1. Accounting, Fifth Edition10
REPORTING
AND ANALYZING LIABILITIES
Accounting, Fifth Edition

2. Learning Objectives
After studying this chapter, you should be able to:
Explain a current liability and identify the major types of current liabilities.
Describe the accounting for notes payable.
Explain the accounting for other current liabilities.
Identify the types of bonds.
Prepare the entries for the issuance of bonds and interest expense.
Describe the entries when bonds are redeemed.
Identify the requirements for the financial statement presentation and analysis of liabilities.

3. Current Liabilities What is a Current Liability? Two key features:
Company expects to pay the debt from existing current assets or through the creation of other current liabilities.
Company will pay the debt within one year or the operating cycle, whichever is longer.
Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest.
LO 1 Explain a current liability and identify the major types of current liabilities.

4. Current Liabilities Question
To be classified as a current liability, a debt must be expected to be paid:
out of existing current assets.
by creating other current liabilities.
within 2 years.
both (a) and (b).
LO 1 Explain a current liability and identify the major types of current liabilities.

5. Current Liabilities – Unearned Revenue
Revenues that are received before the company delivers goods or provides service.
Company debits Cash, and credits a current liability account (Unearned Revenue).
When the company earns the revenue, it debits the Unearned Revenue account, and credits a revenue account.
LO 3 Explain the accounting for other current liabilities.

6. Current Liabilities - Unearned Revenue
Illustration: Superior University sells 10,000 season football tickets at $50 each for its five-game home schedule. The entry for the sales of season tickets is:
Unearned ticket revenue ,000
Cash 500,000
Aug. 6
As each game is completed, Superior records the earning of revenue.
Ticket revenue ,000
Unearned ticket revenue 100,000
Sept. 7
LO 3 Explain the accounting for other current liabilities.

7. 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 collections to the state’s department of revenue.
Illustration: The March 25 cash register readings for Cooley Grocery show sales of $10,000 and sales taxes of $600 (sales tax rate of 6%), the journal entry is:
Mar. 25
Sales revenue 10,000
Cash 10,600
Sales tax payable
LO 3 Explain the accounting for other current liabilities.

8. Current Liabilities Notes Payable Written promissory note.
Usually require the borrower to pay interest.
Those due within one year of the balance sheet date are usually classified as current liabilities.
LO 2 Describe the accounting for notes payable.

9. Current Liabilities - Notes Payable
Illustration: First National Bank agrees to lend $100,000 on September 1, 2014, if Cole Williams Co. signs a $100,000, 12%, four-month note maturing on January 1.
Notes payable ,000
Cash 100,000
Sept. 1
Illustration: On Dec 31, an adjusting entry is booked to recognize the accrued interest.
Interest payable ,000
Interest expense 4,000 *
Dec. 31
* $100,000 x 12% x 4/12 = 4,000
LO 2 Describe the accounting for notes payable.

10. Current Liabilities - Notes Payable
Illustration: At maturity (January 1), Cole Williams Co. must pay the face value of the note plus interest. It records payment as follows.
Jan. 1
Notes payable 100,000
Interest payable 4,000
Cash ,000
LO 2 Describe the accounting for notes payable.

11. Current Liabilities Current Maturities of Long-Term Debt
Portion of long-term debt that comes due in the current year.
No adjusting entry required.
Illustration: Wendy Construction issues a five-year, interest-bearing $25,000 note on January 1, This note specifies that each January 1, starting January 1, 2012, Wendy should pay $5,000 of the note. When the company prepares financial statements on December 31, 2011,
What amount should be reported as a current liability? ___________
What amount should be reported as a long-term liability? _________
$5,000
$20,000
LO 3 Explain the accounting for other current liabilities.

12. Long-Term Notes Payable
Appendix 10C
Long-Term Notes Payable
May be secured by a mortgage that pledges title to specific assets as security for a loan.
Typically, the terms require the borrower to make installment payments over the term of the loan. Each payment consists of
interest on the unpaid balance of the loan and
a reduction of loan principal.
Companies initially record mortgage notes payable at face value.
LO 10 Describe the accounting for long-term notes payable.

