Current liabilities, contingencies, bonds and bond values
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1) What are the criteria for classifying an item as a current liability? What are some examples of current liabilities? Why is it important to classify a portion of long-term debt on a yearly basis as a current liability? What is the implication of misclassifying a liability as current or long-term?
2) What is a contingency? Why are contingencies important to users of financial statements? What are the criteria for recording contingencies? Should companies record a liability for threatened litigation? Why or why not?
3) What is a bond? What are some features of a bond? How do you value bonds? What factors can affect that value?
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Solution Summary
1) What are the criteria for classifying an item as a current liability? What are some examples of current liabilities? Why is it important to classify a portion of long-term debt on a yearly basis as a current liability? What is the implication of misclassifying a liability as current or long-term?
2) What is a contingency? Why are contingencies important to users of financial statements? What are the criteria for recording contingencies? Should companies record a liability for threatened litigation? Why or why not?
3) What is a bond? What are some features of a bond? How do you value bonds? What factors can affect that value?
Solution Preview
1 - Current liabilities are liabilities that will come due within one year's time. If the liability is due in more than one year, it is a long-term liability. When the liability is due is the determining factor for classifying a liability as short term or long term. Examples of current liabilities include accounts payable, wages payable, income taxes payable, and credit card debt. It is important to classify a portion of long term debt that's due on a yearly basis as a current liability because if it's not made, 100% of the debt would show as a long term liability. This would create an erroneous balance sheet and a misstatement in liquidity ratios, which use current liabilities. If a liability is ...
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