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LN_current liabilities and contingencies (Ch13)

LN_current liabilities and contingencies (Ch13) - Ch 13...

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Ch 13: Current Liabilities and Contingencies ACCT 401, SP 11 1. LIABILITIES 1) According to the conceptual framework, a liability has three essential characteristics: A. are ____________________ obligations. B. result from _____________ transactions or events C. are _____________ sacrifices of economic benefits arise from ______ obligation 2) Classifying liabilities as either current or long-term helps investors and creditors assess the risk that the liability will require the use of cash/other assets in the near- term. Note: To be reported as a liability, an obligation does not need to be payable in cash. Nor does the amount and timing need to be precisely known. 2. CURRENT LIABILITIES 1) Definition : current liabilities are “obligations that are expected to be satisfied with current assets or by the creation of other current liabilities .” 2) Examples of current liabilities Accounts payable and other accrued liabilities Short-term notes payable Dividends payable Unearned (deferred) revenues Taxes payable Current maturities of long-term debt
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Ch 13: Current Liabilities and Contingencies ACCT 401, SP 11 3) Special Topics on Current Liabilities: A. Short-term Notes Payable a. A short-term notes payable is a very common type of temporary financing arrangement. A company signs a promissory note, whereby the company promises to pay a sum of money (the principal) at a specified due date. The promissory note also will specify any interest to be paid on the loan/note. b. A note payable may arise when a company borrows cash from a lending institution OR as a result of a purchase /financing arrangement with a vendor. c. For short-term notes payable, we will NOT use time value of money calculations. Why? _________________________________________________________ d. EXAMPLE 1: SHORT-TERM INTEREST BEARING NOTE On 5/1/2011, College borrows $700 cash from Columbia Bank and signs a 6-month, 10% promissory note. Interest is payable at maturity. Prepare the entries to record the issuance of the note and any other entries required during 2011. College is a calendar year-end company. Step 1: issuance of note ( May 1, 2011) Cash ...................................................................................... 700 Notes payable ................................................................... 700 Step 2: maturity of note ( November 1, 2011) Interest expense ..................................................................... 35 Notes payable ......................................................................... 700 Cash ................................................................................ 735
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Ch 13: Current Liabilities and Contingencies ACCT 401, SP 11 e. Short-term notes payable may also be issued at zero-interest, just like long- term notes. With zero-interest bearing notes (i.e., no face amount of interest stated), what type of account is created along with the note payable? o _____________________________________________________ _ B. Interest payable arises in connection with notes payable (either short-term or long-term) and other forms of debt. Companies must record interest payable for interest accrued during the year, but not yet paid. a. Let’s revisit the College problem from EXAMPLE 1. But, now assume that College has a fiscal year-end of June 30 th . EXAMPLE 2: SHORT-TERM INTEREST-BEARING NOTE On 5/1/2011, College borrows $700 cash from Columbia Bank and signs a 6-month, 10% promissory note. Interest is payable at maturity. Prepare the entries to record the issuance of the note and any other entries required during 2011. College’s fiscal year ends on June 30.
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