Recording Transactions

LIABILITIES
OBLIGATION TO TRANSFER ASSETS OR PROVIDE SERVICES

Current Liabilities Due in One Year or Less

• Trade Accounts Payable
  • Represent amounts owed to suppliers for products or services
• Short-term Notes Payable
  • Notes Payable due within one year
• Discounted Note Payable
  • Borrower receives the face value of the note less the interest
  • DEBIT – Cash (maturity value – interest)
  • DEBIT – Discount on Note Payable (interest)
  • CREDIT – Note Payable, short term
• Current portion of long-term debt
• Unearned Revenue
  • Revenue collected in advance
• Warranty Expenses Payable

Contingent Liability

• Potential liability that depends on future events which arise from past transactions
  • Recorded if:
    • Probable
    • Estimable

Long-term Liability

• Any obligations other than current
• Bonds
  • Issued at a premium means at a price above par
  • Issues at a discount means at a price below par
  • Interest rates
    • Contract or stated interest rate is the rate on the bond
    • Market or effective interest rate is rate investors’ demand in exchange for loaning their money
• When Bonds are issued between interest dates, accrued interest must be calculated
• Investor pays interest from last interest date on bond up to date of purchase.
• when interest payment is made, investor receives full amount of interest accrued on bond for period

• Bond issued at a Discount – if stated rate on bond is less than the market rate.
• Entry:
  • DEBIT – Cash (proceeds)
  • DEBIT – Discount on Bond Payable (difference between the proceeds and the maturity value)
  • CREDIT – Bonds Payable (maturity value)
• Amortization of the Discount (Straight Line)
  • DEBIT-Interest Expense
  • CREDIT – Cash (Maturity value x stated rate x period)
  • CREDIT – Discount on bonds (discount/number of periods)

• Bonds issued at a Premium – if stated rate on bond exceeds the market rate
  • Entry:
    • DEBIT-Cash (proceeds)
    • CREDIT-Bonds Payable (maturity value)
    • CREDIT – Premium on Bonds Payable
  • Amortization of the Premium (Straight Line)
    • DEBIT-Interest Expense
    • DEBIT – Premium on Bonds Payable (premium/number of periods)
    • CREDIT – Cash (Maturity value x stated rate x period)
• GAAP requires use of effective interest method
• Retirement of Bonds Payable
  • Recognize gain or loss on retirement (Extraordinary)
  • Entry:
    • DEBIT – Bond Payable (maturity value)
    • CREDIT – Discount on Bond Payable OR DEBIT-Premium on Bond Payable (for un amortized portion)
    • CREDIT – cash
    • CREDIT – Extraordinary gain on retirement OR DEBIT- Extraordinary loss on retirement.
  • Convertible Bonds – usually convertible into common stock.

• Lease Liabilities
  • Operating leases – short-term, DEBIT rent expense and CREDIT cash
  • Capital lease – long-term, accounted for like purchase of asset.
  • Entry:
    • DEBIT – Asset account
    • CREDIT – Cash
    • CREDIT – Lease Liability (PV of future lease payments)
  • Record Depreciation Expense (over life of the lease)
• Record Interest Expense