121_08SG - Chapter 8Accounting for Current and Long-Term...

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Chapter 8 200 Chapter 8—Accounting for Current and Long-Term Liabilities CHAPTER OVERVIEW In the last four chapters, we have concentrated on a detailed examination of assets—specifically cash (Chapter 4), short-term investments and receivables (Chapter 5), inventory (Chapter 6), and plant assets (Chapter 7). We now turn our attention to liabilities, both current and long-term. Whereas assets relate to investing activities, liabilities relate to financing activities. The learning objectives for this chapter are to 1. Account for current liabilities. 2. Identify and report contingent liabilities. 3. Account for basic bonds payable transactions. 4. Measure interest expense; amortize bond discount and premium by the effective interest method. 5. Explain the advantages and disadvantages of borrowing. 6. Account for lease transactions. 7. Report liabilities on the balance sheet. CHAPTER REVIEW Liabilities are obligations to transfer assets (for example, to make cash payments for purchases on account) or to provide services in the future (for example, to earn unearned revenue). Current liabilities are due within one year or within the company’s operating cycle if it is longer than one year. Long-term liabilities are those not classified as current. Objective 1 - Account for current liabilities. Current liabilities include liabilities of a known amount and liabilities that are estimated. Current liabilities of a known amount are: accounts payable— amounts owed to suppliers for goods or services purchased on account, short-term notes payable— notes due within one year. Companies issue notes payable to borrow cash, to purchase inventory, or to purchase plant assets. Interest expense and interest payable must be accrued at the end of the accounting period. Suppose a company acquires a plant asset and issues a note payable. The entry is: Plant Asset XX Notes Payable, Short-Term XX Interest expense and interest payable are recorded at the end of the accounting period with this entry: I n t e r e s t E x p e n s e X X Interest Payable XX When the note is paid off at maturity, the entry is: Notes Payable, Short-Term XX I n t e r e s t P a y a b l e X X I n t e r e s t E x p e n s e X X Cash XX
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Accounting for Current and Long-Term Liabilities 201 Notes payable are often issued at a discount . This means that the borrower prepays the interest and receives cash in an amount equal to the face value of the note less the discount. The entry is: C a s h X X Discount on Notes Payable XX N o t e s P a y a b l e , S h o r t - T e r m X X Discount on Notes Payable is a contra account to Notes Payable, Short-Term. The balance sheet will report the liability as: Current liabilities: Notes payable, short-term $ XXX Less: discount on notes payable XX Notes payable, short-term, net $ XXX Accrued interest is computed on the face value of the note. Since discounting a note effectively means that the interest has been paid in advance, there is no interest payable. Instead, the Discount is reduced.
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121_08SG - Chapter 8Accounting for Current and Long-Term...

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