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Chapter 13 331 - Lecture Notes for Chapter 13(ACCT 331...

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Lecture Notes for Chapter 13 (ACCT 331) Current Liabilities and Contingencies Partha Sengupta Current Liabilities Ψ Liabilities: Situations existing today that will result in probable future sacrifices (give up asset, provide services etc.) in the future. Ψ Current liabilities : Sacrifices need to be made within one year, or the firm’s operating cycle, whichever is longer. 1. Accounts Payable Ψ Obligations to suppliers of merchandise or of services purchased on open account. Inventory xx Accounts payable xx 2. Notes Payable: Ξ Obligations in the form of written promises to pay a certain sum of money in the future. Ξ Lender has written documentation of the obligation in case legal remedies are needed to collect the debt. Ξ Borrower is usually required to pay interest (irrespective of whether the note is interest bearing or non-interest bearing). Ξ Short-term notes payable: obligations due within one year or the current operating cycle (whichever is longer). Ξ Short-term notes are usually associated with lower interest rate (compared to long term notes). Ξ Interest bearing note: Interest paid as a certain percent of face value (principal). Ξ Non-interest bearing note: No explicit interest on face value but amount paid is greater than amount borrowed. Ξ Line of credit: Allows companies to borrow a certain predetermined amount over a certain period of time. These can be noncommitted (money can be borrowed without having to follow formal loan procedures) or committed (formal paperwork completed and a fee might be paid). Ξ Examples. 1
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Example 13-1 : Borrow 10,000 for 6 months with 8% interest on 10/1/04. Example 13-2: Company borrows $100,000 for 5 months on 9/1/04 . Amount to be paid back is $120,000. 3. Secured loans: Ξ Certain specific assets are pledged as collateral or security on the loan. 4. Commercial Paper: These are unsecured loans of maturity ranging between 30 and 270 days issued in denominations of $25,000 or more. These could be backed by a line of credit. 5. Vacations and Sick Days Accrued: 2
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Ξ Companies provide paid vacations to most employees. Ξ If the vacation earned during a year is not taken by year-end, the vacation pay has to be accrued (liability recorded) at year-end so long as the payment is probable and the amount is estimable.
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