Ch 13

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CHAPTER 13 – CURRENT LIABILITIES AND CONTINGENCIES

I.Liabilities

A. Three Characteristics

1. Probable, future sacrifices of economic benefits

2. That arise from present obligations

3. Resulting from past transactions

B. Current Liabilities

1. Payable within 1 year

2. Reported at maturity value

C. Types of Current Liabilities

1. Accounts Payable

a. Buy merchandise on account

b. No interest component

2. Notes Payable

a. Written promise to pay a sum of money on a specified date

b. Interest component (Face*Annual Rate*Time to Maturity)

Note: Assume annual rates unless otherwise stated

3. Dividends Payable

a. Amounts owed to stockholders

b. Recorded at the declaration date

c. Dividends in arrears are not recorded as a current liability 4. Refundable Deposits

5. Unearned Revenues -cash is received prior to revenue being earned

6. Gift Cards- recorded as unearned revenue when sold
Revenue is recognized when:

a. Gift cards are redeemed

b. When gift card usage is deemed remote

7. Sales Taxes

8. Income Taxes Payable

9. Employee-Related Liabilities

a. Payroll Deductions: Includes withholding, social security, insurance premiums, retirement plan contributions

b. Compensated Absences: Includes vacation and other paid time off. Record a liability if:

1. Attributable to employees' services already performed 2. The paid absence can be taken in a subsequent year 3. Payment is probable
4. The amount can be reasonably estimated

c. Employee Bonuses:

1. Tied to performance (financial and nonfinancial)
2. Compensation expense in the period earned
D. Noncurrent vs. Current Classification:

a. Current Maturities of Long-Term Debt

b. Long-Term Liabilities Due on Demand

c. Short-Term Obligations Expected to be Refinanced: Can be classified as long term/ non-current if:

1. Intent to refinance

2. Ability to do so

II.Loss Contingencies

A. Uncertainty as to whether a loss really exists

B. Resolved when some future event occurs

C. Factors affecting accounting treatment:

1. Likelihood a loss will occur

2. Ability to estimate the loss

D. Likelihood of Occurrence

1. Probable – Likely

2. Reasonably Possible – > Remote but < Likely

3. Remote – Slight

Presentation of Contingencies

4. Accrue if it is probable and reasonably estimable

5. Reasonably Possible – Disclosure Note Only

6. Remote – No action is required, except disclosures for the following items:

a. Unused lines of credit
b. Guarantees of indebtedness to others
c. Guarantees to repurchase accounts receivable

E. Types of Loss Contingencies

1. Warranties: Estimated using historical data

DR: warranty expense xx
CR: warranty liability xx

2. Premiums: Incentives offered by the manufacturer to increase sales (rebates)

DR: Premium expense xx
CR: Premium liability xx

3. Litigation

DR: Loss litigation xx
CR: Liability litigation xx

4. Bad Debts

DR: Bad debt expense xx
CR: Allowance for bad debt xx

5. Environmental Liabilities

6. Self Insurance

7. Asset Retirement Obligations: Legal obligations associated with retirement of long-lived assets

DR: Long-Lived Asset XX
CR: Asset Retirement ObligationXX

F. Role of...
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