Bronson Distributors owes a supplier $100,000 on open account. The amount is payable in three months....
Bronson Distributors owes a supplier $100,000 on open account. The amount is payable in three months. What is the theoretically correct way to measure the reportable amount for this liability? In practice, how will it likely be reported? Why?
Homework Answers
Theoretically:
The amount of liability should be recorded at its present value after considering a discounting rate and all anticipated future payments (like interests and principals). All such future payments should be multiplied with related discounting factors and then should be aggregated to get the present value.
Practice:
It may be reported as ordinarily without any present value consideration; as the amount is $100,000 in the open account, it is likely to be reported as it is.
The reason behind it is its time of maturity, which is only 3 months from now; if a liability is to be paid in less than 1 year time, present value calculation usually is not done; it happens because of its short-term nature.
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