F4:M3-Long-Term Liabilities Flashcards
(7 cards)
How to report long-term notes payable on the balance sheet?
- Report at **present value (PV) **of future payments if term > 1 year.
- Current portion at full amount separately.
- Record discount = face value – PV, amortized over life.
- If term ≤ 1 year, report at face value (no discount).
- Disclose key terms and any restricted cash related to the note.
What is Imputed Interest?
Imputed interest is the interest that must be recognized on a loan or note when no interest rate is stated or when the stated interest rate is unreasonably low. This is done to reflect the true economic cost of borrowing, based on the market rate of interest.
What is the Carrying Amount (Present Value) formula?
Carrying Amount (Present Value) = Notes Payable (face value) − Discount on Notes Payable
When do you just record a note payable at face value on the balance sheet?
When the note is due within 1 year the company records the notes payable at face value.
When do you record a note payable at the present value of the obligation?
When the note payable due date is > 1 year
How are mandatorily redeemable financial instruments that require settlement by issuing shares classified under U.S. GAAP?
They are classified as liabilities, not equity, because they represent an unconditional obligation to transfer assets.
What is the effective interest method and how does it work?
The effective interest method is a way to allocate interest expense (or interest income) over the life of a financial instrument, such as a note payable or a bond. Interest is calculated based on carrying value instaed of face value.
