Inter Acct Chapter_13_solutions_part_1

Inter Acct Chapter_13_solutions_part_1 - 13-1 QUESTIONS FOR...

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Question 13-1 A liability entails the present, the future, and the past. It is a present responsibility, to sacrifice assets in the future, caused by a transaction or other event that already has happened. Specifically, “Elements of Financial Statements,” Statement of Financial Accounting Concepts No. 6, par. 36, describes three essential characteristics: Liabilities– 1. are probable, future sacrifices of economic benefits 2. that arise from present obligations (to transfer goods or provide services) to other entities 3. that result from past transactions or events. Question 13-2 Liabilities traditionally are classified as either current liabilities or long-term liabilities in a classified balance sheet. Current liabilities are those expected to be satisfied with current assets or by the creation of other current liabilities (Committee on Accounting Procedure, American Institute of CPAs , Accounting Research and Terminology Bulletin, Final Edition , p. 21). Usually, but with exceptions, current liabilities are obligations payable within one year or within the firm's operating cycle, whichever is longer. Question 13-3 In concept, liabilities should be reported at their present values ; that is, the valuation amount is the present value of all future cash payments resulting from the debt, usually principal and/or interest payments. In this case, the amount would be determined as the present value of $100,000, discounted for three months at an appropriate rate of interest for a debt of this type. This is proper because of the time value of money. In practice, liabilities ordinarily are reported at their maturity amounts if payable within one year because the relatively short time period makes the interest or time value component immaterial. Accounting Principles Board Opinion No 21 , “Interest on Receivables and Payables,” specifically exempts from present value valuation all liabilities arising in connection with suppliers in the normal course of business and due within a year. QUESTIONS FOR REVIEW OF KEY TOPICS
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Answers to Questions (continued) Question 13-4 Lines of credit permit a company to borrow cash from a bank up to a prearranged limit at a predetermined, usually floating, rate of interest. The interest rate often is based on current rates of the prime London interbank borrowing, certificates of deposit, bankers’ acceptance, or other standard rates. Lines of credit usually must be available to support the issuance of commercial paper. Lines of credit can be noncommitted or committed. A noncommitted line of credit allows the company to borrow without having to follow formal loan procedures and paperwork at the time of the loan and is less formal, usually without a commitment fee. Sometimes a compensating balance is required to be on deposit with the bank as compensation for the service. A
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Inter Acct Chapter_13_solutions_part_1 - 13-1 QUESTIONS FOR...

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