Montclair State University

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Montclair State University

• Accounting 301
• Current
• Liabilities

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Current Liabilities
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Liabilities

• Probable future sacrifices of economic benefits
  arising from present obligations to transfer
  assets or provide services to other entities in
  the future as a result of past transactions or
  events

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Current Liabilities

• Debts or obligations, based on past or present
  transaction, to convey current assets or services
  within one year or the normal operating cycle,
  whichever is longer

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Long-Term Liabilities

• Debts or obligations not requiring payment within
  one year or the normal operating cycle, whichever
  is longer

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Other Liabilities

• Debts or obligations that are not properly
  classified as either current or long-term
  liabilities

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Valuation of Current Liabilities

• theoretically should be present value of future
  payments
• in practice, valued at full maturity amount

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Types of Liabilities

• Determinable
• Contingent

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Determinable Current LiabilitiesExamples

• Determinable current liabilities
• obligation has been incurred
• amount of the obligation is known

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Determinable Current LiabilitiesExamples

• notes and accounts currently payable
• accrued liabilities and deferred revenues

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Determinable Current LiabilitiesExamples

• notes and accounts currently payable
• accrued liabilities and deferred revenues
• wages payable
• interest payable

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Determinable Current LiabilitiesExamples

• notes and accounts currently payable
• accrued liabilities and deferred revenues
• current maturities of long-term debt

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Current Maturity ofLong-Term Debt

• 19 1/2 years ago company issued a 20 year bond
• Bond matures (becomes payable) in 6 months
• How would this debt be shown in the liability
  section?
• current liability
• non-current liability

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Current Liabilities

• Debts or obligations, based on past or present
  transaction, to convey current assets or services
  within one year or the normal operating cycle,
  whichever is longer

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Current Liabilities

• Debts or obligations, based on past or present
  transaction, to convey current assets or services
  within one year or the normal operating cycle,
  whichever is longer

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Current Maturities ofLong-Term Debt

• Exclude from current liabilities if
• management intention to retire debt on a
  long-term basis

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Current Maturities ofLong-Term Debt

• Exclude from current liabilities if
• management intention to retire debt on a
  long-term basis
• enterprise has ability to retire debt on a
  long-term basis

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Current Maturities ofLong-Term Debt

• Ability to retire debt on long-term basis
• after the balance sheet date but before the
  financial statements are issued, the company
  retires the debt on a long-term basis

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Current Maturities ofLong-Term Debt

• Ability to retire debt on long-term basis
• after the balance sheet date but before the
  financial statements are issued, the company
  retires the debt on a long-term basis
• before the financial statements are issued the
  company enters into a financing agreement that
  permits the refinancing of the debt on a
  long-term basis

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DELTA AIR LINES, INC.CONSOLIDATED BALANCE SHEETS

• LIABILITIES AND STOCKHOLDERS EQUITY
• (In Thousands, Except Share Amounts)
• Current Liabilities
• Current maturities of long-term debt
• Current obligations under capital leases
• Commercial paper
• Short-term notes payable
• Accounts payable and miscellaneous
• accrued liabilities
• Air traffic liability
• Accrued vacation pay
• Accrued rent
• Transportation tax payable
• Accrued income taxes

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DELTA AIR LINES, INC.CONSOLIDATED BALANCE SHEETS

• LIABILITIES AND STOCKHOLDERS EQUITY
• (In Thousands, Except Share Amounts)
• Current Liabilities
• Current maturities of long-term debt
• Current obligations under capital leases
• Commercial paper
• Short-term notes payable
• Accounts payable and miscellaneous
• accrued liabilities
• Air traffic liability
• Accrued vacation pay
• Accrued rent
• Transportation tax payable
• Accrued income taxes

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DELTA AIR LINES, INC.CONSOLIDATED BALANCE SHEETS

• LIABILITIES AND STOCKHOLDERS EQUITY
• (In Thousands, Except Share Amounts)
• Current Liabilities
• Current maturities of long-term debt
• Current obligations under capital leases
• Commercial paper
• Short-term notes payable
• Accounts payable and miscellaneous
• accrued liabilities
• Air traffic liability
• Accrued vacation pay
• Accrued rent
• Transportation tax payable
• Accrued income taxes

