10 Current Liabilities And
Contingencies
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
1,Conceptual Overview of Liabilities
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.
Intermediate Accounting 10 Current Liabilities And Contingencies
Three Essential Characteristics
of a Liability
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.
Intermediate Accounting 10 Current Liabilities And Contingencies
Primary Liabilities Issues
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.
Intermediate Accounting 10 Current Liabilities And Contingencies
2,Nature and Definition of Current
Liabilities
Current liabilities are
obligations whose
liquidation is expected to
require the used of
existing current assets...
…or the creation of other
current liabilities within one
year or an operating cycle,
whichever is longer.
Intermediate Accounting 10 Current Liabilities And Contingencies
Operating Cycle
Cash
Inventory
Receivables
Intermediate Accounting 10 Current Liabilities And Contingencies
Liquidity
Liquidity refers to how quickly
a liability can be paid,or its
nearness to cash.
Intermediate Accounting 10 Current Liabilities And Contingencies
Ways of Reporting Liquidity
1,Classify current liabilities and assets (mixture of
operating-cycle and maturity-date approach).
2,Classify current liabilities and assets using the ―pure‖
operating-cycle approach.
3,Classify current liabilities and assets under the
maturity-date approach only.
4,Adopt a different classification scheme,possibly
using more classes.
5,Leave the balance sheet unclassified but arranging
items in order of liquidity.
Intermediate Accounting 10 Current Liabilities And Contingencies
Liquidity Ratios
? Cash flows to total debt.
? Net income to total assets (return on total
assets ratio).
? Total debt to total assets.
? Current assets to current liabilities
(current ratio).
? Cash to current liabilities.
Intermediate Accounting 10 Current Liabilities And Contingencies
Types of Current Liabilities
Having Contractual
Amount
Accounts payable
Notes payable
Currently maturing portion of long-
term debt
Dividends payable
Advances and refundable deposits
Accrued items
Unearned items
Intermediate Accounting 10 Current Liabilities And Contingencies
Amount Depends
on Operations
Sales (use) taxes
Payroll taxes
Income taxes
Bonuses
Types of Current Liabilities
Intermediate Accounting 10 Current Liabilities And Contingencies
Amount Must Be
Estimated
Property taxes
Warranties
Premiums and
coupons
Other contingencies
Types of Current Liabilities
Intermediate Accounting 10 Current Liabilities And Contingencies
3,Current Liabilities Having
A Contractual Amount
Trade accounts payable arise from the
purchase of inventory,supplies,or
services on an open charge-account
basis.
Intermediate Accounting 10 Current Liabilities And Contingencies
Current Liabilities Having
A Contractual Amount
A note payable is an
unconditional written
agreement to pay a sum
of money to the bearer on
a specific date.
Intermediate Accounting 10 Current Liabilities And Contingencies
Trishan Corporation uses a perpetual inventory system and
purchases merchandise for $7,000 on September 1,2004 by
issuing a $7,000,12%,30-day note to the supplier,
September 1,2004
Inventory 7,000
Notes Payable 7,000
October 1,2004
Interest Expense ($7,000 x 0.12 x30/360) 70
Notes Payable 7,000
Cash 7,070
Intermediate Accounting 10 Current Liabilities And Contingencies
Current Liabilities Having
A Contractual Amount
On December 1,2004,the Trollingwood Corporation
borrows money at First National Bank by issuing a
$10,000,90 -day,non-interest-bearing note that is
discounted on a 12% basis.
December 1,2004
Cash 9,700
Discount on Notes Payable 300
Notes Payable 10,000
Continued
Intermediate Accounting 10 Current Liabilities And Contingencies
Current Liabilities Having
A Contractual Amount
December 31,2004
Interest Expense 100
Discount on Notes Payable 100
March 1,2005
Interest Expense 200
Discount on Notes Payable 200
Notes Payable 10,000
Cash 10,000
Intermediate Accounting 10 Current Liabilities And Contingencies
Current Liabilities Having
A Contractual Amount
On July 1,2003,Rexlow Corporation issues 13%
serial bonds with a face value of $1 million,
These bonds are to be retired in installments of
$100,000,beginning on July 1,2005.
