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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’s 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

Consider the bond investment by Lady Gaga in IFRS17-5. Discuss the accounting for this investment if Lady Gaga’s

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

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’s 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.

Fairbanks Corporation purchased 400 ordinary shares of Sherman Inc. as a trading investment for \(13,200. During the year, Sherman paid a cash dividend of \)3.25 per share. At year-end, Sherman shares were selling for $34.50 per share. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment

What is the nature of a “discount: on notes payable?

Explain the accounting for an assurance-type warranty.
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