Current Liabilities

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CHAPTER 13
Current Liabilities and Contingencies
.....
Liability

• Present, unavoidable obligation
• Requiring probable future transfer of assets
• Resulting from past transactions or events

Current Liability

• Requiring use of existing current assets

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Present, unavoidable obligation
12/31 Liability
11/1 Borrowed 100,000, 12, 6 months.
11/1 Issued 100,000 non-interest 6-month note
recd 94,340.
500,000 of 8 cumulative preferred is
outstanding for the entire year.
12/1 Declared 8 cash dividend on 500,000
preferred, payable 1/15.
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Future transfer of assets
12/31 Liability
12/1 Declared a 5 stock dividend on 100,000
shares of common stock (1 par, 11 market value).
12/1 Restaurant received 2,200 from sale of gift
certificates.
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From past transactions or events
12/31 Liability
11/1 Signed contract to purchase inventory next
year for 600,000 (inventory worth 570,000
12/31).
12/31 Ordered 32,000 of inventory to be shipped
FOB destination.
Deferred income tax liability 8,000 (on
current income, paid in the future).
8,600 sick pay earned but not taken during past
year.

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Current Liability use of existing
current assets
Current Liability
12/28 Purchased on account and received 3,000 on
inventory,
500,000 of 8 serial bonds are outstanding.
Interest plus 100,000 principal payable each
July 1.
60,000, 10 note payable due March of next year
is outstanding. Firm plans to refinance with a
2-year note.
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Payroll Deductions
To record payroll Salary Expense 10,000 Withho
lding Taxes Payable 1,320 FICA Taxes
Payable 765 Union Dues Payable 88 Cash 7,82
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To record employer payroll tax Payroll Tax
Expense 1,245 FICA Taxes Payable 765 Fed
Unemploy Tax Payable 80 State Unemploy Tax
Payable 400
6.2 on first 7000. 0.8 if state
unemployment taxes have been paid
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Compensated Absences Liability

• Obligation from services already rendered
• Vested or accumulated
• Probable and reasonably estimated

If future compensation exceeds the liability, the
difference is charged to wage expense.
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Gain Contingencies

• Possible donations, lawsuit awards, etc.
• Not recorded

Loss Contingencies

• Expense and liability recognized
• Required conditions
• probable at financial statement date
• reasonably estimated

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Litigation, Claims, Assessments

• Cause of litigation on or before financial
  statement date
• Probability of unfavorable outcome based on
  experience, legal opinion, etc.
• For lawsuits not yet filed
• probable that suit will be filed, and
• probable that outcome will be unfavorable

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Guarantee and Warranty Costs
Cash Basis
Warranty Expense 20,000 Cash, Inventory,
etc. 20,000 (Warranty costs incurred.)
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Accrual Basis Expense Warranty Approach
Cash 3,000,000 Sales 3,000,000 (To
record sales for the year.)
(Warranty costs incurred.)
(To accrue warranty costs.)
(Warranty costs incurred on prior year
sales.)
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Accrual Basis Sales Warranty Approach
Cash 3,000,000 Sales 2,850,000 Unearned
Warranty Rev 150,000 (To record sales for
the year.)
(Warranty costs incurred.)
(To recognize revenue related to
warranty costs incurred.)
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Premiums and Coupons

• Expense recorded w/ actual redemption
• Additional expense accrued at year end
• a reasonable estimate of the cost of future
  redemptions
• matched with current-year revenues

Self-Insurance

• Not insurance
• No liability recorded for events that have not
  happened

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• Current liabilities reported at full maturity
  value (i.e. not discounted)
• Bond sinking fund exception
• Supplemental information on secured liabilities
  and refinancing arrangements
• Loss contingencies that are reasonably possible
  should be disclosed in the notes

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Exercise 13-1
Balance Sheet Class
Accrued vacation pay
Estimated taxes payable
Service warranties
Bank overdraft
Injury claim pending
Unpaid bonus
Customer deposits
Sales tax payable
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Exercise 13-1 (cont.)
Balance Sheet Class
Unredeemed gift certif.
Premium offers outstand
Discount on notes pay
Unpaid payroll deduct.
Current matur LT debt
Unpaid cash dividend
Dividends in arrears
Loans from officers