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Tom Perry - liabilities and reporting of the interest

Tom Perry recently completed the first month of his landscaping business and has contacted you for help in preparing financial statements. While he understands that liabilities are the debts his business owes, he is a little confused about the difference between current and long-term liabilities. His business currently owes the following:

â?¢Accounts owed to suppliers $500
â?¢Mortgage on greenhouse $32,000
â?¢90-day note from bank $1,500
â?¢5-year loan to purchase equipment $10,000

In a memo to Tom, explain the difference between current and long-term liabilities, demonstrate the preparation of the liabilities section of his balance sheet, and discuss how he should record the liabilities of his business. Be sure to discuss the reporting of the current portion of his long-term debt. Also discuss the reporting of the interest he must pay on his loans.

Solution Preview

Dear Tom,

Current liabilities include any owed amounts that are due in the upcoming year. Amounts owed that are due later than that are classified as long term. So, let's look at the four liabilities that you have now and see how they should be classified.

First, the accounts that you owe suppliers, $500, should be classified as short-term since they are due in 30 days (terms of the invoice). Next, the mortgage on the greenhouse, requires that you split the current balance into two parts - the part that will be ...

Solution Summary

Your tutorial is 332 words and shows a mock liability section and discusses each of the four items in a memo to Tom.

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