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Chapter 09 - C hapter 9 Cur r ent L iabilities C...

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Chapter 9 Current Liabilities, Contingencies, and the Time Value of Money
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Accounts Payable Amounts owed for the purchase of inventory, goods, or services on credit—these are the most common liabilities Discount payment terms offered to encourage early payment 2/10, n30
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Promissory Note (not as common) S.J.Devona I promise to pay $1,000 plus 12% annual interest on December 31, 2008. Date: January 1, 2008 Signed: _________ Hot Coffee I nc . Total repayment = $1,120 $1,000 + ($1,000 × 12%)
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Discounted Promissory Note (the so-called “interest-free” note) In exchange for $880 received today, I promise to pay $1,000 on December 31, 2008. Date: January 1, 2008 Signed: _________ Hot Coffee, Inc. Effective interest rate on note = 13.6% ($120 interest/$880 proceeds)
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Taxes Payable Record expense when incurred, not when paid (think about your paycheck—taxes incurred every week but not really due until April 15 th ) Record 2007 tax expense Taxes Paid 12/31/07 3/15/08
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Contingent Liabilities Obligation involving existing condition Outcome not known with certainty Dependent upon some future event Actual amount is estimated
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Accrue estimated amount if: Liability is probable Amount can be reasonably estimated Contingent Liabilities (as per SFAS #5) In year criteria are met: Expense (loss) XXX Liability XXX
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Warranti es Premium s Typical Contingent Liabilities
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Recording Contingent Liabilities Probable liability has been incurred? Amount reasonably estimable? Warranty Expense 10,000 Estimated Liability 10,000 YES YES Record in 2008:
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Disclosing Contingent Liabilities IF not probable but reasonably possible OR amount not estimable Disclose in Financial Statement notes
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Contingent Assets Contingent gains and assets are not recorded but may be disclosed in financial statement notes Conservatism principle applies
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