1. 15-1

2. 15-2 Chapter 10 Liabilities Learning Objectives After studying this chapter, you should be able to: 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.Explain why bonds are issued, and 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 or converted. 7.Describe the accounting for long-term notes payable. 8.Identify the methods for the presentation and analysis of long-term liabilities.

3. 15-3 Preview of Chapter 10 Financial and Managerial Accounting Weygandt Kimmel Kieso

4. 15-4 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. LO 1 Explain a current liability, and identify the major types of current liabilities. Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes payable, salaries payable, and interest payable. Current Liabilities

5. 15-5 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). Question LO 1 Explain a current liability, and identify the major types of current liabilities. Current Liabilities

6. 15-6 LO 2 Describe the accounting for notes payable. Notes Payable  Written promissory note.  Require the borrower to pay interest.  Issued for varying periods. Current Liabilities

7. 15-7 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. Instructions a)Prepare the entry on September 1. b)Prepare the adjusting entry on December 31, assuming monthly adjusting entries have not been made. c)Prepare the entry at maturity (January 1, 2015). LO 2 Describe the accounting for notes payable. Current Liabilities

8. 15-8 Notes payable100,000 Cash100,000 Interest payable4,000 Interest expense4,000 $100,000 x 12% x 4/12 = $4,000 b)Prepare the adjusting entry on Dec. 31. LO 2 Describe the accounting for notes payable. Current Liabilities 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. a) Prepare the entry on September 1.

9. 15-9 Interest payable4,000 Notes payable100,000 Cash104,000 LO 2 Describe the accounting for notes payable. Current Liabilities 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. c) Prepare the entry at maturity (January 1, 2015).

10. 15-10 LO 3 Explain the accounting for other current liabilities. Sales Tax Payable  Sales taxes are expressed as a stated percentage of the sales price.  Either rung up separately or included in total receipts.  Retailer collects tax from the customer.  Retailer remits the collections to the state’s department of revenue. Current Liabilities

11. 15-11 Illustration: The March 25 cash register reading for Cooley Grocery shows sales of $10,000 and sales taxes of $600 (sales tax rate of 6%), the journal entry is: Sales revenue10,000 Cash10,600 Sales tax payable600 LO 3 Explain the accounting for other current liabilities. Current Liabilities

12. 15-12 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. Payroll and Payroll Taxes Payable Current Liabilities

13. 15-13 Illustration: Assume a corporation records its payroll for the week of March 7 as follows: Salaries and wages expense100,000 Federal income tax payable21,864 FICA tax payable7,650 State income tax payable2,922 Salaries and wages payable67,564 LO 3 Cash67,564 Salaries and wages payable 67,564Mar. 11 Record the payment of this payroll on March 11. Mar. 7 Current Liabilities

14. 15-14 Payroll tax expense results from three taxes that governmental agencies levy on employers. These taxes are:  FICA tax  Federal unemployment tax  State unemployment tax LO 3 Explain the accounting for other current liabilities. Current Liabilities

15. 15-15 Illustration: Based on the corporation’s $100,000 payroll, the company would record the employer’s expense and liability for these payroll taxes as follows. Payroll tax expense13,850 Federal unemployment tax payable800 FICA tax payable7,650 State unemployment tax payable 5,400 LO 3 Explain the accounting for other current liabilities. Current Liabilities

16. 15-16 Employer payroll taxes do not include: a.Federal unemployment taxes. b.State unemployment taxes. c.Federal income taxes. d.FICA taxes. Question Current Liabilities LO 3 Explain the accounting for other current liabilities.

17. 15-17

18. 15-18 LO 3 Explain the accounting for other current 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. Current Liabilities

19. 15-19 Illustration: Assume that Superior University sells 10,000 season football tickets at $50 each for its five-game home schedule. The university makes the following entry for the sale of season tickets: LO 3 Explain the accounting for other current liabilities. Unearned revenue500,000 Cash 500,000Aug. 6 Ticket revenue100,000 Unearned revenue 100,000Sept. 7 As the school completes each of the five home games, it would record the revenue earned. Current Liabilities

20. 15-20 Current Maturities of Long-Term Debt  Portion of long-term debt that comes due in the current year.  No adjusting entry required. LO 3 Explain the accounting for other current liabilities. Current Liabilities

21. 15-21 LO 3 Statement Presentation and Analysis Illustration 10-5

22. 15-22 Working capital is calculated as: a.current assets minus current liabilities. b.total assets minus total liabilities. c.long-term liabilities minus current liabilities. d.both (b) and (c). Question Current Liabilities LO 3 Explain the accounting for other current liabilities.

