Chapter 8 : liabilities
On January 1, a company signs a $200,000, 4% 9-month note. Interest is due at maturity.
What is the adjusting entry required if the company prepares financial statements on June 30.
a. Dr Interest expense; Cr Interest payable, $4,000
b. Dr Interest expense; Cr Cash, $4,000
c. Dr Interest expense; Cr Cash, $6,000
d. Dr Interest expense; Cr Interest payable, $6,000
Soln: 200,000 x 4% x (6/12) = 4000
Question # 2
ABC Company is authorized to issue 50,000 common shares. On Feb. 10, 2009, it issued
10,000 shares at $11 per share. The journal entry to record these facts include a
a. Credit to Common shares $110,000
b. Credit to Common shares $550,000
c. Debit to Cash for $550,000
d. Debit to Common shares for $110,000
Soln: 10,000 x 11 = 110,000
Question # 3
XYZ Corporation has 10,000, $2 cumulative preferred shares and 110,000 common shares
outstanding. At the beginning of the current year, preferred dividends were 3 years in arrears.
The Board of Directors wants to pay a $1.50 cash dividend on each outstanding common share.
To accomplish this, what TOTAL amount of dividends must they declare?
a. $225,000 b. $165,000 c. $245,000
solution: 10,000 x $2 = 20,000 x 3 years in arrears = 60,000 + 20,000 (current) = 80,000 (amt
earned by preffered shareholders)
110,000 CS x 150 = 165000
Therefore 165000+80000 = 245000
Total amt of dividends they must declare Chapter 8 : liabilities
Current and Long-Term Liabilities
• liabilities are debts
• borrowing is one way a company finances its operations
• liabilities are classified as current or long-term
Learning Objective 1
Account for current liabilities and contingent liabilities.
Current liabilities are obligations due within one year or within the company’s normal operating
cycle if it is longer
Examples: accounts payable, short-term notes payable, taxes payable, current portion of long-
term debt, accrued expenses, unearned revenue, etc.
Current Liabilities That Must Be Estimated
Estimated Warranty Payable
Assume that Black & Decker made sales of $200,000 subject to product warranties
Black & Decker estimates that 3% of the products it sells this year will require repair or
What is the estimated warranty expense?
Estimated Warranty Payable
$200,000 × 0.03 = $6,000
Warranty Expense 6000
Estimated Warranty Payable 6000
To accrue warranty expense
They are a potential liability that depends on a future event arising out of past events
Examples: Lawsuits in progress, guarantees of a subsidiary’s debt, audit by Canada Revenue
These liabilities are disclosed in the notes
to the financial statements (if it is likely that
they will become actual liabilities).
Bonds: interest bearing long term note payable
Bonds are group of notes payable issued to multiple lenders called bondholders. Principle,
interest rates, payment date
Learning Objective 4
Understand the advantages and disadvantages of borrowing.
Issuing Shares (creates no liability or interest exp)
Capital Stock (Equity) xx
Issue Bonds Chapter 8 : liabilities
Bonds Payable xx
Earnings Per Share (EPS) = (Net income –
Preffered Stock Dividend)/(Avg # of Common
• measures how much each share is earning
• liabilities are a popular way to finance operations
• managers use ratios to determine how much
credit risk it is taking
• both creditors and investors worry when a
company’s debt grow
• there is a risk that the company cannot pay its debts as they become due
• 2 ratios to determine how much credit risk the company is taking are:
• Times interest earned
• Debt ratio
• Times Interest Earned = Operating income
• It measures the number of times that operating income can cover interest expense.
• A high ratio indicates ease in paying interest expense
• Debt ratio = Total liabilities
• It states the proportion of a company’s assets that is financed with debt
Learning Objective 5 : Report liabilities on the balance sheet.
Shareholders’ Equity : Chapter 9
Learning Objective 1 : Explain the features of a corporation.
Corporations are legal entities apart from their owners
Public: shares are traded on stock exchange
Private:shares = privately held Chapter 8 : liabilities
1. Can raise more capital than a
proprietorship or partnership can
2. Continuous life
3. Ease of transferring ownership
4. Limited liability of shareholders
Separation of ownership
2. Corporate taxation
3. Government regulation
Organizing Corporation articles of incorporations
Authority Structure of a Corporation: shareholders board of directors chief executive
officer chief operating officer
Shareholder’s rights: right to sell shares, vote, dividends, liquidation, preemption
Assets = Liabilities + Shareholders’ Equ