| Course | ACC-6040 Fundamentals of Accounting I |
|---|---|
| Module | Module 6 |
| Paper type | Written Assignment 6: reporting and interpreting liabilities, bonds and debt |
| Length | About 738 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | Master of Science in Accounting |
| Updated | October 2026 |
Free sample paper for ACC 6040 Module 6
Borrowing for a Third Rink: Garden State Ice Rinks' Liabilities, a Discounted Bond Issue and Its Coverage
Student Name
Master of Science in Accounting, Thomas Edison State University
ACC-6040: Fundamentals of Accounting I
Mentor Name
Month Day, Year
Borrowing for a Third Rink: Garden State Ice Rinks' Liabilities, a Discounted Bond Issue and Its Coverage
Introduction
Liabilities are obligations to transfer resources in the future. Current liabilities are those expected to be paid within a year or the operating cycle; long-term liabilities, such as bonds, extend beyond it. Libby et al. (2017) stress that the classification matters because lenders and analysts use it to judge liquidity, while the measurement of bonds affects interest expense for years.
Problem 1: Current Liabilities at December 31, 2027
The bank note, originally $900,000, has a remaining balance of $810,000 after the first annual payment. Only the next year's principal is current; the remaining $720,000 is long term. Unearned revenue is a liability because Garden State owes ice time, not cash, and it will become revenue as the leagues skate.
Other typical current liabilities for a rink include payroll taxes withheld, sales taxes collected in the pro shops and season fees received in advance.
| Liability | Amount | Why it is current |
|---|---|---|
| Accounts payable to suppliers | $31,000 | Payable within 30 days |
| Current portion of the bank note: the $90,000 principal due December 31, 2028 | 90,000 | Due within one year, although the rest of the note is long term |
| Unearned revenue: hockey leagues' prepayments for January to April 2028 ice time | 52,000 | Service to be delivered within the year |
| Income taxes payable | 18,000 | Due with the return in April |
| Total current liabilities | $191,000 |
Problem 2: A Bond Issued at a Discount
To pay for a third rink, Garden State sold $2,000,000 of ten-year, 5% bonds on July 1, 2027, with coupons due each June 30 and December 31. Comparable issues were yielding 6%, so the bonds sold below face. With 20 semiannual periods at 3%:
At December 31, 2027, Garden State pays $50,000 of interest but records interest expense of $1,851,234 x 3% = $55,537. The $5,537 difference amortizes the discount, raising the bonds' carrying amount to $1,856,771. Over ten years the carrying amount will climb to $2,000,000, and total interest expense will exceed the cash coupons by the $148,766 discount.
The $148,766 discount, the face amount less the issue price, is additional interest the company pays at maturity. Amortizing it each period is what makes interest expense exceed the cash coupon and brings the carrying value up to $2,000,000 by 2037.
| Component | Factor at 3% | Present value |
|---|---|---|
| Face amount of $2,000,000 | 0.55368 | $1,107,360 |
| Twenty payments of $50,000 | 14.87747 | 743,874 |
| Issue price | | $1,851,234 |
Problem 3: A Contingency
In November, a skater who fell during a public session sued Garden State for $250,000, alleging an uneven ice surface. Counsel rates a loss as reasonably possible rather than probable, and the insurance policy has a $25,000 deductible. Because a loss is not probable, no liability is recorded. The notes must describe the claim, the range of possible loss and the insurance coverage. If counsel later judged a loss probable and estimable, the company would accrue its best estimate, net of expected insurance recovery only if that recovery is probable.
Because a loss is only reasonably possible, Garden State discloses the suit in its notes but records no liability. If the lawyer later judged a loss probable and the amount could be estimated, the rink would accrue its best estimate, or the low end of a range if no amount within it is more likely. A loss contingency is accrued only when it is probable and can be reasonably estimated, and disclosed when it is reasonably possible (Financial Accounting Standards Board, 1975).
