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Chapter 13: Question 1IFRS (page 715)

Under what conditions should a short-term obligation be excluded from current liabilities?

Short Answer

Expert verified

A company should not include short-term obligations under current liabilities if it plans to refinance the obligation on a long-term basis. It indicates the ability to consummate the refinancing.

Step by step solution

01

Definition of Current liabilities

Current liabilities are the liabilities payable within an accounting year. These are created out of realization from current assets or by creating fresh current liability (obligation).

02

Conditions under which a short-term obligation be excluded from current liabilities

A firm is required to exclude a short-term obligation from current liabilities if it aims to refinance the obligation on a long-term basis and:

  1. The firm can show the ability to consummate the refinancing.
  2. The obligation is not considered as a part of normal operations.
  3. It can demonstrate that there will be a negative effect on working capital if it is not further classified.
  4. The interest rate on the long-term obligation is below the prime rate.

Thus, these are conditions that suggest that the short-term be excluded from current liabilities.

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Most popular questions from this chapter

Question: In determining the amount of a provision, a company using IFRS should generally measure:

(a) Using the midpoint of the range between the lowest possible loss and the highest possible loss.

(b) Using the minimum amount of the loss in the range.

(c) Using the best estimate of the amount of the loss expected to occur.

(d) Using the maximum amount of the loss in the range.

CA13-7 ETHICS (Warranties) The Dotson Company, owner of Bleacher Mall, charges Rich Clothing Store a rental fee of \(600 per month plus 5% of yearly profits over \)500,000. Matt Rich, the owner of the store, directs his accountant, Ron Hamilton, to increase the estimate of bad debt expense and warranty costs in order to keep profits at $475,000.

Instructions

Answer the following questions.

(a) Should Hamilton follow his boss’s directive?

(b) Who is harmed if the estimates are increased?

(c) Is Matt Rich’s directive ethical?

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Discuss the accounting treatment or disclosure that should be accorded a declared but unpaid cash dividend, an accumulated but undeclared dividend on cumulative preferred stock, and a stock dividend distributable.

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Business model is to hold the investment to collect interest while outstanding and to receive the principal at maturity.
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