Upload
horace-morgan
View
213
Download
0
Embed Size (px)
Citation preview
Current Liabilities and Contingencies
Chapter 13
An electronic presentation by Norman Sunderman Angelo State University
An electronic presentation by Norman Sunderman Angelo State University
COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.
Intermediate AccountingIntermediate Accounting 10th edition 10th edition
Nikolai Bazley JonesNikolai Bazley Jones
2
Printing PowerPoint
The options for printing are Color,
Grayscale, and Pure Black and White.
For best results select PURE BLACK and WHITE on the
print page.
3
Liabilities are probable future sacrifices of
economic benefits arising from present obligations of a company to transfer assets or provide services
to other entities in the future as a result of past transactions or events.
Conceptual Overview of Liabilities
4
1. It involves a present duty or responsibility of the company to one or more entities that will be settled by the probable future transfer or use of assets at a specified or determinable date, on occurrence of a specific event, or on demand.
2. The duty or responsibility obligates the company, leaving it little or no discretion to avoid the future sacrifice.
3. The transaction or other event obligating the company has already happened.
Three Essential Characteristics of a Liability
5
1. Identification of liabilities— the detection of a company’s obligations.
2. Measurement or valuation of the liabilities and the related expense— the determination of an amount to attach to each obligation and to match as an expense against revenues.
3. Reporting on the financial statements— the specific disclosures in both the company’s financial statements and the related notes.
Primary Liability Issues
6
Current liabilities are obligations whose
liquidation is expected to require the use of
existing current assets...
Current liabilities are obligations whose
liquidation is expected to require the use of
existing current assets...
Current Liabilities
7
…or the creation of other current liabilities within one year or an operating
cycle, whichever is longer.
…or the creation of other current liabilities within one year or an operating
cycle, whichever is longer.
Current Liabilities
8
Cash
Inventory
Receivables
Operating Cycle
9
Liquidity refers to how quickly a liability can be paid, or its nearness to
cash.
Liquidity refers to how quickly a liability can be paid, or its nearness to
cash.
Liquidity
10
1. Cash flows to total debt.
2. Net income to total assets (return on total assets ratio).
3. Total debt to total assets.
4. Current assets to current liabilities (current ratio).
5. Cash to current liabilities.
Liquidity Ratios
11
Having Contractual Amount
Having Contractual Amount
Accounts payableNotes payableCurrently maturing portion of long-term debtDividends payableAdvances and refundable depositsAccrued itemsUnearned items
Accounts payableNotes payableCurrently maturing portion of long-term debtDividends payableAdvances and refundable depositsAccrued itemsUnearned items
Types of Current Liabilities
12
Amount Depends on Operations
Amount Depends on Operations
Sales (use) taxesPayroll taxesIncome taxesBonuses
Sales (use) taxesPayroll taxesIncome taxesBonuses
Types of Current Liabilities
13
Amount Must Be Estimated
Amount Must Be Estimated
Property taxesWarrantiesPremiums and couponsOther contingencies
Property taxesWarrantiesPremiums and couponsOther contingencies
Types of Current Liabilities
14
Trade accounts payable arise from the purchase of inventory, supplies, or services on
an open charge-account basis.
Current Liabilities Having a Contractual Amount
15
A note payable is an unconditional
written agreement to pay a sum of money to the bearer on a
specific date.
Current Liabilities Having a Contractual Amount
16
Cash (Dividends Payable)
Property (Property Dividends Payable)
Scrip (Dividends Payable)
Cash (Dividends Payable)
Property (Property Dividends Payable)
Scrip (Dividends Payable)
Dividends Payable
Declaration of a dividend reduces retained earnings and creates a
current liability.
17
1. The company’s obligation relating to the employee’s rights to receive compensation for future absences is attributed to the employee’s services already rendered.
2. The obligation relates to rights that vest or accumulate.
3. Payment of the compensation is probable.
4. The amount can be reasonably estimated.
A company recognizes an expense and accrues a liability for employees’ compensation for future absences if all the following conditions are met:
Compensated Absences
18
A vested right exists when an employer has an obligation to make payments to an employee that is not contingent on the employee’s future
services.
