000,000 - d
$73,595
$926,405 1
$50,000
55,584
5,584
68,011
931,989 2
55,919
5,919
62,091
937,909 3
56,275
6,275
55,817
944,183 4
56,651
6,651
49,166
950,834 5
57,050
7,050
42,116
957,884 6
57,473
7,473
34,643
965,357 7
57,921
7,921
26,721
973,279 8
58,397
8,397
18,325
981,675 9
58,901
8,901
9,424
990,576 10
59,424
(0)
1,000,000
$500,000
$573,595

58. Appendix 10B – Premium Bond
Effective Interest Amortization a b c d e
Interest Period
Interest Paid
Interest Exp
Premium Amort
Unamor Premium
Bond Carry Val
5% * $1,000,000
(8%/2) * e (prev carry value)
b-a
d-c
$1,000,000 - d
$81,105
$1,081,105 1
$50,000
43,244
(6,756)
(74,349)
1,074,349 2
42,974
(7,026)
(67,323)
1,067,323 3
42,693
(7,307)
(60,016)
1,060,016 4
42,401
(7,599)
(52,417)
1,052,417 5
42,097
(7,903)
(44,513)
1,044,513 6
41,781
(8,219)
(36,294)
1,036,294 7
41,452
(8,548)
(27,746)
1,027,746 8
41,110
(8,890)
(18,856)
1,018,856 9
40,754
(9,246)
(9,610)
1,009,610 10
40,390
1,000,000
$500,000
$418,895
($81,105)

59. Issuing Bonds at a Discount
Illustration 10-7
Statement presentation of discount on bonds payable
Statement Presentation
Sale of bonds below face value causes the total cost of borrowing to be more than the bond interest paid.
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.
LO 5 Prepare the entries for the issuance of bonds and interest expense.

60. Issuing Bonds at a Discount
Total Cost of Borrowing
Illustration 10-8
Illustration 10-9
LO 5 Prepare the entries for the issuance of bonds and interest expense.

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

62. Issuing Bonds at a Premium
Total Cost of Borrowing
Illustration 10-12
Illustration 10-13
LO 5 Prepare the entries for the issuance of bonds and interest expense.

63. Bond at Par Value (Honda):
Accounting for Bond Redemptions
Bond Payable $100,000
Cash $100,000
Bond at Par Value (Honda):
Discounted Bond (Hyundai on Jan 1):
Premium Bond (Porsche) on Jan 1:
Bond Payable $100,000 Cash $100,000
Bond Pay $100,000 Cash $100,000