- The excess of the periodic interest payment of $6,000 over the interest expense is
the amount of premium to be amortized (Column C). - The unamortized premium (Column D) decreases from the initial balance, $3,769,
to a zero balance at the maturity date of the bonds. - The carrying amount (Column E) decreases from $103,769, the amount received for
the bonds, to $100,000 at maturity.
The entry to record the first interest payment on June 30, 2007, and the related pre-
mium amortization is as follows:If the amortization is recorded only at the end of the year, the amount of the pre-
mium amortized on December 31, 2008, would be $602. This is the sum of the first two
semiannual amortization amounts ($293 and $309) from Exhibit 18.470 Chapter 10 Liabilities
SUMMARY OF LEARNING GOALS
Describe and illustrate current liabilities related to
accounts payable, notes payable, and payroll transac-
tions.Current liabilities are obligations that are to be paid
out of current assets and are due within a short time, usually
within one year. The three primary types of current liabilities
are accounts payable, notes payable, and payroll liabilities.
Accounts payable is typically the largest current liabil-
ity. Notes payable may be issued when merchandise is pur-
chased or to temporarily satisfy an account payable. Notes
payable require the recording of interest expense. Notes
may also be discounted at a bank. The employer’s liability
for payroll includes the wages payable plus deductions from
employees’ gross pay. In addition, the employer’s liability
includes employer taxes, such as the employer’s share of
FICA plus federal and state unemployment insurance.
Employers may also incur employment-related expenses
and associated liabilities for fringe benefits, such as vacation
pay, pensions, and medical benefits.Describe the characteristics of long-term liabilities
and apply present value concepts to bonds payable.
The most common form of long-term borrowing for a corpo-
ration is 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 at
the maturity date. Once bonds are issued, periodic interest
payments and repayment of the face value of the bonds are
required.
When a corporation issues bonds, the price that buyers
are willing to pay for the bonds depends upon the following
three factors: (1) the face amount of the bonds, which is the
amount due at the maturity date; (2) the periodic interest tobe paid on the bonds; and (3) the rate of return demanded
by investors who will buy these bonds in the market. Using
present value concepts, bonds may be issued at their face
value, a discount, or a premium.
A discount on bonds payable is amortized to interest
expense over the life of the bonds by debiting Interest
Expense and crediting Discount on Bonds Payable. The
entry to amortize a premium debits Premium on Bonds
Payable and credits Interest Expense.
If a corporation redeems bonds, Bonds Payable is deb-
ited for the face amount of the bonds, the premium (dis-
count) on bonds account is debited (credited) for its balance,
Cash is credited, and any gain or loss on the redemption is
recorded.Describe and illustrate deferred liabilities related to
deferred revenue and deferred taxes. Deferred liabili-
ties are created when a transaction is recorded in a way that
delays or defers (1) the recognition of revenueor (2) the
payment of cash related to an expense. Thus, deferred liabili-
ties are classified as either deferred (unearned) revenues or
deferred expense. Two of the most common deferred
liabilities are deferred (unearned) revenue and deferred
income taxes.Identify the characteristics of contingent liabilities.
A contingent liability is a potential obligation that
results from a past transaction but depends on a future
event. If the contingent liability is both probable and es-
timable, the liability should be recorded. If the contingent
liability is reasonably possible or is not estimable, it should
be disclosed in the footnotes to the financial statements.1
2
3
4
2007
June 30 Interest Expense 5,707
Premium on Bonds Payable 293
Cash 6,000SCF BS IS
OT AT LTSET Ec