13. Long-Term Notes Payable
Appendix 10C
Illustration: Porter Technology Inc. issues a $500,000, 12%, 20-year mortgage note on December 31, The terms provide for semiannual installment payments of $33,231.
Illustration 10C-1
LO 10 Describe the accounting for long-term notes payable.

14. Long-Term Notes Payable
Appendix 10C
Illustration: Porter Technology records the mortgage loan and first installment payment as follows:
Dec. 31
Cash 500,000
Mortgage payable 500,000
Jun. 30
Interest expense 30,000
Mortgage payable 3,231
Cash 33,231
LO 10 Describe the accounting for long-term notes payable.

15. BE10-2, 3 & 4, p 542

16. Current Liabilities – Payroll & 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 laborers (rate per hour).
Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay.
LO 3 Explain the accounting for other current liabilities.

17. FICA – Social Security* State and Local Income Taxes**
Current Liabilities – Payroll Deductions
FICA – Social Security*
FICA Medicare**
Federal Income Tax**
State and Local Income Taxes**
Voluntary Deductions
Gross Pay
Net Pay
Gross pay is the amount you actually earn during a pay period. Out of your gross pay, amounts are withheld for social security (FICA) taxes, Medicare taxes, and federal income taxes. If you live in a state or locality that has an income tax, additional amounts will be withheld. In addition to this mandatory withholding, you may elect to have amounts withheld from your gross pay. For example, you may be eligible to participate in a contributory retirement plan or a medical reimbursement plan.
Your gross pay less all withholdings, mandatory and voluntary, is your net pay. This is the amount of cash you can put in the bank.
* capped, see next slide
** no cap, the more you
make the more you pay
9-17 2 2

18. 1.45% of all wages earned in the year.
Current Liabilities – FICA Payroll Deductions
Federal Insurance Contributions Act (FICA)
FICA Taxes — Soc. Sec.
FICA Taxes — Medicare
6.2% of the first : $128,400 or $7,960 cap
1.45% of all wages earned in the year.
The rate of withholding for FICA taxes and Medicare taxes varies from year to year, but in 2008, the FICA rate was six point two percent on the first one hundred two thousand dollars of gross pay. The Medicare rate of one point forty-five percent was applied on all of your gross pay in 2008, as well.
Your employer is required to match the amounts withheld for FICA and Medicare on a dollar for dollar basis. For every ten dollars withheld from your paycheck, your employer must pay ten dollars on your behalf to the Internal Revenue Service.
Employers must pay withheld taxes to the Internal Revenue Service (IRS).
9-18 2 2

19. History of Social Security
Enacted in 1935 by FD Roosevelt as a result of the 1930s Depression.
First payment made in 1940.
Major changes/additions:
1956: Disability Insurance added.
1964: Food stamp program, Medicare, Medicaid, School Breakfast Program
1970s: WIC, Cost of living adjustments automatic, Earned Income Tax Credit
1980s: Low=income Home Energy Assistance.
1990s: Temp Assistance for Needy Families

21. Current Liabilities - Payroll
Illustration: Assume Cargo Corporation records its payroll for the week of March 7 as follows:
Salaries and wages expense 100,000
Federal income tax payable 21,864
FICA tax payable 7,650
State income tax payable 2,922
Salaries and wages payable 67,564
Mar. 7
Record the payment of this payroll on March 7.
Cash 67,564
Salaries and wages payable 67,564
Mar. 7
LO 3

22. Federal and State Unemployment Taxes
Current Liabilities – Employer Payroll Taxes
FICA Social Security
FICA -Medicare
Federal and State Unemployment Taxes
Employers pay amounts equal to that withheld from the employee’s gross pay.
Your employer must match your contributions for FICA and Medicare taxes.
9-22 2 2

23. Current Liabilities – Payroll Taxes
Payroll tax expense results from three taxes that governmental agencies levy on employers.
These taxes are:
FICA tax
Federal unemployment tax (FUTA)
State unemployment tax
Illustration: Based on Cargo Corp.’s $100,000 payroll,
the company would record the employer’s expense and liability for these payroll taxes as follows.
Payroll tax expense 13,850
State unemployment taxes payable 800
FICA tax payable 7,650
Federal unemployment taxes payable 5,400
LO 3 Explain the accounting for other current liabilities.

