Chap 013

Chapter13CurrentLiabilitiesandContingencies
Aliabilityentailsthepresent,the
future, and the past. It is a present
responsibility,tosacrificeassetsinthe
future, caused by a transaction or
QUESTIONSFORREVIEWOFKEYTOPICS
othereventthatalreadyhashappened.
Specifically, Elements of Financial
Statements, Statement of Financial
Question131
AccountingConcepts No.6,par.36,
describes three essential
characteristics:Liabilities
1. areprobable,futuresacrificesofeconomicbenefits
2. thatarisefrompresentobligations(totransfergoodsorprovideservices)tootherentities
3. thatresultfrompasttransactionsorevents.
Liabilitiestraditionallyareclassifiedaseithercurrentliabilitiesorlongterm
Question132liabilitiesinaclassifiedbalancesheet.Currentliabilitiesarethoseexpectedtobe
satisfied with current assets or by the creation of other current liabilities
(Committee onAccounting Procedure, American Institute ofCPAs,Accounting
ResearchandTerminologyBulletin,FinalEdition,p.21). Usually,butwithexceptions,current
liabilitiesareobligationspayablewithinoneyearorwithinthefirm'soperatingcycle,whicheveris
longer.
Inconcept,liabilitiesshouldbereportedattheir presentvalues;thatis,the
Question133valuationamountisthepresentvalueofallfuturecashpaymentsresultingfromthe
debt,usuallyprincipaland/orinterestpayments.Inthiscase,theamountwouldbe
determinedasthepresentvalueof$100,000,discountedforthreemonthsatan
appropriaterateofinterestforadebtofthistype.
This is proper because of the time value of money. In practice, liabilities ordinarily are
reportedattheirmaturityamountsifpayablewithinoneyearbecausetherelativelyshorttimeperiod
makestheinterestortimevaluecomponentimmaterial. AccountingPrinciplesBoardOpinionNo
21,InterestonReceivablesandPayables,specificallyexemptsfrompresentvaluevaluationall
liabilitiesarisinginconnectionwithsuppliersinthenormalcourseofbusinessandduewithina
year.
Linesofcreditpermitacompanytoborrowcashfrom
AnswerstoQuestions(continued) abankuptoaprearrangedlimitatapredetermined,usually
floating,rateofinterest.Theinterestrateoftenisbasedon
current rates of the prime London interbank borrowing,
Question134
certificates of deposit, bankers acceptance, or other
standardrates.Linesofcreditusuallymustbeavailableto
supporttheissuanceofcommercialpaper.
Linesofcreditcanbenoncommittedorcommitted.Anoncommittedlineofcreditallowsthe
companytoborrowwithouthavingtofollowformalloanproceduresandpaperworkatthetimeof
SolutionsManual,Vol.2,Chapter13
TheMcGrawHillCompanies,Inc.,2008
131
theloanandislessformal,usuallywithoutacommitmentfee.Sometimesacompensatingbalance
isrequiredtobeondepositwiththebankascompensationfortheservice. A committed lineof
creditismoreformal.Itusuallyrequiresacommitmentfeeintheneighborhoodof 1/4ofonepercent
oftheunusedbalanceduringtheavailabilityperiod. Sometimescompensatingbalancesalsoare
required.
Wheninterestisdiscountedfromthefaceamountofanoteatthetimeitis
Question135written,itusuallyisreferredtoasanoninterestbearingnote.Theydo,ofcourse
entailinterest,buttheinterestisdeducted(ordiscounted)fromthefaceamountto
determine the cash proceeds made available to the borrower at the outset and
includedintheamountpaidatmaturity.Infact,theeffectiveinterestrateishigherthanthestated
discountratebecausethediscountrateisappliedtothefacevalue,butthecashborrowedislessthan
thefacevalue.
Commercial paper represents loans from other corporations. It refers to
Question136unsecured notes sold in minimum denominations of $25,000 with maturities
rangingfrom30to270days. Thefirmwouldberequiredtofilearegistration
statementwiththeSECifthematurityisbeyond270days.Thenamecommercial
paper implies that a paper certificate is issued to the lender to represent the obligation. But,
increasingly, nopaperis created becausethe entire transaction iscomputerized. Recordingthe
issuanceandpaymentofcommercialpaperisthesameasfornotespayable.
Theinterestrateusuallyislowerthaninabankloanbecausecommercialpaper(a)typicallyis
issuedbylarge,soundcompanies(b)directlytothelender,and(c)normallyisbackedbyalineof
creditwithabank.
Thisisanexampleofanaccruedexpenseanexpenseincurredduringthe
Question137current period, but not yet paid. The expense and related liability should be
recordedasfollows:
Salariesexpense
Salariespayable
5,000
5,000
Thisachievesapropermatchingofthisexpensewiththerevenuesithelpsgenerate.
Anemployershouldaccrueanexpenseandtherelated
AnswerstoQuestions(continued) liabilityforemployees' compensationforfutureabsences,
like vacation pay, if the obligation meets each of four
conditions: (1)theobligationisattributabletoemployees'
Question 13-8
services already performed, (2) the paid absence can be
takeninalateryearthebenefitvests(willbecompensated
evenifemploymentisterminated)orthebenefitcanbeaccumulatedovertime,(3)thepaymentis
probable,and(4)theamountcanbereasonablyestimated.
Customary practice should be considered when deciding whether an obligation exists. For
instance, whether the rights to paid absences have been earned by services already rendered
sometimes depends on customary policy for the absence in question. An example is whether
compensation for upcoming sabbatical leave should be accrued. Is it granted only to perform
13-2
Intermediate Accounting,Revised4/e
researchbeneficialtotheemployer?Or,isitcustomarythatsabbaticalleaveisintendedtoprovide
unrestrainedcompensationforpastservice.
Similar concerns also influence whether unused rights to the paid absences can be carried
forwardorexpire.Althoughholidaytime,militaryleave,maternityleave,andjurytimetypicallydo
notaccumulateifunused,ifitiscustomarypracticethatonecanbecarriedforward,aliabilityis
accruedifitsprobableemployeeswillbecompensatedinafutureyear. Similarly, sickpay is
specificallyexcludedbySFAS43frommandatoryaccrualbecausefutureabsencedependsonfuture
illness,whichusuallyisnotacertainty.But,ifcompanypolicyorcustomisthatemployeesarepaid
sickpayevenwhentheirabsenceisnotduetoillness,aliabilityforunusedsickpayshouldbe
recorded.
Whenacompanycollectscashfromacustomerasarefundabledepositoras
Question139anadvancepaymentforproductsorservices,aliabilityiscreatedobligatingthe
firmtoreturnthedepositortosupplytheproductsorservices.Whentheamountis
tobereturnedtothecustomerincash,itisarefundabledeposit.Whentheamount
willbeappliedtothepurchasepricewhengoodsaredeliveredorservicesprovided(giftcertificates,
magazinesubscriptions,layawaydeposits,specialorderdeposits,andairlinetickets)itisacustomer
advance.
Examplesofamountscollectedforthirdpartiesthatrepresentliabilitiesuntil
Question1310remittedaresalestaxes,andpayrollrelateddeductionssuchasfederalandstate
incometaxes,socialsecuritytaxes,employeeinsurance,employeecontributions
toretirementplans,anduniondues.
AnswerstoQuestions(continued) 1. Current liability The requirement to classify
currentlymaturingdebtasacurrentliabilityincludes
debtthatiscallable,ordueondemand,bythecreditor
intheupcomingyearevenifthedebtisnotexpectedto
becalled.
Question1311
2 Longtermliability Thecurrentliabilityclassificationincludes(a)situationsinwhichthe
creditorhastherighttodemandpaymentbecauseanexistingviolationofaprovisionofthedebt
agreementmakesitcallableand(b)situationsinwhichdebtisnotyetcallable,butwillbe
callablewithintheyearifanexistingviolationisnotcorrectedwithinaspecifiedgraceperiod
unlessit's probable theviolationwillbecorrectedwithinthegraceperiod. Inthiscase,the
existingviolationisexpectedtobecorrectedwithin6months.
Shortterm obligations can be reported as noncurrent liabilities if the
Question1312company(a) intends torefinanceonalongtermbasisand(b)demonstratesthe
abilitytodosobyarefinancingagreementorbyactualfinancing.
Alosscontingencyisanexistingsituation,orsetofcircumstancesinvolving
Question1313potential loss that will beresolved when some future event occurs ordoesnt
occur. Examples: (1) an unsettled tax deficiency assessed by the IRS, (2) a
possibleuncollectiblereceivable,(3)beingthedefendantinalawsuit.
133
Thelikelihoodthatthefutureevent(s)willconfirmtheincurrenceofthe
Question1314liabilitymustbecategorizedas:
PROBABLEtheconfirmingeventislikelytooccur.
REASONABLYPOSSIBLEthechancetheconfirmingeventwilloccurismorethanremotebutless
thanlikely.
REMOTEthechancetheconfirmingeventwilloccurisslight.
Aliabilityshouldbeaccruedifitisbothprobablethattheconfirmingevent
Question1315willoccurandtheamountcanbeatleastreasonablyestimated.
If one or both of the accrual criteria is not met, but there is at least a
Question1316reasonablepossibilitythatanobligationexists(thelosswilloccur),adisclosure
noteshoulddescribethecontingency.Thenotealsoshouldprovideanestimateof
thepossiblelossorrangeofloss,ifpossible. Ifanestimatecannotbemade,a
statementtothateffectshouldbeincluded.
AnswerstoQuestions(continued) 1. Manufacturersproductwarrantiestheseinevitably
Question1317
involve expenditures, and reasonably accurate