23. 15-23 Liquidity refers to the ability to pay maturing obligations and meet unexpected needs for cash. The current ratio permits us to compare the liquidity of different- sized companies and of a single company at different times. Illustration 10-7 Illustration 10-6 LO 3 Explain the accounting for other current liabilities. Analysis Statement Presentation and Analysis

24. 15-24 The Missing Control Human Resource Controls. Thorough background checks should be performed. No employees should begin work until they have been approved by the Board of Education and entered into the payroll system. No employees should be entered into the payroll system until they have been approved by a supervisor. All paychecks should be distributed directly to employees at the official school locations by designated employees. Independent internal verification. Budgets should be reviewed monthly to identify situations where actual costs significantly exceed budgeted amounts. Total take: $150,000 ANATOMY OF A FRAUD Art was a custodial supervisor for a large school district. The district was supposed to employ between 35 and 40 regular custodians, as well as 3 or 4 substitute custodians to fill in when regular custodians were missing. Instead, in addition to the regular custodians, Art “ hired ” 77 substitutes. In fact, almost none of these people worked for the district. Instead, Art submitted time cards for these people, collected their checks at the district office, and personally distributed the checks to the “ employees. ” If a substitute ’ s check was for $1,200, that person would cash the check, keep $200, and pay Art $1,000.

25. 15-25  A form of interest-bearing notes payable.  To obtain large amounts of long-term capital. Three advantages over common stock: 1.Stockholder control is not affected. 2.Tax savings result. 3.Earnings per share may be higher. LO 4 Explain why bonds are issued, and identify the types of bonds. Long-Term Liabilities Bond Basics

26. 15-26 Effects on earnings per share—stocks vs. bonds. Illustration 10-9 LO 4 Explain why bonds are issued, and identify the types of bonds. Bond Basics

27. 15-27 The major disadvantages resulting from the use of bonds are: a.that interest is not tax deductible and the principal must be repaid. b.that the principal is tax deductible and interest must be paid. c.that neither interest nor principal is tax deductible. d.that interest must be paid and principal repaid. Question Current Liabilities LO 4 Explain why bonds are issued, and identify the types of bonds.

28. 15-28 Types of Bonds LO 4 Bond Basics

29. 15-29  State laws grant corporations the power to issue bonds.  Board of directors and stockholders must approve bond issues.  Board of directors must stipulate number of bonds to be authorized, total face value, and contractual interest rate.  Bond contract known as a bond indenture.  Paper certificate, typically a $1,000 face value. Bond Basics Issuing Procedures LO 4 Explain why bonds are issued, and identify the types of bonds.

30. 15-30  Represents a promise to pay: ► sum of money at designated maturity date, plus ► periodic interest at a contractual (stated) rate on the maturity amount (face value).  Interest payments usually made semiannually.  Generally issued when the amount of capital needed is too large for one lender to supply. Bond Basics Issuing Procedures LO 4 Explain why bonds are issued, and identify the types of bonds.

31. 15-31 Maturity Date Maturity Date Illustration 10-10 Contractual Interest Rate Contractual Interest Rate Face or Par Value Face or Par Value DUE 2017 2017 LO 4 Issuer of Bonds Issuer of Bonds Bond Basics

32. 15-32 Determining the Market Value of Bonds The features of a bond (callable, convertible, and so on) affect the market rate of the bond. Bond Basics Market value is a function of the three factors that determine present value: 1.dollar amounts to be received, 2.length of time until the amounts are received, and 3.market rate of interest. LO 4 Explain why bonds are issued, and identify the types of bonds.

33. 15-33 Corporation records bond transactions when it  issues (sells),  retires (buys back) bonds and  when bondholders convert bonds into common stock. NOTE: If bondholders sell their bond investments to other investors, the issuing firm receives no further money on the transaction, nor does the issuing corporation journalize the transaction. Accounting for Bond Issues LO 5 Prepare the entries for the issuance of bonds and interest expense.