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DELTA AIR LINES, INC.CONSOLIDATED BALANCE SHEETS

• LIABILITIES AND STOCKHOLDERS EQUITY
• (In Thousands, Except Share Amounts)
• Current Liabilities
• Current maturities of long-term debt
• Current obligations under capital leases
• Commercial paper
• Short-term notes payable
• Accounts payable and miscellaneous
• accrued liabilities
• Air traffic liability
• Accrued vacation pay
• Accrued rent
• Transportation tax payable
• Accrued income taxes

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Taxes
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Taxes

• Sales tax
• Property taxes
• Payroll taxes

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Sales Taxes

• Cash in Bank (or A/R) XX
• Sales XX
• Sales Taxes Payable XX

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Property Taxes

• We will skip this topic

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Payroll Taxes
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Payroll Taxes

• Wages and Salaries Expense xx
• Federal Income Tax Withheld xx
• State Income Tax Withheld xx
• FICA Taxes Payable xx
• Union Dues Payable xx
• Cash in Bank xx

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Payroll Taxes

• Wages and Salaries Expense xx
• Federal Income Tax Withheld xx
• State Income Tax Withheld xx
• FICA Taxes Payable xx
• Union Dues Payable xx
• Cash in Bank xx

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Payroll Taxes

• Wages and Salaries Expense xx
• Federal Income Tax Withheld xx
• State Income Tax Withheld xx
• FICA Taxes Payable xx
• Union Dues Payable xx
• Cash in Bank xx

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Payroll Taxes

• Wages and Salaries Expense xx
• Federal Income Tax Withheld xx
• State Income Tax Withheld xx
• FICA Taxes Payable xx
• Union Dues Payable xx
• Cash in Bank xx

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Payroll Taxes

• Payroll Tax Expense xx
• Fringe Benefits Expense xx
• Federal Unemployment Tax Payable xx
• State Unemployment Tax Payable xx
• FICA Taxes Payable xx
• Payable to Pension Fund xx

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Payroll Taxes

• Payroll Tax Expense xx
• Fringe Benefits Expense xx
• Federal Unemployment Tax Payable xx
• State Unemployment Tax Payable xx
• FICA Taxes Payable xx
• Payable to Pension Fund xx

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Payroll Taxes

• Payroll Tax Expense xx
• Fringe Benefits Expense xx
• Federal Unemployment Tax Payable xx
• State Unemployment Tax Payable xx
• FICA Taxes Payable xx
• Payable to Pension Fund xx

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Bonus Agreements
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Bonus Agreements

• Alternative Calculations
• calculate bonus based on income before deducting
  bonus and taxes
• calculate bonus based on income before deducting
  taxes but after deducting bonus
• calculate bonus based on income before deducting
  bonus but after deducting taxes
• calculate bonus based on income after deducting
  bonus and taxes

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Bonus Agreements

• Alternative Calculations
• calculate bonus based on income before deducting
  bonus and taxes
• calculate bonus based on income before deducting
  taxes but after deducting bonus
• calculate bonus based on income before deducting
  bonus but after deducting taxes
• calculate bonus based on income after deducting
  bonus and taxes

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Bonus Agreements

• Alternative Calculations
• calculate bonus based on income before deducting
  bonus but after deducting taxes

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Bonus Agreements

• Alternative Calculations
• calculate bonus based on income before deducting
  bonus but after deducting taxes
• B bonus (5) T taxes (30)
• I income before deducting bonus and taxes
  (500,000)

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Bonus Agreements

• Alternative Calculations
• calculate bonus based on income before deducting
  bonus but after deducting taxes
• B bonus (5) T taxes (30)
• I income before deducting bonus and taxes
  (500,000)
• B .05(I - T)

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Bonus Agreements

• Alternative Calculations
• calculate bonus based on income before deducting
  bonus but after deducting taxes
• B bonus (5) T taxes (30)
• I income before deducting bonus and taxes
  (500,000)
• B .05(I - T)
• T .30(I - B)

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Bonus Agreements

• Alternative Calculations
• calculate bonus based on income before deducting
  bonus but after deducting taxes
• B bonus (5) T taxes (30)
• I income before deducting bonus and taxes
  (500,000)
• B .05(I - T)
• T .30(I - B)
• B .05(I - .30(I - B))