Current liability:
Bonds Payable,due July,2005 $100,000
Long-term liability:
Bonds payable $900,000
December 31,2004 Balance Sheet
Intermediate Accounting 10 Current Liabilities And Contingencies
Current Liabilities Having
A Contractual Amount
4,Current Liabilities Whose
Amounts Depend on Operations
Intermediate Accounting 10 Current Liabilities And Contingencies
Sales and Use Taxes
Selleroy Company sells merchandise for cash with
a retail sales price of $50,000 on which a sales tax
of 6% is levied,The company collects $53,000.
Cash 53,000
Sales 50,000
Sales Taxes Payable 3,000
Typical Situation
Intermediate Accounting 10 Current Liabilities And Contingencies
At the end of January the Sales account is adjusted
to record the tax on all goods sold [$53,000 –
($53,000 ÷ 1.06)] = $3,000.
Cash 53,000
Sales 53,000
The Sales Tax is Included in the Price
Charged to the Customer
Sales 3,000
Sales Taxes Payable 3,000
Intermediate Accounting 10 Current Liabilities And Contingencies
Sales and Use Taxes
Liabilities Related to Payrolls
Involuntary Taxes
Withheld from
Employees
Federal income tax
State income tax
F.I.C.A,taxes:
O.A.S.D.I.
Medicare
Involuntary Taxes
Withheld from
Employers
F.I.C.A,taxes:
O.A.S.D.I.
Medicare
Federal unemploy-
ment tax
State unemployment
tax
Intermediate Accounting 10 Current Liabilities And Contingencies
Liabilities Related to Payrolls
Voluntary Payroll
Deductions Withheld
from Employees
Union dues
Government bonds
Group hospital
insurance
Accident insurance
Life insurance
Others
Intermediate Accounting 10 Current Liabilities And Contingencies
Accounting for Payroll
Taxes and Deductions
To record salaries and employee withholding items:
Sales Salaries Expense 10,000
Office Salaries Expense 4,000
F.I.C.A,Taxes Payable (8% x $14,000) 1,120
Employee Federal Income Taxes
Withholding Payable 990
Employee State Income Taxes
Withholding Payable 500
Employee Union Dues Withholding
Payable 180
Cash 11,210
Intermediate Accounting 10 Current Liabilities And Contingencies
To record employer payroll taxes:
Payroll Taxes Expense 1,988
F.I.C.A,Taxes Payable
(8% x $14,000) 1,120
Federal Unemployment Taxes
Payable ((0.8% x $14,000) 112
State Unemployment Taxes
Payable (5.4% x $14,000) 756
Accounting for Payroll
Taxes and Deductions
Intermediate Accounting 10 Current Liabilities And Contingencies
5,Current Liabilities Requiring
Amounts to be Estimated
Intermediate Accounting 10 Current Liabilities And Contingencies
Property Taxes
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 1,2004 to June 30,2005 are $7,200,The tax
bill is mailed in October with a requirement that
the tax be paid before December 31,2004,The tax
bill reported an actual tax of $7,290,and the
corporation pays this amount on October 31,2004.
Intermediate Accounting 10 Current Liabilities And Contingencies
Three Monthly Entries July 31–September 30,2004
Property Tax Expense ($7,200 ÷ 12) 600
Property Taxes Payable 600
October 31,2004,Payment of Property Taxes
Property Tax Payable 1,800
Prepaid Property Taxes 5,490
Cash 7,290
Three Monthly Entries,October 31–December 31,2004
Property Tax Expense 610
Prepaid Property Taxes 610
Intermediate Accounting 10 Current Liabilities And Contingencies
Property Taxes
Expense Warranty
Accrual Method
Intermediate Accounting 10 Current Liabilities And Contingencies
Warranty Obligations
Cash or Accounts Receivable 1,200,000
Sales 1,200,000
Warranty cost per machine is estimated at $150.
Warranty Expense 30,000
Estimated Liability under
Warranties 30,000
Anglee Machinery Corporation begins production on
a new machine in April 2004 and sells 200 of these
machines at $6,000 each by December 31,2004.
Continued
Intermediate Accounting 10 Current Liabilities And Contingencies
The corporation spent $5,000 in 2004 to fulfill
warranty agreements for the 200 machines.
Estimated Liability under Warranties 5,000
Cash (or other assets) 5,000
The corporation spent $25,150 in 2005 to fulfill
warranty agreements for the two machines.
Estimated Liability under Warranties 25,000
Warranty Expense 150
Cash (or other assets) 25,150
Intermediate Accounting 10 Current Liabilities And Contingencies
Warranty Obligations
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 1,200,000
Sales ($5,850 x 200) 1,170,000
Unearned Warranty Revenue 30,000
Sales Warranty Accrual
Method
Continued
Intermediate Accounting 10 Current Liabilities And Contingencies
Warranty Obligations
Recognition of warranty expense for period,April–
December,2004.
