Cpt 9 Ppt-9 - Chapter 9 Current Liabilities Contingencies...

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Chapter 9 Current Liabilities, Contingencies, and the Time Value of Money
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Current Liabilities Obligation that will be satisfied within one year or within current operating cycle Normally recorded at face value and are important because they are indications of a company’s liquidity Examples: Accounts payable Notes payable Current portion of long-term debt Taxes payable Other accrued liabilities LO 1
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Accounts Payable Amounts owed for inventory, goods, or services acquired in the normal course of business Usually do not require the payment of interest, but terms may be given to encourage early payment Example: 2/10, n/30 A 2% discount is available if payment occurs within the first ten days If payment is not made within ten days, the full amount must be paid within 30 days
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Notes Payable Amounts owed that are represented by a formal contract Formal agreement is signed by the parties to the transaction Arise from dealing with a supplier or acquiring a cash loan from a bank or creditor The accounting for notes depends on whether the interest is paid on the note’s due date or is deducted before the borrower receives the loan proceeds
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Example 9.1—Recording the Interest on Notes Payable Assume that Hot Coffee Inc. receives a one-year loan from First National Bank on January 1. The face amount of the note of $1,000 must be repaid on December 31 along with interest at the rate of 12%
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Example 9.1—Recording the Interest on Notes Payable (continued) The company could identify and analyze the effect of the repayment as follows:
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Example 9.2—Discounting a Note Suppose that on January 1, 2014, First National Bank granted to Hot Coffee a $1,000 loan, due on December 31, 2014, but deducted the interest in advance and gave Hot Coffee the remaining amount of $880 ($1,000 face amount of the note less interest of $120)
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Example 9.2—Discounting a Note (continued) The Discount on Notes Payable account should be treated as a reduction of Notes Payable. If a balance sheet was developed immediately after the January 1 loan, the note would appear in the Current Liability category as follows:
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Example 9.2—Discounting a Note (continued) The original balance in the Discount on Notes Payable account
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