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Bonus Agreements

• Alternative Calculations
• calculate bonus based on income before deducting
  bonus but after deducting taxes
• B bonus (5) T taxes (30)
• I income before deducting bonus and taxes
  (500,000)
• B .05(I - T)
• T .30(I - B)
• B .05(I - .30(I - B))
• B .05(500,000 - .30(500,000 - B))

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Bonus Agreements

• Alternative Calculations
• calculate bonus based on income before deducting
  bonus but after deducting taxes
• B bonus (5) T taxes (30)
• I income before deducting bonus and taxes
  (500,000)
• B .05(I - T)
• T .30(I - B)
• B .05(I - .30(I - B))
• B .05(500,000 - .30(500,000 - B))
• B .05(500,000 - 150,000 .30B)

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Bonus Agreements

• Alternative Calculations
• calculate bonus based on income before deducting
  bonus but after deducting taxes
• B bonus (5) T taxes (30)
• I income before deducting bonus and taxes
  (500,000)
• B .05(I - T)
• T .30(I - B)
• B .05(I - .30(I - B))
• B .05(500,000 - .30(500,000 - B))
• B .05(500,000 - 150,000 .30B)
• B 25,000 - 7,500 .015B

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Bonus Agreements

• Alternative Calculations
• calculate bonus based on income before deducting
  bonus but after deducting taxes
• B bonus (5) T taxes (30)
• I income before deducting bonus and taxes
  (500,000)
• B .05(I - T)
• T .30(I - B)
• B .05(I - .30(I - B))
• B .05(500,000 - .30(500,000 - B))
• B .05(500,000 - 150,000 .30B)
• B 25,000 - 7,500 .015B
• B - .015B 17,500 .985B 17,500 B
  17,766

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Compensates Absences

• absences from employment for which it is expected
  that employees will be paid

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Compensates Absences

• absences from employment for which it is expected
  that employees will be paid
• liability must be accrued if
• employers obligation for future absences is
  attributable to employees services already
  rendered
• the obligation relates to the rights that vest or
  accumulate
• payment of the compensation is probable, and
• amount can be reasonably estimated

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Compensates Absences

• absences from employment for which it is expected
  that employees will be paid
• sick pay modification - if sick pay benefits
• vest, accrual is required
• accumulate and employees are compensated even if
  not sick, then a liability must be accrued
• accumulate and employees receive sick pay only if
  sick, then a liability is permitted but not
  required

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Contingent Liabilities

• An existing condition involving uncertainty as to
  possible gain or loss that will be resolved when
  one or more future events occur or fail to occur

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Contingent LiabilitiesExamples

• premiums offered to customers
• obligations related to product warranties
• guarantees of indebtedness of others
• pending or threatened litigation
• risk of loss or damage of enterprise property by
  fire, explosion, or other hazards
• collectibility of receivables
• actual or possible claims and assessments
• threat of expropriation of assets

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Contingent LiabilitiesExamples

• premiums offered to customers
• obligations related to product warranties
• guarantees of indebtedness of others
• pending or threatened litigation
• risk of loss or damage of enterprise property by
  fire, explosion, or other hazards
• collectibility of receivables
• actual or possible claims and assessments
• threat of expropriation of assets

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Contingent LiabilitiesExamples

• premiums offered to customers
• obligations related to product warranties
• guarantees of indebtedness of others
• pending or threatened litigation
• risk of loss or damage of enterprise property by
  fire, explosion, or other hazards
• collectibility of receivables
• actual or possible claims and assessments
• threat of expropriation of assets

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Contingent LiabilitiesExamples

• premiums offered to customers
• obligations related to product warranties
• guarantees of indebtedness of others
• pending or threatened litigation
• risk of loss or damage of enterprise property by
  fire, explosion, or other hazards
• collectibility of receivables
• actual or possible claims and assessments
• threat of expropriation of assets

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Contingent LiabilitiesExamples

• risk of loss from catastrophes assumed by
  property and casualty insurance companies
  including reinsurance companies
• obligations of commercial banks under standby
  letters of credit
• agreements to repurchase receivables (or to
  repurchase the related property) that have been
  sold

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Contingent Liabilities

• If P(Future Liability) High
• Reasonable Estimate of Amount

Record liability
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Contingent Liabilities

• If P(Future Liability) High
• Reasonable Estimate of Amount
• If P(Future Liability) ? High
• and/or no Reasonable
• Estimate of Amount

Record liability
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Ranges of ProbabilitySFAS 5