34. 15-34 Issue at Par, Discount, or Premium? Accounting for Bond Issues LO 5 Prepare the entries for the issuance of bonds and interest expense. Illustration 10-12 Bond Contractual Interest Rate of 10%

35. 15-35 LO 5 Prepare the entries for the issuance of bonds and interest expense. 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. Accounting for Bond Issues Question

36. 15-36 LO 5 Prepare the entries for the issuance of bonds and interest expense. 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. Question Accounting for Bond Issues

37. 15-37 Illustration: On January 1, 2014, Candlestick Corporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). The entry to record the sale is: LO 5 Prepare the entries for the issuance of bonds and interest expense. Jan. 1Cash 100,000 Bonds payable100,000 Issuing Bonds at Face Value Accounting for Bond Issues

38. 15-38 Illustration: On January 1, 2014, Candlestick Corporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest is payable semiannually on January 1 and July 1. Prepare the entry to record the payment of interest on July 1, 2014, assume no previous accrual. LO 5 Prepare the entries for the issuance of bonds and interest expense. July 1Interest expense 5,000 Cash5,000 Issuing Bonds at Face Value

39. 15-39 Illustration: On January 1, 2014, Candlestick Corporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest is payable semiannually on January 1 and July 1. Prepare the entry to record the accrual of interest on December 31, 2014, assume no previous accrual. LO 5 Prepare the entries for the issuance of bonds and interest expense. Dec. 31Interest expense 5,000 Interest payable5,000 Issuing Bonds at Face Value

40. 15-40 LO 5 Prepare the entries for the issuance of bonds and interest expense. Illustration: On January 1, 2014, Candlestick, Inc. sells $100,000, five-year, 10% bonds for $92,639 (92.639% of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is: Jan. 1Cash 92,639 Discount on bonds payable7,361 Bond payable100,000 Accounting for Bond Issues Issuing Bonds at a Discount

41. 15-41 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. Statement Presentation LO 5 Prepare the entries for the issuance of bonds and interest expense. Illustration 10-13 Issuing Bonds at a Discount Carrying value or book value

42. 15-42 LO 5 Prepare the entries for the issuance of bonds and interest expense. Total Cost of Borrowing Illustration 10-14 Illustration 10-15 Issuing Bonds at a Discount

43. 15-43 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. LO 5 Prepare the entries for the issuance of bonds and interest expense. Issuing Bonds at a Discount Question

44. 15-44 LO 5 Prepare the entries for the issuance of bonds and interest expense. Jan. 1Cash 108,111 Bonds payable100,000 Premium on bond payable8,111 Illustration: On January 1, 2014, Candlestick, Inc. sells $100,000, five-year, 10% bonds for $108,111 (108.111% of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is: Accounting for Bond Issues Issuing Bonds at a Premium

45. 15-45 Statement Presentation LO 5 Prepare the entries for the issuance of bonds and interest expense. 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. Illustration 10-16 Issuing Bonds at a Premium

46. 15-46 LO 5 Prepare the entries for the issuance of bonds and interest expense. Total Cost of Borrowing Illustration 10-17 Illustration 10-18 Issuing Bonds at a Premium

47. 15-47 LO 6 Describe the entries when bonds are redeemed or converted. Assuming that the company pays and records separately the interest for the last interest period, Candlestick records the redemption of its bonds at maturity as follows: Bond payable 100,000 Cash100,000 Accounting for Bond Retirements Redeeming Bonds at Maturity

48. 15-48 When bonds are retired before maturity, it is necessary to: 1.eliminate carrying value of bonds at redemption date; 2.record cash paid; and 3.recognize 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. LO 6 Describe the entries when bonds are redeemed or converted. Accounting for Bond Retirements Redeeming Bonds before Maturity

49. 15-49 LO 6 Describe the entries when bonds are redeemed or converted. 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. Accounting for Bond Retirements Question

50. 15-50 Illustration: Assume Candlestick, Inc. has sold its bonds at a premium. At the end of the eighth period, Candlestick retires these bonds at 103 after paying the semiannual interest. The carrying value of the bonds at the redemption date is $101,623. Candlestick makes the following entry to record the redemption at the end of the eighth interest period (January 1, 2018): Bonds payable 100,000 Premium on bonds payable1,623 Loss on bond redemption1,377 Cash103,000 LO 6 Describe the entries when bonds are redeemed or converted. Accounting for Bond Retirements