24. Current Liabilities – Payroll Tax Summary
EmployEE
EmployER
FICA – Social Security X
(2018 Cap: $128,400)
FICA - Medicare
Federal, State & Local INCOME Taxes No
Voluntary Deductions
FUTA & SUTA (Unemployment Taxes)
$7,000 Cap

25. BE10-5, 6 & 7, p 542

26. Financial Statement Analysis and Presentation
Balance Sheet Presentation
Illustration 10-15
LO 7

27. Financial Statement Analysis and Presentation
Illustration 10-16
LO 7

28. Financial Statement Analysis and Presentation
Liquidity
Illustration 10-17
Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.
LO 7 Identify the requirements for the financial statement presentation and analysis of liabilities.

29. Financial Statement Analysis and Presentation
Solvency
Illustration 10-18
Solvency ratios measure the ability of a company to survive over a long period of time.
LO 7

30. Different Ways to Finance a Company
Borrowing from a Bank (Ch 10): Notes Payable – More expensive and restrictive than bonds.
Selling Stock (Ch 11): Gives up ownership shares, but does NOT require interest or principal repayments.
Issuing Bonds (Ch 10): Easier to deal with than bank loans, require interest & principal repayment.

31. READ Chapter 10 + Appendix 10B & Appendix D (D-1 to D-13)
HOMEWORK
READ Chapter 10 + Appendix 10B & Appendix D (D-1 to D-13)
P10-1A (a) & (b)
E10-1
E10-5

32. Basic Time Value Concepts
Time Value of Money
Would you rather receive $1,000 today or in a year from now?
Today! “Interest Factor”

33. Nature of Interest Payment for the use of money.
Excess cash received or repaid over the amount borrowed (principal).
Variables involved in financing transaction:
Principal (p) - Amount borrowed or invested.
Interest Rate (i) – An annual percentage.
Time (n) - The number of years or portion of a year that the principal is borrowed or invested.
LO 1 Distinguish between simple and compound interest.

34. Nature of Interest Simple Interest FULL YEAR
Interest computed on the principal only.
Illustration:
Assume you borrow $5,000 for 2 years at a simple interest of 12% annually. Calculate the annual interest cost.
Illustration D-1
Interest = p x i x n
FULL YEAR
= $5,000 x x 2
= $1,200
LO 1 Distinguish between simple and compound interest.

35. Nature of Interest Compound Interest Computes interest on
the principal and
any interest earned that has not been paid or withdrawn.
Most business situations use compound interest.
LO 1 Distinguish between simple and compound interest.

36. Nature of Interest - Compound Interest
Illustration: Assume that you deposit $1,000 in Bank Two, where it will earn simple interest of 9% per year, and you deposit another $1,000 in Citizens Bank, where it will earn compound interest of 9% per year compounded annually. Also assume that in both cases you will not withdraw any interest until three years from the date of deposit.
Illustration D-2
Simple versus compound interest
Year 1 $1, x 9%
$ 90.00
$ 1,090.00
Year 2 $1, x 9%
$ 98.10
$ 1,188.10
Year 3 $1, x 9%
$106.93
$ 1,295.03
LO 1 Distinguish between simple and compound interest.

37. Future Value of a Single Amount
Future value of a single amount is the value at a future date of a given amount invested, assuming compound interest.
FV = p x (1 + i )n
Illustration D-3
Formula for future value
FV = future value of a single amount
p = principal (or present value; the value today)
i = interest rate for one period
n = number of periods
LO 2 Solve for a future value of a single amount.

38. Future Value of a Single Amount
Illustration: If you want a 9% rate of return, you would compute the future value of a $1,000 investment for three years as follows:
Illustration D-4
LO 2 Solve for a future value of a single amount.

39. What table do we use? Future Value of a Single Amount
Alternate Method
Future Value of a Single Amount
Illustration: If you want a 9% rate of return, you would compute the future value of a $1,000 investment for three years as follows:
Illustration D-4
What table do we use?
LO 2 Solve for a future value of a single amount.

