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Chapter13-1

C H A P T E RC H A P T E R 1313

CURRENT LIABILITIES ANDCURRENT LIABILITIES AND

CONTINGENCIESCONTINGENCIES

Intermediate Accounting13th Edition

Kieso, Weygandt, and Warfield

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Chapter13-2

What is a Liability?What is a Liability?

What is a Liability?What is a Liability?

FASB, defines liabilitiesas:

Probable Future Sacrifices of Economic Benefits

arising from present obligations of a particular entity

to transfer assets or provide services to otherentities in the future as a result of past transactions

or events.

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Chapter13-3

What is a Current Liability?What is a Current Liability?


Current liabilitiesare obligations whose liquidation isreasonably expected to require use of existing resources

properly classified as current assets, or the creation of

other current liabilities.

Tyical Current Liabilities:

Accounts payable.

Notes payable.

Current maturities of longterm debt.

!hortterm obligationsexpected to be refinanced.

"ividends payable.

#nearned revenues.

!ales taxes payable.

$ncome taxes payable.%mployeerelated liabilities.

L! " #escribe the nature, tye, and $aluation of current liabilities%

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Chapter13-4

&alances owed to others for goods, supplies, or

services purchased on open account.

Accounts Payable &trade accounts ayable'




Arise because of time lag between receipt of

goods or services and the payment for them.

'he terms of the sale (e.g., )*+, n*- state

period of extended credit.

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Chapter13-5

/ritten promises to pay a certain sum of money on a

specified future date.

(otes Payable




Arise from purchases, financing, or other

transactions.

Notes classified as shortterm or longterm.

Notes may be interestbearing or 0erointerest

bearing.

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Chapter13-6

)llustration &)nterest*Bearin+ (ote': Castle National&an1 agrees to lend 2+, on 3arch +, )+, to

4andscape Co. if 4andscape signs a 2+,, 5

percent, fourmonth note. 4andscape records the cash

received on 3arch + as follows6




Cash +,

Notes 7ayable +,

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Chapter13-7

)llustration &)nterest*Bearin+ (ote': $f 4andscapeprepares financial statements semiannually, it ma1es

the following ad8usting entry to recogni0e interest

expense and interest payable at 9une -6

What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?


$nterest expense ),

$nterest payable ),

&"--,--- . /0 . 12"3' 4 3,---)nterest calculation 4

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Chapter13-

)llustration &)nterest*Bearin+ (ote': At maturity(9uly +, 4andscape records payment of the note and

accrued interest as follows.



Notes payable +,

$nterest payable ),

Cash +),

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Chapter13-!

)llustration &5ero*)nterest*Bearin+ (ote': :n3arch +, 4andscape issues a 2+),, fourmonth,

0erointerestbearing note to Castle National &an1.

'he present value of the note is 2+,. 4andscape

records this transaction as follows.



Cash +,

"iscount on notes payable ),Notes payable +),

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Chapter13-12

!ept. + 7urchased inventory from :rion Company onaccount for 2

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Chapter13-14

:ct. + &orrowed 2?

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Chapter13-15

%xclude longterm debts maturing currently as

current liabilities if they are to be6

Current 9aturities of Lon+*Term #ebt



+. @etired by assets accumulated that have not been

shown as current assets,

). @efinanced, or retired from the proceeds of a new

debt issue, or-. Converted into capital stoc1.

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Chapter13-16

%xclude from current liabilities if both of the

following conditions are met6

Short*Term !bli+ations E.ected to Beefinanced


L! 3 E.lain the classification issues of short*termdebt e.ected to be refinanced%

+. 3ust intend to refinancethe obligation on a longterm

basis.

). 3ust demonstrate an abilityto refinance6 Actual refinancing

%nter into a financing agreement

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Chapter13-17 L! 3 E.lain the classification issues of short*termdebt e.ected to be refinanced%


E"6*6 &efinancin+ of Short*Term #ebt'::n "ecember -+, )+,Alexander Company had 2+,), of shortterm debt in the form

of notes payable due ebruary ), )++. :n 9anuary )+, )++, the

company issued )

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Chapter13-1

7artial &alance !heet

Current liabilities6

Notes payable

4ongterm debt6

Notes payable refinanced

'otal liabilities



2 -,

B,

2+,),

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Chapter13-1!

Amount owed by a corporation to its stoc1holders

as a result of board of directors authori0ation.

#i$idends Payable


Denerally paid within three months.

#ndeclared dividends on cumulative preferred stoc1

not recogni0ed as a liability.

"ividends payable in the form of shares of stoc1 arenot recogni0ed as a liability. @eported in equity.


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Chapter13-2"

$nclude returnable cash deposits received fromcustomers and employees.

Customer Ad$ances and #eosits


3ay be classified as current or longterm.


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Chapter13-21

7ayment received before delivering goods orrendering servicesE

;nearned e$enues


#nearned and %arned @evenue Accounts


)llustration "6*6)llustration "6*6

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Chapter13-22

BE"6*7: !ports 7ro 3aga0ine sold +), annualsubscriptions on August +, )+, for 2+= each. 7repare!ports 7ros August +, )+, 8ournal entry and the"ecember -+, )+, annual ad8usting entry.



Aug. + Cash )+5,

#nearned revenue )+5,

(+), x 2+=

"ec. -+ #nearned revenue B,

!ubscription revenue B,

(2)+5, x

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Chapter13-23

@etailers must collect sales taxes from customerson transfers of tangible personal property and on

certain services and then remit to the propergovernmental authority.

Sales Ta.es Payable



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Chapter13-24

BE"6*/:"illons Corporation made credit sales of 2-,which are sub8ect to 5> sales tax. 'he corporation also madecash sales which totaled 2),5? including the 5> sales tax.(a prepare the entry to record "illons credit sales. (b7repare the entry to record "illons cash sales.



