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Chapter 5: Q20Q. (page 238)

The creditors of Chester Company agree to accept promissory notes for the amount of its indebtedness with a proviso that two-thirds of the annual profits must be applied to their liquidation. How should these notes be reported on the balance sheet of the issuing company? Give a reason for your answer

Short Answer

Expert verified

Promissory notes must bereflected in the balance sheet as a long-term liability.

Step by step solution

01

Definition of Creditors

All the individuals or companies from which the business entity has borrowed money or purchased inventory are creditors. These are reported as liabilities of the business entity.

02

Reporting Promissory Notes

The business entity must report the promissory note as long-term liabilities in the company鈥檚 balance sheet. The balance sheet must also include the term related to a promissory note. At the end of each year after calculation of the profit. The business entity must transfer the promissory note balance from long-term liability to current liability, equal to two-thirds of profit generated. Such transfer must be followed until the business entity fully liquidates its promissory note.

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Most popular questions from this chapter

Sergey Co. has net cash provided by operating activities of \(1,200,000. Its average current liabilities for the period are \)1,000,000, and its average total liabilities are $1,500,000. Comment on the company鈥檚 liquidity and financial flexibility, given this information.

BE5-9 (L03) Use the information presented in BE5-8 for Adams Company to prepare the long-term liabilities section of the balance sheet.

BE 8: Included in Adams Company鈥檚 December 31, 2017, trial balance are the following accounts: Accounts Payable \(220,000, Pension Liability \)375,000, Discount on Bonds Payable \(29,000, Unearned Rent Revenue \)41,000, Bonds Payable \(400,000, Salaries and Wages Payable \)27,000, Interest Payable \(12,000, and Income Taxes Payable \)29,000. Prepare the current liabilities section of the balance sheet.

The bookkeeper for Geronimo Company has prepared the following balance sheet as of July 31, 2017.

GERONIMO COMPANY

Balance Sheet

As of July 31, 2017

Cash

\(69,000

Notes and accounts payable

\)44,000

Account receivable (net)

40,500

Long-term liabilities

75,000

Inventory

60,000

Stockholder鈥檚 equity

155,500

Equipment (net)

84,000

Patents

21,000

\(274,500

\)274,500

The following additional information is provided.

1. Cash includes \(1,200 in a petty cash fund and \)15,000 in a bond sinking fund.

2. The net accounts receivable balance is comprised of the following two items: (a) accounts receivable \(44,000 and (b) allowance for doubtful accounts \)3,500.

3. Inventory costing \(5,300 was shipped out on consignment on July 31, 2017. The ending inventory balance does not include the consigned goods. Receivables in the amount of \)5,300 were recognized on these consigned goods.

4. Equipment had a cost of \(112,000 and an accumulated depreciation balance of \)28,000.

5. Income taxes payable of $6,000 were accrued on July 31. Geronimo Company, however, had set up a cash fund to meet this obligation. This cash fund was not included in the cash balance but was offset against the income taxes payable amount.

Instructions

Prepare a corrected classified balance sheet as of July 31, 2017, from the available information, adjusting the account balances using the additional information.

Differentiate between operating activities, investing activities, and financing activities.

A recent financial magazine indicated that the airline industry has poor financial flexibility. What is meant by financial flexibility, and why is it important?
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