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10-Prepared by Coby Harmon University of California, Santa Barbara Westmont CollegeWILEYIFRS EDITION10-PREVIEW OF CHAPTER 10Financial Accounting IFRS 3rd Edition Weygandt ● Kimmel ● Kieso10-A debt that a company expects to pay from existing current assets or through the creation of other current lia...

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WILEY

IFRS EDITION Prepared by Coby Harmon University of California, Santa Barbara Westmont College

PREVIEW OF CHAPTER 10

Financial Accounting IFRS 3rd Edition Weygandt ● Kimmel ● Kieso 10-2

CHAPTER

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. 7. Describe the accounting for long-term notes payable. 8. Identify the methods for the presentation and analysis of non-current liabilities. 10-3

Current Liabilities What Is a Current Liability? A debt that a company expects to pay

Learning Objective 1 Explain a current liability, and identify the major types of current liabilities.

1. from existing current assets or through the creation of other current liabilities, and 2. within one year or the operating cycle, whichever is longer. Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable.

10-4

LO 1

Notes Payable Learning Objective 2



Written promissory note.



Usually require the borrower to pay interest.



Frequently issued to meet short-term financing needs.



Issued for varying periods of time.



Those due for payment within one year of the balance

Describe the accounting for notes payable.

sheet date are usually classified as current liabilities.

10-5

LO 2

Notes Payable Illustration: Hong Kong National Bank agrees to lend HK$100,000 on September 1, 2017, if C.W. Co. signs a HK$100,000, 12%, four-month note maturing on January 1. Instructions a) Prepare the journal entry on September 1. b) Prepare the adjusting journal entry on December 31, assuming monthly adjusting entries have not been made. c) Prepare the journal entry at maturity (January 1, 2018).

10-6

LO 2

Notes Payable Illustration: Hong Kong National Bank agrees to lend HK$100,000 on September 1, 2017, if C.W. Co. signs a HK$100,000, 12%, four-month note maturing on January 1. a) Prepare the journal entry on September 1. Cash

100,000

Notes Payable

100,000

b) Prepare the adjusting journal entry on Dec. 31. Interest Expense Interest Payable

4,000 4,000

HK$100,000 x 12% x 4/12 = HK$4,000 10-7

LO 2

Notes Payable Illustration: Hong Kong National Bank agrees to lend HK$100,000 on September 1, 2017, if C.W. Co. signs a HK$100,000, 12%, four-month note maturing on January 1. c) Prepare the journal entry at maturity (January 1, 2018). Notes Payable Interest Payable Cash

10-8

100,000 4,000 104,000

LO 2

Sales Taxes Payable 

Sales taxes are expressed as a stated percentage of the sales price.



Learning Objective 3 Explain the accounting for other current liabilities.

Selling company ►

collects tax from the customer.

►

remits the collections to the government’s department of revenue.

10-9

LO 3

Sales Taxes Payable Illustration: The March 25 cash register reading for Cooley Grocery shows sales of NT$10,000 and sales taxes of NT$600 (sales tax rate of 6%), the journal entry is: Cash Sales Revenue Sales Tax Payable

10-10

10,600 10,000 600

LO 3

Sales Taxes Payable Sometimes companies do not ring up sales taxes separately on the cash register. Illustration: Cooley Grocery rings up total receipts of NT$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: Mar. 25

Cash Sales Revenue Sales Taxes Payable

10,600 10,000 * 600

* NT$10,600 ÷ 1.06 = NT$10,000 10-11

LO 3

Unearned Revenues Revenues that are received before goods are delivered or services are performed. 1. Company increases (debits) Cash and increases (credits) a current liability account, Unearned Revenue. 2. When the company recognizes revenue, it decreases (debits) the unearned revenue account and increases (credits) a revenue account. 10-12

LO 3

Unearned Revenues Illustration: Busan IPark (KOR) sells 10,000 season football tickets at W 50,000 each for its five-game home schedule. The club makes the following entry for the sale of season tickets (in thousands of W): Aug. 6

Cash Unearned Ticket Revenue

500,000 500,000

As each game is completed, Busan IPark records the revenue earned. Sept. 7

10-13

Unearned Ticket Revenue Ticket Revenue

100,000 100,000 LO 3

Non-Current Liabilities Obligations that are expected to be paid more than one year in the future.

Learning Objective 4 Explain why bonds are issued, and identify the types of bonds.

Bond Basics 

A form of interest-bearing notes payable.



To obtain large amounts of long-term capital.

Three advantages over ordinary shares: 1. Shareholder control is not affected. 2. Tax savings result. 3. Earnings per share may be higher. 10-14

LO 4

Illustration 10-8 Bond certificate 10-15

LO 4

Accounting for Bond Issues A corporation records bond transactions when it

Learning Objective 5 Prepare the entries for the issuance of bonds and interest expense.



issues (sells) or redeems (buys back) bonds and



when bondholders convert bonds into ordinary shares.