A vested right exists when an employer has an obligation to make payments to an employee that is not contingent on the employee’s future
services.
Compensated Absences
19
Accumulated rights are those that can be carried forward by the employee to future periods if not taken in the
period in which they are earned.
Accumulated rights are those that can be carried forward by the employee to future periods if not taken in the
period in which they are earned.
Compensated Absences
20
FASB Statement No. 47 requires that if a company enters into an unconditional
purchase obligation that (1) is noncancellable, (2) is negotiated as part of arranging financing
for facilities to provide the contracted items, and (3) contains a term in excess of one year,
the company must make certain disclosures in the notes to its financial statements.
FASB Statement No. 47 requires that if a company enters into an unconditional
purchase obligation that (1) is noncancellable, (2) is negotiated as part of arranging financing
for facilities to provide the contracted items, and (3) contains a term in excess of one year,
the company must make certain disclosures in the notes to its financial statements.
Disclosure of Off-Balance Sheet Obligations
21
FASB Statement No. 107 requires a company to disclose the fair value of all its financial instruments (both assets and liabilities),
whether recognized or not on the balance sheet.
FASB Statement No. 107 requires a company to disclose the fair value of all its financial instruments (both assets and liabilities),
whether recognized or not on the balance sheet.
FASB Statement No. 131 requires a company to recognize as liabilities any “derivative”
financial instruments that are obligations of the company, based on their fair value.
FASB Statement No. 131 requires a company to recognize as liabilities any “derivative”
financial instruments that are obligations of the company, based on their fair value.
Disclosure of Off-Balance Sheet Obligations
22
Definition of Derivatives
Derivatives are financial instruments, such as forwards and options whose value
depends upon the value of an underlying instrument (asset or liability) such as a
security, commodity, currency or interest rate. Hence, they are "derived" from these
underlying instruments.
Derivatives are financial instruments, such as forwards and options whose value
depends upon the value of an underlying instrument (asset or liability) such as a
security, commodity, currency or interest rate. Hence, they are "derived" from these
underlying instruments.
23
Current Liabilities Whose Amounts Depend upon
Operations
Current Liabilities Whose Amounts Depend upon
Operations
24
Involuntary Taxes Involuntary Taxes Withheld from Withheld from
EmployeesEmployees
Involuntary Taxes Involuntary Taxes Withheld from Withheld from
EmployeesEmployees
Federal income taxState income taxF.I.C.A. taxesMedicare
Federal income taxState income taxF.I.C.A. taxesMedicare
Involuntary Taxes Involuntary Taxes Withheld from Withheld from
EmployersEmployers
Involuntary Taxes Involuntary Taxes Withheld from Withheld from
EmployersEmployers
F.I.C.A. taxesMedicareFederal unemploy-
ment taxState unemployment
tax
F.I.C.A. taxesMedicareFederal unemploy-
ment taxState unemployment
tax
Liabilities Related to Payrolls
25
Voluntary Payroll Voluntary Payroll Deductions Withheld Deductions Withheld
from Employeesfrom Employees
Voluntary Payroll Voluntary Payroll Deductions Withheld Deductions Withheld
from Employeesfrom Employees
Union duesGovernment bondsGroup hospital insurance
Accident insuranceLife insuranceOthers
Union duesGovernment bondsGroup hospital insurance
Accident insuranceLife insuranceOthers
Liabilities Related to Payrolls
26
To record salaries and employee withholding items:
Sales Salaries Expense 20,000Office Salaries Expense 8,000 F.I.C.A. Taxes Payable (8% x $14,000) 2,240
Employee Federal Income Taxes Withholding Payable 1,980Employee State Income Taxes Withholding Payable 1,000Employee Union Dues Withholding Payable 360Cash 22,420
Accounting for Payroll Taxes and Deductions
The actual FICA rate is 6.2% and Medicare is 1.45% for a total of The actual FICA rate is 6.2% and Medicare is 1.45% for a total of 7.65%. Together these taxes are referred to as social security. For 7.65%. Together these taxes are referred to as social security. For
simplicity, an assumed rate of 8% is used for both these taxes.simplicity, an assumed rate of 8% is used for both these taxes.