40. What factor do we use? Future Value of a Single Amount $1,000x
= $1,295.03
Present Value
Factor
Future Value
LO 2 Solve for a future value of a single amount.

41. Future Value of an Annuity
Future value of an annuity is the sum of all the payments (receipts) plus the accumulated compound interest on them.
Necessary to know the
interest rate,
number of compounding periods, and
amount of the periodic payments or receipts.
LO 3 Solve for a future value of an annuity.

42. Future Value of an Annuity
Illustration: Assume that you invest $2,000 at the end of each year for three years at 5% interest compounded annually.
Illustration D-6
LO 3 Solve for a future value of an annuity.

43. Future Value of an Annuity
Illustration:
Invest = $2,000
i = 5%
n = 3 years
Illustration D-7
LO 3 Solve for a future value of an annuity.

44. Future Value of an Annuity
When the periodic payments (receipts) are the same in each period, the future value can be computed by using a future value of an annuity of 1 table.
Illustration: Assume that you invest $2,000 at the end of each year for three years at 5% interest compounded annually.
LO 3 Solve for a future value of an annuity.

45. What factor do we use? Future Value of an Annuity $2,000 x 3.15250
= $6,350.00
Payment
Factor
Future Value
LO 3 Solve for a future value of an annuity.

46. Present Value Concepts
The present value is the value now of a given amount to be paid or received in the future, assuming compound interest.
Present value variables:
Dollar amount to be received in the future,
Length of time until amount is received, and
Interest rate (the discount rate).
LO 4 Identify the variables fundamental to solving present value problems.

47. Present Value of a Single Amount
Illustration D-9
Formula for present value
Present Value = Future Value / (1 + i )n
p = principal (or present value)
i = interest rate for one period
n = number of periods
LO 5 Solve for present value of a single amount.

48. Present Value of a Single Amount
Illustration: If you want a 10% rate of return, you would compute the present value of $1,000 for one year as follows:
Illustration D-10
LO 5 Solve for present value of a single amount.

49. Present Value of a Single Amount
Illustration D-10
Illustration: If you want a 10% rate of return, you can also compute the present value of $1,000 for one year by using a present value table.
What table do we use?
LO 5 Solve for present value of a single amount.

50. Present Value of a Single Amount
What factor do we use?
$1,000 x
= $909.09
Future Value
Factor
Present Value
LO 5 Solve for present value of a single amount.

51. Present Value of a Single Amount
Illustration D-11
Illustration: If you receive the single amount of $1,000 in two years, discounted at 10% [PV = $1,000 / 1.102], the present value of your $1,000 is $
What table do we use?
LO 5 Solve for present value of a single amount.

52. Present Value of a Single Amount
What factor do we use?
$1,000 x
= $826.45
Future Value
Factor
Present Value
LO 5 Solve for present value of a single amount.

53. Present Value of a Single Amount
Illustration: Suppose you have a winning lottery ticket and the state gives you the option of taking $10,000 three years from now or taking the present value of $10,000 now. The state uses an 8% rate in discounting. How much will you receive if you accept your winnings now?
$10,000 x
= $7,938.30
Future Value
Factor
Present Value
LO 5 Solve for present value of a single amount.

54. Present Value of an Annuity
The value now of a series of future receipts or payments, discounted assuming compound interest.
Necessary to know
the discount rate,
The number of discount periods, and
the amount of the periodic receipts or payments.
LO 6 Solve for present value of an annuity.

55. Present Value of an Annuity
Illustration D-14
Illustration: Assume that you will receive $1,000 cash annually for three years at a time when the discount rate is 10%.
What table do we use?
LO 6 Solve for present value of an annuity.

56. Present Value of an Annuity
What factor do we use?
$1, x = $2,486.85
Future Value
Factor
Present Value
LO 6 Solve for present value of an annuity.

57. Bond: Long-Term Liabilities
Bonds are a form of 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.
LO 4 Identify the types of bonds.

58. Bond: Long-Term Liabilities
Issuing Procedures
Alternative Terminology The
contractual rate is often referred
to as the stated rate.
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.
LO 4 Identify the types of bonds.