estimatesofthe total liabilityforaperiodusuallyare
possible,basedonpriorexperience.
2. Cashrebatesandotherpremiumofferstheseinevitablyinvolveexpenditures,andreasonably
accurate estimates of the total liability for a period usually are possible, based on prior
experience.
Thecontingentliabilityforwarranties andguarantees usuallyisaccrued.
Question1318Theestimatedwarranty(guarantee)liabilityiscreditedandwarranty(guarantee)
expenseisdebitedinthereportingperiodinwhichtheproductunderwarrantyis
sold. An extended warranty provides warranty protection beyond the
manufacturersoriginalwarranty. Amanufacturerswarrantyisofferedasanintegralpartofthe
product package. By contrast, an extended warranty is priced and sold separately from the
warrantedproduct.Itessentiallyconstitutesaseparatesalestransactionandisrecordedassuch.
Severalweeksusuallypassbetweentheendofacompanysfiscalyearand
Question1319the date the financial statements for that year actually are issued. Any
enlightening events occurring during this period should be used to assess the
natureofalosscontingencyexistingatthereportdate.Sincealiabilityshouldbe
accruedifitisbothprobablethattheconfirmingeventwilloccurandtheamountcanbeatleast
reasonablyestimated,thecontingencyshouldbeaccrued.
13-4
Whenacontingencycomesintoexistenceonlyaftertheyearend,aliability
Question1320cannotbeaccruedbecausenoneexistedattheendoftheyear.Yet,ifthelossis
probableandcanbereasonablyestimated,thecontingencyshouldbedescribedin
adisclosurenote.Thenoteshouldincludetheeffectofthelossonkeyaccounting
numbersaffected.Furthermore,eveneventsotherthancontingenciesthatoccuraftertheyearend
butbeforethefinancialstatementsareissuedmustbedisclosedinasubsequenteventsdisclosure
noteiftheyhaveamaterialeffectonthecompanysfinancialposition.(i.e.,anissuanceofdebtor
equitysecurities,abusinesscombination,ordiscontinuedoperations).
When an assessment is probable, reporting the
AnswerstoQuestions(concluded)
possibleobligationwouldbewarrantedifanunfavorable
settlementisatleastreasonablypossible. Thismeansan
Question1321
estimatedlossandcontingentliabilitywouldbeaccruedif
(a)anunfavorableoutcomeisprobableand(b)theamount
canbereasonablyestimated.Otherwisefootnotedisclosure
wouldbeappropriate.So,whentheassessmentisunassertedasyet,atwostepprocessisinvolved
indecidinghowitshouldbereported:
1. Istheassessmentprobable?Ifitisnot,nodisclosureiswarranted.
2. Iftheassessmentisprobable,evaluate(a)thelikelihoodofanunfavorableoutcomeand(b)
whetherthedollaramountcanbeestimatedtodeterminewhetheritshouldbeaccrued,
disclosedonly,orneither.
You should not accrue your gain. A gain contingency should not be
Question1322accrued.Thisconservativetreatmentisconsistentwiththegeneralinclinationof
accounting practice to anticipate losses, but to recognize gains only at their
realization. Thoughgaincontingencies arenotrecordedintheaccounts,they
shouldbedisclosedinnotestothefinancialstatements.Attentionshouldbepaidthatthedisclosure
notenotgive"misleadingimplicationsastothelikelihoodofrealization."
BRIEFEXERCISES
BriefExercise131
Cash
Notespayable
60,000,000
Interestexpense($60,000,000x12%x3/12).......
Interestpayable...........................................
60,000,000
1,800,000
1,800,,000
135
Cash(difference).................
54,600,000
Discountonnotespayable($60,000,000x12%x9/12)
.................................................5,400,000
Notespayable(faceamount)
........................60,000,000
BriefExercise132
Interestexpense($60,000,000x12%x3/12)..................
Discountonnotespayable....................................
1,800,000
1,800,000
a.
BriefExercise133
December31
$100,000x12%x6/12=$6,000
b.
September30
$100,000x12%x3/12=$3,000
BriefExercise134
12,000,000
11,190,000
.................................................810,000
Interestexpense.........................................................
Discountonnotespayable...........................................
13-6
810,000
810,000
Notespayable(faceamount).........................................
Cash.......................................................................
12,000,000
12,000,000
9,550,000
.................................................450,000
........................10,000,000
BriefExercise135
Effectiveinterestrate:
Discount($10,000,000x6%x9/12)
Cashproceeds
Interestratefor9months
Annualeffectiverate
BriefExercise136
$9,550,000
4.712%
x12/9
___________
6.3%
450,000
December12
Cash.......................................................................
Liabilitycustomeradvance............................
January16
Cash.......................................................................
Liabilitycustomeradvance................................
Salesrevenue.....................................................
24,000
216,000
24,000
24,000
240,000
137
Accountsreceivable.....
645,000
...............Salesrevenue
.........................600,000
Salestaxespayable([6%+1.5%]x$600,000)
...........................45,000
BriefExercise137
BriefExercise138
Thisisalosscontingencyandtheestimatedwarranty
liabilityiscreditedandwarrantyexpenseisdebitedin
theperiodinwhichtheproductsunderwarrantyare
sold.Rightwillreportaliabilityof$130,000:
WarrantyLiability
__________________________________________
Actualexpenditures 20,000
150,000 Warrantyexpense(1%x$15,000,000)
130,000 Balance
BriefExercise139
Thisisalosscontingencyandshouldbeaccrued
becauseitisbothprobablethattheconfirmingevent
willoccurandtheamountcanbeatleastreasonably
estimated.GooGooshouldreporta$5.5millionlossinitsincomestatementand
a$5.5millionliabilityinitsbalancesheet
Lossproductrecall........................................................ 5,500,000
Liabilityproductrecall...........................................
5,500,000
Adisclosurenotealsoisappropriate.
13-8
BriefExercise1310
appropriate.
Thisisagaincontingency.Gaincontingenciesarenot
accrued even if the gainis probable and reasonably
estimable.Thegainshouldberecognizedonlywhen
realized. A carefully worded disclosure note is
This is a loss contingency. A liability should be

accruedifitisbothprobablethattheconfirmingevent
BriefExercise1311 willoccurandtheamountcanbeatleast reasonably
estimated.Ifoneorbothofthesecriteriaisnotmet(as
in this case), but there is at least a reasonable
possibility that the loss will occur, a disclosure note should describe the
contingency.ThatswhatBellshoulddohere.
Onlythethirdsituationscostsshouldbeaccrued. A
liabilityshouldbeaccruedforalosscontingencyifit
BriefExercise1312 isboth probable thattheconfirmingeventwilloccur
andtheamountcanbeatleast reasonablyestimated.
Ifoneorbothofthesecriteriaisnotmet,butthereisat
leastareasonablepossibilitythatthelosswilloccur,a
disclosurenoteshoulddescribethecontingency.Bothcriteriaaremetonlyforthe
warrantycosts.
BriefExercise1313
NodisclosureisrequiredbecauseanEPSclaimisnot
yetasserted,andanassessmentisnotprobable.Even
ifanunfavorableoutcomeisthoughttobeprobablein
the event of an assessment and the amount is
estimable,disclosureisnotrequiredunlessanunassertedclaimisprobable.
EXERCISESRequirement1
Exercise131
Cash................................................................
Notespayable..............................................
8,000,000
8,000,000
139
Requirement2
Interestexpense($8,000,000x12%x2/12).........
Interestpayable...........................................
160,000
160,000
Requirement3
Interestexpense($8,000,000x12%x7/12).........
Interestpayable(fromadjustingentry)...............
Notespayable(faceamount)..............................
Cash(total)....................................................
Exercise132 1.
Interestrate
560,000
160,000
8,000,000
8,720,000
Fiscalyearend
12%
December31
6
$200millionx12%x /12=$12million
2.
Interestrate
Fiscalyearend
10%
September30
3
$200millionx10%x /12=$5million
3.
Interestrate
9%
Fiscalyearend
October31
$200millionx9%x4/12=$6million
Interestrate
Fiscalyearend
4.
6%
January31
$200millionx6%x7/12=$7million
1.
b
Exercise133
2.
Exercise134
2006
Jan.13 Noentryismadeforalineofcredituntilaloanactuallyismade. It
wouldbedescribedinadisclosurenote.
13-10
Feb.1
Cash..........................................................................
Notespayable.........................................................
5,000,000
May1
Interestexpense($5,000,000x10%x3/12)....................
Cash($5,000,000+125,000)......................................
125,000
5,000,000
Dec.1
Cash(difference)..........................................................
Discountonnotespayable($10,000,000x9%x9/12)....
Notespayable(faceamount).....................................
9,325,000
675,000
5,000,000
5,125,000
10,000,000
Dec.31
Theeffectiveinterestrateis9.6515%($675,000$9,325,000)x12/9.So,
properly,interestshouldberecordedatthatratetimestheoutstandingbalance
timesonetwelfthofayear:
Interestexpense($9,325,000x9.6515%x1/12)..............
75,000
75,000
Howeverthesameresultsareachievedifinterestisrecordedatthediscount
ratetimesthematurityamounttimesonetwelfthofayear:
Interestexpense($10,000,000x9%x1/12)....................
75,000
75,000
Exercise134(concluded) 2007
Sept.1
Interestexpense($10,000,000x9%x8/12)*..................
Notespayable(balance)...............................................
Cash(maturityamount).............................................
600,000
600,000
10,000,000
10,000,000
1311
*or,($9,325,000x9.6515%x8/12)=$600,000
Exercise135
Wagesexpense(increaseswagesexpenseto$410,000)
....................................................6,000
Liabilitycompensatedfutureabsences
..................................................6,000*
*($404,0004,000]=$400,000
x1/40=$10,000
(4,000)
=$6,000
nonvacationwages
vacationpayearned
vacationpaytaken
vacationpaycarriedover
Exercise136Requirement1
Wagesexpense(700x$900)..............................................
Liabilitycompensatedfutureabsences.............
630,000
630,000
Requirement2
Liabilitycompensatedfutureabsences..................
Wagesexpense($31million+[5%x$630,000])..............
Cash(orwagespayable)(total).............................
13-12
630,000
31,031,500
31,661,500
Cash............................................................................
Liabilitygiftcertificates......................................
5,200
Cash($2,100+841,300)..............................................
Liabilitygiftcertificates..........................................
Salesrevenue...........................................................
Salestaxespayable(4%x$2,100).............................
884
1,300
Requirement2
Giftcertificatessold
Giftcertificatesredeemed
LiabilitytobereportedatDecember31
5,200
2,100
84
$5,200
1,300
$3,900
Requirement3
ThesalestaxliabilityisacurrentliabilitybecauseitispayableinJanuary.
Theliabilityforgiftcertificatesispartcurrentandpartnoncurrent:
Giftcertificatessold
Estimatedcurrentliability
Giftcertificatesredeemed
CurrentliabilityatDecember31
NoncurrentliabilityatDecember31($5,200x20%)
Total
$5,200
x80%
$4,160
(1,300
)
$2,860
1,040
$3,900
DepositsCollected
1313
Cash..................................................................
Liabilityrefundabledeposits.....................
850,000
ContainersReturned
Liabilityrefundabledeposits.........................
Cash..............................................................
790,000
DepositsForfeited
Liabilityrefundabledeposits.........................
Revenuesaleofcontainers.........................
35,000
Costofgoodssold............................................
Inventoryofcontainers................................
Requirement2
BalanceonJanuary1
Depositsreceived
Depositsreturned
Depositsforfeited
BalanceonDecember31
35,000
850,000
790,000
35,000
35,000
$530,000
850,000
(790,000)
(35,000)
$555,000
Cash.......................................................................
Liabilitycustomeradvance............................
7,500
7,500
Requirement2
Cash.......................................................................
Liabilityrefundabledeposits..........................
25,500
25,500
Requirement3
Accountsreceivable...............................................
Salesrevenue....................................................
Salestaxespayable([5%+2%]x$800,000)..........
13-14
856,000
800,000
56,000
Normally,shorttermdebt(payablewithinayear)isclassified
Exercise1310ascurrentliabilities.However,whensuchdebtistoberefinanced
onalongtermbasis,itmaybeincludedwithlongtermliabilities.
ThenarrativeindicatesthatSprinthasboth(1)theintentand(2)theability("existing
longtermcreditfacilities")torefinanceonalongtermbasis. Thus,Sprintreported
thedebtaslongtermliabilities.
1315
Exercise1311
1. Currentliability:$10million
The requirement to classify currently maturing debt as a current liability