51. 15-51 Until conversion, the bondholder receives interest on the bond. For the issuer, the bonds sell at a higher price and pay a lower rate of interest than comparable debt securities without the conversion option. Upon conversion, the company transfers the carrying value of the bonds to paid-in capital accounts. No gain or loss is recognized. LO 6 Describe the entries when bonds are redeemed or converted. Accounting for Bond Retirements Converting Bonds into Common Stock

52. 15-52 Illustration: 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. Saunders makes the following entry to record the conversion: Bonds payable 100,000 Common stock (2,000 x $10)20,000 Paid-in capital in excess of par value80,000 LO 6 Describe the entries when bonds are redeemed or converted. Accounting for Bond Retirements

53. 15-53 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. Question LO 6 Describe the entries when bonds are redeemed or converted. Accounting for Bond Retirements

54. 15-54 May be secured by a mortgage that pledges title to specific assets as security for a loan. Typically, terms require 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 7 Describe the accounting for long-term notes payable. Accounting for Long-Term Notes Payable

55. 15-55 Illustration: Porter Technology Inc. issues a $500,000, 12%, 20- year mortgage note on December 31, 2014. The terms provide for semiannual installment payments of $33,231 (not including real estate taxes and insurance). The installment payment schedule for the first two years is as follows. LO 7 Describe the accounting for long-term notes payable. Illustration 10-19 Accounting for Other Long-Term Liabilities

56. 15-56 LO 7 Describe the accounting for long-term notes payable. Dec. 31Cash 500,000 Mortgage payable500,000 Jun. 30Interest expense30,000 Mortgage payable3,231 Cash33,231 Accounting for Other Long-Term Liabilities Illustration: Porter Technology Inc. issues a $500,000, 12%, 20- year mortgage note on December 31, 2014. The terms provide for semiannual installment payments of $33,231 (not including real estate taxes and insurance). The installment payment schedule for the first two years is as follows.

57. 15-57 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. LO 7 Describe the accounting for long-term notes payable. Accounting for Other Long-Term Liabilities Question

58. 15-58

59. 15-59 LO 8 Identify the methods for the presentation and analysis of long-term liabilities. Illustration 10-20 Statement Presentation and Analysis Presentation

60. 15-60 Two ratios that provide information about debt-paying ability and long-run solvency are:  Debt to Total Assets Ratio  Times Interest Earned Ratio LO 8 Identify the methods for the presentation and analysis of long-term liabilities. Statement Presentation and Analysis Analysis

61. 15-61 Illustration: Kellogg had total liabilities of $8,925 million, total assets of $11,200 million, interest expense of $295 million, income taxes of $476 million, and net income of $1,208 million. The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations. LO 8 Statement Presentation and Analysis Analysis

62. 15-62 Illustration: Kellogg had total liabilities of $8,925 million, total assets of $11,200 million, interest expense of $295 million, income taxes of $476 million, and net income of $1,208 million. Times interest earned indicates the company’s ability to meet interest payments as they come due. LO 8 Statement Presentation and Analysis Analysis

63. 15-63

64. 15-64 Illustration: Assume that you are willing to invest a sum of money that will yield $1,000 at the end of one year, and you can earn 10% on your money. What is the $1,000 worth today? To compute the answer, 1.divide the future amount by 1 plus the interest rate ($1,000/1.10 = $909.09 OR 2.use a Present Value of 1 table. ($1,000 X.90909) = $909.09 (10% per period, one period from now). LO 9 Compute the market price of a bond. Present Value of Face Value APPENDIX 10A PRESENT VALUE CONCEPTS RELATED TO BOND PRICING

65. 15-65 To compute the answer, 1.divide the future amount by 1 plus the interest rate ($1,000/1.10 = $909.09. Illustration 10A-1 LO 9 Compute the market price of a bond. Present Value of Face Value

66. 15-66 LO 9 Compute the market price of a bond. Present Value of Face Value To compute the answer, 2.use a Present Value of 1 table. ($1,000 X.90909) = $909.09 (10% per period, one period from now).

