Contingent Loss Example Journal Entries 136b Chapter13
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
13-2
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
13-3
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
13-5
Bob Anderson, 2004
Bob Anderson, 2004
13-6
07:35
Zero Interest-bearing Note
May 1 Journal Entry ?
Cash
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
13-2
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
13-3
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
13-5
Bob Anderson, 2004
Bob Anderson, 2004
13-6
07:35
Zero Interest-bearing Note
May 1 Journal Entry ?
Cash