includesdebtthatiscallablebythecreditorintheupcomingyearevenifthe
debtisnotexpectedtobecalled.
2. Noncurrentliability:$14million
Thecurrentliabilityclassificationincludes(a)situationsinwhichthecreditor
hastherighttodemandpaymentbecauseanexistingviolationofaprovisionof
thedebtagreementmakesitcallableand(b)situationsinwhichdebtisnotyet
callable, but will be callable within the year if an existing violation is not
correctedwithinaspecifiedgraceperiodunlessit's probable theviolation
willbecorrectedwithinthegraceperiod.Inthiscase,theexistingviolationis
expectedtobecorrectedwithin6months.
3. Currentliability:$7million
Thedebtshouldbereportedasacurrentliabilitybecauseitispayableinthe
upcomingyear,willnotberefinancedwithlongtermobligations,andwillnot
bepaidwithabondsinkingfund.
Thisisalosscontingency.Theremaybeafuturesacrificeofeconomicbenefits
(costofsatisfyingthewarranty)duetoanexistingcircumstance(thewarranted
awningshavebeensold)thatdependsonanuncertainfutureevent(customer
claims).
Theliabilityisprobablebecauseproductwarrantiesinevitablyentailcosts.A
reasonablyaccurateestimateofthetotalliabilityforaperiodispossiblebased
onpriorexperience. So,thecontingentliabilityforthewarrantyisaccrued.
Theestimatedwarrantyliabilityiscreditedandwarrantyexpenseisdebitedin
2006,theperiodinwhichtheproductsunderwarrantyaresold.
Requirement2
2006Sales
13-16
Accountsreceivable............................................
Sales................................................................
5,000,000
Accruedliabilityandexpense
Warrantyexpense(3%x$5,000,000).........................
Estimatedwarrantyliability............................
150,000
Actualexpenditures
Estimatedwarrantyliability...............................
Cash,wagespayable,partsandsupplies,etc..
37,500
5,000,000
150,000
37,500
Requirement3
WarrantyLiability
__________________________________________
Actualexpenditures 37,500
150,000 Estimatedliability
112,500 Balance
Thisisnotalosscontingency. Anextendedwarrantyispricedandsold
separatelyfromthewarrantedproductandthereforeessentiallyconstitutesa
separate sales transaction. Since the earning process for an extended
warrantycontinuesduringthecontractperiod,revenueshouldberecognized
overthesameperiod. Revenuefromseparatelypricedextendedwarranty
contractsaredeferredasaliabilityatthetimeofsale,andrecognizedover
thecontractperiodonastraightlinebasis.
Requirement2
During2006
Accountsreceivable..............................................
Unearnedrevenueextendedwarranties........
412,000
412,000
1317
December31,2006(adjustingentry)
Unearnedrevenueextendedwarranties............
Revenueextendedwarranties
([$412,0002years]x1/2year*)........................
103,000
103,000
*Sincesalesofwarrantiesweremadeevenlythroughouttheyear,onehalfofone
yearsrevenueisconsideredearned.
Thisisalosscontingency. Aliabilityis accrued ifitisboth probable thatthe
confirmingeventwilloccurandtheamountcanbeatleastreasonablyestimated. If
oneorbothofthesecriteriaisnotmet,butthereisatleastareasonablepossibilitythat
thelosswilloccur,adisclosurenoteshoulddescribethecontingency.Inthiscase,a
liabilityisaccruedsincebothofthesecriteriaaremet.
Requirement2
Loss:
$2million
Requirement3
Liability:
$2million
Requirement4
Lossproductrecall................................................................ 2,000,000
2,000,000
Thisisalosscontingency.Somelosscontingenciesdontinvolveliabilitiesatall.
Somecontingencieswhenresolvedcauseanoncashassettobeimpaired,soaccruingit
13-18
meansreducingtherelatedassetratherthanrecordingaliability. Themostcommon
loss contingency of this type is an uncollectible receivable, as described in this
situation.
Requirement2
Baddebtexpense:3%x$2,400,000=$72,000
Requirement3
Baddebtexpense(3%x$2,400,000).................................
Allowanceforuncollectibleaccounts...................
72,000
72,000
Requirement4
Allowanceforuncollectibleaccounts:
Beginning of 2006
Write off of bad debts*
Year-end accrual (Req. 3)
End of 2006
$75,000
73,000
$ 2,000
72,000
$74,000
*Allowanceforuncollectibleaccounts.........................
Accountsreceivable..........................................
Netrealizablevalue:
Accountsreceivable
Less:Allowanceforuncollectibleaccounts
Netrealizablevalue
73,000
73,000
$490,000
(74,000)
$416,000
1319
Exercise1316
Requirement1
Promotionalexpense:
70%x$5x20,000=$70,000
Requirement2
Premiumliability:
$70,00022,000=$48,000
Requirement3
Promotionalexpense([70%x$5x20,000]$22,000).......
Estimatedpremiumliability....................................
48,000
48,000
Exercise1317
Scenario1
No disclosure is required because an IRS claim is as yet unasserted, and an
assessmentisnotprobable.
Scenario2
No disclosure is required because an IRS claim is as yet unasserted, and an
assessmentis not probable. Evenifanunfavorableoutcomeisthoughttobe
probableintheeventofanassessmentandtheamountisestimable,disclosureis
notrequiredunlessanunassertedclaimisprobable.
Scenario3
13-20
AdisclosurenoteisrequiredbecauseanIRSclaimisasyetunasserted,butan
assessment is probable. Since an unfavorable outcome is not thought to be
probable in the event of an assessment, no accrual is needed, but since an
unfavorable outcome is thought to be reasonably possible in the event of an
assessment,disclosureinafootnoteisrequired. Keepinmind,though,thatin
practice,disclosureofanunassertedclaimisrare.Suchdisclosurewouldalertthe
other party, the IRS in this case, of a potential point of contention that may
otherwisenotsurface.Theoutcomeoflitigationandanyresultinglossarehighly
uncertain,makingdifficultthedeterminationoftheirpossibilityofoccurrence.
Scenario4
AccrualofthelossisrequiredbecauseanIRSclaimisasyetunasserted,butan
assessment is probable. Since an unfavorable outcome also is thought to be
probableintheeventofanassessment,accrualisneeded.Keepinmind,though,
thatinpractice,accrualofanunassertedclaimisrare.Suchdisclosurewouldalert
theotherparty,theIRSinthiscase,ofapotentialpointofcontentionthatmay
otherwise not surface. Accrual could be offered in court as an admission of
responsibility.Alossusuallyisnotrecordeduntilaftertheultimatesettlementhas
beenreachedornegotiationsforsettlementaresubstantiallycompleted.
Warrantyexpense([4%x$2,000,000]$30,800).............
Estimatedwarrantyliability..................................
49,200
49,200
Requirement2
Baddebtexpense(2%x$2,000,000).................................
Allowanceforuncollectibleaccounts...................
40,000
40,000
1321
Requirement3
Thisisalosscontingency.Classicalcanusetheinformationoccurringafter
theendoftheyearandbeforethefinancialstatementsareissuedtodetermine
appropriatedisclosure.
Losslitigation......................................................... 1,500,000
Liabilitylitigation................................................
1,500,000
Requirement4
Thisisagaincontingency.Gaincontingenciesarenotaccruedevenifthe
gainisprobableandreasonablyestimable. Thegainshouldberecognized
onlywhenrealized.Adisclosurenoteisappropriate.
Requirement5
Lossproductrecall....................................................
500,000
500,000
Requirement6
Promotionalexpense([60%x$25x10,000]$105,000).. .
Estimatedpremiumliability....................................
1.
d
45,000
45,000
Exercise1319
2.
3.
4.
d
a
a
13-22
Exercise1320
Item
__C_
__D_
__C_
__C_
__C_
__C_
1.
2.
3.
4.
5.
6.
__C_ 7.
__C_ 8.
__L_ 9.
__D_ 10.
__C_ 11.
__N_ 12.
__C_ 13.
__A_ 14.
__C_ 15.
ReportingMethod
Commercialpaper.
N. Notreported
Noncommittedlineofcredit.
C. Currentliability
Customeradvances.
L. Longtermliability
Estimatedwarrantycost.
D. Disclosurenoteonly
Accountspayable.
A. Asset
Longtermbondsthatwillbecallablebythecreditorintheupcoming
yearunlessanexistingviolationisnotcorrected (thereisareasonable
possibilitytheviolationwillbecorrectedwithinthegraceperiod).
NotedueMarch3,2007.
Interestaccruedonnote,Dec.31,2006.
Shorttermbankloantobepaidwithproceedsofsaleofcommonstock.
Adeterminablegainthatiscontingentonafutureeventthatappears
extremelylikelytooccurinthreemonths.
Unassertedassessmentofbacktaxesthatprobablywillbeasserted,in
whichcasetherewouldprobablybealossinsixmonths.
Unasserted assessment of back taxes with a reasonable possibility of
being asserted, in which case there would probably be a loss in 13
months.
Adeterminablelossfromapasteventthatiscontingentonafutureevent
thatappearsextremelylikelytooccurinthreemonths.
Bondsinkingfund.
Longtermbondscallablebythecreditorintheupcomingyearthatare
notexpectedtobecalled.
Requirement 1
Exercise1321
Accrued liability and expense
1323
Warranty expense (3% x $3,600,000)................................................ 108,000

