WILEY

IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
10-1 Westmont College
 PREVIEW OF CHAPTER 10

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

10LEARNING OBJECTIVES
Liabilities

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
Learning Objective
What Is a Current Liability? 1
Explain a current liability,
and identify the major
A debt that a company expects to pay 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. Describe the accounting
for notes payable.
 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
sheet date are usually classified as current liabilities.

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.
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).

10-7 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.
a) Prepare the journal entry on September 1.
Cash 100,000
Notes Payable

b) Prepare100,000
the adjusting journal entry on Dec. 31.

Interest Expense 4,000

Interest Payable
HK$100,000 x 12% x 4/12 = HK$4,000
4,000
10-8 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 100,000

Interest Payable 4,000
Cash

104,000

10-9 LO 2
 Sales Taxes Payable
Learning Objective
3
 Sales taxes are expressed as a stated Explain the accounting
for other current
percentage of the sales price. liabilities.

 Selling company
► collects tax from the customer.
► remits the collections to the government’s
department of revenue.

10-10 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 10,600
Sales Revenue
Sales Tax Payable
10,000
600

10-11 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 10,600
Sales Revenue 10,000 *
Sales Taxes Payable

600
* NT$10,600 ÷ 1.06 = NT$10,000
10-12 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.
10-13 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 500,000

Unearned Ticket Revenue

As each game is500,000

completed, Busan IPark records the revenue
earned.

Sept. 7 Unearned Ticket Revenue 100,000

Ticket Revenue

10-14 100,000 LO 3
 Current Maturities 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, 2017. This note specifies that each
January 1, starting January 1, 2018, Wendy should pay €5,000 of the
note. When the company prepares financial statements on December
31, 2017,
1. What amount should be reported as a current liability? €5,000
__________ €20,000
2. What amount should be reported as a long-term liability?
________
10-15 LO 3
 Statement Presentation and Analysis

PRESENTATION
 Current liabilities are presented after non-current
liabilities on the statement of financial position.
 A common method of presenting current liabilities is to
list them by order of magnitude, with the largest ones
first.

10-17 LO 3
 Statement Presentation and Analysis

Illustration 10-3
Statement of financial position presentation of current liabilities (in thousands)
10-18 LO 3
 Non-Current Liabilities
Learning Objective
Obligations that are expected to be 4
Explain why bonds are
paid more than one year in the future. 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.

10-20
LO 4
 Bond Basics

Effects on earnings per share—equity vs. debt.

Illustration 10-7
Effects on earnings per share—equity vs. debt

10-21 LO 4
 Bond Basics

TYPES OF BONDS

10-22 LO 4
 Bond Basics

ISSUING PROCEDURES
 Government laws grant corporations power to issue
bonds.
 Board of directors and shareholders must approve bond
issues.
 Board of directors must stipulate number of bonds to be
authorized, total face value, and contractual interest rate.
 Terms of the bond are set forth in a legal document called
a bond indenture.

10-23 LO 4
 Bond Basics

ISSUING PROCEDURES
 Represents a promise to pay:
► face value at designated maturity date, plus
► periodic interest at a contractual (stated) interest
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.

10-24 LO 4
 Illustration 10-8
Bond certificate

10-25 LO 4
 Determining the Market Price of a
Bond
The current market price (present value) of a bond is a
function of three factors:
1. the dollar amounts to be received,

2. the length of time until the amounts are received, and

3. the market rate of interest.

The process of finding the present

value is referred to as discounting the
future amounts.

10-28 LO 4
 Determining the Market Price of a
Bond
Illustration: Assume that Acropolis SA on January 1, 2017, issues
€100,000 of 9% bonds, due in five years, with interest payable
annually at year-end.
Illustration 10-10
Time diagram
depicting cash flows

Illustration 10-11
Computing the market price of bonds
10-29 LO 4
 Accounting for Bond Issues
Learning Objective
5
A corporation records bond transactions Prepare the entries for
the issuance of bonds
when it 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.
10-32 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 10,000

Interest Payable 10,000

10-33 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 10,000

Cash 10,000

10-34 LO 5
 DISCOUNT OR PREMIUM ON BONDS

Issue at Par, Discount, or

Premium?

Illustration 10-12
Interest rates and bond prices

10-35 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 98,000

Bonds Payable 98,000

10-37 LO 5
 ISSUING BONDS AT A DISCOUNT
Illustration 10-13
Statement Presentation 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.

