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Lecture 1

ACC 311 Lecture Notes - Lecture 1: Quick Ratio, Deferred Income, Revolving Credit

Course Code
ACC 311
Professor De La Rosa

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Current Liabilities and Contingencies
Part A: Current Liabilities
I. Characteristics of Liabilities
A. Most liabilities obligate the debtor to pay cash at specified
times and result from legally enforceable agreements.
B. Some liabilities are not contractual obligations and may not be
payable in cash.
C. A liability is a present obligation to sacrifice assets in the future
because of something that already has occurred ( 3 essential
II. What is a Current Liability?
A. Classifying liabilities as either current or long-term helps
iestos ad editos assess the elatie isk of a usiesss
B. Current liabilities are expected to require current assets and
usually are payable within one year.
C. Current liabilities ordinarily are reported at their maturity
1. Practical expediency
2. Conceptually, liabilities should be recorded at their present
3. Relatively short time to maturity
III. Accounts Payable and Notes
A. Open accounts and notes
1. Accounts payable Buying merchandise on account in the
ordinary course of business creates accounts payable
2. Trade notes payable Formally recognized by a written
promissory note; sometimes bear interest
B. Short-term notes payable
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1. Line of credit allows a company to borrow cash without
having to follow formal loan procedures and paperwork
2. Interest on notes face amount x annual rate x time to
3. Noninterest-bearing notes iteest is disouted fo the
face amount of a note; the effective interest rate is higher
than the stated discount rate
4. Secured loans a specified asset (often inventory or accounts
receivable) is pledged as collateral or security for the loan
C. Commercial paper
1. Large, highly rated firms
2. Lower rate than through a bank loan
3. Unsecured notes sold in minimum denominations of $25,000
4. Maturities ranging from 30 to 270 days
5. Interest often discounted at the issuance of the note
6. Usually backed by a line of credit
7. Recording its issuance and payment exactly the same as
forms of notes payable
Prepare the journal entries for each of the liabilities, including any
year-end adjusting entries for United Corporation. United’s year end
is June 30.
Jan 13 Negotiated a revolving credit agreement with the Parish Bank
that can be renewed annually upon bank approval. The
amount available under the line of credit is $20 million at the
aks pie ate.
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Feb 1 Arranged a three-month bank loan of $5 million with Parish
Bank under the line of credit agreement. Interest at the
prime rate of 10% was payable at maturity.
May 1 Paid the note at maturity.
Dec 1 Supported by the credit line, issued $10 million of
commercial paper on a nine-month note. Interest was
discounted at issuance at a 9% discount.
June 30 Fiscal year-end
Sept 1 Paid the commercial paper at maturity
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