07:3513-1Bob Anderson, UCSB 2004CURRENT LIABILITIES & CONTINGENCIESChapter1313-2Bob Anderson, 2004ECON 136A REFRESHERWhat is a liability?Present (not necessarily current) unavoidable obligation;Result of a past transaction;What makes a liability current?Conversion in one year or operating cycle, whichever is longerCurrent liabilities are not recorded at their present value as they “turn” soon enough that there is no material difference.13-3Bob Anderson, 2004136A ConceptsPurchase discounts on A/P has already been covered, refresher is in text. You can also look at:Purchase Cost $10,000 terms 2/10 net 30Purchases10,000Purchases9,800Accounts Payable10,000Accounts payable9,800Invoices of $4,000 paid within discount periodAccounts payable4,000Accounts payable3,920Purchase discount80Cash3,920Cash3,920Invoices of $6,000 paid after discount periodAccounts payable6,000Accounts payable5,880Cash6,000Purchase discounts lost120Cash6,000GROSS METHODNET METHOD13-4Bob Anderson, 2004Written promises to pay a certain sum of money on a specified future date.Example --On April 1, the corporation bought a truck for $30,000 from GM Company, paying $4,000 in cash and signing a one-year, 12% note for the balance of the purchase price.Notes Payable
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07:3513-5Bob Anderson, 2004April 1 Journal Entry ?DebitCreditTrucks30,000Cash4,000Notes payable26,000Any entry required at April 30 ?Interest expense260Interest payable260($26,000 x 12% / 12)Notes Payable13-6Bob Anderson, 2004Written promises to pay a certain sum of money on a specified future date. No such thing as 0% interest, always “impute a rate” if the stated rate is different than a reasonable rate.Example --On May 1, the corporation borrowed $80,000 from Lima National Bank by signing a $90,200 non-interest bearing note due in one year. Zero Interest-bearing Note13-7Bob Anderson, 2004May 1 Journal Entry ?DebitCreditCash80,000Discount on N/P10,200Notes payable90,200Any entry required at May 30 ?Interest expense850Discount on N/P 850($10,200 / 12 = $850)Straight-line amortization is only acceptable if the results are not materially different from the effective interest method.Zero Interest-bearing Note13-8Bob Anderson, 2004The portion of bonds, mortgage notes, and other long-term indebtedness that matures with the next fiscal year.Current Maturities of Long-term Debt