136b_chapter13

136b_chapter13 - CURRENT LIABILITIES & CONTINGENCIES...

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15:56 13-1 Bob Anderson, UCSB 2004 CURRENT LIABILITIES & CONTINGENCIES Chapter 13 13-2 Bob Anderson, 2004 ECON 136A REFRESHER What is a liability? n Present (not necessarily current) unavoidable obligation; n Result of a past transaction; What makes a liability current? n Conversion in one year or operating cycle, whichever is longer n Current liabilities are not recorded at their present value as they “turn” soon enough that there is no material difference. 13-3 Bob Anderson, 2004 136A Concepts n Purchase discounts on A/P has already been covered, refresher is in text. You can also look at 136A class slide 8-25; n No such thing as 0% interest, always “impute a rate” if the stated rate is different than a reasonable rate. 13-4 Bob Anderson, 2004 Written promises to pay a certain sum of money on a specified future date. Example -- On April 1, the corporation bought a truck for $30,000 from GM Company, paying $4,000 in cash and signing a one-year, 12% note for the balance of the purchase price. Notes Payable
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15:56 13-5 Bob Anderson, 2004 April 1 Journal Entry ? Debit Credit Trucks 30,000 Cash 4,000 Notes payable 26,000 Any entry required at April 30 ? Interest expense 260 Interest payable 260 ($26,000 x 12% / 12) Notes Payable 13-6 Bob Anderson, 2004 Written promises to pay a certain sum of money on a specified future date. Example -- On May 1, the corporation borrowed $80,000 from Lima National Bank by signing a $90,200 non-interest bearing note due in one year. Zero Interest-bearing Note 13-7 Bob Anderson, 2004 May 1 Journal Entry ? Debit Credit Cash 80,000 Discount on N/P 10,200 Notes payable 90,200 Any entry required at May 30 ? Interest expense 850 Discount on N/P 850 ($10,200 / 12 = $850) Straight-line amortization is only acceptable if the results are not materially different from the effective interest method. Zero Interest-bearing Note 13-8 Bob Anderson, 2004 The portion of bonds, mortgage notes, and other long-term indebtedness that matures with the next fiscal year. Current Maturities of Long-term Debt
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15:56 13-9 Bob Anderson, 2004 Classification of Current Obligation to be Refinanced It is possible that a “current” obligation may be classified as long-term IF: 1. Management intends to refinance AND 2. Management can demonstrate the ABILITY to do so n Evidenced by commitment from lender or other party, OR n Subsequent refinance before the financial statements are issued (like a change in estimate) 13-10 Bob Anderson, 2004 Short-Term Obligations 13-11 Bob Anderson, 2004 Short-Term Obligations Mgmt. Intends of Refinance YES NO 13-12 Bob Anderson, 2004 Short-Term Obligations Mgmt. Intends of Refinance YES Classify as Current Liability NO
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15:56 13-13 Bob Anderson, 2004 Short-Term Obligations Mgmt. Intends of Refinance Demonstrates Ability to Refinance YES YES Classify as Current Liability NO NO 13-14 Bob Anderson, 2004 Short-Term Obligations Mgmt. Intends of Refinance Demonstrates Ability
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This note was uploaded on 08/06/2008 for the course ECON 136B taught by Professor Anderson during the Spring '08 term at UCSB.

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136b_chapter13 - CURRENT LIABILITIES & CONTINGENCIES...

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