Accounting 201 Chapter: 10

Current Liability
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
Notes Payable
-Written promissory note
-Usually requires the borrower to pay interest
-Those due within one year of the balance sheet date are usually classified as
current liabilities
Sales tax Payable
-Sales taxes are expressed as a stated percentage of the sales price.
-Selling company
-Collects tax from the customer
-remits the collection to the states department of revenue
Unearned Revenue
Revenues that are received before the company delivers goods or
provides service
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.
Current Maturities of Long-Term Debt
-Portion of long-term debt that comes due in the current year.
-No adjusting entry required
Payroll and Payroll Taxes Payable
-The term payroll pertains to both
Salaries- managerial, administrative, and sales personnel (monthly or yearly
rate).
Wages- store clerks, factory employees, and manual labororers (rate per
hour)
Determining the payroll involves computing three amounts: 1) gross earnings,2)
payroll deductions, and 3) net pay

Payroll tax expense results from three taxes that governmental agencies levy on
employers.
These taxes are:
-FICA tax
-Federal unemployment tax
-State unemployment tax
BONDS
-Form on interest-bearing notes payable issued by corporations,
universities, and governmental agencies.
-Sold in small denominations (usually $1,000 or multiples of $1,000).
When a corporation issues bonds, it is borrowing money. The person who
buys the bonds (the bondholder) is investing in bonds.
Bond Types
-Secured
-Unsecured
-Convertible
-Callable
Issuing Procedures
-Bond Certificate
-Issued to the investor
-Provides name of the company issuing bonds, face value, maturity
date, and
contractual (stated) interest rate.
Face value principal due at the maturity.
Maturity date date final payment is due
Contractual interest rate rate to determine cash interest paid, generally
semiannually
Determining the Market Value of Bonds
The current market price (present value) of a bond is a function of three factors:
1) The dollar amounts to be received
2) The length of time until the amounts are received, and

3) The market rate of interest.

Accounting for Bond Issues

A corporation records bond transactions when it
-Issues or retires (buy back) bonds and
-When bondholders convert bonds into common stock.
Bonds may be issued at
-face value,
-below face value (discount) or
-above face value (premium)
Bond prices are quoted as a percentage of face value.
Sale of bonds below face value causes the total cost of borrowing to be more
than the bond interest paid.
The reason: Borrower is required to pay the bond discount at the maturity date.
Thus, the bond discount is considered to be an increase in the cost of
borrowing.
Sales of bonds above face value causes the total cost of borrowing to be less
than the bond interest paid
The reason: The borrower is not required to pay the bond premium at the maturity
date of the bonds. Thus, the bond premium is considered to eb a reduction in
the cost of borrowing
Redeeming Bonds at Maturity
When a company retires bonds before maturity, it is necessary to:
1- Eliminate the carrying value of the bonds at the redemption date
2- Record the cash paid; and
3- Recognize the gain or loss on redemption
Liquidity
Liquidity ratios measure the short-term ability of a company to pay its maturing
obligations and to meet unexpected needs for cash
Solvency
Solvency ratios measure the ability of a company to survive over a long period of
time

Off-Balance-Sheet Financing
-Contingencies
-Leasing
-Operating lease and capital lease