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Intermed AC 12e- Ch 13- EOC Sol

Intermed AC 12e- Ch 13- EOC Sol - Intermediate Accounting...

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Intermediate Accounting 12th Edition (by D. E. Kieso, J. J. Weygandt, T. D. Warfield © 2007 CH 13- EOC A NSWERS TO Q UESTIONS 1. Distinguish between a current liability and a long-term Debt. Current liabilities are obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of other current liabilities. Long-term debt consists of all liabilities not properly classified as current liabilities. 2. Assume that your friend Greg Jonas, who is a music major, asks you to define and discuss the nature of a liability. Assist him by preparing a definition of a liability and by explaining to him what you believe are the elements or factors inherent in the concept of a liability. You might explain to your friend that the accounting profession prepares financial statements somewhat in accordance with the broad or loose definition of a liability submitted by the AICPA in 1953: “Something represented by a credit balance that is or would be properly carried forward upon a closing of books of account according to the rules or principles of accounting, provided such credit balance is not in effect a negative balance applicable to an asset. Thus the word is used broadly to comprise not only items which constitute liabilities in the proper sense of debts or obligations (including provision for those that are unascertained), but also credit balances to be accounted for which do not involve the debtor and creditor relation.” Since your friend may not have completely understood the above definition (if it may be called that), you might indicate that more recent definitions of liabilities call for the disbursement of assets or services in the future and that the present value of all of a person’s or company’s future disbursements of assets constitutes the total liabilities of that person or company. But, accountants quantify or measure only those liabilities or future disbursements which are discernible or reasonably determinable at the present time. And, accountants have accepted the completed transaction as providing the objectivity or basis necessary for financial recognition. Therefore, a liability may be viewed as an obligation to convey assets or perform services at some time in the future and is based upon a past or present transaction or event. A formal definition of liabilities presented in Concepts Statement No. 6 is as follows: Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. 3. Why is the liabilities section of the balance sheet of primary significance to bankers?
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