Question

E14-2 (L01) (Classification) The following items are found in the financial statements.

(a) Discount on bonds payable.

(b) Interest expense (credit balance).

(c) Unamortized bond issue costs.

(d) Gain on repurchase of debt.

(e) Mortgage payable (payable in equal amounts over next 3 years).

(f) Debenture bonds payable (maturing in 5 years).

(g) Notes payable (due in 4 years).

(h) Premium on bonds payable.

(i) Bonds payable (due in 3 years).

Instructions

Indicate how each of these items should be classified in the financial statements.

Short answer

Item	Classification in the financial statement
(a) Discount on bonds payable.	Contra-account to bond payable
(b) Interest expense (credit balance).	Interest payable (current liability)
(c) Unamortized bond issue costs.	Part of long-term liabilities
(d) Gain on repurchase of debt.	Other gains and losses in the income statement
(e) Mortgage payable (payable in equal amounts over next 3 years).	1/3 of the total amountas the current portion of long-term debt and 2/3 as long-term debt
(f) Debenture bonds payable (maturing in 5 years).	Long-term liability
(g) Notes payable (due in 4 years).	Long-term liability
(h) Premium on bonds payable.	Adjunct to the bond payable (long-term liability account)
(i) Bonds payable (due in 3 years).	Long-term liability

Step-by-step solution

Definition of Liability

Any event that will create the outflow of economic benefits is known as liability. The liability of the business entity is reported in the financial statement known as the balance sheet, under which it is classified as current and non-current.

Classification in the financial statement

(a) Discount on bond payable reduces the carrying value of the bond payable. Therefore, it is reported as a contra-account of bond payable.

(b) Interest expenses (credit balance) refers to the interest expenses that are not paid. These are reported as interest payable in the current liability.

(c) The unamortized cost incurred in the bond issue will be reported as part of the long-term liability, i.e., bonds payable.

(d) Gain on redemption of debt will be reported as other income in the income statement of the business entity.

(e) The portion of the mortgage that will be paid within the operating period will be classified as the current portion of long-term debt, and the remaining will be reported as long-term debt.

(f) Debenture bond payable will mature after the operating period and, therefore, will be reported as a long-term liability.

(g) Note payable that will get due in 4 years will be reported as long-term debt in the balance sheet.

(h) Premium on bond payable will be reported as an adjunct account to the bond payable in the long-term liabilities section. It will be added to the bond payable.

(i) Bond payable due after an operating period will be reported as long-term liability.