Contingent Loss Example Journal Entries 136b Chapter13

Topics: Generally Accepted Accounting Principles, Liability, Accounts payable Pages: 9 (1978 words) Published: June 13, 2015
CURRENT LIABILITIES &
CONTINGENCIES

ECON 136A REFRESHER
What is a liability?
 Present (not necessarily current) unavoidable
obligation;
 Result of a past transaction;

Chapter
13

What makes a liability current?
Conversion in one year or operating cycle,
whichever is longer
 Current liabilities are not recorded at their present
value as they “turn” soon enough that there is no
material difference.


Bob Anderson, UCSB 2004

13-1

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Bob Anderson, 2004

07:35



136A Concepts

Notes Payable

Purchase discounts on A/P has already been
covered, refresher is in text. You can also
look at:

Written promises to pay a certain sum of money
on a specified future date.
Example -On April 1, the corporation bought a truck for
$30,000 from GM Company, paying $4,000 in
cash and signing a one-year, 12% note for
the balance of the purchase price.

GROSS METHOD
Purchase Cost $10,000 terms 2/10 net 30
Purchases
10,000
Accounts Payable
10,000

NET METHOD
Purchases

9,800
Accounts payable

Invoices of $4,000 paid within discount period
Accounts payable
4,000
Accounts payable
Purchase discount
80
Cash
Cash
3,920
Invoices of $6,000 paid after discount period
Accounts payable
6,000
Cash
6,000

Bob Anderson, 2004

Accounts payable
Purchase discounts lost
Cash

9,800

3,920
3,920

5,880
120
6,000

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Bob Anderson, 2004

13-4

Notes Payable
April 1 Journal Entry ?
Trucks
Cash
Notes payable

Debit
30,000

Zero Interest-bearing Note
Written promises to pay a certain sum of money on a
specified future date. No such thing as 0% interest,
always “impute a rate” if the stated rate is different than a reasonable rate.

Credit
4,000
26,000

Any entry required at April 30 ?
Interest expense
260
Interest payable
($26,000 x 12% / 12)

Example -On May 1, the corporation borrowed $80,000 from Lima National Bank by signing a $90,200 non-interest
bearing note due in one year.

260

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Bob Anderson, 2004

Bob Anderson, 2004

13-6

07:35

Zero Interest-bearing Note
May 1 Journal Entry ?
Cash
Discount on N/P
Notes payable

Debit
80,000
10,200

Current Maturities of Long-term
Debt

Credit

90,200

Any entry required at May 30 ?
Interest expense
850
Discount on N/P
850
($10,200 / 12 = $850)
Straight-line amortization is only acceptable if the
results are not materially different from the effective
interest method.
Bob Anderson, 2004

13-7

The portion of bonds, mortgage notes, and
other long-term indebtedness that
matures with the next fiscal year.

Bob Anderson, 2004

13-8

Classification of Current Obligation to be Refinanced

Short-Term Obligations

It is possible that a “current” obligation may be
classified as long-term IF:
1.
Management intends to refinance
AND
Management can demonstrate the ABILITY to do
so

2.





Evidenced by commitment from lender or other party,
OR
Subsequent refinance before the financial statements
are issued (like a change in estimate)
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Bob Anderson, 2004

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Bob Anderson, 2004

07:35

Short-Term Obligations
Mgmt. Intends of Refinance

Short-Term Obligations
NO

Mgmt. Intends of Refinance

YES

Bob Anderson, 2004

YES

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Bob Anderson, 2004

NO
Classify as

Current
Liability

13-12

Short-Term Obligations

Short-Term Obligations

Mgmt. Intends of Refinance

NO
Classify as

YES

Current
Liability

Demonstrates Ability
to Refinance

NO

Mgmt. Intends of Refinance

NO
Classify as

YES

Current
Liability

Demonstrates Ability
to Refinance

YES

NO

YES

Actual Refinancing
after balance sheet date
but before issue date

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Bob Anderson, 2004

or

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Bob Anderson, 2004

07:35

Short-Term Obligations

Short-Term Obligations

Mgmt. Intends of Refinance

NO
Classify as

YES

Demonstrates Ability
to Refinance...
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