Chapter 13 Discussion Notes Fall 2014 Essay

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Words: 2824
Pages: 12

13-1

Current Liabilities and
Contingencies
Chapter 13
Current Liabilities: Nature and Examples of
Current Liabilities, Imputing Interest
Contingencies: Warranties/Guarantees,
Premiums, Litigation, Subsequent Events,
Unasserted Claims

13-2

Characteristics of Liabilities
Probable
Probable future future sacrifices sacrifices of of economic economic benefits. benefits.

Arise
Arise
from from present present obligatio obligatio ns ns to to other other entities. entities. Result
Result
from from past past transactio transactio ns ns or or events. events. 13-3

What is a Current Liability?
LIABILITIES
LIABILITIES
Current
Current Liabilities
Liabilities
Obligations
Obligations payable payable within within one one year year or or one one operating operating cycle, cycle, whichever whichever is is longer. longer. Expected
Expected to to be be satisfied satisfied with with current current assets assets or or by by the the creation creation of of other other current current liabilities. liabilities. Long-term
Long-term
Liabilities
Liabilities

13-4

Current Liabilities
Account
s payable Taxes payable Unearne d revenue s Cash dividends payable
Current
Liabilitie s Accrued expense s
Short-term
notes payable 13-5

Open Accounts and Notes
 Accounts
Accounts Payable
Payable

Obligations
Obligations to to suppliers suppliers for for goods goods purchased purchased on on open open account. account.  Trade
Trade Notes
Notes Payable
Payable

Similar
Similar to to accounts accounts payable, payable, but but recognized recognized by by aa written written promissory promissory note. note.  Short-term
Short-term Notes
Notes Payable
Payable

Cash
Cash borrowed borrowed from from the the bank bank and and recognized recognized by by aa promissory promissory note. note.  Credit
Credit lines lines Prearranged
Prearranged agreements agreements with with aa bank bank that that allow allow aa company company to to borrow borrow cash cash without without following following normal normal loan loan 13-6

Interest
Interest on notes is calculated as follows: Face
Amount

Amount
Amount
borrowe borrowe d d ×

Annual
Rate

×

Interest
Interest rate rate is is always always stated stated as as an an annual annual rate. rate. Time To
Maturity

Interest
Interest owed owed is is adjusted adjusted for for the the portion portion of of the the year year that that the the face face amount amount is is outstanding. outstanding. 13-7

Interest-bearing Notes
On
On September
September 1,
1, Eagle
Eagle Boats
Boats borrows borrows $80,000
$80,000
from from Cooke
Cooke Bank.
Bank. The
The note note is is due due in in 66 months months and and has has aa stated stated interest interest rate rate of of 9%.
9%. Record
Record
the the journal journal entry. entry. September 1:
Cash ....................................................
Notes payable .......................

80,000
80,000

To record short-term note payable to Cooke Bank.

How
How much much interest interest is is owed owed to to Cooke
Cooke Bank
Bank at at year-end, year-end, on on December
December 31?
31?
$80,000 × 9% × 4/12 = $2,400

13-8

Interest-bearing Notes
Assume
Assume Eagle
Eagle Boats’
Boats’ year-end year-end is is December
December 31.
31.
Record
Record the the necessary necessary adjustment adjustment at at year-end. year-end. December 31:
Interest expense ................................... payable .......................

2,400

Interest

2,400

To accrue interest on note due to Cooke Bank.

Record
Record the the journal journal entry entry for for the the loan loan repayment repayment when when the the note note matures matures on on February
February 28.
28.
February 28:
Interest payable ...................................
Interest expense ...................................
Notes payable ……………………………
Cash ……………………………
To pay off note and interest.

2,400
1,200
80,000
83,600

13-9

Noninterest-bearing Notes
Notes
Notes without without aa

stated stated interest…