Problem 4: Liquidity, Solvency and Coverage
Garden State's liquidity is strong, but its solvency has changed sharply: the bond issue nearly doubled its liabilities, and creditors now provide $1.85 for each dollar of owners' equity. Earnings cover interest about four times, comfortable for now, but interest expense will rise in 2028 when a full year of bond interest is recorded, before the third rink produces revenue. Lenders often write covenants on ratios like these, and Dichev and Skinner (2002) found that firms cluster just above covenant thresholds, suggesting that managers work to avoid violations, which is why Garden State's managers should model 2028 coverage before committing to further borrowing.
| Ratio | Calculation | Result |
|---|---|---|
| Current ratio | Current assets of $650,180 / current liabilities of $191,000 | 3.40 |
| Debt to equity | Total liabilities of $2,767,771 / equity of $1,496,244 | 1.85 |
| Times interest earned | (Income before tax of $339,043 + interest of $109,537) / interest of $109,537 | 4.1 times |
References
Dichev, I. D., & Skinner, D. J. (2002). Large-sample evidence on the debt covenant hypothesis. Journal of Accounting Research, 40(4), 1091-1123. https://doi.org/10.1111/1475-679X.00083
Financial Accounting Standards Board. (1975). Accounting for contingencies (Statement of Financial Accounting Standards No. 5).
Libby, R., Libby, P. A., & Hodge, F. (2017). Financial accounting (9th ed.). McGraw-Hill Education.
ACC 6040 Module 6 instructions, in plain terms
Written Assignment 6 deals with what the rink owes: current obligations, a bond issue and a lawsuit. Expect problems on accounts payable, accrued liabilities, unearned revenue, the current portion of long-term debt, bonds issued at par, a discount or a premium with effective interest amortization, contingencies and ratios such as the current ratio, debt to equity and times interest earned. Some versions include present value calculations or long-term notes. These facts were invented for teaching; they continue the invented rink operator into its expansion, so its balances agree with earlier assignments. Some versions add a note payable. Expect a list of year-end obligations to classify, a bond issued below face to price and amortize, a contingency to judge and three ratios to read.
Inside the ACC 6040 Module 6 example
The introduction defines liabilities and explains why classification matters. Problem 1 lists current liabilities in a table with the reason each is current and explains the split of the bank note. Problem 2 prices the bonds with factors, computes the first period's interest expense and amortization and projects the total discount over the bonds' life. Problem 3 runs a skater's injury claim through the contingency rules and says what new facts would change the answer. Problem 4 computes three ratios, interprets the change in solvency caused by the bond issue and looks ahead to 2028, with research on covenant behavior. The contingent liability is judged against the probability thresholds. The contingent liability is assessed against the probable and reasonably possible thresholds.
ACC 6040 Module 6 rubric: what earns full marks
Liability and bond problems are another of the five assignments in the 25 percent group. Mentors check the sorting of short-term obligations, including next year's slice of long-term debt and unearned league fees, then whether the bond price uses the 6% market rate over twenty half-years, whether interest follows the effective interest method, whether the injury claim is judged on likelihood and measurability and whether the three ratios are both right and explained. Explanations of what the ratios imply for lenders show understanding beyond the arithmetic. An amortization table that carries the bond's carrying value from issue to the first interest date, with the discount shown separately, is the strongest evidence.
ACC 6040 Module 6 help from the desk
The usual errors here are leaving the whole bank note in long-term liabilities, discounting bonds at the coupon rate or with annual periods for semiannual interest, and accruing a lawsuit loss that is only reasonably possible. Halve the rate and double the periods for semiannual bonds. Compute interest expense on the carrying amount. Disclose, rather than record, reasonably possible losses. Interpret each ratio in a sentence. Interest expense comes from the 6% market rate, the coupon from the 5% stated rate; swapping the two is the classic bond slip. A free first sample of your own ACC-6040 Module 6 problems is available on request.
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ACC 6040 Module 6 questions, answered
Where can I find a free ACC 6040 Module 6 sample paper?
The rink's liabilities assignment is reproduced above: current liabilities sorted, a bond issued at a discount with effective interest amortization, a lawsuit contingency and three ratios.
What is the current portion of long-term debt?
The principal due within the next year, reported as a current liability, while the rest of the debt stays long term.
How is the price of a bond issued at a discount computed?
Discount the $2,000,000 repayment and every coupon at the 6% market rate; because 6% beats the 5% coupon, the total lands below face.
When is a lawsuit recorded as a liability?
When a loss is likely and its size can be estimated; one that is only possible is described in a note.
What does times interest earned measure?
How many times operating earnings cover interest expense, computed as income before interest and taxes divided by interest expense.