8. Current Liabilities Illustration: First National Bank agrees to lend $100,000 on September 1, 2010, 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. Notes payable 100,000 Cash 100,000 SO 2 Describe the accounting for notes payable. Sept. 1

9. Current Liabilities Illustration: If Cole Williams Co. prepares financial statements annually, it makes an adjusting entry at December 31 to recognize interest. Interest payable 4,000 Interest expense 4,000 * SO 2 Describe the accounting for notes payable. Dec. 31 * $100,000 x 12% x 4/12 = 4,000

10. Current Liabilities Illustration: At maturity (January 1), Cole Williams Co. must pay the face value of the note plus interest. It records payment as follows. Interest payable 4,000 Notes payable 100,000 SO 2 Describe the accounting for notes payable. Jan. 1 Cash 104,000

12. Current Liabilities Illustration: 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: SO 3 Explain the accounting for other current liabilities. Mar. 25 Sales 10,000 Cash 10,600 Sales tax payable 600

13. Current Liabilities Illustration: Cooley Grocery rings up total receipts of $10,600. Because the amount received from the sale is equal to the sales price 100% plus 6% of sales, (sales tax rate of 6%), the journal entry is: SO 3 Explain the accounting for other current liabilities. Mar. 25 Sales 10,000 Cash 10,600 Sales tax payable 600 Sometimes companies do not ring up sales taxes separately on the cash register. * $10,600 / 1.06 = 10,000 *

15. Current 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: SO 3 Explain the accounting for other current liabilities. Unearned ticket revenue 500,000 Cash 500,000 Aug. 6 Ticket revenue 500,000 Unearned ticket revenue 500,000 Sept. 7 Superior records the earning of revenue with the following entry.

17. Current Liabilities 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 . SO 3 Explain the accounting for other current liabilities. Payroll and Payroll Taxes Payable

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

20. Current Liabilities Illustration: Based on Cargo Corp.’s $100,000 payroll, the company would record the employer’s expense and liability for these payroll taxes as follows. Payroll tax expense 13,850 State unemployment tax payable 800 FICA tax payable 7,650 Federal unemployment tax payable 5,400 SO 3 Explain the accounting for other current liabilities.

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

26. Bond: Long-Term Liabilities Maturity Date Illustration 10-3 Contractual Interest Rate Face or Par Value Issuer of Bonds SO 4 Identify the types of bonds.

28. Bond: Long-Term Liabilities Illustration: Assume that Acropolis Company on January 1, 2010, issues $100,000 of 9% bonds, due in five years, with interest payable annually at year-end. Illustration 10-5 Computing the market price of bonds Illustration 10-4 Time diagram depicting cash flows SO 4 Identify the types of bonds.

31. Illustration: Devor Corporation issues 100, five-year, 10%, $1,000 bonds dated January 1, 2010, at 100 (100% of face value). The entry to record the sale is: Jan. 1 Cash 100,000 SO 5 Prepare the entries for the issuance of bonds and interest expense. Issuing Bonds at Face Value Bonds payable 100,000 Prepare the entry Devor would make to accrue interest on December 31. Dec. 31 Bond interest expense 10,000 Bond interest payable 10,000

32. Prepare the entry Devor would make to pay the interest on Jan. 1, 2011. Jan. 1 Bond interest payable 10,000 Cash 10,000 SO 5 Prepare the entries for the issuance of bonds and interest expense. Issuing Bonds at Face Value

33. Accounting for Bond Issues 8% 10% 12% Premium Face Value Discount Assume Contractual Rate of 10% SO 5 Prepare the entries for the issuance of bonds and interest expense. Bonds Sold At Market Interest

35. Illustration: Assume that on January 1, 2010, 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: SO 5 Prepare the entries for the issuance of bonds and interest expense. Issuing Bonds at a Discount 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

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

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

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

40. Redeeming Bonds at Maturity SO 6 Describe the entries when bonds are redeemed. Candlestick records the redemption of its bonds at maturity as follows: Accounting for Bond Retirements Bonds payable 100,000 Cash 100,000

43. 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, 2014) as: Accounting for Bond Retirements Bonds payable 100,000 Premium on bonds payable 400 Loss on bond redemption 2,600 Cash 103,000 SO 6 Describe the entries when bonds are redeemed.

