How To Prepare The Liabilities Section Of Obrian's Balance S

How To Prepare The Liabilities Section Of Obrians Balance Sheet On T

To prepare the liabilities section of O'Brian's balance sheet, list all current and long-term liabilities in order of their due dates or type. Start with current liabilities such as accounts payable of $157,000, FICA taxes payable of $7,800, interest payable of $40,000, unearned rent revenue of $240,000, income taxes payable of $3,500, and sales taxes payable of $1,700. Include notes payable due within the year, such as the $20,000 note due May 1, 2018, and the $80,000 due in 2019. Also, record long-term liabilities like bonds payable of $900,000, less the discount on bonds payable of $41,000, which reflects the bond's discounted value. The bonds payable are due in 2021, so they are classified as long-term liabilities. By accurately categorizing and summing these liabilities, you can ensure the liabilities section reflects the company's current obligations and long-term debt, providing a clear financial picture for stakeholders.

Paper For Above instruction

The liabilities section of O'Brian's balance sheet represents the company's obligations that arise from its business activities and must be settled through the transfer of assets or services in the future. Proper preparation involves categorizing liabilities into current liabilities, due within one year, and long-term liabilities, payable over a period exceeding one year. Effective classification ensures the balance sheet accurately portrays the company's financial position and liquidity status.

In preparing the liabilities section, start by listing current liabilities. These are obligations expected to be paid within the normal operating cycle or one year, whichever is longer. For O'Brian, these include accounts payable of $157,000, FICA taxes payable of $7,800, interest payable of $40,000, unearned rent revenue of $240,000, income taxes payable of $3,500, and sales taxes payable of $1,700. These are all short-term and should be presented collectively, indicating their urgency and liquidity impact.

Next, record notes payable that are due within the forthcoming year. The note payable of $20,000, due May 1, 2018, is a current liability because of its imminent maturity. Conversely, the note payable due in 2019, amounting to $80,000, should be classified as a long-term liability. Proper classification of these notes provides transparency concerning the company's short-term obligations and its ability to meet its financial commitments.

Long-term liabilities in O'Brian’s balance sheet include bonds payable of $900,000. However, since the bonds are issued at a discount of $41,000, this discount must be deducted from the face value of the bonds to reflect the bonds payable at its net carrying amount, which is $859,000 ($900,000 - $41,000). Bonds payable are due in 2021, fulfilling the criteria for long-term classification. Recognizing bonds payable net of discounts provides a more accurate valuation of the company's obligations, in line with accounting standards.

In sum, preparing the liabilities section involves accurately listing, classifying, and summing all obligations. Appropriate categorization enhances the clarity of the company's liquidity position, helps in assessing its financial health, and ensures compliance with accounting principles. The balance sheet thus becomes a reliable tool for investors, creditors, and management to gauge the firm's financial stability and investment potential.

References

  • Financial Accounting Standards Board (FASB). (2020). Accounting Standards Codification Topic 405 - Liabilities. FASB.
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