Estimated warranty liability ................................................
108,000
Actual expenditures (summary entry)
Estimated warranty liability ....................................................
Cash, wages payable, parts and supplies, etc. ....................
88,000
88,000
Requirement 2
Actual expenditures (summary entry)
Estimated warranty liability ($50,000 $23,000)......................
Loss on product warranty (3% 2%] x $2,500,000)...................
Cash, wages payable, parts and supplies, etc. ....................
27,000
25,000
52,000*
*(3% x $2,500,000) $23,000 = $52,000
Exercise13221.Thisisachangeinestimate.
Torevisetheliabilityonthebasisofthenewestimate:
Liabilitylitigation($1,000,000600,000)....................
Gainlitigation......................................................
400,000
400,000
2.Adisclosurenoteshoulddescribetheeffectofachangeinestimateonincome
before extraordinary items, net income, and related pershare amounts for the
currentperiod.
Exercise1323
Thenotedescribesalosscontingency. Dowanticipatesa
future sacrifice of economic benefits (cost of remediation and
restoration) due to an existing circumstance (environmental
violations)thatdependsonanuncertainfutureevent(requirementtopayclaim).
Dowconsiderstheliabilityprobableandtheamountisreasonablyestimable.
Asaresult,thecompanyaccruedtheliability:
13-24
($inmillions)
Lossprovisionfromenvironmentalclaims.....................
Liabilityforsettlementofenvironmentalclaims.....
381
381
d.SFAS43listsfourrequirementsthatmustbemet
beforealiabilityisaccruedforfuturecompensated
absences.Theserequirementsarethattheobligationmustariseforpast
services,theemployeerightsmustvestoraccumulate,paymentisprobable,
andtheamountcanbereasonablyestimated.Iftheamountcannotbe
reasonablyestimated,noliabilityshouldberecorded.However,the
obligationshouldbedisclosed.
Exercise 13-24
1.
2. c.SFAS5requiresacontingentliabilitytoberecorded,alongwiththerelated
loss,whenitisprobablethatanassethasbeenimpairedoraliabilityhas
beenincurred,andtheamountofthelosscanbereasonablyestimated.The
keywordsareprobableandreasonablyestimated.
3. c.SFAS5prescribesaccountingforcontingencies.Thelikelihoodof
contingenciesisdividedintothreecategories:probable(likelytooccur),
reasonablypossible,andremote.Whencontingentlossesareprobableand
theamountcanbereasonablyestimated,theamountofthelossshouldbe
chargedagainstincome.Iftheamountcannotbereasonablyestimatedbut
thelossisatleastreasonablypossible,fulldisclosureshouldbemade,
includingastatementthatanestimatecannotbemade.
4. b.Ifanenterpriseintendstorefinanceshorttermobligationsonalongterm
basisanddemonstratesanabilitytoconsummatetherefinancing,the
obligationsshouldbeexcludedfromcurrentliabilitiesandclassifiedas
noncurrent(SFAS6,ClassificationofShortTermObligationsExpectedto
BeRefinanced).Theabilitytoconsummatetherefinancingmaybe
demonstratedbyapostbalancesheetdateissuanceofalongtermobligation
orequitysecurities,orbyenteringintoafinancingagreement.
1325
Exercise1325
Salariesandwagesexpense(totalamountearned)
..................................500,000
Withholdingtaxespayable(federalincometax)
..................................100,000
Socialsecuritytaxespayable($500,000x6.2%)
31,000
Medicaretaxespayable($500,000x1.45%)..........
Salariesandwagespayable(netpay)..................
Payrolltaxexpense(total).......................................
Socialsecuritypayable(employersmatchingamount)
Medicaretaxespayable(employersmatchingamount)
Federalunemploymenttaxpayable($500,000x0.8%)
Stateunemploymenttaxpayable($500,000x5.4%)
7,250
361,750
69,250
31,000
7,250
4,000
27,000
PROBLEMSRequirement1
Problem131
BlantonPlastics
Cash......................................................................... 14,000,000
Notespayable.......................................................
14,000,000
N,C&IBank
Notesreceivable....................................................... 14,000,000
Cash.....................................................................
14,000,000
Requirement2
Adjustingentries(December31,2006)
13-26
BlantonPlastics
Interestexpense($14,000,000x12%x3/12).................
Interestpayable.....................................................
420,000
N,C&IBank
Interestreceivable.....................................................
Interestrevenue($14,000,000x12%x3/12).............
420,000
420,000
420,000
Maturity(January31,2007)
BlantonPlastics
140,000
Interestpayable(fromadjustingentry)........................
420,000
Notespayable(faceamount)....................................... 14,000,000
Cash(total).............................................................
14,560,000
N,C&IBank
Cash(total)................................................................. 14,560,000
Interestrevenue($14,000,000x12%x1/12)...............
140,000
Interestreceivable(fromadjustingentry)..................
420,000
Notesreceivable(faceamount)...............................
14,000,000
Problem131(concluded) Requirement3
Issuanceofnote(October1,2006)
Cash(difference)......................................................... 13,440,000
Discountonnotespayable($14,000,000x12%x4/12)560,000
14,000,000
Adjustingentry(December31,2006)
420,000
420,000
Maturity(January31,2007)
140,000
140,000
1327
Notespayable(faceamount)....................................... 14,000,000
Cash.....................................................................
14,000,000
Effectiveinterestrate:
Discount($14,000,000x12%x4/12) $
Cashproceeds
$13,440,000
Interestratefor4months
4.1666%
x12/4
___________
Annualeffectiverate
12.5%
560,000
Problem132Requirement1
2006
a.
Noentryismadeforalineofcredituntilaloanactuallyismade.It
wouldbedescribedinadisclosurenote.
b.
Cash.................................................................... 12,000,000
Notespayable.................................................
12,000,000
c.
Cash.....................................................................
Liabilityrefundabledeposits......................
2,600
d.
Accountsreceivable(total)...................................
Salesrevenue(given).......................................
Salestaxespayable([3%+3%]x$4,100,000)....
4,346,000
e.
Interestexpense($12,000,000x10%x3/12)...........
Interestpayable.............................................
300,000
2,600
4,100,000
246,000
300,000
2007
13-28
f.
Cash.................................................................... 10,000,000
Bondspayable................................................
10,000,000
Interestexpense($12,000,000x10%x2/12)...........
200,000
Interestpayable(fromadjustingentry)...................
300,000
Notespayable(faceamount).................................. 12,000,000
Cash($12,000,000+500,000)............................
12,500,000
g.
Liabilityrefundabledeposits...........................
Cash................................................................
1,300
1,300
Problem132(concluded) Requirement2
CURRENTLIABILITIES:
Accountspayable
Currentportionofbankloan
Liabilityrefundabledeposits
Salestaxespayable
Accruedinterestpayable
Totalcurrentliabilities
$252,000
2,000,000*
2,600
246,000
300,000
$2,800,600
LONGTERMLIABILITIES:
Bankloantoberefinanced
onalongtermbasis
$10,000,000*
*Theintentofmanagementistorefinanceall$12,000,000ofthebankloan,butthe
actualrefinancingdemonstratestheabilityonlyfor$10,000,000.
1329
Problem133
Requirement1
a. The requirement to classify currently maturing debt as a current liability