45. Balance Sheet Presentation SO 7 Identify the requirements for the financial statement presentation and analysis of liabilities. Financial Statement Analysis and Presentation Illustration 10-15

46. Analysis SO 7 Identify the requirements for the financial statement presentation and analysis of liabilities. Financial Statement Analysis and Presentation Illustration 10-16

47. Liquidity Financial Statement Analysis and Presentation $99,823 $99,680 = 1.0:1 $91,387 $85,373 = 1.07:1 Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. SO 7 Identify the requirements for the financial statement presentation and analysis of liabilities.

48. Solvency Financial Statement Analysis and Presentation $175,678 $275,941 = 64% $13,927+$418+$7,609 $418 = 52.5 times Solvency ratios measure the ability of a company to survive over a long period of time.

52. 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 Amortizing Bond Discount and Premium Straight-Line Amortization SO 8 Apply the straight-line method of amortizing bond discount and bond premium. Appendix 10A

53. Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2010, 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, 2010. Amortizing Bond Discount Straight-Line Amortization Discount on bonds payable 400 Bond interest expense 10,400 Dec. 31 Bond interest payable 10,000 SO 8 Apply the straight-line method of amortizing bond discount and bond premium. Appendix 10A

54. Illustration 10A-2 Amortizing Bond Discount Straight-Line Amortization SO 8 Apply the straight-line method of amortizing bond discount and bond premium. Appendix 10A

55. Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2010, 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, 2010. Amortizing Bond Premium Straight-Line Amortization Premium on bonds payable 400 Bond interest expense 9,600 Dec. 31 Bond interest payable 10,000 SO 8 Apply the straight-line method of amortizing bond discount and bond premium. Appendix 10A

56. Illustration 10A-2 Amortizing Bond Premium Straight-Line Amortization Appendix 10A SO 8 Apply the straight-line method of amortizing bond discount and bond premium.

58. Amortizing Bond Discount SO 9 Apply the effective-interest method of amortizing bond discount and bond premium. Effective-Interest Amortization Appendix 10B Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2010, 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.

59. Illustration 10B-2 Amortizing Bond Discount SO 9 Apply the effective-interest method of amortizing bond discount and bond premium. Effective-Interest Amortization Appendix 10B

60. Illustration: Candlestick, Inc. records the accrual of interest and amortization of bond discount on Dec. 31, as follows: SO 9 Apply the effective-interest method of amortizing bond discount and bond premium. Effective-Interest Amortization Appendix 10B Amortizing Bond Discount Discount on bonds payable 319 Bond interest expense 10,319 Dec. 31 Bond interest payable 10,000

61. Amortizing Bond Premium SO 9 Apply the effective-interest method of amortizing bond discount and bond premium. Effective-Interest Amortization Appendix 10B Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2010, 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.

62. Illustration 10B-4 Amortizing Bond Premium SO 9 Apply the effective-interest method of amortizing bond discount and bond premium. Effective-Interest Amortization Appendix 10B

63. Illustration: Candlestick, Inc. records the accrual of interest and amortization of premium discount on Dec. 31, as follows: SO 9 Apply the effective-interest method of amortizing bond discount and bond premium. Effective-Interest Amortization Appendix 10B Amortizing Bond Premium Premium on bonds payable 330 Bond interest expense 9,670 Dec. 31 Bond interest payable 10,000

65. Long-Term Notes Payable Illustration 10C-1 Illustration: Porter Technology Inc. issues a $500,000, 12%, 20-year mortgage note on December 31, 2010. The terms provide for semiannual installment payments of $33,231. Appendix 10C SO 10 Describe the accounting for long-term notes payable.

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

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