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10-1
 Chapter 10

Liabilities

Financial Accounting, IFRS Edition

Weygandt Kimmel Kieso
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10-2
 Study
Study Objectives
Objectives
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.
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 Liabilities
Liabilities

Current Liabilities Non-Current Liabilities

Notes payable Bond basics

Sales taxes payable Accounting for bond issues
Unearned revenues Accounting for bond
Current maturities of long- retirements
term debt Accounting for long-term
Statement presentation notes payable
and analysis Statement presentation and
analysis

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 Section 1 Current Liabilities
What
What is
is aa Current
Current Liability?
Liability?
Current liability is debt with two key features:
1. Company expects to pay the debt from existing
current assets or through the creation of other current
liabilities.
2. Company will pay the debt 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 payable, salaries payable,
and interest payable.

Slide SO 1 Explain a current liability, and identify the

10-5 major types of current liabilities.
 What
What is
is aa Current
Current Liability?
Liability?

Question
To be classified as a current liability, a debt must be
expected to be paid:
a. out of existing current assets.
b. by creating other current liabilities.
c. within 2 years.
d. both (a) and (b).

Slide SO 1 Explain a current liability, and identify the

10-6 major types of current liabilities.
 What
What is
is aa Current
Current Liability?
Liability?

Notes Payable
Written promissory note.
Require the borrower to pay interest.
Issued for varying periods.

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SO 2 Describe the accounting for notes payable.
 What
What is
is aa Current
Current Liability?
Liability?

Illustration: On March 1, 2011, Cole Williams borrows

$100,000 from First National Bank on a 4-month, 12% note.
Instructions
a) Prepare the entry on March 1.
b) Prepare the adjusting entry on June 30, assuming
monthly adjusting entries have not been made.
c) Prepare the entry at maturity (July 1).

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10-8
SO 2 Describe the accounting for notes payable.
 What
What is
is aa Current
Current Liability?
Liability?

Illustration: On March 1, 2011, Cole Williams borrows

$100,000 from First National Bank on a 4-month, 12% note.
a) Prepare the entry on March 1.
Cash 100,000
Notes payable

b) Prepare100,000
the adjusting entry on June 30.
$100,000 x 12% x 4/12 = $4,000

Interest expense 4,000

Interest payable
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10-9 4,000 SO 2 Describe the accounting for notes payable.
 What
What is
is aa Current
Current Liability?
Liability?

Illustration: On March 1, 2011, Cole Williams borrows

$100,000 from First National Bank on a 4-month, 12% note.
c) Prepare the entry at maturity (July 1).

Notes payable 100,000

Interest payable 4,000
Cash

104,000

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SO 2 Describe the accounting for notes payable.
 What
What is
is aa Current
Current Liability?
Liability?

Sales Tax Payable

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

Either rung up separately or included in total

receipts.

Retailer collects tax from the customer.

Retailer remits the collections to the state’s

department of revenue.

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SO 3 Explain the accounting for other current liabilities.
 What
What is
is aa Current
Current Liability?
Liability?

Illustration: The March 25 cash register reading for Cooley

Grocery shows sales of $10,000 and sales taxes of $600 (sales
tax rate of 6%), the journal entry is:

Cash 10,600
Sales
Sales tax payable
10,000
600

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SO 3 Explain the accounting for other current liabilities.
 What
What is
is aa Current
Current Liability?
Liability?

Unearned Revenue
Revenues that are received before the company delivers
goods or provides services.
1. Company debits Cash, and credits
a current liability
account (unearned revenue).
2. When the company earns the
revenue, it debits the
Unearned Revenue account,
and credits a revenue account.

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SO 3 Explain the accounting for other current liabilities.
 What
What is
is aa Current
Current Liability?
Liability?

Illustration: Assume that Superior University sells 10,000

season football tickets at $50 each for its five-game home
schedule. The university makes the following entry for the sale
of season tickets:
Aug. 6 Cash 500,000
Unearned revenue

500,000 each of the five home games, it would

As the school completes
record the revenue earned.

Sept. 7 Unearned revenue 100,000

Ticket revenue

Slide 100,000
SO 3 Explain the accounting for other current liabilities.
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 What
What is
is aa Current
Current Liability?
Liability?

Unearned Revenue Illustration 10-2

Unearned and earned
revenue accounts

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SO 3 Explain the accounting for other current liabilities.
 What
What is
is aa Current
Current Liability?
Liability?

Current Maturities of Long-Term Debt

Portion of long-term debt that comes due in the
current year.
No adjusting entry required.

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SO 3 Explain the accounting for other current liabilities.
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