Warranty Expense 5,000
Cash (or other assets) 5,000
Recognition of warranty revenue for period,April–
December,2004.
Unearned Warranty Revenue 5,000
Warranty Revenue 5,000
Continued
Intermediate Accounting 10 Current Liabilities And Contingencies
Warranty Obligations
Recognition of warranty expense during 2005.
Warranty Expense 25,150
Cash (or other assets) 25,150
Recognition of warranty revenue during 2005.
Unearned Warranty Revenue 25,000
Warranty Revenue 25,000
Intermediate Accounting 10 Current Liabilities And Contingencies
Warranty Obligations
6,Contingencies
A contingency is an existing
condition involving uncertainty as
to possible gain or loss that will
ultimately be resolved.
Intermediate Accounting 10 Current Liabilities And 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.
Contingencies
Intermediate Accounting 10 Current Liabilities And Contingencies
Criteria Disclosure
No Future event probable? Yes
No Amount reasonably estimated? Yes
Report amount
in financial
statements
Yes NoReasonable possibilityof loss
Disclose in notes to
financial statements
or and
and
Not required
to disclose
Intermediate Accounting 10 Current Liabilities And Contingencies
Contingencies
Disclosure of Gain Contingencies
(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.
Intermediate Accounting 10 Current Liabilities And Contingencies
Short-Term Debt Expected
to be Refinanced
When a company relies on a
financing agreement to
demonstrate the ability to
refinance,the amount of the short-
term debt that it excludes from
current liabilities is reduced to an
amount that is the lesser of...
Intermediate Accounting 10 Current Liabilities And Contingencies
7,Other Liability Classification
Issues
1,The amount available for refinancing under
the agreement,or
2,The amount obtainable under the agreement
after considering the restrictions included in
other agreements,or
3,A reasonable estimate of the minimum
amount expected to be available for future
refinancing if the amount that could be
obtained fluctuates.
Intermediate Accounting 10 Current Liabilities And Contingencies
Short-Term Debt Expected
to be Refinanced
The End
Contingencies
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
1,Conceptual Overview of Liabilities
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.
Intermediate Accounting 10 Current Liabilities And Contingencies
Three Essential Characteristics
of a Liability
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.
Intermediate Accounting 10 Current Liabilities And Contingencies
Primary Liabilities Issues
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.
Intermediate Accounting 10 Current Liabilities And Contingencies
2,Nature and Definition of Current
Liabilities
Current liabilities are
obligations whose
liquidation is expected to
require the used of
existing current assets...
…or the creation of other
current liabilities within one
year or an operating cycle,
whichever is longer.
Intermediate Accounting 10 Current Liabilities And Contingencies
Operating Cycle
Cash
Inventory
Receivables
Intermediate Accounting 10 Current Liabilities And Contingencies
Liquidity
Liquidity refers to how quickly
a liability can be paid,or its
nearness to cash.
Intermediate Accounting 10 Current Liabilities And Contingencies
Ways of Reporting Liquidity
1,Classify current liabilities and assets (mixture of
operating-cycle and maturity-date approach).
2,Classify current liabilities and assets using the ―pure‖
operating-cycle approach.
3,Classify current liabilities and assets under the
maturity-date approach only.
4,Adopt a different classification scheme,possibly
using more classes.
5,Leave the balance sheet unclassified but arranging
items in order of liquidity.
Intermediate Accounting 10 Current Liabilities And Contingencies
Liquidity Ratios
? Cash flows to total debt.
? Net income to total assets (return on total
assets ratio).
? Total debt to total assets.
? Current assets to current liabilities
(current ratio).
? Cash to current liabilities.
Intermediate Accounting 10 Current Liabilities And Contingencies
Types of Current Liabilities
Having Contractual
Amount
Accounts payable
Notes payable
Currently maturing portion of long-
term debt
Dividends payable
Advances and refundable deposits
Accrued items
Unearned items
Intermediate Accounting 10 Current Liabilities And Contingencies
Amount Depends
on Operations
Sales (use) taxes
Payroll taxes
Income taxes
Bonuses
Types of Current Liabilities
Intermediate Accounting 10 Current Liabilities And Contingencies
Amount Must Be
Estimated
Property taxes
Warranties
Premiums and
coupons
Other contingencies
Types of Current Liabilities
Intermediate Accounting 10 Current Liabilities And Contingencies
3,Current Liabilities Having
A Contractual Amount
Trade accounts payable arise from the
purchase of inventory,supplies,or
services on an open charge-account
basis.