59. Bond: Long-Term Liabilities
Illustration 10-3
LO 4

60. Bond: Long-Term Liabilities
Determining the Market Value of Bonds
The current market price (present value) of a bond is a function of three factors:
the dollar amounts to be received,
the length of time until the amounts are received, and
the market rate of interest.
The process of finding the present value is referred to as discounting the future amounts.
LO 4 Identify the types of bonds.

61. Present Value of a Long-term Note or Bond
Two Cash Flows:
Periodic interest payments (annuity).
Principal paid at maturity (single-sum).
100,000
$5,000
5,000
5,000
5,000
5,000
5,000 1 2 3 4 9 10
LO 7 Compute the present value of notes and bonds.

62. Present Value of a Long-term Note or Bond
Illustration: Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1. Calculate the present value of the principal and interest payments.
100,000
$5,000
5,000
5,000
5,000
5,000
5,000 1 2 3 4 9 10
LO 7 Compute the present value of notes and bonds.

63. Present Value of a Long-term Note or Bond
PV of Principal
$100, x = $61,391
Principal
Factor
Present Value
LO 7 Compute the present value of notes and bonds.

64. Present Value of a Long-term Note or Bond
PV of Interest
$5, x = $38,609
Factor
Present Value
Principal
LO 7 Compute the present value of notes and bonds.

65. Present Value of a Long-term Note or Bond
Illustration: Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1.
Present value of Principal $61,391
Present value of Interest 38,609
Bond current market value $100,000
LO 7 Compute the present value of notes and bonds.

66. Accounting for Bond Issues
A corporation records bond transactions when it
issues or retires (buys 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.
LO 5 Prepare the entries for the issuance of bonds and interest expense.

67. Accounting for Bond Issues
Issue at Par, Discount, or Premium?
Illustration 10-6
Helpful Hint Bond prices vary inversely with changes in the market interest rate. As market interest rates decline, bond prices increase. When a bond is issued, if the market interest rate is below the contractual rate, the bond price is higher than the face value.
LO 5

68. Issuing Bonds at Face Value
Illustration: Devor Corporation issues 100, five-year, 10%, $1,000 bonds dated January 1, 2014, at 100 (100% of face value). The entry to record the sale is:
1/1/14 Cash 100,000
Bonds payable 100,000
Prepare the entry Devor would make to accrue interest on December 31. ($100,000 x 10% x 12/12)
12/31/14 Interest expense 10,000
Interest payable 10,000
Prepare the entry Devor makes on Jan. 1, 2015 to pay the interest.
1/1/15 Interest payable 10,000
Cash 10,000
LO 5 Prepare the entries for the issuance of bonds and interest expense.

69. Issuing Bonds at a Discount
Illustration: Assume that on January 1, 2014, Candlestick Inc. sells $100,000, five-year, 10% bonds at 98 (98% of face value) with interest payable on January 1. The entry to record the issuance is:
Jan. 1 Cash 98,000
Discount on bonds payable 2,000
Bonds payable 100,000
LO 5 Prepare the entries for the issuance of bonds and interest expense.

70. Issuing Bonds at a Discount
Illustration 10-7
Statement presentation of discount on bonds payable
Statement Presentation
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 a increase in the cost of borrowing.
LO 5 Prepare the entries for the issuance of bonds and interest expense.

71. Issuing Bonds at a Discount
Total Cost of Borrowing
Illustration 10-8
Illustration 10-9
LO 5 Prepare the entries for the issuance of bonds and interest expense.

72. Issuing Bonds at a Discount
Question
Helpful Hint Both a discount
and a premium account are
valuation accounts. A valuation
account is one that is needed to
value properly the item to which
it relates.
Discount on Bonds Payable:
has a credit balance.
is a contra account.
is added to bonds payable on the balance sheet.
increases over the term of the bonds.
LO 5 Prepare the entries for the issuance of bonds and interest expense.

