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Lecture 1

AFM123 Lecture Notes - Lecture 1: Promissory Note, Life Insurance, Canada Pension Plan


Department
Accounting & Financial Management
Course Code
AFM123
Professor
Peter Blake
Lecture
1

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AFM 123 Liabilities
All liabilities are recorded at the amount of the obligation owed on that particular date. They will either be
classified as Current Liabilities or Long-Term Liabilities. Current Liabilities will be paid within one year from
the Balance Sheet. Long Term Liabilities will be paid later than one year from the Balance Sheet date.
In some cases, the amount owed changes with the passage of time since interest is being charged (note payable,
loan payable, mortgage payable). In other cases, the amount owed does not change until it is paid (amounts
owed under Accounts Payable where interest is not charged).
Accounts Payable – buy merchandise on account; e.g. $1,000 worth of inventory, due in 30 days
DR Inventory $1,000
CR Accounts Payable $1,000
When pay:
DR Accounts Payable $1,000
CR Cash $1,000
Notes Payable – promissory notes signed by officer and usually interest is charged; e.g. $2,000 note payable
due in one month plus interest at 12% p.a. (i.e. receive $2,000 cash; repay $2,020 in one month)
DR Cash $2,000
CR Notes Payable $2,000
When re-pay:
DR Notes Payable $2,000
DR Interest Expense $ 20
CR Cash $2,020
Adjusting for unpaid interest at reporting dates:
Since interest is charged and owed as time passes, it is sometimes necessary to make adjustments for unpaid
interest at a reporting date. For example, assume ABC Corporation’s year-end date is December 31. On Sept. 1,
they sign a 6 month promissory note for $14,000 agreeing to pay interest at 6% p.a. The entire balance must be
repaid on February 28, but on December 31, ABC not only owes the $14,000, they also owe 4 months’ interest
(14,000*.06*4/12 = $280). Therefore, in order for the balance sheet to reflect all amounts owing, the following
entry is made:
DR Interest Expense $280
CR Interest Payable $280
When pay:
DR Interest Payable $280
DR Interest Expense $140
CR Cash $420
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