Accounting 312- chapter 12 - Accounting 312 Chapter 12-...

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Accounting 312 Chapter 12- Accounting For Liabilities I. Current Liabilities A. What is a Liability 1. 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 2. three characteristics a. present obligation that entails settlement by probable future transfer or use of cash, goods or services b. unavoidable obligation c. transaction or other event creating the obligation has already occurred 3. Liabilities with a more distant due date do not represent a claim on the co’s current resources B. What is a current liability 1. obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of other current liabilities 2. the operating cycle is the period of time elapsing between the acquisition of goods and service involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections a. retail and service establishments have several operation cycles within a year 3. examples: accounts payable, notes payable, current maturities of long term debt, dividends payable, unearned rev, income tax pay, employee-related liabilities 4. co record and report current liabilities at their full maturity value a. the slight overstatement of liabilities that results from carrying current liabilities at maturity value (don’t take into account time value of money) is considered immaterial 5. Accounts Payable a. aka trade accounts payable- owed to others for goods, supplies, or services purchased on account b. arise because of the time lag between the receipt of services or acquisition of title to assets and the payment for them c. if title as passed to the purchaser before receipt of the goods, the co should record the transaction at the time of title passage d. goods received in inventory must agree with the liability 6. Notes Payable a. written promises to pay a certain sum of money on a specified future date b. may arise from purchases, financing or other transactions c. can be short term or long term d. Interest Bearing Notes Issued i. Assume a bank agrees to lend $100,000 on March 1 for a 6 percent, four month note: March 1: Cash 100,000 Notes Pay 100,000 Semi Annual Financial Statement: Interest Exp 2,000 Interest Pay 2,000 Maturity: Note Pay 100,000 Interest Pay 2,000 Cash 102,000 1
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e. Zero Interest Bearing Note Issued i. does not explicitly state an interest rate on the face of the note but the lender DOES charge interest ii. at maturity the borrower must pay back an amt greater than the cash received at the issuance date iii. PV equals the face value of the note at maturity minus the interest or dsct charged by the lender for the terms of the note iv. ie: assume a co issues a 102,000 notes for four months, zero interest PV of note = 100,000 Cash 100,000 Dsct Note Pay 2,000 Note Pay
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Accounting 312- chapter 12 - Accounting 312 Chapter 12-...

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