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Chapter 7 Comments 8th ed

Chapter 7 Comments 8th ed - Instructor Comments Chapter...

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Instructor Comments Chapter Seven Welcome to Chapter Seven on liabilities. This chapter provides you with a good discussion of both current and long-term liabilities. Interest Although most of you probably understand how to compute interest on a loan, if you are having any trouble, make sure that you understand the formula and computations at the top of page 119 and page 246. Interest on a Discount Basis Traditionally, interest on a note is paid at the end of the note when the principal is paid. However, some financial institutions will deduct the interest on a note from the loan proceeds at the beginning when cash is received. This is called “discounting” and is explained on page 247. The first journal entry on page 248 (about one third of the way down the page) illustrates this situation. Note that the amount of cash received is only $880, not $1,000 which is the amount that must be paid when the note matures. Therefore, even though the note is for $1,000, you actually only receive $880. Since you only received $880, and the cost (the interest on the loan) is $120(12% of $1,000 for one year), the effective interest rate is higher than it would have been had you received $1,000 when the money was borrowed. To clarify, interest computed on the $880 actually received at 12% for one-year is less than $120. Keep this in mind the next time you personally plan to borrow money!!! Unearned Revenue Although you already have been exposed to “unearned revenue”, you should understand the discussion on unearned revenue, and the journal entry in the middle of page 251, as well as the required adjusting entry in the middle of page 251.
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Purchase Discounts When merchandise is purchased and a discount is offered, there are two ways to record the transaction (pages 250 and 251). Do not
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