includesdebtthatiscallablebythecreditorintheupcomingyearevenifthe
debtisnotexpectedtobecalled.So,theentire$40milliondebtisacurrent
liability.
b. $5millioncanbereportedaslongterm,but$1millionmustbereportedasa
currentliability.Shorttermobligationsthatareexpectedtoberefinancedwith
longtermobligationscanbereportedasnoncurrentliabilitiesonlyifthefirm
(a)intendstorefinanceonalongtermbasisand(b)actuallyhasdemonstrated
the ability to do so. Ability to refinance on a longterm basis can be
demonstrated by either an existing refinancing agreement or by actual
financing priortotheissuanceofthefinancialstatements. Therefinancing
agreementinthiscaselimitstheabilitytorefinanceto$5millionofthenotes.
In the absence of other evidence of ability to refinance, the remaining $1
millioncannotbereportedaslongterm.
c. Theentire$20millionmaturityamountshouldbereportedasacurrentliability
because that amount is payable in the upcoming year and it will not be
refinancedwithlongtermobligationsnorpaidwithabondsinkingfund.
d. Theentire$12millionloanshouldbereportedasalongtermliabilitybecause
thatamountispayablein2012anditwillnotberefinancedwithlongterm
obligations nor paid with a bond sinking fund. The current liability
classification includes (a) situations in which the creditor has the right to
demand payment because an existing violation of a provision of the debt
agreementmakesitcallableand(b)situationsinwhichdebtisnotyetcallable,
butwillbecallablewithintheyearifanexistingviolationisnotcorrected
within a specified grace period unless it's probable the violation will be
correctedwithinthegraceperiod.Here,theexistingviolationisexpectedtobe
correctedwithin6months(actually3monthsinthiscase).
Problem133(concluded)
Requirement2
13-30
December31,2006
($inmillions)
CurrentLiabilities
Accountspayableandaccruals
10%notespayabledueMay2007
Currentlymaturingportionoflongtermdebt:
11%bondsdueOctober31,2017,
redeemableonOctober31,2007
12%bondsdueSeptember30,2007
TotalCurrentLiabilities
$22
1
$40
20
LongTermDebt
Currentlymaturingdebtclassifiedaslongterm:
10%notespayabledueMay2007(NoteX)
9%bankloandueOctober2009
TotalLongTermLiabilities
TotalLiabilities
60
83
5
12
17
$100
NOTEX:CURRENTLYMATURINGDEBTCLASSIFIEDASLONGTERM
TheCompanyintendstorefinance$6millionof10%notesthatmatureinMayof
2007.InMarch,2007,theCompanynegotiatedalineofcreditwithacommercial
bankforupto$5millionanytimeduring2007.Anyborrowingswillmaturetwo
yearsfromthedateofborrowing.Accordingly,$5millionwasreclassifiedtolong
termliabilities.
Problem134
Requirement1
a. Interestexpense($600,000x10%x5/12).....................
Interestpayable.................................................
25,000
25,000
b. NoadjustingentrysinceinteresthasbeenpaiduptoDecember31.$950,000
canbereportedasanoncurrentliability,because(a)intentand(b)abilityto
refinancehasbeendemonstratedforthatamount.
1331
c. Accountsreceivable(toeliminatethecreditbalance)...
Advancesfromcustomers.................................
18,000
d. Rentrevenue(10/12x$30,000).................................
Unearnedrentrevenue.....................................
25,000
18,000
25,000
Requirement2
CURRENTLIABILITIES:
Accountspayable
Currentportionoflongtermdebt250,000
Accruedinterestpayable
Advancesfromcustomers
Unearnedrentrevenue
Banknotespayable
LONGTERMLIABILITIES:
Mortgagenotepayable
$35,000
25,000
18,000
25,000
600,000
$953,000
$950,000
Problem135Requirement1
B=.10($150,000BT),where
T=.30($150,000B),
B=thebonus
T=incometax
Requirement2
Sinceincometax(T)isacomponentofbothequations,wecancombinethetwo
andthensolvefortheremainingunknownamount(B):
SubstitutevalueofTforT:
B =.10[$150,000B.30($150,000B)]
Reducetherighthandsideoftheequationtooneknownandoneunknownvalue:
13-32
B =.10($150,000B$45,000+.30B)
B =.10($105,000.70B)
B =$10,500.07B
Add.07Btobothsides
1.07B =$10,500
Dividebothsidesby1.07
B =$9,813
Requirement3
Bonuscompensationexpense..............................
Accruedbonuscompensationpayable............
9,813
9,813
Requirement4
Theapproachisthesameinanycase:(1)expressthebonusformulaasoneor
morealgebraicequation(s),(2)usealgebratosolvefortheamountofthebonus.For
example,thebonusmight specifythatthebonusis10% ofthedivisionsincome
beforetax,butafterthebonusitself:
B =.10($150,000B)
B =$15,000.10B
1.10B =$15,000
B =$13,636
1333
a. This is a loss contingency. Eastern can use the information

Problem136 occurringaftertheendoftheyearindeterminingappropriate
disclosure. ItisunlikelythatEasternwouldchoosetoaccrue
the$122millionlossbecausethejudgmentwillbeappealedand
thatoutcomeisuncertain.Adisclosurenoteisappropriate:
_______________________________
NoteX:Contingency
Inalawsuitresultingfromadisputewithasupplier,ajudgmentwasrendered
againstEasternCorporationintheamountof$107millionplusinterest,atotalof
$122millionatFebruary3,2007. Easternplanstoappealthejudgment. While
managementandlegalcounselarepresentlyunabletopredicttheoutcomeorto
estimatetheamountofanyliabilitythecompanymayhavewithrespecttothis
lawsuit,itisnotexpectedthatthismatterwillhaveamaterialadverseeffectonthe
company.
b. Thisisalosscontingency.Easterncanusetheinformationoccurringaftertheend
oftheyearindeterminingappropriatedisclosure.Easternshouldaccruethe$140
millionlossbecausetheultimateoutcomeappearssettledandthelossisprobable.
Losslitigation...........................................
Liabilitylitigation..................................
13-34
140,000,000
140,000,000
Adisclosurenotealsoisappropriate:
_________________________________
Notes:Litigation
InNovember2005,theStateofNevadafiledsuitagainsttheCompany,seeking
civilpenaltiesandinjunctivereliefforviolationsofenvironmentallawsregulating
hazardous waste. On January 12, 2007, the Company announced that it had
reachedasettlementwithstateauthoritiesonthismatter.Basedupondiscussions
withlegalcounsel,theCompany,hasaccruedandchargedtooperationsin2006,
$140milliontocovertheanticipatedcostofallviolations.TheCompanybelieves
thattheultimatesettlementofthisclaimwillnothaveamaterialadverseeffecton
theCompany'sfinancialposition.
Problem136(concluded) c. Thisisagaincontingency.Gaincontingenciesarenot
accrued even if the gain is probable and reasonably
estimable.Thegainshouldberecognizedonlywhen
realized.
Though gain contingencies are not recorded in the accounts, they should be
disclosedinnotestothefinancialstatements.
_______________________________
NoteX:Contingency
EasternistheplaintiffinapendinglawsuitfiledagainstUnitedSteelfordamages
duetolostprofitsfromrejectedcontractsandforunpaidreceivables.Thecaseisin
finalappeal.Noamounthasbeenaccruedinthefinancialstatementsforpossible
collectionofanyclaimsinthislitigation.
d. No disclosure is required because an IRS claim is as yet unasserted, and an

assessmentisnot probable. Evenifanunfavorableoutcomeisthoughttobe
probableintheeventofanassessmentandtheamountisestimable,disclosureis
notrequiredunlessanunassertedclaimisprobable.
1335
Problem137
Requirement1
Yes,Northeastsfrequentflyerprogramisofferedinordertoenhancerevenues.
Under the matching principle the cost is properly recognized as an operating
expenseintheyearsalesaremade(travelmilesareearned).
Requirement2
Expense:
25%x$40million=$10million
Requirement3
Liability:
Beginning of 2006
Redemption
Year-end accrual (Req. 2)
End of 2006
$25,000
(8,000)
$17,000
10,000
$27,000
Requirement4
Operatingexpense..............................................
Airtrafficliability(25%x$40million)...............
Problem138
$inmillions
10
10
Requirement1
Heinrich would record a contingent liability (and loss) of $27,619,020, calculated as

