Current Liabilities

1
Current Liabilities
Obligations likely to be paid off using

• Current assets or

• By creating another current liability

Generally considered short-term within 1 year or
operating cycle
2
Current Liabilities
Types of current liabilities

• Accounts Payable
• Notes Payable
• Current maturities of long-term debt
• Short term liabilities expected to be refinanced
• Dividends Payable
• Returnable Deposits
• Unearned Revenues
• Taxes Payable
• Employee-Related liabilities

3
Current Liabilities
Accounts Payable
Generally created when you receive goods or
services prior to paying for them.
e.g. You have been provided one months worth of
local phone access, but have not yet been billed.
Phone Expense 40 Phone Service Payable 40
4
Current Liabilities
Notes Payable
Written promise to pay, usually with stated
interest rate and term to maturity.
e.g. Sell 3 month, 50,000 note, 6 interest, on
February 1st.
Feb 1 Cash 50,000 Note Payable 50,000
(Note that short-term notes are not recorded with
discount or premium like long-term notes, since
discount rate will not have enough time to make
a material adjustment necessary)
5
Current Liabilities
Current Maturities of Long-Term Debt
The portion of LT Debt that matures within the
next year is reported as a current liability
unless

• it will be retired using non-current assets
• it will be refinanced using a new long-term debt
  issue
• it will be converted into capital stock

6
Current Liabilities
Short-term obligations to be refinanced
These are considered current unless

• Refinanced on a long-term basis

If refinanced on a long-term basis, you can only
exclude from current liabilities the amount of
proceeds refinanced.
e.g. Retiring 800,000 of short-term debt by
issuing 10,000 shares of stock worth 70 a share.
Still need to show 100,000 of current
liabilities, since only 700,000 of proceeds were
refinanced.
7
Current Liabilities
Dividends Payable
Cash Dividends become a current liability on the
date of declaration.
Preferred Stock Dividends in arrears are not a
liability and require only footnote disclosure.
Stock Dividends declared are not a current
liability since they will not be paid using
current assets.
8
Preferred Stock refresher
Preferred stock provides preferential dividend
treatment to its owners over common stock
shareholders.
Most preferred certificates carry a stated
dividend rate as a percentage of par value. This
stated rate is guaranteed to the preferred
shareholders only if dividends are declared for
the period.
e.g. 100 par, 5 rate preferred will pay 5 of
dividends, if declared.
If dividends are not declared, then the preferred
dividends will go into an arrears status.
This means that these must be paid-in-full before
any dividends can be paid to common shareholders.
While dividends in arrears look like a liability,
they technically are not, since management does
not have any obligation to declare dividends in
the future. Once declared, however, they become
a current liability.
9
Current Liabilities
Unearned Revenue
Record pre-paid revenue as a liability and then
record it as a revenue when finally earned.
e.g. Beaver Stadium ticket office receives 160
of prepaid ticket revenue for 8 home games
Cash 160 Unearned Ticket Revenue 160
After the UCF game, it records a portion of the
revenue earned.
Unearned Ticket Revenue 20 Ticket Revenue 20
10
Current Liabilities
Collected Tax Receipts
Taxes collected for the taxing authority are
current liabilities.
e.g. McClanahans collects 6 sales tax on 100
of sales
Cash 106 Sales Revenue 100 Sales Taxes
Payable 6
The Payable reflects the amount they will
eventually pay to the taxing authority.
Another example is employee withholding taxes
collected by an employer.
11
Current Liabilities
Loss Contingencies
If there is a possibility of a future loss or
expense, a contingent liability is recorded.
Common examples

• Warranties
• Lawsuit judgment
• Rebates
• Coupons

Record expense and liability if both

1. Probable that liability will be incurred and
2. Loss can be reasonably estimated

Footnote the contingency if only reasonably
possible or remote
12
Current Liabilities
Warranties
If the warranty comes with the product, we
usually record expected warranty expense in the
year of original product sale (Expense Warranty
Approach).
The warranty expense is debited against a
matching contingent warranty liability credit.
e.g. Sell 30,000 truck with 5 year warranty on
Feb 1st. Expected warranty costs are 4,000.
Feb 1 Cash 30,000 Sales Revenue 30,000
Warranty Exp, Truck 4,000 Estimated Warr.
Liability, Truck 4,000
13
Current Liabilities
Warranties
An alternative approach is to record warranty
expense under the cash basis that is, record
expenses as they are incurred. This will not
generate a liability.
When the warranty comes with the product sale,
this does not best reflect matching expenses to
revenues.
14
Current Liabilities
Extended Warranties
Extended Warranties are generally sold
after-market.
They are not directly connected to the product,
since they are optional purchases and are usually
serviced by someone other than the manufacturer.
Extended Warranties are treated as unearned
revenue.
Revenue is earned as time passes and portions of
the warranty period expire.
Expenses are generally recorded under the cash
basis.
15
Current Liabilities
Promotions, Coupons, and Rebates
Record a contingent liability for the estimated
expense.
e.g. For Halloween, Skellar offers a promotion by
offering 1000 coupons that entitles
coupon-holders to a Rolling Rock T-shirt for 3
plus one empty bottle.
Shirts actually cost 5 and the Skellar expects a
60 redemption rate on the promotion (600 shirts
sold).
16
Current Liabilities
e.g. For Halloween, Skellar offers a promotion by
offering 1000 coupons that entitles
coupon-holders to a Rolling Rock T-shirt for 3
plus one empty bottle.
First, record purchase of promotional inventory
Oct 31 Promotional T-shirt Inv
3,000 Cash 3,000
Assume ½ of inventory has been redeemed at years
end
Cash 900
Promotion Expense 600
Promotional T-shirt inv 1,500
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Current Liabilities
e.g. For Halloween, Skellar offers a promotion by
offering 1000 coupons that entitles
coupon-holders to a Rolling Rock T-shirt for 3
plus one empty bottle.
Assume ½ of inventory has been redeemed at years
end
Cash 900
Promotion Expense 600
Promotional T-shirt inv 1,500
Finally, record contingent liability for
remaining expected redemptions.
Promotion Expense 600 Estimated Liability for
Promotion 600