Accounts receivable -+,=!ales -,!ales tax payable +,=

(2-, x 5> F 2+,=

Cash ),5?!ales +B,

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Chapter13-25

&usinesses must prepare an income tax return and

compute the income tax payable resulting from

the operations of the current period.

)ncome Ta. Payable


'axes payable are a current liability

Corporations must ma1e periodic tax payments

throughout the year."ifferences between taxable income and accounting

income sometimes occur .


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Chapter13-26

Amounts owed to employees for salaries or wagesare reported as a current liability.

Emloyee*elated Liabilities


$n addition, current liabilities may include6

7ayroll deductions.

Compensated absences.

&onuses.

L! 6 )dentify tyes of emloyee*related liabilities%

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Chapter13-2

)llustration:Assume a wee1ly payroll of 2+, entirelysub8ect to .$.C.A. tax (?.5, with income tax withholding of2+,-) and union dues of 2== deducted. 'he company recordsthe salaries and

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Chapter13-2!

Comensated Absences



7aid absences for vacation, illness, and holidays.

Accrue a liability if all the following conditions exist.

'he employers obligation is attributable to employees

services already rendered.

'he obligation relates to rights that vest or

accumulate.

7ayment of the compensation is probable.

'he amount can be reasonably estimated.

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Chapter

13-3"

Bonus A+reements



@esult in payments to certain or all employees inaddition to their regular salaries or wages.

&onuses paid are anoperating expense.

#npaid bonuses should be

reported as a currentliability.

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Chapter

13-31

An existing condition, situation, or set of

circumstances involving uncertainty as to possible

gain &+ain contin+ency'or loss &loss contin+ency'

to an enterprise that will ultimately be resolvedwhen one or more future events occur or fail to

occur.G

Contin+enciesContin+enciesContin+enciesContin+encies

GAccounting for Contingencies, !tatement of inancial Accounting!tandards No. < (!tamford, Conn.6 A!&, +B?

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Chapter

13-32

>ain Contin+encies>ain Contin+encies>ain Contin+encies>ain Contin+encies

'ypical Dain Contingencies are6+. 7ossible receipts of monies from gifts, donations, and

bonuses.

). 7ossible refunds from the government in tax disputes.

-. 7ending court cases with a probable favorable

outcome.

H. 'ax loss carryforwards (Chapter +B.

L! 1 )dentify the criteria used to account for anddisclose +ain and loss contin+encies%

Dain contingencies are not recorded.

"isclosed only if probability of receipt is high.

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Chapter

13-34

Accountin+Probability

Accrue

Footnote

)+nore

Probable

easonablyPossible

emote

Loss Contin+enciesLoss Contin+enciesLoss Contin+enciesLoss Contin+encies


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Chapter

13-35

BE"6*"-:!corcese $nc. is involved in a lawsuit at "ecember-+, )+. (a 7repare the "ecember -+ entry assuming it isprobable that !corcese will be liable for 2B, as a resultof this suit. (b 7repare the "ecember -+ entry, if any,assuming it is not probable that !corcese will be liable for any

payment as a result of this suit.

(a 4awsuit loss B,

4awsuit liability B,



(b No entry is necessary. 'he loss is not accrued becauseit is not probable that a liability has been incurred at+)*-+*+.

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Chapter

13-36


Common loss contin+encies:+. 4itigation, claims, and assessments.

). Duarantee and warranty costs.

-. 7remiums and coupons.

H. %nvironmental liabilities.

L! 7 E.lain the accountin+ for different tyes of loss contin+encies%

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Chapter

13-37


Companies must consider the following factors, in

determining whether to record a liability with

respect to endin+ orthreatenedliti+ationandactual or possible claimsand assessments.

Liti+ation, Claims, and Assessments

'ime period in which the action occurred.

7robability of an unfavorable outcome.Ability to ma1e a reasonable estimate of the loss.


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Chapter

13-3


7romise made by a seller to a buyer to ma1e good

on a deficiency of quantity, quality, or performance

in a product.

>uarantee and Warranty Costs

$f it is probable that customers will ma1e warranty

claims and a company can reasonably estimate the

costs involved, the company must record an expense.


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Chapter

13-3!




'wo basic methods of accounting for warranty costs6

Cash*Basis method

%xpense warranty costs as incurred, because

+. it is not probable that a liability has been

incurred, or

). it cannot reasonably estimate the amount ofthe liability.

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Chapter

13-4"




'wo basic methods of accounting for warranty costs6

Accrual*Basis method

Charge warranty costs to operating expense in

the year of sale.

3ethod is the generally accepted method.

@eferred to as the expense warranty approach.

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Chapter

13-41



BE"6*"6:!treep actory provides a )year warranty with one

of its products which was first sold in )+. $n that year, !treepspent 2?, servicing warranty claims. At yearend, !treepestimates that an additional 2H, will be spent in the futureto service warranty claims related to )+ sales. 7repare !treeps

8ournal entry to record the 2?, expenditure, and the"ecember -+ ad8usting entry.

)+ /arranty expense ?,

Cash ?,+)*-+*+ /arranty expense H,

/arranty liability H,

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Chapter

13-42


Companies should charge the costs of premiums and

coupons to expense in the period of the sale that

benefits from the plan.

Premiums and Couons

Accountin+:

Company estimates the number of outstanding premium

offers that customers will present for redemption.

Company charges the cost of premium offers to

7remium %xpense and credits %stimated 4iability for

7remiums.


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Chapter

13-43



)llustration: luffy Ca1emix Company offered its customers alarge nonbrea1able mixing bowl in exchange for )< cents and +

boxtops. 'he mixing bowl costs luffy Ca1emix Company ?

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