• probable future event or events are likely to
  occur

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Ranges of ProbabilitySFAS 5

• probable future event or events are likely to
  occur
• remote chance of future event or events
  occurring is slight

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Ranges of ProbabilitySFAS 5

• probable future event or events are likely to
  occur
• reasonably possible chance of future event
  occurring is more than remote but less than
  likely
• remote chance of future event or events
  occurring is slight

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Disclosure

• if event is
• probable and
• loss can be reasonably estimated
• the estimated loss should be accrued

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Disclosure

• if no reasonable estimate
• no accrual
• contingency must be disclosed

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Disclosure

• if event is reasonably possible
• no accrual
• contingency must be disclosed
• parenthetical comment
• footnote
• show short

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DisclosureShowing Short

• Current Liabilities 30,000
• Long-Term Liabilities 670,000
• Contingent Liability -
• Pending Lawsuit 30,000,000
• TOTAL LIABILITIES 700,000

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Disclosure

• if event is remote
• disclosure normally not required

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Gain Contingency

• should be disclosed
• no income recognized

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Guarantees and Warrantees
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Guarantees and WarranteesDemonstration Problem

• The Williams Co. started operating on April 17,
  20x1. The company manufactures and sells various
  types of farm machinery. Each machine is under
  warranty for one year and the company has
  estimated, on the basis of past experience of
  other companies in the industry, that the
  warranty cost will probably average 2 of total
  sales. Record journal entries for the following
  transactions

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Guarantees and Warrantees Demonstration Problem

• (a) Sales during 20x1, 500,000, all for cash
• Cash 500,000
• Sales 500,000

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Guarantees and Warrantees Demonstration Problem

• (b) Incurrence of 6,000 of warranty costs in
  20x1
• Warrantee Expense 6,000
• Various Credits 6,000

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Guarantees and Warrantees Demonstration Problem

• (c) The necessary adjusting entry at the end of
  20x1 (assume fiscal year ends on December 31 each
  year)
• Warranty Expense
• Liab. for Warranties

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Guarantees and Warrantees Demonstration Problem

• (c) The necessary adjusting entry at the end of
  20x1 (assume fiscal year ends on December 31 each
  year)
• Warranty Expense
• Liab. for Warranties

2 of sales 2 x 500,000 10,000 10,000 -
6,000 4,000
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Guarantees and Warrantees Demonstration Problem

• (c) The necessary adjusting entry at the end of
  20x1 (assume fiscal year ends on December 31 each
  year)
• Warranty Expense 4,000
• Liab. for Warranties 4,000

2 of sales 2 x 500,000 10,000 10,000 -
6,000 4,000
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Postretirement Benefits
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Credit Risk
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McCormick Company1994 Annual ReportCredit
Risk

• Financial instruments which potentially subject
  the Company to concentrations of credit risk
  consist primarily of trade accounts receivable.
  Because the Company has a large and diverse
  customer base with no single customer accounting
  for a significant percentage of trade accounts
  receivable, there was no material concentration
  of credit risk at November 30, 1994

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McCormick Company1994 Annual ReportCredit
Risk

• Financial instruments which potentially subject
  the Company to concentrations of credit risk
  consist primarily of trade accounts receivable.
  Because the Company has a large and diverse
  customer base with no single customer accounting
  for a significant percentage of trade accounts
  receivable, there was no material concentration
  of credit risk at November 30, 1994

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Texas Instruments1994 Annual ReportRisk
Concentration

• Financial instruments which potentially subject
  the company to concentrations of credit risk are
  primarily cash investments and accounts
  receivable. The company places its cash
  investments in investment grade, short-term debt
  instruments and limits the amount of credit
  exposure to any one commercial issuer.

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Texas Instruments1994 Annual ReportRisk
Concentration

• . . . Concentrations of credit risk with
  respect to the receivables are limited due to the
  large number of customers in the companys
  customer base, and their dispersion across
  different industries and geographic areas. The
  company maintains an allowance for losses based
  upon the expected collectibility of all accounts
  receivable, including receivables sold.

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General Motors1991 Annual ReportCredit Risk

• General Motors has business activities with
  customers, dealers, and associates around the
  world, and its receivables from and guarantees to
  such parties are well diversified and, in many
  cases, secured by collateral. Consequently, in
  managements opinion, no significant
  concentration of credit risk exists for the
  Corporation.

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Current Liabilities