Accounting Week 6 Chapter 10
On November 30, 2010, Central Food purchased two trucks for a total of $140,000, issuing a one-year, 6% note payable, all due at maturity. The interest on this loan is stated separately. A. The December 31, 2010, adjusting entry for this note includes? B. The total liabilities related to this note reported in Central Food's Dec. 31, 2010 balance sheet is? C. What is the amount of interest expense central food's recognizes on this note in 2011? D. How much must Central Food pay the lender upon maturity of this note? E. The liability for this loan as of Dec. 31, 2010?
A. The December 31, 2010, adjusting entry for this note includes a credit to Interest Payable for $700. B. The total liabilities related to this note reported in Central Food's December 31, 2010, balance sheet is $140,700. C. $7,700 is the amount of interest expense Central Food's recognizes on this note in 2011. D. Central Food must pay $148,400 to the lender upon maturity of this note. E. The liability for this loan as of December 31, 2010 is classified as a long-term liability if Central Food has the intent and ability to refinance by taking out a new loan not due for several years.
Current Liabilities
Are defined as obligations that will come due within a year. The period of one year is the current operating cycle of a company which matches its current asset's time requirement which is also on year. Accounts Payable - most common current liablility Unearned Revenues - defered revenues, means that the business has been paid for sales or service activities that have not yet occurred. Long-Term Debt - current portion of long-term debt is that portion of a long term debt due within on year. principal amount due within on year is shown as current while the interest portion is shown as accrued interest payable.
Owners' Equity
Can be separated into the original investments of owners and equity that was earned and retained by the company. Does not mature.
Long Term Liabilities
Example Bond prices are sometimes quoted as percentages of maturity values. For example: A $1,000,000 face value bond is sold for $1,000,000, which means this bond sold for 100% of its maturity value. The journal entry to record the issuance of this bond would be: Debit Credit Cash $1,000,000 Bonds Payable $1,000,000 A $1,000,000 face value bond is sold for $976,000, which means the bond sold at 97.0% (quoted as 97) of its maturity value. Therefore, the bond was sold at a discount. The journal entry to record the issuance of this bond would be: Debit Credit Cash $976,000 Discount on Bonds $24,000 Bonds Payable $1,000,000 A $1,000,000 face value bond is sold for $1,030,000, which means the bond sold at 103% (quoted as 103) of its maturity value. Therefore, the bond was sold at a premium. The journal entry to record the issuance of this bond would be: Debit Credit Cash $1,030,000 Bonds Payable $1,000,000 Premium on Bonds $30,000
Businesses have two basic sources of financing
Liabilities and Owners' equity
Many Liabilities are for a definite dollar amount, clearly stated by contract. examples:
Notes payable, Accounts payable, Accrued expenses, Interest payable, Salaries payable.
Liabilities
all liabilities eventually mature. They come due and must be paid. Providers of money are considered creditors rather than owners.
Contingent Liabilities
are uncommon, but may be reported if they are a result of a pending condition. Examples of this type of liabliity could be a legal lawsuit and potential fines or actions from regulators.