follows:
$40,000,000 x 20% = $ 8,000,000
30,000,000 x 50% =
15,000,000
20,000,000 x 30% =
6,000,000
$29,000,000
13-36
x .95238*
$27,619,020
*Present value of $1, n = 1, i = 5% (from Table 6A-2)
Requirement2
Loss product recall
Liability product recall
27,619,020
27,619,020
Requirement3
The difference between $29,000,000 and the initial value of the liability of
$27,619,020 represents interest expense, which Heinrich will accrue during 2007 as
follows:
Interest expense
1,380,980
1,380,980
Requirement4
Interest increases the liability to $29 million at the end of 2007. Since there is a
difference between the actual costs, $30 million, and the $29 million liability, Heinrich
will record an additional loss.
Loss product recall
Cash
Problem139
29,000,000
1,000,000
30,000,000
Case1
NoteOnly.Whenacontingencycomesintoexistenceaftertheyearend,aliability
cannotbeaccruedbecauseitdidntexistattheendoftheyear.However,ifthe
loss is probable and can be estimated, the situation should be described in a
disclosurenote.
Case2
1337
NoteOnly.Sinceanunassertedclaimorassessmentisprobable,thelikelihoodofan
unfavorableoutcomeandthefeasibilityofestimatingadollaramountshouldbe
consideredindecidingwhetherandhowtoreportthepossibleloss.Anestimated
lossandcontingentliabilitycannotbeaccruedsinceanunfavorableoutcomeis
onlyreasonablypossibleeventhoughtheamountcanbereasonablyestimated.
Case3
AccrualandDisclosureNote.Whenthecauseofalosscontingencyoccursbefore
theyearend,aclarifyingeventbeforefinancialstatementsareissuedcanbeused
todeterminehowthecontingencyisreported. Eventhoughthelosswasnot
probableatyearend,itbecomessobeforefinancialstatementsareissued.The
situationalsoshouldbedescribedinadisclosurenote.
Case4
NoDisclosure.Eventhoughthecauseofthecontingencyoccurredbeforeyearend,
Lincolnisunawareof thelosscontingencywhenthefinancialstatementsare
issued.
13-38
Problem1310
j_ 1. FaceamountxInterestratexTime
g 2. Payablewithcurrentassets
h 3. Shorttermdebttoberefinanced
withcommonstock
i_ 4. Presentvalueofinterestplus
presentvalueofprincipal
d 5. Noninterestbearing
a 6. Noncommittedlineofcredit
b_ 7. Pledgedaccountsreceivable
c_ 8. Reclassificationofdebt
f_ 9. Purchasedbyothercorporations
e_ 10.Expensesnotyetpaid
l_ 11. Liabilityuntilrefunded
k_ 12. Appliedagainstpurchaseprice
ListA ListB
a. Informalagreement
b. Securedloan
c. Refinancingpriortotheissuance
ofthefinancialstatements
d. Accountspayable
e. Accruedliabilities
f. Commercialpaper
g. Currentliabilities
h. Longtermliability
i. Usualvaluationofliabilities
j. Interestondebt
k. Customeradvances
l. Customerdeposits
Problem1311
1339
Salariesandwagesexpense(totalamountearned)...........
Withholdingtaxespayable(federalincometax)...........
Withholdingtaxespayable(localincometax).............
Socialsecuritytaxespayable($2,000,000x6.2%).......
Medicaretaxespayable($2,000,000x1.45%).............
Medicalinsurancepayable($42,000x20%)...............
Lifeinsurancepayable($9,000x20%)...........................
Retirementplanpayable(employeesinvestment)..........
Salariesandwagespayable(netpay)........................
2,000,000
Payrolltaxexpense(total)...........................................
277,000
Socialsecuritytaxespayable(employersmatchingamount)
Medicaretaxespayable(employersmatchingamount).
FUTApayable($2,000,000x0.8%).............................
Stateunemploymenttaxpayable($2,000,000x5.4%).
Salariesandwagesexpense(fringebenefits).................
Medicalinsurancepayable($42,000x80%)...............
Lifeinsurancepayable($9,000x80%)...........................
Retirementplanpayable(matchingamount)...................
CASES
124,800
400,000
53,000
124,000
29,000
8,400
1,800
84,000
1,299,800
124,000
29,000
16,000
108,000
33,600
7,200
84,000
[Note:Thiscaseencouragesthestudenttoreferenceauthoritative
pronouncements.]
ResearchCase131
The $2,000,000 of commercial paper liquidated in November 2006 would be
classifiedasacurrentliabilityinCheshire'sbalancesheetatSeptember30,2006.The
essenceofacurrentliabilityisthatitspaymentrequirestheuseofcurrentassetsorthe
creationofothercurrentliabilities.Ifaliabilityisliquidatedaftertheyearendwith
currentassets,itisreportedasacurrentliabilityasoftheendofthereportingperiod
evenifthecurrentassetsarelaterreplenishedbyproceedsofalongtermobligation
beforetheissuanceofthefinancialstatements.
The$3,000,000ofcommercialpaperliquidatedinJanuary2007butrefinancedby
the longterm debt offering in December 2006 would be excluded from current
liabilitiesinthebalancesheetattheendofSeptember2006.Itshouldbenotedthat
the existence of a financing agreement at the date of issuance of the financial
13-40
statements rather than a completed financing at that date would not change these
classifications.
Collecting cash from a customer as a refundable
RealWorldCase132
depositnormallycreatesaliabilitytoreturnthedeposit
ifthedepositisexpectedtoberefunded. Inthiscase,
thedepositisnotreturnabletothecustomer,butpaymentstillwillbemadetothe
zoo if the pails are returned. The possible future payment represents a loss
contingencytoZooDoo.Aliabilityisaccruedifitisboth(a)probablethatthepails
willbereturnedand(b)theamountofpaymentcanbereasonablyestimated.Inthat
case a liability should be credited (say Liability donations for returnable
containers).Sincethecostofthecontainersandtheamountofthedonationdiffer,it
may be desirable also to employ a receivable account for the cost of containers
expectedtobereturned.Toillustrate,assumethesaleof1,000containersoffertilizer
andtheexpectationthat40%willbereturned:
1341
WhenContainersPurchased
Inventory(1,000x$1.76).................................................
Cash...........................................................................
1,760
WhenProductSold
Cash...............................................................................
Sales(1,000x$12.50)...................................................
12,500
Costofgoodssold($1,760[400x$.76]))........................
Containersreceivable([1,000x$1.76]x40%)..................
Inventory(1,000x$1.76).............................................
Liabilitydonationsforreturnablecontainers
([1,000x$1.00]x40%)...............................................
WhenContainersReturned
Inventory(1,000x40%x$1.76)........................................
Liabilitydonationsforreturnablecontainers.............
Containersreceivable................................................
Cash(1,000x40%x$1.00)...........................................
1,456
704
1,760
12,500
1,760
400
704
400
704
400
WhenUnreturnedContainersReplaced
Inventory(600x$1.76)...................................................
1,056
Cash...........................................................................
1,056
Case132(concluded)
Itisprobablethatatleastsomepailswillbereturned.But
thisisastartupcompanywithoutpastexperienceandthereare
noother firms with similar operations. So,itis likely that areasonable estimate
cannotbemade.[Thecompanypresidentstatedthiswasthecase.]
Ifoneorbothoftheaccrualcriteriaisnotmet,butthereisatleastareasonable
possibility that the cost will be incurred, a disclosure note should describe the
contingency.Italsoshouldprovideanestimateofthepossiblelossorrangeofloss,if
possible.Ifanestimatecannotbemade,astatementtothateffectisneeded.
13-42
[Note: This case encourages the student to reference

