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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?
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'
What is a Current Liability?What is a Current Liability?
What is a Current Liability?What is a Current Liability?
L! " #escribe the nature, tye, and $aluation of current liabilities%
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
What is a Current Liability?What is a Current Liability?
What is a Current Liability?What is a Current Liability?
L! " #escribe the nature, tye, and $aluation of current liabilities%
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
What is a Current Liability?What is a Current Liability?
What is a Current Liability?What is a Current Liability?
L! " #escribe the nature, tye, and $aluation of current liabilities%
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?
L! " #escribe the nature, tye, and $aluation of current liabilities%
$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.
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
L! " #escribe the nature, tye, and $aluation of current liabilities%
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.
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
L! " #escribe the nature, tye, and $aluation of current liabilities%
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
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
L! " #escribe the nature, tye, and $aluation of current liabilities%
+. @etired by assets accumulated that have not been
shown as current assets,
). @efinanced, or retired from the proceeds of a new
debt issue, or-. Converted into capital stoc1.
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Chapter13-16
%xclude from current liabilities if both of the
following conditions are met6
Short*Term !bli+ations E.ected to Beefinanced
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
L! 3 E.lain the classification issues of short*termdebt e.ected to be refinanced%
+. 3ust intend to refinancethe obligation on a longterm
basis.
). 3ust demonstrate an abilityto refinance6 Actual refinancing
%nter into a financing agreement
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Chapter13-17 L! 3 E.lain the classification issues of short*termdebt e.ected to be refinanced%
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
E"6*6 &efinancin+ of Short*Term #ebt'::n "ecember -+, )+,Alexander Company had 2+,), of shortterm debt in the form
of notes payable due ebruary ), )++. :n 9anuary )+, )++, the
company issued )
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Chapter13-1
7artial &alance !heet
Current liabilities6
Notes payable
4ongterm debt6
Notes payable refinanced
'otal liabilities
L! 3 E.lain the classification issues of short*termdebt e.ected to be refinanced%
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
2 -,
B,
2+,),
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Chapter13-1!
Amount owed by a corporation to its stoc1holders
as a result of board of directors authori0ation.
#i$idends Payable
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
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.
L! 3 E.lain the classification issues of short*termdebt e.ected to be refinanced%
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Chapter13-2"
$nclude returnable cash deposits received fromcustomers and employees.
Customer Ad$ances and #eosits
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
3ay be classified as current or longterm.
L! 3 E.lain the classification issues of short*termdebt e.ected to be refinanced%
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Chapter13-21
7ayment received before delivering goods orrendering servicesE
;nearned e$enues
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
#nearned and %arned @evenue Accounts
L! 3 E.lain the classification issues of short*termdebt e.ected to be refinanced%
)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.
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
L! 3 E.lain the classification issues of short*termdebt e.ected to be refinanced%
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
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
L! 3 E.lain the classification issues of short*termdebt e.ected to be refinanced%
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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.
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
L! 3 E.lain the classification issues of short*termdebt e.ected to be refinanced%
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
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
'axes payable are a current liability
Corporations must ma1e periodic tax payments
throughout the year."ifferences between taxable income and accounting
income sometimes occur .
L! 3 E.lain the classification issues of short*termdebt e.ected to be refinanced%
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Chapter13-26
Amounts owed to employees for salaries or wagesare reported as a current liability.
Emloyee*elated Liabilities
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
$n addition, current liabilities may include6
7ayroll deductions.
Compensated absences.
&onuses.
L! 6 )dentify tyes of emloyee*related liabilities%
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Chapter13-2
)llustration:Assume a wee1ly payroll of 2+, entirelysub8ect to .$.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
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
L! 6 )dentify tyes of emloyee*related liabilities%
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
What is a Current Liability?What is a Current Liability?What is a Current Liability?What is a Current Liability?
L! 6 )dentify tyes of emloyee*related liabilities%
@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
L! 1 )dentify the criteria used to account for anddisclose +ain and loss 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,
Loss Contin+enciesLoss Contin+enciesLoss Contin+enciesLoss Contin+encies
L! 1 )dentify the criteria used to account for anddisclose +ain and loss contin+encies%
(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
Loss Contin+enciesLoss Contin+enciesLoss Contin+enciesLoss Contin+encies
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
Loss Contin+enciesLoss Contin+enciesLoss Contin+enciesLoss Contin+encies
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.
L! 7 E.lain the accountin+ for different tyes of loss contin+encies%
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Chapter
13-3
Loss Contin+enciesLoss Contin+enciesLoss Contin+enciesLoss Contin+encies
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.
L! 7 E.lain the accountin+ for different tyes of loss contin+encies%
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Chapter
13-3!
Loss Contin+enciesLoss Contin+enciesLoss Contin+enciesLoss Contin+encies
>uarantee and Warranty Costs
L! 7 E.lain the accountin+ for different tyes of loss contin+encies%
'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"
Loss Contin+enciesLoss Contin+enciesLoss Contin+enciesLoss Contin+encies
>uarantee and Warranty Costs
L! 7 E.lain the accountin+ for different tyes of loss contin+encies%
'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
Loss Contin+enciesLoss Contin+enciesLoss Contin+enciesLoss Contin+encies
L! 7 E.lain the accountin+ for different tyes of loss contin+encies%
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
Loss Contin+enciesLoss Contin+enciesLoss Contin+enciesLoss Contin+encies
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.
L! 7 E.lain the accountin+ for different tyes of loss contin+encies%
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Chapter
13-43
Loss Contin+enciesLoss Contin+enciesLoss Contin+enciesLoss Contin+encies
L! 7 E.lain the accountin+ for different tyes of loss contin+encies%
)llustration: luffy Ca1emix Company offered its customers alarge nonbrea1able mixing bowl in exchange for )< cents and +
boxtops. 'he mixing bowl costs luffy Ca1emix Company ?