27
1. The bonus is based on the corporation’s income after deducting income taxes, but before deducting the bonus.
2. The bonus is based on the corporation’s net income after deducting both the bonus and the income tax.
1. The bonus is based on the corporation’s income after deducting income taxes, but before deducting the bonus.
2. The bonus is based on the corporation’s net income after deducting both the bonus and the income tax.
Alternative Methods
Bonus Obligations
28
1. The word “after” means deduction in the bonus equation.
2. The bonus is always a deduction for the calculation of income taxes.
1. The word “after” means deduction in the bonus equation.
2. The bonus is always a deduction for the calculation of income taxes.
Bonus Obligations
29
Bonex Corporation’s reported income for the current year is $260,000 before deducting income
taxes and bonus. The effective tax rate is 30% and the bonus is 10%.
Bonex Corporation’s reported income for the current year is $260,000 before deducting income
taxes and bonus. The effective tax rate is 30% and the bonus is 10%.
Bonus Obligations
30
Method 1: Bonus computed on income after deducting taxes but before deducting the bonus:
B = 0.10($260,000 - T)T = 0.30($260,000 - B)B = 0.10[($260,000 - .30($260,000 - B)]
B = 0.10($260,000 - $78,000 + 0.30B) B = $26,000 - $7,800 + 0.03B
B - 0.03 B = $18,200 0.97 B = $18,200
B = $18,200 ÷ 0.97B = $18,763 (rounded)
Bonus Obligations
31
Method 2: Bonus computed on income after deducting both taxes and the bonus:
B = 0.10($260,000 - B - T)T = 0.30($260,000 - B)
B = 0.10[$260,000 - B - .30($260,000 -B)] B = 0.10[$260,000 - B - $78,000 + 0.30B]B = $26,000 - 0.10B - $7,800 + 0.03B
B+0.10B-0.03B = $18,200 1.07B = $18,200
B = $18,200 ÷ 1.07B = $17,009 (rounded)
Bonus Obligations
32
Salaries Expense (Officer’s Bonus) 17,009 Officer’s Bonus Payable 17,009
To record the bonus:
Income Tax Expense 72,897 Income Taxes Payable 72,897
To record the income tax expense: Current Liability
Current Liability
Bonus Obligations
33
Current Liabilities Requiring Amounts to
be Estimated
Current Liabilities Requiring Amounts to
be Estimated
34
Ezzell Company closes its books annually each December 31. The fiscal year for the town and
county in which the firm is located ends on June 30. The estimated property taxes for the period July 1, 2007, to June 30, 2008, are $7,200. The
tax bill is mailed in October with a requirement that the tax be paid before December 31, 2007.
The tax bill reported an actual tax of $7,290, and the corporation pays this amount on
October 31, 2007.
Ezzell Company closes its books annually each December 31. The fiscal year for the town and
county in which the firm is located ends on June 30. The estimated property taxes for the period July 1, 2007, to June 30, 2008, are $7,200. The
tax bill is mailed in October with a requirement that the tax be paid before December 31, 2007.
The tax bill reported an actual tax of $7,290, and the corporation pays this amount on
October 31, 2007.
Property Taxes
35
Anglee Machinery Corporation sells 200 machines for $6,000. This amount includes a service contract
sale of $150 and a machine sale of $5,850.
Anglee Machinery Corporation sells 200 machines for $6,000. This amount includes a service contract
sale of $150 and a machine sale of $5,850.
Cash or Accounts Receivable 1,200,000Sales ($5,850 x 200) 1,170,000Unearned Warranty Revenue 30,000
Sales Warranty Accrual MethodSales Warranty Accrual MethodSales Warranty Accrual MethodSales Warranty Accrual Method
ContinuedContinuedContinuedContinued
Warranty Obligations
36
Recognition of warranty expense for period, April-December, 2007.
Recognition of warranty expense for period, April-December, 2007.
Warranty Expense 5,000Cash (or other assets) 5,000
Recognition of warranty revenue for period, April-December, 2007.
Recognition of warranty revenue for period, April-December, 2007.
Unearned Warranty Revenue 5,000Warranty Revenue 5,000
ContinuedContinuedContinuedContinued
Warranty Obligations
37
Recognition of warranty expense during 2008.Recognition of warranty expense during 2008.
