Why do people always make liabilities sound so complicated?
For example, *ahem* the semiannual interest payment for a five-year, $1,000 par-value bond with an annual 8% coupon is $40: ($1,000 x 0.08) / 2 = $80 / 2 = $40… or… if the bond was issued at a premium of $200, the semiannual amortization using the straight-line method is simply $20: ($200 / 5) / 2 = $40 / 2 = $20. Therefore, debit interest expense by $20 ($40 – $20), credit cash by $40 and debit premium on bonds payable by $20.
See? Nothin’ to it.
Easy for you to say.
Liabilities are complicated because people are forward-thinking. Humans do not live on cash flow alone. There must be accrual. And accruals are the stuff of science fiction because they suggest the future.
Continue reading “L is for Liabilities”