LessonFive:LiabilitiesAims:1.Toexplainwhatliabilityis.2.Todiscussaccountspayableandnotespayable.3.Tointroducewhatalong-termnotepayableisandhowacompanyaccountsforthistypeofdebt.4.Todiscusswhatrisksareassociatedwithlong-termdebt.5.Tointroducebondspayable,andtostudyhowacompanyrecordsandreportsthetransactionsassociatedwithbonds.5.1

DefinitionofLiabilitiesLiabilitiesmaybedefinedastheprobablefuturesacrificeofeconomicbenefitsarisingfrompresentobligationsofaparticularentitytotransferassetsorprovideservicestootherentitiesinthefutureasaresultofpasttransactionsorevents.Liabilitiescanbedividedintotwoparts:currentliabilitiesandlong-termliabilities.5.2

CurrentLiabilitiesCurrentliabilitiesareobligationsthatmustbepaidwithinoneyearorwithintheope-ratingcycle,whicheverislonger.5.3

Long-termLiabilitiesAmountsowedtosomeoneelsewhicharepayableafteroneyear.Examplesinclude:(1)Longtermloans;(2)Debentures,whicharelongtermloanssecuredonthebusinessassets.Thismeansifthebusinessfailstorepaybacktheloanontimethebusinessassetsareatrisk.5.4

TheKindsofCurrentLiabilitiesAmongthemostcommonexamplesofcurrentliabilitiesareaccountspayable,short-termnotespayable,thecurrentportionoflong-termdebt,accruedliabilities,andunearnedrevenue.5.5

AccountsPayableAccountspayableoftenaresubdividedintothecategoriesoftradeaccountspayableandotheraccountspayable.Tradeaccountspayableareshort-termobligationstosuppliersforpurchasesormerchandise.Otheraccountspayableincludeliabilitiesforanygoodsandservicesotherthanmerchandise.5.6

NotesPayableNotespayableareissuedwheneverbankloansareobtained.Othereventswhichmaygiverisetonotespayableincludethepurchaseofrealestateorcostlyequipment,thepurchaseofmerchandise,andthesubstitutionofanoteforapast-dueaccountpayable.5.9

DiscountonNotesPayable

TheamountofdiscountisrecordedinaseparatecontraliabilityaccountcalledDiscountonNotesPayable.ThebalanceofthisaccountissubtractedfromtheNotesPayableaccounttoarriveatthebookvalueofNotesPayable.5.12

TheCurrentPortionofLong-termDebtSomelong-termdebts,suchasmortgageloans,arepayableinaseriesofmonthlyorquarterlyinstallments.Inthesecases,theprincipalamountduewithinoneyear(ortheoperatingcycle)isregardedasacurrentliability,andtheremainderoftheobligationisclassifiedasalong-termliability.5.13

AccruedLiabilitiesAccruedliabilitiesarisefromtherecognitionofexpensesforwhichpaymentwillbemadeinafutureperiodExamplesofaccruedliabilitiesincludeinterestpayable,incometaxespayable,andamountsrelatedtopayrolls.5.14

InterestPayableInterest—thecostofborrowing—accrueswiththepassageoftime.

Whencompaniesenterintolong-termfinancingagreements,theymaybecomecommittedtopayinglargeamountsofinterestformanyyearstocome.Atanybalancesheetdate,however,onlyasmallportionofthistotalinterestobligationrepresentsa“l(fā)iability”.5.15

IncomeTaxesPayableTheincometaxesexpenseaccruesasprofitsareearned.Attheendofeachaccountingperiod,theamountofaccruedincometaxesisestimatedandrecordedinanadjustingentry.Incometaxexpense20,000Incometaxpayable20,0005.16

PayrollLiabilitiesEverybusinessincursanumberofaccruedliabilitiesrelatingtoitspayroll.ThelargestoftheseliabilitiesistheobligationtopayemployeesforservicesrenderedduringthePeriod.5.17

UnearnedRevenueAliabilityforunearnedrevenueariseswhenacustomerpaysinadvance.Uponreceiptofanadvancepaymentfromacustomer,thecompanydebitsCashandcreditsaliabilityaccountsuchasUnearnedRevenue.5.18

EstimatedLiabilitiesThetermestimatedliabilitiesrefertoliabilities,whichappearonfinancialstatementsatestimateddollaramounts.5.19

ContingentLiabilityContingentliabilityisapotentialliability,whicheitherwilldevelopintoafull-fledgedliabilityorwillbeeliminatedentirelybyafutureevent.Forexample,whenabusinessendorsesanoteandturnsitovertoabankforcash,thebusiness(asendorser)iscontingentlyliabletothebank.5.20

TheCategoryofLong-termLiabilitiesLong-termliabilitiesaretheobligationanenterprisethatisnotduewithinthenext12monthsortheoperatingcycle(iflongerthanayear).suchasBondsPayable,MortgagesPayable,Long-termNotesPayableandLeases.5.21

BondsPayableTheissuanceofbondspayableisatechniqueofsplittingalargeloanintoagreatmanyunits,calledbonds.Asaninterest-bearing(ordiscounted)certificateofdebtissuedbyagovernmentorcorporationinordertoraisemoney,eachbondisalong-terminterest-bearingnotepayable,usuallyinthefaceamountof$1000.5.23

BondsIssuedataDiscountAssumethatacorporationplanstoissue$2000000facevalueof9%,10-yearbonds.AttheissuancedateofJanuary1,thegoingmarketrateofinterestisslightlyabove9%andthebondssellatapriceofonly98($980foreach$1000bond).Theissuanceofthebondswillberecordedbythefollowingentry:Cash

1960000DiscountonBondsPayable

40000

BondsPayable

20000005.24

Amortizat