Generally Accepted Accounting Principles and Short-term Borrowings

Topics: Generally Accepted Accounting Principles, Debt, Balance sheet Pages: 3 (611 words) Published: September 16, 2013
Break question – Chapter 13, lecture #1

Wilk Co. reported the following liabilities at December 31 of the current year:

Accounts Payable – trade 750,000
Short-term borrowings 400,000
Bank loan, current portion $100,0003,500,000
Other bank loan1,000,000

The bank loan of $3,500,000 was in violation of the loan agreement. The creditor had not waived the rights for the loan. Half the other bank loan will mature on June 30 next year, and the other half in the year following. Interest on the other bank loan is not included in the above figures. Interest of $75,000 was paid on June 30 of the prior year along with an installment on the loan principal, and interest of $50,000 will be paid with the next installment on June 30 next year. What amount should Wilk report as current liabilities at December 31 this year?

a. $1,250,000
b. $4,650,000
c. $5,175,000
d. $5,700,000

Solution:

The A/P and short-term borrowings are current, and because the $3.5M bank loan is in violation of a loan provision (and the creditor has not waived his rights), the full $3.5M is due and a current liability.

Of the $1 M bank loan, interest that has accrued between June 30 last year and December 31 also needs to be shown as a current liability, along with the $500,000 principal payment (1/2 the $1 million).

The total interest is $50,000, but only ½ of that has accrued between July 1 of the current year and December 31, so another $25,000 should be included as a current liability as of December 31. The interest rate is 5% (but that wasn’t part of the required).

750,000 + 400,000 + 3,500,000 + 500,000 + 25,000 = $5,175,000 (C)

Break question – Chapter 13, lecture #2

During January of the current year, Haze Corp. won a litigation award of $15,000 which was tripled to $45,000 to include punitive damages. The defendant, who is financially stable, has appealed only the $30,000 of punitive damages. Haze was awarded $55,000 in...
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