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Accounting for Liabilities
Chapter 07
McGrawHill/Irwin Copyright © 2012 by The McGrawHill Companies, Inc. All rights reserved.
7-2
Learning Objectives
1. Show how notes payable and related interest expense affect financial statements.
2. Show how sales tax liabilities affect financial statements.
3. Define contingent liabilities and explain how they are reported in financial statements.
4. Explain how warranty obligations affect financial statements. 5. Show how installment notes affect financial statements.
6. Show how a line of credit affects financial statements.
7. Explain how to account for bonds issued at face value and their related interest costs.
8. Use the straight-line method to amortize bond discounts and premiums.
9. Distinguish between current and noncurrent assets and liabilities. 10.Prepare a classified balance sheet.
11.Use the effective interest rate method to amortize bond discounts and premiums (Appendix).
7-3
Reporting Contingent Liabilities
7-4
Installment Notes Payable
Longterm installment notes are liabilities that usually have terms from two to five years.
Principal
Payments
Company
Each payment covers interest for the period
and a portion of the
principal.
Lender
As payments are made, the amount allocated to interest gets smaller and to principal gets larger.
7-5
Installment Notes Payable
$30,000
$25,000
$20,000
$15,000
$10,000
Annual payments are constant.
Interest
Principal
$5,000
$-
Year 1 Year 2 Year 3 Year 4 Year 5
With each payment the amount applied to the principal increases and the amount applied to interest decreases.
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