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. 10-16

LO 5

ISSUING BONDS AT FACE VALUE Illustration: On January 1, 2017, Candlestick AG issues €100,000, five-year, 10% bonds at 100 (100% of face value). The entry to record the sale is: Jan. 1

Cash

100,000

Bonds Payable

100,000

Prepare the entry Candlestick would make to accrue interest on December 31 (€100,000 x 10%). Dec. 31

Interest Expense Interest Payable

10-17

10,000 10,000

LO 5

ISSUING BONDS AT FACE VALUE Prepare the entry Candlestick would make to pay the interest on Jan. 1, 2018. Jan. 1

Interest Payable Cash

10-18

10,000 10,000

LO 5

DISCOUNT OR PREMIUM ON BONDS Issue at Par, Discount, or Premium?

Illustration 10-12 Interest rates and bond prices

10-19

LO 5

ISSUING BONDS AT A DISCOUNT Illustration: Assume that on January 1, 2017, Candlestick AG sells €100,000, five-year, 10% bonds for €98,000 (98% of face value). Interest is payable annually on January 1. The entry to record the issuance is as follows. Jan. 1

Cash Bonds Payable

10-20

98,000 98,000

LO 5

ISSUING BONDS AT A DISCOUNT Statement Presentation

Illustration 10-13 Statement presentation of discount on bonds payable

The issuance of bonds below face value—at a discount—causes the total cost of borrowing to differ from the bond interest paid. The issuing company must pay not only the contractual interest rate over the term of the bonds but also the face value (rather than the issuance price) at maturity.

10-21

LO 5

ISSUING BONDS AT A PREMIUM Illustration: Assume that the Candlestick AG bonds previously described sell for €102,000 (102% of face value) rather than for €98,000. The entry to record the sale is as follows: Jan. 1

Cash Bonds Payable

10-22

102,000 102,000

LO 5

REDEEMING BONDS AT MATURITY Candlestick AG records the redemption of its bonds at maturity as follows: Bonds Payable Cash

10-23

Learning Objective 6 Describe the entries when bonds are redeemed.

100,000 100,000

LO 6

REDEEMING BONDS BEFORE MATURITY When a company retires bonds before maturity, it is necessary to: 1. eliminate the carrying value of the bonds at the redemption date; 2. record the cash paid; and 3. recognize the gain or loss on redemption. The carrying value of the bonds is the face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date.

10-24

LO 6

REDEEMING BONDS BEFORE MATURITY Illustration: Assume at the end of the fourth period, Candlestick AG 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 €100,476. Candlestick records the redemption at the end of the fourth interest period (January 1, 2021) as follows: Jan. 1

Bonds Payable Loss on Bond Redemption Cash

10-25

100,476 2,524 103,000

LO 6

>

DO IT!

R & B Inc. issued £500,000, 10-year bonds at a discount. Prior to maturity, when the carrying value of the bonds is £496,000, the company redeems the bonds at 98. Prepare the entry to record the redemption of the bonds. Solution There is a gain on redemption. The cash paid, £490,000 (£500,000 × 98%), is less than the carrying value of £496,000. The entry is: Bonds Payable Gain on Bond Redemption Cash

10-26

496,000 6,000 490,000

LO 6

Amortizing Bond Discount Illustration: Candlestick AG sold €100,000, five-year, 10% bonds on January 1, 2017, for €98,000. The effective-interest rate is 10.5348% and interest is payable on Jan. 1 of each year. Prepare the bond discount amortization schedule.

10-27

LO 9

Amortizing Bond Discount

Illustration 10A-2 Bond discount amortization schedule

10-28

LO 9

Amortizing Bond Discount Illustration: Candlestick AG records the accrual of interest and amortization of bond discount for the first period on Dec. 31, as follows: Dec. 31 Interest Expense Bonds Payable Interest Payable

10-29

10,324 324 10,000

LO 9

Amortizing Bond Discount For the second interest period, bond interest expense will be €10,358 (€98,324 × 10.5348%), and the discount amortization will be €358. At December 31, Candlestick makes the following adjusting entry. Dec. 31 Interest Expense Bonds Payable Interest Payable

10-30

10,358 358 10,000

LO 9

APPENDIX 10B Straight-Line Method

Amortizing Bond Discount

Learning Objective 10 Apply the straightline method of amortizing bond discount and bond premium.

To follow the expense recognition principle, companies allocate bond discount to expense in each period in which the bonds are outstanding.

Illustration 10B-1 Formula for straight-line method of bond discount amortization

10-31

LO 10

Amortizing Bond Discount Illustration: Candlestick AG sold €100,000, five-year, 10% bonds on January 1, 2017, for €98,000 (discount of €2,000). Interest is payable on January 1 of each year. Prepare the entry to accrue interest and amortize the bond discount at Dec. 31, 2017. Dec. 31 Interest Expense Bonds Payable Interest Payable

10-32

10,400 400 10,000

LO 10

Amortizing Bond Discount

Illustration 10B-2 Bond discount amortization schedule 10-33

LO 10

Amortizing Bond Premium Illustration: Candlestick, Inc., sold €100,000, five-year, 10% bonds on January 1, 2017, for €102,000 (premium of €2,000). Interest is payable on January 1 of each year. Prepare the entry to accrue interest and amortize the bond premium at Dec. 31, 2017. Dec. 31 Interest Expense Bonds Payable Interest Payable

10-34

9,600 400 10,000

LO 10

Amortizing Bond Premium

Illustration 10B-4 Bond premium amortization schedule 10-35

LO 10...