Lecture Notes Chapter 10

Lecture Notes Chapter 10 - CHAPTER 10 Reporting and...

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CHAPTER 10 Reporting and Analyzing Liabilities Chapter Outline Study Objective 1 - Explain a Current Liability and Identify the Major Types of Current Liabilities H Liabilities are defined as “creditors' claims on total assets” and as “existing debts and obligations.” i These claims, debts, and obligations must be settled or paid at some time in the future by the transfer of assets or services. i A current liability is a debt that can reasonably be expected to be paid (1) from existing current assets or through the creation of other current liabilities, and (2) within one year or the operating cycle, whichever is longer. i Debts that do not meet both of these criteria are classified as long-term liabilities . i The different types of current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest. Study Objective 2 - Describe the Accounting for Notes Payable H Obligations in the form of written notes are recorded as notes payable. i Notes payable H are often used instead of accounts payable because they give the lender written documentation of the obligation in case legal remedies are needed to collect the debt. i usually require the borrower to pay interest and frequently are issued to meet short-term financing needs. i are issued for varying periods of time. i Notes due for payment within one year of the balance sheet date are generally classified as current liabilities. List some similarities and differences between Notes Payable and Accounts Payable. Is a Note Payable more binding on a debtor than an Accounts Payable? 10-1
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Work through the illustration in the chapter concerning Cole Williams Co. borrowing $100,000 from the First National Bank on September 1, 2007. The note earns interest at a rate of 12% and matures in four months. On September 1 Cole Williams Co. receives $100,000 and makes the following journal entry: Sep. 1 Cash 100,000 Notes Payable 100,000 (To record issuance of 12%, 4-month note to First National Bank) The interest, which accrues over the life of the note, must be recorded when financial statements are prepared at December 31. Dec. 31 Interest Expense 4,000 Interest Payable 4,000 (To accrue interest for 4 months on First National Bank note) The note matures on January 1 and Cole Williams must pay the face amount of the note plus the interest ($100,000 x 12% x 4/12). The entry to record the payment of the note and interest is: Jan. 1 Notes Payable 100,000 Interest Payable 4,000 Cash 104,000 (To record payment of First National Bank note and accrued interest at maturity) A discussion of accounting for long-term installment notes payable is presented in Appendix 10C at the end of the chapter. Study Objective 3 - Explain the Accounting for Other Current Liabilities
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Lecture Notes Chapter 10 - CHAPTER 10 Reporting and...

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