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Chapter 13: Question 3Q (page 691)

Why is the liabilities section of the balance sheet of primary significance to bankers?

Short Answer

Expert verified

The liabilities section of the balance sheet is of great importance as it helps in understanding the organization鈥檚 liquidity.

Step by step solution

01

Meaning of Liabilities Section

Liabilities are treated as obligations of the company. The liabilities section of the balance sheet is recorded after the assets section in the balance sheet which includes different types of loans, debts, accounts payable, equities, etc.

02

Importance of liabilities section of the balance sheet to bankers

In consideration of any financial statements of a company, the balance sheet is regarded as an effective instrument in evaluating financial health at a certain point in time.

The banker being the lender of money is interested in the importance of his claim on the assets of the company in relation to other claims. All potential creditors are required to do the due diligence of the liabilities section and its associated footnotes indicating amounts, maturity dates, collateral, subordination, and restrictions of existing contractual deeds.

The assets and the revenue resource are equally important to a banker considering a loan.

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Most popular questions from this chapter

Question: (Lessee-Lessor Entries, Operating Lease) Cleveland Inc. leased a new crane to Abriendo Construction under a 5-year noncancelable contract starting January 1, 2017. Terms of the lease require payments of \(33,000 each January 1, starting January 1, 2017. Cleveland will pay insurance, taxes, and maintenance charges on the crane, which has an estimated life of 12 years, a fair value of \)240,000, and a cost to Cleveland of \(240,000. The estimated fair value of the crane is expected to be \)45,000 at the end of the lease term. No bargain-purchase or -renewal options are included in the contract. Both Cleveland and Abriendo adjust and close books annually at December 31. Collectibility of the lease payments is reasonably certain, and no uncertainties exist relative to unreimbursable lessor costs. Abriendo鈥檚 incremental borrowing rate is 10%, and Cleveland鈥檚 implicit interest rate of 9% is known to Abriendo.

Instructions

  1. Identify the type of lease involved and give reasons for your classification. Discuss the accounting treatment that should be applied by both the lessee and the lessor.

BE13-2 (L01) Upland Company borrowed \(40,000 on November 1, 2017, by signing a \)40,000, 9%, 3-month note. Prepare Upland鈥檚 November 1, 2017, entry; the December 31, 2017, annual adjusting entry; and the February 1, 2018, entry.

Journal Entries for Fair Value and Equity Methods) The following are two independent situations.

Situation 1: Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of \(13 per

share on March 18, 2017. On June 30, Martinez declared and paid \)75,000 cash dividends to all stockholders. On December 31,

Martinez reported net income of \(122,000 for the year. At December 31, the market price of Martinez Fashion was \)15 per share.

Situation 2: Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles鈥檚 30,000 outstanding shares

of common stock at a total cost of \(9 per share on January 1, 2017. On June 15, Seles declared and paid cash dividends of \)36,000

to all stockholders. On December 31, Seles reported a net income of $85,000 for the year.

Instructions

Prepare all necessary journal entries in 2017 for both situations.

Within the current liabilities section, how do you believe the accounts be listed? Defend your position.

Presented below are two independent cases related to available-for-sale debt investments.

Case 1 Case 2

Amortized cost \(40,000 \)100,000

Fair value 30,000 110,000

Expected credit losses 25,000 92,000

For each case, determine the amount of impairment loss, if any
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