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Chap 11 Outline[1]

Chap 11 Outline[1] - Chapter Outline I A 1 2 3 B 1 2 C 1 2...

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Chapter Outline Notes I. Characteristics of Liabilities A. Defining Liabilities Probable future payments of assets or services that a company is presently obligated to make as a result of past transactions or events. Note three crucial factors: 1. Due to past transaction or event. 2. Present obligation. 3. Future payment of assets or services. B. Classifying Liabilities 1. Current liabilities ( short-term liabilities ) Obligations due within one year or the company's operating cycle, whichever is longer. 2. Long-term liabilities Obligations not expected to be paid within the longer of one year or operating cycle. C. Uncertainties in Liabilities requires addressing three important questions that are sometime uncertain at the time liability is incurred: 1. Whom to pay? (Ex. A note “Payable to Bearer”) 2. When to pay? (Ex. Unearned revenues may not know when service will be provided to satisfy) 3. How much to pay? (Ex. Accrued expense that needed to be estimated prior to receipt of bill) II. Known Liabilities Set by agreements, contracts, or laws and are measurable. (also called definitely determinable liabilities) Examples of these liabilities in the current classification include: A. Accounts Payable Amounts owed to suppliers for products or services purchased with credit. B. Sales Taxes Payable Amounts the retailer (seller) collects as sales taxes from customers when sales occur, and currently owes to the government until remitted. C. Unearned Revenues also known as deferred revenues, collections in advance and prepayments . Amounts received in advance from customers for future products or services.
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Chapter Outline Notes D. Short-Term Notes Payable Written promise to pay a specified amount on a definite future date within one year or t he company’s operating cycle, whichever is longer. Can arise from many transactions; two common examples: 1. Creditor requires the substitution of an interest-bearing note for an overdue account payable that does not bear interest. ( Dr Accounts Payable, Cr Notes Payable) 2. Note given to borrow money from bank. Ex. Face value equals amount borrowed ( principal ) and at maturity a larger amount is repaid. The difference between amount borrowed and repaid is the interest . The note is recorded at and reported at face value. ( Dr Cash, Cr Notes Payable) In both examples above, interest is recorded as incurred. This may be when paid with note or as end-of -period accrued interest adjustment.
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