Chapter 10 Liabilities 447If employees are required to take all their vacation time within one year, the va-
cation pay payable is reported on the balance sheet as a current liability. If employees
are allowed to accumulate their vacation time, the estimated vacation pay liability that
is applicable to time that will notbe taken within one year is a long-term liability.
When payroll is prepared for the period in which employees have taken vacations,
the vacation pay payable is reduced. The entry debits Vacation Pay Payableand credits
Salaries Payableand the other related accounts for taxes and withholdings.LONG-TERM LIABILITIES
Most of us have or will finance (purchase on credit) an automobile, a computer, or a
home. Similarly, corporations often finance their operations by purchasing on credit
through long-term borrowing. The most common form of long-term borrowing for a cor-
poration is by issuing bonds, which are simply a form of a long-term, interest-bearing
note. Like a note, a bond requires periodic interest payments, and the face amount must
be repaid, or redeemed, at the maturity date. Bondholders are creditors of the issuing cor-
poration, and their claims on the assets of the corporation rank ahead of stockholders.
A corporation that issues bonds enters into a contract, called a bond indentureor
trust indenture, with the bondholders. A bond issue is normally divided into a num-
ber of individual bonds. Usually, the face value of each bond, called the principal, is
$1,000 or a multiple of $1,000. The intereston bonds may be payable annually, semi-
annually, or quarterly. Most bonds pay interest semiannually.
The price of a bond is quoted as a percentage of the bond’s face value. Thus, in-
vestors could purchase or sell Time Warnerbonds quoted at 109– 87 for $1,098.75.
Likewise, bonds quoted at 109 could be purchased or sold for $1,090.
When all bonds of an issue mature at the same time, they are called term bonds.
If the maturities are spread over several dates, they are called serial bonds. For ex-
ample, one-tenth of an issue of $1,000,000 bonds, or $100,000, may mature 16 years
from the issue date, another $100,000 in the 17th year, and so on, until the final $100,000
matures in the 25th year.
Bonds that may be exchanged for other securities, such as common stock, are
calledconvertible bonds. Bonds that a corporation reserves the right to redeem before
their maturity are called callable bonds. Bonds issued on the basis of the general credit
of the corporation are called debenture bonds.
Once bonds are issued, periodic interest payments and repayment of the face value
of the bonds are required. If these payments are not made, the bondholders could seek
court action and force the company into bankruptcy. For example, Atkins Nutritionals,
Inc., the company that made low-carb dieting famous, recently filed for Chapter 11Barnes & Noble, Inc.: More Than Just a Book Seller
HOW BUSINESSES MAKE MONEY
Barnes & Noble, Inc., is the largest bookstore chain in the
United States. In addition to selling books at its retail stores,
Barnes & Noble also sells books through the Internet and com-
puter games through its GameStop subsidiary. In recent years,
the company has expanded into the publishing business,
focusing on out-of-print classic books, study aids, and how-to
books. Barnes & Noble’s approach of expanding into new
lines of business has the potential to increase profits as well as
differentiate it from competitors such as Borders, Inc.Describe the characteristics
of long-term liabilities and
apply present value
concepts to bonds
payable.