Intermediate Accounting 10 Current Liabilities And Contingencies
Current Liabilities Having
A Contractual Amount
A note payable is an
unconditional written
agreement to pay a sum
of money to the bearer on
a specific date.
Intermediate Accounting 10 Current Liabilities And Contingencies
Trishan Corporation uses a perpetual inventory system and
purchases merchandise for $7,000 on September 1,2004 by
issuing a $7,000,12%,30-day note to the supplier,
September 1,2004
Inventory 7,000
Notes Payable 7,000
October 1,2004
Interest Expense ($7,000 x 0.12 x30/360) 70
Notes Payable 7,000
Cash 7,070
Intermediate Accounting 10 Current Liabilities And Contingencies
Current Liabilities Having
A Contractual Amount
On December 1,2004,the Trollingwood Corporation
borrows money at First National Bank by issuing a
$10,000,90 -day,non-interest-bearing note that is
discounted on a 12% basis.
December 1,2004
Cash 9,700
Discount on Notes Payable 300
Notes Payable 10,000
Continued
Intermediate Accounting 10 Current Liabilities And Contingencies
Current Liabilities Having
A Contractual Amount
December 31,2004
Interest Expense 100
Discount on Notes Payable 100
March 1,2005
Interest Expense 200
Discount on Notes Payable 200
Notes Payable 10,000
Cash 10,000
Intermediate Accounting 10 Current Liabilities And Contingencies
Current Liabilities Having
A Contractual Amount
On July 1,2003,Rexlow Corporation issues 13%
serial bonds with a face value of $1 million,
These bonds are to be retired in installments of
$100,000,beginning on July 1,2005.
Current liability:
Bonds Payable,due July,2005 $100,000
Long-term liability:
Bonds payable $900,000
December 31,2004 Balance Sheet
Intermediate Accounting 10 Current Liabilities And Contingencies
Current Liabilities Having
A Contractual Amount
4,Current Liabilities Whose
Amounts Depend on Operations
Intermediate Accounting 10 Current Liabilities And Contingencies
Sales and Use Taxes
Selleroy Company sells merchandise for cash with
a retail sales price of $50,000 on which a sales tax
of 6% is levied,The company collects $53,000.
Cash 53,000
Sales 50,000
Sales Taxes Payable 3,000
Typical Situation
Intermediate Accounting 10 Current Liabilities And Contingencies
At the end of January the Sales account is adjusted
to record the tax on all goods sold [$53,000 –
($53,000 ÷ 1.06)] = $3,000.
Cash 53,000
Sales 53,000
The Sales Tax is Included in the Price
Charged to the Customer
Sales 3,000
Sales Taxes Payable 3,000
Intermediate Accounting 10 Current Liabilities And Contingencies
Sales and Use Taxes
Liabilities Related to Payrolls
Involuntary Taxes
Withheld from
Employees
Federal income tax
State income tax
F.I.C.A,taxes:
O.A.S.D.I.
Medicare
Involuntary Taxes
Withheld from
Employers
F.I.C.A,taxes:
O.A.S.D.I.
Medicare
Federal unemploy-
ment tax
State unemployment
tax
Intermediate Accounting 10 Current Liabilities And Contingencies
Liabilities Related to Payrolls
Voluntary Payroll
Deductions Withheld
from Employees
Union dues
Government bonds
Group hospital
insurance
Accident insurance
Life insurance
Others
Intermediate Accounting 10 Current Liabilities And Contingencies
Accounting for Payroll
Taxes and Deductions
To record salaries and employee withholding items:
Sales Salaries Expense 10,000
Office Salaries Expense 4,000
F.I.C.A,Taxes Payable (8% x $14,000) 1,120
Employee Federal Income Taxes
Withholding Payable 990
Employee State Income Taxes
Withholding Payable 500
Employee Union Dues Withholding
Payable 180
Cash 11,210
Intermediate Accounting 10 Current Liabilities And Contingencies
To record employer payroll taxes:
Payroll Taxes Expense 1,988
F.I.C.A,Taxes Payable
(8% x $14,000) 1,120
Federal Unemployment Taxes
Payable ((0.8% x $14,000) 112
State Unemployment Taxes
Payable (5.4% x $14,000) 756
Accounting for Payroll
Taxes and Deductions
Intermediate Accounting 10 Current Liabilities And Contingencies
5,Current Liabilities Requiring
Amounts to be Estimated
Intermediate Accounting 10 Current Liabilities And Contingencies
Property Taxes
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 1,2004 to June 30,2005 are $7,200,The tax
bill is mailed in October with a requirement that
the tax be paid before December 31,2004,The tax
bill reported an actual tax of $7,290,and the
corporation pays this amount on October 31,2004.
