Thursday, July 2, 2009

the nature of liability (2)

If the borrower defaults on a secured loan, the creditors may foreclose upon the pledged assets. Assets which have been pledged as security for loans should be identified in notes accompanying the borrower's financial statements.
Most long-term liabilities, and some long term once require the borrower to pay interest. Only interest payable as of the balance sheet date appears as a liability in the borrower's obligation to pay interest in future periods sometimes is disclosed in the notes to the financial statements, but it is not shown as an existing liability.
The total amount of interest expense for a period appears in the company's income statement, and is also deductible in calculating the taxable income of the business. The deductibility of interest is a major advantage of using liabilities to finance business assets. After considering the reduction in income taxes, the effect cost of borrowing is often only 60%to70% of the stated rate of interest.

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