Managing Current Liabilities

2583 Words Jul 6th, 2012 11 Pages
Running head: MANAGING CURRENT LIABILITIES

Managing Current Liabilities:
The Great Balancing Act
06/26/2011

One of the most crucial steps in running a major corporation is ensuring that the balance sheet truly reflects the viability of the company. If investors feel that a firm holds too much debt reflecting in poor financial ratios, their stock price may become depressed resulting in angry shareholders. Therefore, why do companies engage in leveraging activities and worry about contingencies? There are many reasons for this and some of these reasons will be outlined in the context of this paper. This paper will attempt to address what exactly is a liability, the different forms it takes, the reasons behind using
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LIBOR is “the world’s most widely used benchmark for short-term interest rates” (“Investopedia”, 2011). Furthermore, the terms of the note also indicate that installment payments must be made monthly. When the promissory note is executed, the companies should credit notes payable, and debit either cash or an asset (equipment) depending on if the lender sent funds directly to the company or whomever the asset is to be purchased from.
One month later, the company must make its first payment on the borrowed funds. Suppose the current LIBOR rate is 0.20. Subsequently, the interest rate for the first payment would be 3.20 percent. When the company pays the first payment, it would debit both notes payable and interest expense for the amounts due and credit cash. The company would continue this procedure until the balance of thirty million is paid in full ten years from the date of the promissory note.
The second type of note is a line a credit. A committed line of credit is a formal agreement that would require a commitment fee to be paid by the company in order to keep the line of credit open (Spiceland et al., 2011). For example, suppose a company opens a fifteen million dollar line of credit. When the company is ready to begin construction
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