authoritativepronouncements.]
ResearchCase133
Paragraph54ofSFACNo.6explains:
Assetsareprobablefutureeconomicbenefitsownedorcontrolledbytheentity.
Its liabilities are claims to the entity's assets by other entities and, once incurred,
involvenondiscretionaryfuturesacrificesofassetsthatmustbesatisfiedondemand,at
aspecifiedordeterminabledate,oronoccurrenceofaspecifiedevent. Incontrast,
equityisaresidualinterestwhatremainsafterliabilitiesaredeductedfromassets
anddependssignificantlyontheprofitabilityofabusinessenterprise.
Brieflystated,creditorsandownershaveclaimstoasinglesetofprobablefuture
economicbenefitsownedorcontrolledbythecompany.
JudgmentCase134Requirement1
Theconditions,allofwhichmustbemetforaccrual,are:
1. Theobligationisattributabletoemployees'servicesalreadyperformed.
2. Thepaidabsencecanbetakeninalateryearthebenefitvests(willbe
compensated even if employment is terminated) or the benefit can be
accumulatedovertime
3. Paymentisprobable.
4. Theamountcanbereasonablyestimated.
Requirement2
a. Militaryleave,maternityleave,andjurytime
Customandpracticealsoinfluencewhetherunusedrightstopaidabsences
expireorcanbecarriedforward. Obviously,ifrightsvest(payableevenif
employment is terminated) they havent expired. But typically, absence
periodsforthesetypesofpotentialabsencesdonotaccumulateifunused,soa
liabilityforthosebenefitsusuallyisnotaccrued.Companypolicyandcustom
maydictateotherwise,however.Anexamplewouldbeacompanypolicythat
permits,say,twoweekspaidabsenceeachyearforsuchactivitiesasmilitary
1343
leaveandjurytime,whereemployeesnotcalledtosuchdutycanusethetime
for leisure activities. If the four accrual conditions are otherwise met, a
liabilityforthosebenefitsshouldbeaccrued.
b. Paidsabbaticalleave
Anexpenseandrelatedliabilityshouldnotbeaccruedifthesabbaticalleave
isgrantedforthebenefitoftheemployer,sayforthepurposeofnewproduct
research.However,ifthesabbaticalleaveisintendedtoprovideunrestricted
compensatedabsenceforthelastfouryearsserviceandotherconditionsare
met, accrual is appropriate. Company policy, custom, and actual practice
shoulddeterminepropertreatment.
c. Sickdays
Ifpaymentofsickpaybenefitsdependsonfutureillness,anemployerdoes
nothavetoaccruealiabilityforbenefits,evenifthefouraccrualconditions
aremet. However,thedecisionofwhethertoaccruenonvestingsickpay
shouldbebasedonactualcustomandpractice.Iftheemployerroutinelypays
sickpayevenwhenabsenceisnotduetoillness,aliabilityforunusedsick
payshouldberecorded.
13-44
EthicsCase135
Discussionshouldincludetheseelements.
Liabilitieshadbeenrecordedpreviously.
Whenahighdegreeofuncertaintyexistsconcerningthecollectionofreceivables,
revenueshouldnotberecordedatthetimeofsale.Instead,unearnedrevenue
a liability should be recorded. With the high degree of uncertainty
surroundingsalesofOutdoorsRUs,itwouldbeveryhardtojustifyrecording
salesrevenuewhenmembershipsaresigned.
EthicalDilemma:
Howdoesadoubtfuljustificationforachangeinreportingmethodscomparewith
theperceivedneedtomaintainprofits?
Whoisaffected?
Rice
Sun
Othermanagers?
Thecompanysauditor
Shareholders
Potentialshareholders
Theemployees
Thecreditors
1345
TruebloodAccountingCase136
A solution and extensive discussion materials accompany each case in the
Deloitte&ToucheTruebloodCaseStudySeries.Theseareavailabletoinstructorsat:
http://www.deloitte.com/dtt/article/0,1002,sid%3D2257&cid%3D95505,00.html.
13-46
CommunicationCase137
Assumptions students make will determine the correct answer to some
classifications. Depending on the assumptions made, different views can be
convincinglydefended. Theprocessofdevelopingandsynthesizingthearguments
willlikelybemorebeneficialthananysinglesolution. Eachstudentshouldbenefit
fromparticipatingintheprocess,interactingfirstwithhisorherpartner,thenwiththe
classasawhole.Itisimportantthateachstudentactivelyparticipateintheprocess.
Dominationbyoneortwoindividualsshouldbediscouraged.
A significant benefit of this case is forcing students consideration of why
liabilitiescurrentlyduearesometimesclassifiedaslongterm.Italsorequiresthemto
carefullyconsidertheprofessionsdefinitionofcurrentliabilities. Argumentslikely
willincludethefollowing:
a. Commercialpaper
If its assumed that early April is prior to the actual issuance of the financial
statements,then$12millioncanbereportedaslongterm,but$3millionmustbe
reported as a current liability. Shortterm obligations that are expected to be
refinancedwithlongtermobligationscanbereportedasnoncurrentliabilitiesonlyif
the firm (a) intends to refinance on a longterm basis and (b) actually has
demonstratedtheability todoso. Abilitytorefinanceonalongtermbasiscanbe
demonstratedbyeitheranexistingrefinancingagreementorbyactualfinancingprior
totheissuanceofthefinancialstatements. Therefinancingagreementinthiscase
limitstheabilitytorefinanceto$12millionofthenotes. Intheabsenceofother
evidenceofabilitytorefinance,theremaining$3millioncannotbereportedaslong
term.
IfitsassumedthatearlyAprilisaftertheactualissuanceofthefinancialstatements,
theabilitytorefinancehasnotbeendemonstrated,andallwouldbereportedasshort
term.
b. 11%notes
Unless its assumed that the investments are noncurrent assets, earmarked as a
sinkingfundforthenotes,thedebtshouldbereportedasacurrentliabilitybecauseit
ispayableintheupcomingyear,willnotberefinancedwithlongtermobligationsand
willnotbepaidwithanoncurrentasset.
1347
Case137(concluded)
c. 10%notes
Shortterm obligations that are expected to be refinanced with longterm

obligationscanbereportedasnoncurrentliabilitiesonlyifthefirm(a) intends to
refinanceonalongtermbasisand(b)actuallyhasdemonstratedtheabilitytodoso.
Abilitytorefinanceonalongtermbasiscanbedemonstratedbyeitheranexisting
refinancingagreement orby actualfinancing priortotheissuanceofthefinancial
statements. Managementsabilitytorefinanceatleastsomeofthenotesonalong
termbasiswasdemonstratedbytheissuanceofnewbondspriortotheissuanceofthe
financialstatements.Nomentionismadeoftheproceedsofthenewbondsorwhether
they were used to pay off the maturing notes. If its assumed the intent was to
refinancethenotes,thennoteswouldbeclassifiedasnoncurrenttotheextentofthe
proceedsofthebonds.
d. Bonds
If its assumed that March 15 is prior to the actual issuance of the financial
statements,thebondscanbereportedasnoncurrentliabilities.Thefirm(a)intendsto
refinanceonalongtermbasiswithcommonstock,and(b)actuallyhasdemonstrated
theabilitytodosobyarefinancingagreementpriortotheissuanceofthefinancial
statements.Refinancingwitheitherdebtorequityservesthispurpose.
CommunicationCase138Memorandum:
To:
From:
Re:
MitchRiley
YourName
Accountingforcontingencies
BelowisabriefoverviewofmyinitialthoughtsonhowWesternshouldaccountfor
thefourcontingenciesinquestion.
13-48
1. Thelabordisputesconstitutealosscontingency.Thoughalossisprobable,the
amountoflossisnotreasonablyestimable.Adisclosurenoteisappropriate:
_______________________________
NoteX:Contingency
During2006,theCompanyexperiencedlabordisputesatthreeofitsplants.
The Company hopes an agreement will soon be reached. However
negotiations between the Company and the unions have not produced an
acceptablesettlementand,asaresult,strikesareongoingatthesefacilities.
2. TheA.J.Connermatterisagaincontingency. Gaincontingenciesarenot
accruedevenifthegainisprobableandreasonablyestimable.Thegainshould
berecognizedonlywhenrealized.
Thoughgaincontingenciesarenotrecordedintheaccounts,theyshouldbe
disclosedinnotestothefinancialstatements.
_______________________________
NoteX:Contingency
Inaccordancewitha2004contractualagreementwithA.J.ConnerCompany,
the Company is entitled to $37 million for certain fees and expense
reimbursements. ThebankruptcycourthasorderedA.J.Connertopaythe
Company$23millionimmediatelyuponconsummationofaproposedmerger
withGarnerHoldingGroup.
Case138(concluded)
3.Thecontingencyforwarrantiesshouldbeaccrued:
Warrantyexpense([2%x$2,100million]$1million)
Estimatedwarrantyliability
41,000,000
41,000,000
TheliabilityatDecember31,2006,isreportedas$41million.
1349
4. TheCrumpHoldingslawsuitisalosscontingency. Eventhoughthelawsuit
occurredin2007,thecausefortheactionoccurredin2006.Onlyadisclosure
noteisneededbecauseanunfavorableoutcomeisreasonablypossible,butnot
probable.Also,theamountisnotreasonablyestimable.
_______________________________
NoteX:Contingency
CrumpHoldingsfiledsuitinJanuary2007againsttheCompanyseeking$88
million, as an adjustment to the purchase price in connection with the
Company's sale of its textile business in 2006. Crump alleges that the
Companymisstatedtheassetsandliabilitiesusedtocalculatethepurchase
priceforthedivision.TheCompanyhasansweredthecomplaintandintends
to vigorously defend the lawsuit. Management believes that the final
resolutionofthecasewillnothaveamaterialadverseeffectontheCompany's
financialposition.
Wecandiscussthesefurtherinourmeetinglatertoday.
JudgmentCase139
This is a loss contingency. Valleck can use the

information from the February negotiations (occurring
after the end of the year) in determining appropriate
disclosure.Thecauseforthesuitexistedattheendoftheyear.Valleckshouldaccrue
boththe$190,000compliancecostandthe$205,000penaltybecauseanagreement
has been reached making the loss probable and the amount at least reasonably
estimable.Thesearethetwoconditionsthatrequireaccrualofalosscontingency.
Thedisclosurenoteshouldalsoindicatethataccrualwasmade. Thiscanbe
accomplishedbyaddingthefollowingsentencetotheendofthenote:
.......BothoftheaboveamountshavebeenfullyaccruedasofDecember31,2006.
13-50
Suggested Grading Concepts and Grading

Scheme:
Content (80% )
20 Identifies the situation as a change in estimate.
The liability was originally (appropriately) estimated as
$750,000.
The final settlement indicates the estimate should be revised.
40
Describes the journal entry related to the change in amounts.

The liability must be reduced (a debit).
A gain should be recorded (a credit).
The amount of the gain should be $275,000 ($750,000
$475,000).
20
Indicates that additional disclosure is necessary.