Intermediate Accounting 10 Current Liabilities And Contingencies
Three Monthly Entries July 31–September 30,2004
Property Tax Expense ($7,200 ÷ 12) 600
Property Taxes Payable 600
October 31,2004,Payment of Property Taxes
Property Tax Payable 1,800
Prepaid Property Taxes 5,490
Cash 7,290
Three Monthly Entries,October 31–December 31,2004
Property Tax Expense 610
Prepaid Property Taxes 610
Intermediate Accounting 10 Current Liabilities And Contingencies
Property Taxes
Expense Warranty
Accrual Method
Intermediate Accounting 10 Current Liabilities And Contingencies
Warranty Obligations
Cash or Accounts Receivable 1,200,000
Sales 1,200,000
Warranty cost per machine is estimated at $150.
Warranty Expense 30,000
Estimated Liability under
Warranties 30,000
Anglee Machinery Corporation begins production on
a new machine in April 2004 and sells 200 of these
machines at $6,000 each by December 31,2004.
Continued
Intermediate Accounting 10 Current Liabilities And Contingencies
The corporation spent $5,000 in 2004 to fulfill
warranty agreements for the 200 machines.
Estimated Liability under Warranties 5,000
Cash (or other assets) 5,000
The corporation spent $25,150 in 2005 to fulfill
warranty agreements for the two machines.
Estimated Liability under Warranties 25,000
Warranty Expense 150
Cash (or other assets) 25,150
Intermediate Accounting 10 Current Liabilities And Contingencies
Warranty Obligations
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 1,200,000
Sales ($5,850 x 200) 1,170,000
Unearned Warranty Revenue 30,000
Sales Warranty Accrual
Method
Continued
Intermediate Accounting 10 Current Liabilities And Contingencies
Warranty Obligations
Recognition of warranty expense for period,April–
December,2004.
Warranty Expense 5,000
Cash (or other assets) 5,000
Recognition of warranty revenue for period,April–
December,2004.
Unearned Warranty Revenue 5,000
Warranty Revenue 5,000
Continued
Intermediate Accounting 10 Current Liabilities And Contingencies
Warranty Obligations
Recognition of warranty expense during 2005.
Warranty Expense 25,150
Cash (or other assets) 25,150
Recognition of warranty revenue during 2005.
Unearned Warranty Revenue 25,000
Warranty Revenue 25,000
Intermediate Accounting 10 Current Liabilities And Contingencies
Warranty Obligations
6,Contingencies
A contingency is an existing
condition involving uncertainty as
to possible gain or loss that will
ultimately be resolved.
Intermediate Accounting 10 Current Liabilities And 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.
Contingencies
Intermediate Accounting 10 Current Liabilities And Contingencies
Criteria Disclosure
No Future event probable? Yes
No Amount reasonably estimated? Yes
Report amount
in financial
statements
Yes NoReasonable possibilityof loss
Disclose in notes to
financial statements
or and
and
Not required
to disclose
Intermediate Accounting 10 Current Liabilities And Contingencies
Contingencies
Disclosure of Gain Contingencies
(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.
Intermediate Accounting 10 Current Liabilities And Contingencies
Short-Term Debt Expected
to be Refinanced
When a company relies on a
financing agreement to
demonstrate the ability to
refinance,the amount of the short-
term debt that it excludes from
current liabilities is reduced to an
amount that is the lesser of...
Intermediate Accounting 10 Current Liabilities And Contingencies
7,Other Liability Classification
Issues
1,The amount available for refinancing under
the agreement,or
2,The amount obtainable under the agreement
after considering the restrictions included in
other agreements,or
3,A reasonable estimate of the minimum
amount expected to be available for future
refinancing if the amount that could be
obtained fluctuates.
Intermediate Accounting 10 Current Liabilities And Contingencies
Short-Term Debt Expected
to be Refinanced
The End
