Chapter 13 notes - Chapter 10 What is a Current Liability?...

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Chapter 10 What is a Current Liability? Liabilities are classified as current or long-term. Current liabilities are present obligations that are expected to be satisfied within one year or within the normal operating cycle, whichever is longer. Long-term liabilities are expected to be satisfied beyond that period. Current liabilities are expected to be satisfied with current assets or through the incurrence of another current liability. Types of Current Liabilities Short-Term Notes Payable Short-term notes payable are current obligations evidenced by promissory notes that are due within one year of the date of the balance sheet. Promissory notes usually require the payment of interest. Interest can be stated separately or included in the face amount. In the latter case, the actual amount borrowed is less than the face amount. The journal entry to record issuing promissory note in exchange for cash is as follows: D. Cash $5,000 Cr. Notes Payable $5,000 The journal entry to record issuing promissory note to replace Account Payable is as follows: D. Account Payable $5,000 Cr. Notes Payable $5,000 The journal entry to record payment of note with interest stated separately is as follows: D. Notes Payable $5,000 Interest Expense 500 Cr. Cash $5,500 The journal entry to record accrued interest expense on note with interest stated separately at the end of the fiscal year (with no actual payment of the interest) is as follows: D. Interest Expense $250 Cr. Interest Payable $250
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maturity when some of the interest has been accrued in the previous year is as follows: D. Notes Payable $5,000 Interest Expense 250 Interest Payable 250 Cr. Cash $5,500 Discounted Promisory Notes (Not In Book) Sometimes Promisory Notes are issued without interest payments being specified. In order to get interest, the payee requires that the face amount of the note includes the principal owed plus the interest amount. In other words, if you give someone $100, and then sign a note promising to pay you $110 (no interest specified). You are really paying 10% interest. The fact that you got less than the face amount is called a discount. The journal entry for the issuance of such a note would be as follows: D. Cash $100 Discount on Note Payable 10 Cr. Notes Payable $110 When the interest has accrued: D. Interest Expense $10 Cr. Discount on Note Payable $10 Some people debit Interest Expense immediately rather than Discount on Note Payable. You really shouldn't debit the interest account until the interest has accrued. Under this approach you would make the following journal entry when the note is issued: D. Cash $100 Interest Expense 10 Cr. Notes Payable $110 When the promissory note is paid, you would make the following journal entry: D. Notes Payable $110 Cr. Cash $110 Sales Taxes Payable Most states and many cities levy a sales tax on retail transactions, and the federal government also charges an excise tax on some products. The merchant
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Chapter 13 notes - Chapter 10 What is a Current Liability?...

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