CHAPTER 7
ACCOUNTING FOR AND
PRESENTATION OF
LIABILITIES

McGraw-Hill/Irwin

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Learning Objectives
1.

2.

3.

What is the financial statement presentation of short-term debt and current maturities of long-term debt?
What is the difference between interest calculated on a straight basis and on a discount basis?
What are unearned revenues and how are they presented in the balance sheet?

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Learning Objectives
4.

5.

6.
7.

What is the accounting for employer’s liability for payroll and payroll taxes?
What is the importance of making estimates for certain accrued liabilities and how are these items presented in the balance sheet?
What is leverage and how is it provided by long-term debt?
What are the different characteristics of a bond?

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Learning Objectives
8.
9.
10.

Why does bond discount or premium arise and how is it accounted for?
What are deferred income taxes and why do they arise?
What is minority interest, why does it arise, and what does it mean in the balance sheet?

McGraw-Hill/Irwin

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Learning Objective 1
•

What is the financial statement presentation of short-term debt and current maturities of longterm debt?

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Current Liabilities
•

Amounts due within one year or operating cycle

•

A working capital loan is a short-term loan with the expectation that it will be repaid from the collection of accounts receivable generated by the sale of inventory •

A revolving line of credit is a predetermined maximum amount, but flexibility in timing and amount borrowed McGraw-Hill/Irwin

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Notes Payable
•

A note is a formal promise to pay a stated amount at a stated date, usually with interest

•

Prime rate is the term frequently used to express the interest rate on short-term loans McGraw-Hill/Irwin

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Learning Objective 2
•

What is the difference between interest calculated on a straight basis and on a discount basis?

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Interest Calculation Methods
•

Straight interest is calculated as follows:
Interest = Principal X Rate X Time (in years)

•

A discount is interest that is subtracted from the loan principal and the borrower receives the difference

•

The difference received by the borrower is called the proceeds

•

The discounted amount is shown in the balance sheet as a contra liability
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Current Maturities of LongTerm Debt
•

The portion of long-term borrowing that must be repaid within a year of the balance sheet date is reported as a current liability

•

The remainder of the long-term debt is shown in noncurrent liabilities

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Accounts Payable
•

Accounts payable are amounts owed to suppliers for goods and services that have been provided to the entity on credit

•

May be reported using either the gross or the net method

•

The gross method recognizes cash discounts when the invoices are paid within the discount period

•

The net method recognizes cash discounts when purchases are made
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Learning Objective 3
•

What are unearned revenues and how are they presented in the balance sheet?

McGraw-Hill/Irwin

©The McGraw-Hill Companies, Inc., 2002

Unearned Revenues or
Deferred Credits
•

Unearned revenues occur when customers pay for goods or services before the goods or services are delivered:
Cash
Unearned revenue

•

XX
XX

When earned, the liability of unearned revenues is removed and recorded as revenues:
Unearned revenue
Revenue
XX
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XX
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Learning Objective 4
•

What is the accounting for