67. 15-67 The future amount ($1,000), the interest rate (10%), and the number of periods (1) are known LO 9 Compute the market price of a bond. Illustration 10A-2 Present Value of Face Value

68. 15-68 If you are to receive the single future amount of $1,000 in two years, discounted at 10%, its present value is $826.45 [($1,000 1.10) 1.10]. LO 9 Compute the market price of a bond. Illustration 10A-3 Present Value of Face Value

69. 15-69 To compute the answer using a Present Value of 1 table. ($1,000 X.82645) = $826.45 (10% per period, two periods from now). LO 9 Compute the market price of a bond. Present Value of Face Value

70. 15-70 In addition to receiving the face value of a bond at maturity, an investor also receives periodic interest payments (annuities) over the life of the bonds. To compute the present value of an annuity, we need to know: 1)interest rate, 2)number of interest periods, and 3)amount of the periodic receipts or payments. LO 9 Compute the market price of a bond. Present Value of Interest Payments (Annuities)

71. 15-71 Assume that you will receive $1,000 cash annually for three years and the interest rate is 10%. LO 9 Compute the market price of a bond. Illustration 10A-5 Present Value of Interest Payments (Annuities)

72. 15-72 LO 9 Compute the market price of a bond. Illustration 10A-6 Present Value of Interest Payments (Annuities) Assume that you will receive $1,000 cash annually for three years and the interest rate is 10%.

73. 15-73 LO 9 Compute the market price of a bond. $1,000 annual payment x 2.48685 = $2,486.85 Present Value of Interest Payments (Annuities) Assume that you will receive $1,000 cash annually for three years and the interest rate is 10%.

74. 15-74 Selling price of a bond is equal to the sum of:  Present value of the face value of the bond discounted at the investor’s required rate of return PLUS  Present value of the periodic interest payments discounted at the investor’s required rate of return LO 9 Compute the market price of a bond. Computing the Present Value of a Bond

75. 15-75 Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1. Illustration 10A-8 LO 9 Compute the market price of a bond. Computing the Present Value of a Bond

76. 15-76 Illustration 10A-9 LO 9 Compute the market price of a bond. Computing the Present Value of a Bond Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1.

77. 15-77 LO 9 Compute the market price of a bond. Computing the Present Value of a Bond Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1. Illustration 10A-10

78. 15-78 LO 9 Compute the market price of a bond. Computing the Present Value of a Bond Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1. Illustration 10A-11

79. 15-79 Under the effective-interest method, the amortization of bond discount or bond premium results in period interest expense equal to a constant percentage of the carrying value of the bonds. Required steps: LO 10 Apply the effective-interest method of amortizing bond discount and bond premium. 1.Compute the bond interest expense. 2.Compute the bond interest paid or accrued. 3.Compute the amortization amount. APPENDIX 10B EFFECTIVE-INTEREST METHOD OF BOND AMORTIZATION

80. 15-80 Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2014, for $92,639, with interest payable each July 1 and January 1. This results in a discount of $7,361. Illustration 10B-2 LO 10 Apply the effective-interest method of amortizing bond discount and bond premium. Effective-Interest Method of Bond Amortization Amortizing Bond Discount

81. 15-81 Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2014, for $92,639, with interest payable each July 1 and January 1. This results in a discount of $7,361. Journal entry on July 1, 2014, to record the interest payment and amortization of discount is as follows: Interest Expense 5,558 Cash5,000 Discount on Bonds Payable 558 July 1 LO 10 Apply the effective-interest method of amortizing bond discount and bond premium. Amortizing Bond Discount

82. 15-82 Illustration 10B-4 Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2014, for $108,111, with interest payable each July 1 and January 1. This results in a premium of $8,111. Amortizing Bond Premium LO 10 Apply the effective-interest method of amortizing bond discount and bond premium.

83. 15-83 Interest Expense 4,324 Cash5,000 Premium on Bonds Payable 676 July 1 Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2014, for $108,111, with interest payable each July 1 and January 1. This results in a premium of $8,111. Journal entry on July 1, 2014, to record the interest payment and amortization of premium is as follows: Amortizing Bond Premium LO 10 Apply the effective-interest method of amortizing bond discount and bond premium.

