Chapter 13: Current Liabilities and Contingencies

 How can we classify the types of liabilities, short term versus long term.
 Understanding contingencies, anticipating losses and gains
 Disclosure, how to report these things in the financial statements

 Liabilities: probable future sacrifices of economic benefits

o Understand classification of asset versus expense
o Liabilities are easier to classify
o Timeline: past event…..obligation in future = during this time we have a liability
 If the timeline is longer than one year or operating cycle it is long term
 If the timeline is shorter than one year or operation cycle it is short term
o Current liabilities are based on current assets
 Example:
 Inventory 100
o Account payable 100
 Account payable 100
o Notes payable 100 (LONG TERM LIABILITY)
 Typical Types of Current Liabilities (understand why using the timeline figure..not in depth)
o 1. Accounts payable: balances owed to others for goods, supplies, or services purchased
 Obligation should be met within a short period, for example 30 days
o 2. Notes payable: written promises to pay a certain sum of money on a specified future
date.
 Can be short or long term
 Can be interest bearing or zero interest
 Interest-bearing: due date within 6 months or year
 Zero interest: assume some interest, must find out what the interest may
be. We will use notes payable less discount on notes payable
o Discount shows the cost of borrowing
o Debit to interest expense of the life of the note
 Interest expense (D), Discount (Cr).
o 3. Dividends Payable: amount owed by a corporation to its stockholders as a result of
board of directors’ authorization
 Generally paid within three months
 Undeclared dividends on cumulative preferred stock note recognized as liability
 Dividends payable in the form of additional shares are reported in stockholders’
equity
 This is for stock dividend - not cash dividend
o 4. Customer Advances and Deposits: returnable cash deposits received from customers
and employees
 To guarantee performance of a contract or service or
 As guarantees to cover payment of expected future obligations
 May be classified as current or long term liabilities
o 5. Unearned Revenue: payment received before delivering goods or rendering services
o 6. Sales Tax Payable: retailers must collect sales taxes from customers on transfers of
tangible personal property and on certain services and then remit to the proper
governmental authority.
 How to segregate combined:
 Example 4% of tax is included in 150,000
 150,000 / 1.04 = 144,230.77
 150,000 - 144,230.77 = 5,769.23
 o Sales revenue 5,769 will be debited
o 7. Income tax payable: businesses must prepare an income tax return and compute the
income tax payable
 Periodic tax payments
 Taxes payable are a current liability
 Differences between GAAP and actual
o 8. Employee-Related Liabilities: amounts owed to employees for salaries or wages are
reported as a current liability
 Ex: payroll deductions, compensated absences, bonuses
 Bonus Agreements: payments to certain or all employees in addition to their
salary
o 9. Current Maturities of Long Term Debt: portions of debt that will mature within the
year
 Example three years of long term notes at 300,000
 There is long term debt of 300,000 in three years
 What if there are installations?
 50 at end of first year (current liability because current maturity of long
term debt)
 100 at end of second (LT)
 150 at end of third (LT)
o 10. Short-Term Obligations Expected to be Refinanced: exclude from current liabilities if
both the following conditions are met:
 1. Must intend to refinance the obligation on a long-term basis
 1. Must demonstrate an ability to refinance:
 Actual refinancing
 Enter into a financing agreement