Kieso 13e_chapter 13 notes - CHAPTER 13 REVIEW 1 Chapter 13 presents a discussion of the nature and measurement of items classified on the balance sheet

Kieso 13e_chapter 13 notes - CHAPTER 13 REVIEW 1 Chapter 13...

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CHAPTER 13 REVIEW 1. Chapter 13 presents a discussion of the nature and measurement of items classified on the balance sheet as current liabilities. Attention is focused on the mechanics involved in recording current liabilities and financial statement disclosure requirements. Also included is a discussion concerning the identification and reporting of contingent liabilities. Current Liabilities 2. (S.O. 1) In general, liabilities involve future disbursements of assets or services. According to the FASB, a liability has three essential characteristics: (a) it is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services; (b) it is an unavoidable obligation; and (c) the transaction or other event creating the obligation has already occurred. Liabilities are classified on the balance sheet as current obligations or long-term obligations. Current liabilities are those obligations whose liquidation is reasonably expected to require use of existing resources classified as current assets or the creation of other current liabilities. 3. The relationship between current assets and current liabilities is an important factor in the analysis of a company’s financial condition. Thus, the definition of current liabilities for a particular industry will depend upon the time period (operating cycle or one year, whichever is longer) used in defining current assets in that industry. Accounts Payable 4. Accounts payable represents obligations owed to others for goods, supplies, and services purchased on open account. These obligations, commonly known as trade accounts payable, should be recorded to coincide with the receipt of the goods or at the time title passes to the purchaser. Attention must be paid to transactions occurring near the end of one accounting period and at the beginning of the next to ascertain that the record of goods received (inventory) is in agreement with the liability (accounts payable) and that both are recorded in the proper period. Notes Payable 5. Notes payable are written promises to pay a certain sum of money on a specified future date and may arise from sales, financing, or other transactions. Notes may be classified as short-term or long-term, depending on the payment due date. 6. Short-term notes payable resulting from borrowing funds from a lending institution may be interest-bearing or zero-interest-bearing. Interest-bearing notes
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payable are reported as a liability at the face amount of the note along with any accrued interest payable. A zero- interest-bearing note does not explicitly state an interest rate on the face of the note. Interest is the difference between the present value of the note and the face value of the note at maturity. For example, Burke Co. borrowed $138,000 from a bank by giving the bank a one-year, zero- interest-bearing note that has a face amount of $150,000. The entry to record this transaction on Burke’s books would be as follows: Cash ............................................................. 138,000 Discount on Notes Payable ............................ 12,000 Notes Payable ............................................... 150,000
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  • Spring '10
  • Joung
  • Balance Sheet, ........., Generally Accepted Accounting Principles

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