Liabilities

What are "Liabilities?"

Liabilities are an obligation to transfer assets or provide services... (basically something you are liable or responsible for completing).

Types of Liabilities:

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

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