Bonus (4) Provides detail regarding the disclosure note.
A disclosure note should describe the effect of a
change in estimate on key items.
The effect on income before extraordinary items, net income,
and related per share amounts for the current period should be
indicated.
80-84 points
Writing (20%)
5
Terminology and tone appropriate to the audience of a Vice
President.
6
Organization permits ease of understanding.
Introduction that states purpose.
Paragraphs separate main points.
9
English.
Word selection.
Spelling.
Grammar.
20 points
1351
Aliabilityisaccruedifitisbothprobablethataloss
will occur and the amount can be at least reasonably
estimated.Ifoneorbothofthesecriteriaisnotmet,but
thereisatleastareasonablepossibilitythatthelosswill
ResearchCase1311occur,adisclosurenoteshoulddescribethenatureofthe
contingency. Italsoshouldprovideanestimateof the
possiblelossorrangeofloss,ifpossible.Ifanestimate
cannotbemade,astatementtothateffectisneeded.
Often such disclosure notes provide only a very general description of
contingenciesforlossesthatwerenotaccruedinthefinancialstatements,reducingthe
usefulnessoftheinformationtoinvestorsandcreditors.
SuggestedGradingConceptsandGrading
Scheme:
Content (80%)
30 Warrantyforawnings(5each;maximumof30forthispart)
changeinestimate
changeiseffectedprospectivelyonly
nopriorfinancialstatementsareadjusted
willaffecttheadjustingentryforwarrantyexpense
in2006[WarrantyexpenseandEstimated
warrantyliability(2%x$4,000,000)]
30 Cleanairlawsuit(5each;maximumof30forthispart)
changeinestimate
changeiseffectedprospectivelyonly
nopriorfinancialstatementsareadjusted
willrequirearevisionofthepreviouslyrecorded
liability[LosslitigationandLiabilitylitigation
increasedby$150,000($350,000200,000)]
20 Indicatesthatadditionaldisclosureisnecessaryforboth
Bonus(4)Providesdetailregardingthedisclosurenote
adisclosurenoteshoulddescribetheeffectofa
changeinestimateonkeyitems
13-52
theeffectonincomebeforeextraordinary
items,netincome,andrelatedpershareamounts
forthecurrentperiodshouldbeindicated
8084points
Writing (20%)
5
Terminologyandtoneappropriatetotheaudienceof
divisionmanagers
6
Organizationpermitseaseofunderstanding
introductionthatstatespurpose
paragraphsseparatemainpoints
9
English
wordselection
spelling
grammar
1353
RealWorldCase1313
Requirement1
Thefrequentflyerprogramisofferedinordertoenhancerevenuesandunder
thematchingprincipleisproperlyrecognizedasanoperatingexpenseintheyear
salesaremade(travelmilesareearned).
Requirement2
Incrementalcostreferstotheadditionalcostofprovidingthefreetravelthat
otherwisewouldnotbeincurred.Thisistheconceptuallyappropriatemeasureof
theoperatingexpense.
Requirement3
Theoretically,thecostoftheportionofthetraveltobeprovidedinthecoming
yearshouldbeconsideredcurrent.Becausetheawardsearneddonotexpirefor
severalyears,presumably,atleastaportionofthecostshouldtheoreticallybe
consideredlongterm.
Requirement4
$inmillions
Operatingexpense(giveninnote)..........................
Airtrafficliability...........................................
13-54
215
215
RealWorldCase1314
Requirement1
Thelitigationrepresentsalosscontingency.Alosscontingencyshouldbeaccrued
ifpaymentisbothprobableandreasonablyestimable. Bothcriteriaweremetin
thiscase,necessitatingtheaccrual.
Requirement2
Theliabilityisdifferentfortworeasons.First,$30.3millionofthecostswerepaid
in2004.Second,estimateswererefinedandaccrualswereadjustedaccordingly.
Requirement3
Remediationliability($158.1127.5)..............
Cash............................................................
Gainaccrualadjustment(tobalance)..........
($inmillions)
30.6
30.3
.3
1355
EthicsCase1315
Discussionshouldincludetheseelements.
Warrantyestimate
Thecostofproductwarranties(orproductguarantees)cannotbepredictedwith
certainty.However,tomatchexpensesandrevenues,weestimatethecost.The
estimatedwarrantyliabilityiscreditedandwarrantyexpenseisdebitedinthe
reportingperiodinwhichtheproductunderwarrantyissold.Inthiscase,the
estimateisprobablysofterthannormalbecausethecompanyisnewandhas
little experience in these estimates. However, Craig presumably made the
estimatesonthebasisofthebestinformationavailable. Thecurrenteffortto
change the estimate clearly is motivated by the desire to window dress
performance.
EthicalDilemma:
IsCraigsobligationtochallengethequestionablechangeinestimatesgreater
thantheobligationtothefinancialinterestsofhisemployerandbosses?
Whoisaffected?
Craig
President,controller,andothermanagers
Shareholders
Potentialshareholders
Theemployees
Thecreditors
Thecompanysauditors
13-56
InternationalCase1316
The analysis should indicate similarities and differences between the United
Statesandthechosencountryfocusingonthefollowingissues:
a. Dependingonthecountrychosen,thefinancialstatementdifferencesmaybe
minimal. In most countries, current liabilities are reported as a separate
classificationofliabilitiesasintheU.S.Inothercountries,GreatBritain,for
example,theyoftenarenettedagainstcurrentassets.
b. Inmostcountries,liketheUnitedStates,losscontingenciesmustbeaccruedif
estimableandprobable. Precisemeaningofthosecriteriavaries. Inafew
countries,China,forexample,notreatmentisspecified. InArgentina,gain
contingenciesareaccruedifhighlyprobable,butinmostcountriestheyare
disclosedonly.Inseveralcountries,Germany,Italy,andSpain,forinstance,
theyarenotdisclosed.
The analysis might also comment whether cultural differences are likely
contributorstothedifferencesobserved.
1357
AnalysisCase1317
Requirement1
Currentratio
Currentassets
Currentliabilities
$1,879
$1,473
1.28
Industryaverage=1.5
Thecurrentratioisoneofthemostwidelyusedratios.Itisintendedasameasure
of shortterm solvency and is determined by dividing current assets by current
liabilities. Comparingassetsthateitherarecashorwillbeconvertedtocashinthe
nearterm,withthoseliabilitiesthatmustbesatisfiedinthenearterm,providesa
useful measure of a companys liquidity. A ratio of 1 to 1 or higher often is
considered a ruleofthumb standard, but like other ratios, acceptability should be
evaluatedinthecontext of theindustryinwhichthecompanyoperatesandother
specificcircumstances. IGFscurrentratioisslightlylessthantheindustryaverage
which,onthesurface,mightindicatealiquidityproblem.Keepinmind,though,that
industryaveragesareonlyoneindicationofadequacyandthatthecurrentratioisbut
oneindicationofliquidity.
Case1317(concluded) Requirement2
Acidtestratio
(orquickratio)
Quickassets
Currentliabilities
$48+347+358
$1,473
0.51
Industryaverage=0.80
13-58
Theacidtestorquickratioattemptstoadjustfortheimplicitassumptionofthe
current ratiothat all current assetsareequallyliquid. Thisratioissimilartothe
currentratio,butisbasedonamoreconservativemeasureofassetsavailabletopay
currentliabilities. Specifically,thenumerator,quickassets,includesonlycashand
cash equivalents,shortterm investments,and accounts receivable. Byeliminating
currentassetssuchasinventoriesandprepaidexpensesthatarelessreadilyconvertible
intocash,theacidtestratioprovidesamorerigorousindicationofacompany'sshort
termsolvencythandoesthecurrentratio.
Once again, IGFs ratio is less than that of the industry as a whole. Is this
confirmationthatliquidityisanissueforIGF?Perhaps;perhapsnot.Itdoes,though,
raisearedflagthatsuggestscautionwhenassessingotherareas. Itsimportantto
rememberthateachratioisbutonepieceofthepuzzle.Forexample,profitabilityis
probablythebestlongrunindicationofliquidity. Also,managementmaybevery
efficient in managing current assets so that some current assets receivables or
inventoryaremoreliquidthantheyotherwisewouldbeandmorereadilyavailableto
satisfyliabilities.
AnalysisCase13181.
Thefourcomponentsofcurrentliabilitiesare:
($inmillions)
CurrentLiabilities:
Currentportionoflongtermdebt
Accruedsalariesandemployeebenefits
Accountspayable
Accruedexpenses
2004
2003
$750
1,062
1,615
1,305
$4,732
$308
724
1,168
1,135
$3,335
2. Current assets are sufficient to cover current liabilities in both 2004 and 2003:
Total current assets:
2004: $4,970
2003: $3,941
Thecurrentratiofor2004is:$4,970 4,732 =1.05

Thecurrentratiofor2003is:$3,941 3,335 =1.18,
whichisslightlyhigher.
1359
Comparingliabilitiesthatmustbesatisfiedsoonwithassetsthateitherarecashor
willbeconvertedtocashsoonprovidesausefulmeasureofacompanysliquidity.
A current ratio of 1 to 1 or higher sometimes is considered a ruleofthumb
standard.However,thecurrentratioisbutoneindicationofliquidity.Eachratiois
butonepieceofthepuzzle.
3. FromNote3weseethatthetwolargestaccruedexpensesforFedExin2004were
employee benefits and insurance expense. An accrued expense is an expense
incurred during the current period, but not yet paid. FedEx recorded these as
adjustingentriesattheendofthereportingperiodwithdebitstotheappropriate
expensesandcreditstorelatedliabilities.Thishelpsachieveapropermatchingof
expenseswiththerevenuestheyhelpgenerate.
13-60

Chap 013

Încărcat de

Informații document

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Chap 013

Încărcat de

Drepturi de autor:

Formate disponibile

Chapter13CurrentLiabilitiesandContingencies

AnswerstoQuestions(continued) 1. Current liability The requirement to classify

involve expenditures, and reasonably accurate

This is a loss contingency. A liability should be

The requirement to classify currently maturing debt as a current liability

Warranty expense (3% x $3,600,000)................................................ 108,000

*(3% x $2,500,000) $23,000 = $52,000

a. The requirement to classify currently maturing debt as a current liability

a. This is a loss contingency. Eastern can use the information

d. No disclosure is required because an IRS claim is as yet unasserted, and an

Heinrich would record a contingent liability (and loss) of $27,619,020, calculated as

[Note: This case encourages the student to reference

Shortterm obligations that are expected to be refinanced with longterm

This is a loss contingency. Valleck can use the

Suggested Grading Concepts and Grading

Describes the journal entry related to the change in amounts.

Indicates that additional disclosure is necessary.

Thecurrentratiofor2004is:$4,970 4,732 =1.05

S-ar putea să vă placă și