10-38 LO 5
 Total Cost of Borrowing Illustration 10-14
Computation of total cost
of borrowing—bonds
issued at discount

Illustration 10-15
10-39 Alternative computation of total cost of borrowing—bonds issued at discount 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 102,000

Bonds Payable 102,000

10-41 LO 5
 ISSUING BONDS AT A PREMIUM

Illustration 10-17
Statement Presentation Statement presentation of
bonds issued at a premium

Sale of bonds above face value causes the total cost of borrowing
to be less than the bond interest paid.
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.

10-42 LO 5
 Total Cost of Borrowing Illustration 10-18
Total cost of borrowing—
bonds issued at a
premium

Illustration 10-19
Alternative computation of total cost of borrowing—bonds issued at a premium

10-43 LO 5
 REDEEMING BONDS AT MATURITY
Learning Objective
Candlestick AG records the redemption of its 6
Describe the entries
bonds at maturity as follows: when bonds are
redeemed.

Bonds Payable 100,000

Cash 100,000

10-46 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.

10-47 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 100,476

Loss on Bond Redemption 2,524
Cash 103,000

10-48 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 496,000

Gain on Bond Redemption 6,000
Cash 490,000

10-49 LO 6
 Accounting for Long-Term Notes
Payable Learning Objective
7
 May be secured by a mortgage that Describe the accounting
for long-term notes
pledges title to specific assets as payable.
security for a loan.
 Typically, the terms require the borrower to make
installment payments over the term of the loan. Each
payment consists of
1. interest on the unpaid balance of the loan and
2. a reduction of loan principal.
 Companies initially record mortgage notes payable at
face value.

10-50 LO 7
 Accounting for Long-Term Notes
Payable
Illustration: Mongkok Technology Ltd. issues a HK$500,000, 8%,
20-year mortgage note on December 31, 2017. The terms provide
for annual installment payments of HK$50,926.

Illustration 10-21
Mortgage installment payment schedule

10-51 LO 7
 Accounting for Long-Term Notes
Payable
Illustration: Mongkok records the mortgage loan and first
installment payment as follows:

Dec. 31 Cash 500,000

Mortgage Payable 500,000

Dec. 31 Interest Expense 40,000

Mortgage Payable 10,926
Cash 50,926

10-52 LO 7
 Accounting for Long-Term Notes
Payable
Question
Howard Ltd. issued a 20-year mortgage note payable on
January 1, 2017. At December 31, 2017, the unpaid
principal balance will be reported as:

a. a current liability.

b. a non-current liability.

c. part current and part non-current liability.

d. interest payable.

10-53 LO 7
 Statement Presentation and Analysis
Learning Objective
8
PRESENTATION Identify the methods for
the presentation and
analysis of non-current
liabilities

Illustration 10-22
Statement of financial position presentation of non-current liabilities

10-56 LO 8
 APPENDIX 10A Effective-Interest Method
Learning
The amortization of the discount or premium Objective 9
Apply the effective-
results in interest expense equal to a constant interest method of
amortizing bond
percentage of the carrying value of the bonds. discount and bond
premium.
Required steps:
1. Compute the bond interest expense.
2. Compute the bond interest paid or accrued.
Illustration 10A-1
3. Compute the amortization amount. Computation of amortization—
effective-interest method

10-61 LO 9
 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.

10-62 LO 9
 Amortizing Bond Discount

Illustration 10A-2
Bond discount amortization schedule

10-63 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 10,324

Bonds Payable 324
Interest Payable 10,000

10-64 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 10,358

Bonds Payable 358
Interest Payable 10,000

10-65 LO 9
 Amortizing Bond Premium

Illustration: Candlestick AG sells the bonds described above for

€102,000 rather than €98,000. This would result in a bond premium
of €2,000 (€102,000 − €100,000). This premium results in an
effective-interest rate of approximately 9.4794%.

10-66 LO 9
 Amortizing Bond Premium

Illustration 10A-4
Bond premium amortization schedule

10-67 LO 9
 Amortizing Bond Premium

Illustration: Candlestick AG records the accrual of interest and

amortization of premium discount for the first period on Dec. 31,
as follows:

Dec. 31 Interest Expense 9,669

Bonds Payable 331
Interest Payable 10,000

10-68 LO 9
 APPENDIX 10B Straight-Line Method
Learning
Objective 10
Amortizing Bond Discount Apply the straight-
line method of
amortizing bond
To follow the expense recognition principle, discount and bond
premium.
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

10-70 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 10,400

Bonds Payable 400
Interest Payable 10,000

10-71 LO 10
 Amortizing Bond Discount

Illustration 10B-2
Bond discount amortization schedule

10-72 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 9,600

Bonds Payable 400
Interest Payable 10,000

10-73 LO 10
 Amortizing Bond Premium

Illustration 10B-4
Bond premium amortization schedule

10-74 LO 10
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10-86