Assume that on December 1, 2010, your company borrowed $ 14,000, a portion of wh
ID: 2348941 • Letter: A
Question
Assume that on December 1, 2010, your company borrowed $ 14,000, a portion of which is to be repaid each year on November 30.Specifically, your company will make the following principal payments: 2011, $ 2,000; 2012, $ 3,000; 2013, $ 4,000; and 2014, $ 5,000. Show how this loan will be reported in the December 31, 2011 and 2010 balance sheets, assuming that principal payments will be made when required.
Current Liability Amount to be repaid in 2011 -- $2,000
Long term liability (Non- Current) - Amount to be repaid in 2012-2014 - $12,000
Use the information above to complete the following requirements:
1. GIVE THE JOURNAL ENTRY TO RECORD THE NOTE ON NOVEMBER 1, 2010
2. GIVE ANY ADJUSTING ENTRY REQUIRED ON DECEMBER 31, 2010.
3. GIVE THE JOURNAL ENTRY TO RECORD PAYMENT OF THE NOTE AND THE INTEREST ON THE MATURITY DATE, APRIL 30. 2011, ASSUMING THAT INTEREST HAS NOT BEEN RECORDED SINCE DECEMBER 31, 2010.
ANY HELP WOULD BE MUCH APPRECIATED. THANKS IN ADVANCE
Explanation / Answer
Liabilities that are not paid off within a year, or within a business's operating cycle, are known as long-term or noncurrent liabilities. Such liabilities often involve large sums of money necessary to undertake opening of a business, conduct a major expansion of a business, replace assets, or make a purchase of significant assets. Such debt typically requires a longer period of time to pay off. Examples of long-term liabilities include notes, mortgages, lease obligations, deferred income taxes payable, and pensions and other postretirement benefits. When debt that has been classified as long-term is paid off within the next year, the amount of that paid-off liability should be reported by the company as a current liability in order to reflect the expected drain on current assets. An exception to this rule, however, comes into effect if a company decides to pay off the liability through the transfer of noncurrent assets that have been previously accumulated for that very purpose. So based on above, in 31 Dec'10 Balance sheet, Long-Term Liability will be $14000 In 31 Dec'2011 Balance sheet, LT Liability will be $12000