ACCT2520-55Chp13 - Sara Sharkey ACCT 2520-55 1 Liabilities...

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Sara Sharkey ACCT 2520-55 02/3/16 1. Liabilities are probable, future sacrifices of economic benefits that arise from present obligations (to transfer goods or provide services) to other entities that result from past transactions or events. 2. Current liabilities are those expected to be satisfied with current assets or by the creation of other current liabilities. Usually, but with exceptions, current liabilities are obligations payable within one year or within the firm's operating cycle, whichever is longer. 3. In concept, liabilities should be reported at their present values; that is, the valuation amount is the present value of all future cash payments resulting from the debt, usually principal and/or interest payments. In this case, the amount would be determined as the present value of $100,000, discounted for three months at an appropriate rate of interest for a debt of this type. This is proper because of the time value of money. In practice, liabilities ordinarily are reported at their maturity amounts if payable within one year because the relatively short time period makes the interest or time value component immaterial. 4. Lines of credit permit a company to borrow cash from a bank up to a prearranged limit at a predetermined, usually floating, rate of interest. The interest rate often is based on current rates of the prime London interbank borrowing, certificates of deposit, bankers' acceptance, or other standard rates. Lines of credit usually must be available to support the issuance of commercial paper. Lines of credit can be noncommitted or committed. A noncommitted line of credit allows the company to borrow without having to follow formal loan procedures and paperwork at the time of the loan and is less formal, usually without a commitment fee. Sometimes a compensating balance is required to be on deposit with the bank as compensation for the service. A committed line of credit is more formal. It usually requires a commitment fee in the neighborhood of 1/4 of one percent of the unused balance during the availability period. Sometimes compensating balances also are required. 5. When interest is "discounted" from the face amount of a note at the time it is written, it usually is referred to as a "noninterest-bearing" note. Noninterest-bearing notes do, of course entail interest, but the interest is deducted (or discounted) from the face amount to determine the cash proceeds made available to the borrower at the outset and included in the amount paid at maturity. In fact, the effective interest rate is higher than the stated discount rate because the discount rate is applied to the face value, but the cash borrowed is less than the face value.
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