84. 15-84 Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2014, for $92,639 (discount of $7,361). Interest is payable on July 1 and January 1. Illustration 10C-2 Amortizing Bond Discount LO 11 Apply the straight-line method of amortizing bond discount and bond premium. APPENDIX 10B STRAIGHT-LINE AMORTIZATION

85. 15-85 Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2014, for $92,639 (discount of $7,361). Interest is payable on July 1 and January 1. The bond discount amortization for each interest period is $736 ($7,361/10). Journal entry on July 1, 2014, to record the interest payment and amortization of discount is as follows: Interest Expense 5,736 Cash5,000 Discount on Bonds Payable 736 July 1 Amortizing Bond Discount LO 11 Apply the straight-line method of amortizing bond discount and bond premium.

86. 15-86 Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2014, for $108,111 (premium of $8,111). Interest is payable on July 1 and January 1. Illustration 10C-4 Amortizing Bond Premium LO 11 Apply the straight-line method of amortizing bond discount and bond premium.

87. 15-87 Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2014, for $108,111 (premium of $8,111). Interest is payable on July 1 and January 1. The bond premium amortization for each interest period is $811 ($8,111/10). Journal entry on July 1, 2014, to record the interest payment and amortization of premium is as follows: Interest Expense 4,189 Cash5,000 Premium on Bonds Payable 811 July 1 Amortizing Bond Discount LO 11 Apply the straight-line method of amortizing bond discount and bond premium.

88. 15-88  Liabilities are defined by the IASB as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Liabilities may be legally enforceable via a contract or law but need not be; that is, they can arise due to normal business practice or customs.  IFRS requires that companies classify liabilities as current or non- current on the face of the statement of financial position (balance sheet), except in industries where a presentation based on liquidity would be considered to provide more useful information (such as financial institutions). When current liabilities (also called short-term liabilities) are presented, they are generally presented in order of liquidity. Key Points

89. 15-89  Under IFRS, liabilities are classified as current if they are expected to be paid within 12 months.  Similar to GAAP, items are normally reported in order of liquidity. Companies sometimes show liabilities before assets. Also, they will sometimes show non-current (long-term) liabilities before current liabilities.  Under IFRS, companies sometimes will net current liabilities against current assets to show working capital on the face of the statement of financial position. (This is evident in the Zetar financial statements in Appendix C.)  The basic calculation for bond valuation is the same under GAAP and IFRS. Key Points

90. 15-90  IFRS requires use of the effective-interest method for amortization of bond discounts and premiums. GAAP allows use of the straight-line method where the difference is not material. Under IFRS, companies do not use a premium or discount account but instead show the bond at its net amount. For example, if a $100,000 bond was issued at 97, under IFRS a company would record: Cash 97,000 Bonds payable 97,000 Key Points

91. 15-91  The accounting for convertible bonds differs across IFRS and GAAP, Unlike GAAP, IFRS splits the proceeds from the convertible bond between an equity component and a debt component. The equity conversion rights are reported in equity. Key Points

92. 15-92 The FASB and IASB are currently involved in two projects, each of which has implications for the accounting for liabilities. One project is investigating approaches to differentiate between debt and equity instruments. The other project, the elements phase of the conceptual framework project, will evaluate the definitions of the fundamental building blocks of accounting. The results of these projects could change the classification of many debt and equity securities. Looking to the Future

93. 15-93 Which of the following is false? a)Under IFRS, current liabilities must always be presented before noncurrent liabilities. b)Under IFRS, an item is a current liability if it will be paid within the next 12 months. c)Under IFRS, current liabilities are shown in order of liquidity. d)Under IFRS, a liability is only recognized if it is a present obligation. IFRS Self-Test Questions

94. 15-94 The accounting for bonds payable is: a)essentially the same under IFRS and GAAP. b)differs in that GAAP requires use of the straight-line method for amortization of bond premium and discount. c)the same except that market prices may be different because the present value calculations are different between IFRS and GAAP. d)not covered by IFRS. IFRS Self-Test Questions

95. 15-95 The joint projects of the FASB and IASB could potentially: a)change the definition of liabilities. b)change the definition of equity. c)change the definition of assets. d)All of the above. IFRS Self-Test Questions

96. 15-96 “Copyright © 2012 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 permission 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.” Copyright