Warranty Expense 25,150Cash (or other assets) 25,150
Recognition of warranty revenue during 2008.Recognition of warranty revenue during 2008.
Unearned Warranty Revenue 25,000Warranty Revenue 25,000
Warranty Obligations
38
On October 1, 2007, the American Meatball Corporation began offering to customers a serving disk in return for 30 meatball can labels. The offer expires on April 1, 2008. The cost of each premium serving disk is $2. It is estimated that 60% of the
labels will be redeemed.
Premium and Coupon Obligations
39
Purchased 12,000 serving dishes at $2 each.Inventory of Premium Serving Dishes 24,000
Cash (or Accounts Payable) 24,000
Sold 300,000 cans of meatball at $1.80 each...Cash (or Accounts Receivable) 540,000
Sales 540,000
ContinuedContinuedContinuedContinued
Premium and Coupon Obligations
40
Received 105,000 labels from customers:.Premium Expense 7,000
Inventory of Premium Serving Dishes 7,000
Estimated that 75,000 labels will be submitted next year:Premium Expense 5,000
Estimated Premium Claims Outstanding 5,000
Estimated labels that will be redeemed (300,000 x .60)Estimated labels that will be redeemed (300,000 x .60) 180,000180,000Deduct labels redeemed during 2007Deduct labels redeemed during 2007 (105,000(105,000))Estimated number of future label redemptionsEstimated number of future label redemptions 75,00075,000
Premium expense for estimated future redemptions:Premium expense for estimated future redemptions:
(75,000 (75,000 ÷ 30) x $2÷ 30) x $2 $5,000$5,000
Premium expense for estimated future redemptions:Premium expense for estimated future redemptions:
(75,000 (75,000 ÷ 30) x $2÷ 30) x $2 $5,000$5,000
Premium and Coupon Obligations(105,000 ÷ 30)(105,000 ÷ 30)
x $2x $2
41
A contingency is an existing condition involving uncertainty as to possible gain or loss that
will ultimately be resolved.
A contingency is an existing condition involving uncertainty as to possible gain or loss that
will ultimately be resolved.
Contingencies
42
Contingencies
Probable. The future event or events is likely to occur.
Reasonably possible. The chance of the future event occurring is more than remote but less than likely.
Remote. The chance of the future event occurring is slight.
43
Criteria Disclosure
NoNo Future event probable? YesYes
NoNoAmount reasonably
estimated? YesYes
Report amount in financial statements
Report amount in financial statements
Report amount in financial statements
Yes NoNoNoNoReasonable possibility
of loss
Disclose in notes to financial statementsDisclose in notes to financial statementsDisclose in notes to financial statementsDisclose in notes to financial statements
or and
and
Disclose in notes to financial statementsDisclose in notes to financial statements
Not required to disclose
Not required to disclose
Contingencies
44
a. Contingencies that might result in gains usually are not reflected in [a company’s] accounts since to do so might be to recognize revenue prior to its realization.
b. Adequate disclosure shall be made of contingencies that might result in gains, but care shall be exercised to avoid misleading implications as to the likelihood of realization.
FASB Statement No. 5 requires that these gains be disclosed in the notes to the company’s financial statements.
Disclosure of Gain Contingencies
45
A company may reclassify current liabilities to long-term to improve its working capital
and current ratio.
A company may reclassify current liabilities to long-term to improve its working capital
and current ratio.
Short-Term Debt Expected to be Refinanced
46
1. The company intends to refinance the obligation on a long-term basis, and
2. The company can demonstrate the ability to consummate the refinancing.
3. A reasonable estimate of the minimum amount expected to be available for future refinancing if the amount that could be obtained fluctuates.
Short-Term Expected to be Refinanced
47
Ability must be demonstrated by the fact that the company
1. Has issued long-term obligations or equity securities after the date of its balance sheet but before it issues its balance sheet, or
2. has entered into a bona fide long-term financing agreement before it issues its balance sheet that clearly permits the company to refinance the short-term obligations on a long-term basis.
Short-Term Debt Expected to be Refinanced
48
Chapter13
Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.