73. Issuing Bonds at a Premium
Illustration: Assume that the Candlestick Inc. bonds previously described sell at 102 rather than at 98. The entry to record the sale is:
Jan. 1 Cash ,000
Bonds payable 100,000
Premium on bonds payable 2,000
LO 5 Prepare the entries for the issuance of bonds and interest expense.

74. Issuing Bonds at a Premium
Statement Presentation
Illustration 10-11
Statement presentation of premium on bonds payable
Sale 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 be a reduction in the cost of borrowing.
LO 5 Prepare the entries for the issuance of bonds and interest expense.

75. Issuing Bonds at a Premium
Total Cost of Borrowing
Illustration 10-12
Illustration 10-13
LO 5 Prepare the entries for the issuance of bonds and interest expense.

76. Appendix 10B Effective Interest Amortization
Under the effective-interest method, the amortization of the discount or premium results in interest expense equal to a constant percentage of the carrying value.
Required steps:
Compute the bond interest expense.
Compute the bond interest paid or accrued.
Compute the amortization amount.
Illustration 10B-1
LO 9

77. Appendix 10B Amortizing Bond Discount Effective Interest Amortization
Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2014, for $98,000. The effective-interest rate is 10.53% and interest is payable on Jan. 1 of each year. Prepare the bond discount amortization schedule.
LO 9 Apply the effective-interest method of amortizing bond discount and bond premium.

78. Appendix 10B Amortizing Bond Discount Effective Interest Amortization
Illustration 10B-2
LO 9 Apply the effective-interest method of amortizing bond discount and bond premium.

79. Appendix 10B Amortizing Bond Discount Effective Interest Amortization
Illustration: Candlestick, Inc. records the accrual of interest and amortization of bond discount on Dec. 31, as follows:
Dec. 31
Interest expense 10,319
Discount on bonds payable 319
Interest payable 10,000
LO 9 Apply the effective-interest method of amortizing bond discount and bond premium.

80. Appendix 10B Amortizing Bond Premium Effective Interest Amortization
Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2014, for $102,000. The effective-interest rate is 9.48% and interest is payable on Jan. 1 of each year. Prepare the bond premium amortization schedule.
LO 9 Apply the effective-interest method of amortizing bond discount and bond premium.

81. Appendix 10B Amortizing Bond Premium Effective Interest Amortization
Illustration 10B-4
LO 9 Apply the effective-interest method of amortizing bond discount and bond premium.

82. Appendix 10B Amortizing Bond Premium Effective Interest Amortization
Illustration: Candlestick, Inc. records the accrual of interest and amortization of premium discount on Dec. 31, as follows:
Dec. 31
Interest expense 9,670
Premium on bonds payable 330
Interest payable 10,000
LO 9 Apply the effective-interest method of amortizing bond discount and bond premium.

83. Accounting for Bond Redemptions
Redeeming Bonds at Maturity
Candlestick records the redemption of its bonds at maturity as follows:
Bonds payable 100,000
Cash 100,000
LO 6 Describe the entries when bonds are redeemed.

84. Accounting for Bond Retirements
Redeeming Bonds at Maturity
When a company retires bonds before maturity, it is necessary to:
eliminate the carrying value of the bonds at the redemption date;
record the cash paid; and
recognize the gain or loss on redemption.
The carrying value of the bonds is the face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date.
LO 6 Describe the entries when bonds are redeemed.

85. Accounting for Bond Retirements
Question
When bonds are redeemed before maturity, the gain or loss on redemption is the difference between the cash paid and the:
carrying value of the bonds.
face value of the bonds.
original selling price of the bonds.
maturity value of the bonds.
LO 6 Describe the entries when bonds are redeemed.

86. Accounting for Bond Retirements
Illustration: Assume at the end of the fourth period, Candlestick Inc., having sold its bonds at a premium, retires the bonds at 103 after paying the annual interest. Assume that the carrying value of the bonds at the redemption date is $100,400 (principal $100,000 and premium $400). Candlestick records the redemption at the end of the fourth interest period (January 1, 2018) as:
Bonds payable 100,000
Premium on bonds payable 400
Loss on bond redemption 2,600
Cash 103,000
LO 6 Describe the entries when bonds are redeemed.

87. HOMEWORK
P10-10A