Glossary

(b) Semiannual
Interest
Period
Issue date
1
2
3
4

(A)
Cash
Payment

(B)
Interest
Expense

(c)
Reduction
of Principal

$36,324
36,324
36,324
36,324

$30,000
29,621
29,218
28,792

$6,324
6,703
7,106
7,532

(c) Current liability

Non-current liability

(D)
Principal
Balance
$500,000
493,676
486,973
479,867
472,335

$14,638 ($7,106 + $7,532)

$472,335

SUMMARY OF STUDY OBJECTIVES

1 Explain a current liability, and identify the major types
of current liabilities. A current liability is a debt that can
reasonably be expected to be paid (1) from existing current
assets or through the creation of other current liabilities,
and (2) within one year or the operating cycle, whichever is
longer. The major types of current liabilities are notes
payable, accounts payable, sales taxes payable, unearned
revenues, and accrued liabilities such as taxes, salaries and
wages, and interest payable.
2 Describe the accounting for notes payable. When a
pron~issorynote is interest-bearing, the amount of assets
received upon the issuance of the note is generally equal
to the face value of the note. Interest expense is accrued
over the life of the note. At maturity, the amount paid is
equal to the face value of the note plus accrued interest.

3 Explain the accounting for other current liabilities.

Sales takes payable are recorded at the time the related
sales occur.The company serves as a collection agent for the
taxing authority. Sales taxes are not an expense to the
company. Unearned revenues are initially recorded in an
unearned revenue account. As the revenue is earned, a
transfer from unearned revenue to earned revenue occurs.
The current maturities of long-term debt should be reported
as a current liability in the statement of financial position.
4 Explain why bonds are issued, and identify the types
of bonds. Bonds may be sold to many investors, and they

offer the following advantages over equity financing:

(a) shareholder control is not affected, (b) tax savings result,
and (c) earnings per share may be higher. The following

Bond certificate A legal document that indicates the name

of the issuer, the face value of the bonds, and such other
data as the contractual interest rate and maturity date of
the bonds. (p. 445).
Bond discount The amount by which a bond sells at less
than its face value. (p. 449).

Record mortgage payments,

recognizing that each payment
consists of (1) interest on the
unpaid loan balance and (2) a
reduclion of the loan principal.

PLUS
different types of bonds may be issued: secured and unsecured bonds, term and serial bonds, registered and bearer
bonds, convertible and callable bonds.

5 Prepare the entries for the issuance of bonds and interest expense. When bonds are issued, Cash is debited
for the cash proceeds, and Bonds Payable is credited for the
face value of the bonds.
6 Describe the entries when bonds are redeemed.
When bonds are redeemed at maturity, Cash is credited
and Bonds Payable is debited for the face value of the
bonds. When bonds are redeemed before maturity, it is
necessary to (a) eliminate the carrying value of the bonds
at the redemption date, (b) record the cash paid, and (c)
recognize the gain or loss on redemption.
7 Describe the accounting for long-term notes payable.
Each payment consists of (1) interest on the unpaid balance of the loan and (2) a reduction of loan principal. The
interest decreases each period, while the portion applied to
the loan principal increases.
8 Identify the methods for the presentation and analysis
of non-current liabilities. The nature and amount of each

long-term debt should be reported in the statement of

financial position or in the notes accompanying the financial
statements. Shareholders and long-term creditors are interested in a company's long-run solvency. Debt to total assets
and times interest earned are two ratios that provide information about debt-paying ability and long-run solvency.

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GLOSSARY
Bearer (coupon) bonds Bonds not registered. (p. 445).

459

PLUS

Bond indenture A legal document that sets forth the terms

the

issue. (p. 445).

Bond premium The amount by which a bond sells above its

face value. (p. 449).

Bonds A form of interest-bearing notes payable issued
by corporations, universities, and governmental entities.
( p 443).