Purpose:
The balance sheets presented by public companies are classified balance sheets. In a classified balance sheet, liabilities are either reported as current liabilities or long-term liabilities. Classifying liability as either current or long-term helps investors and creditors assess the relative risk of a business liability. To ensure that the financial statement is a fair representation of the company's financial condition, there are rules governing the classification of classified balance sheet.
The purpose of this assignment is to help you practice how to report liabilities on the balance sheet following current U.S. GAAP. This assignment will also help you to become familiar with the following important content knowledge in accounting:
(1) Current and noncurrent liabilities; and
(2) Criteria for classification of liabilities.
Task:
1. Write a response to each of the following questions.
(1) Under current U.S. GAAP, how do we characterize current liabilities in general?
(2) What is the more discriminating definition accountants use when classify liabilities?
(3) Given a choice, do you suppose management would prefer to report an obligation as a current liability or as a noncurrent liability? Why?
2. Apply the general characteristic of current liabilities and the more discriminating definition of current liabilities, classify ABC Corporation's liabilities into current liabilities and noncurrent liabilities and prepare the liability section of ABC's balance sheet at December 31, 2012.
Criteria for success:
You will be successful in this assignment if you can:
1. Provide answers to all of the questions with descriptions that are clear to another reader;
2. Provide a logic reasoning for your response to question 1 (3) , and
3. Classify and present ABC Corporation's liabilities correctly on the balance sheet.
Background information:
ABC Corporation includes the following items in its liabilities at the financial statement date of December 31, 2012.
1. $500,000 of 10%, 10-year bonds, mature on June 30, 2018.
2. $10,000 accrued bond interests, payable on June 30, 2013.
3. Salary payable, $200,000, due Jan. 11, 2013.
4. $1,000,000 of 9%, 6-month note payable, due Feb 15, 2013.
The following transactions occurred early in 2013 before the financial statements for 2012 was issued on Mar. 1, 2013:
The salary payable was paid on Jan. 11, 2013;
To refinance the 9%, 6-month note payable by issuing a $1,200,000, 5-year, 10% note payable at par on Feb. 10, 2013 and using the proceeds to pay off the note due Feb. 15, 2013.