Chapter 13 Current Liabilities and Contingencies Sid Glandon

Chapter 13: Current Liabilities and Contingencies Sid Glandon, DBA, CPA Assistant Professor of Accounting

Liability l FASB Concepts Statement #6 – Present obligation l – – Probable future transfer or use of cash, goods, or services Unavoidable obligation Transaction or event has already occurred

Current Liabilities l Obligations whose liquidation will require – – Use of current assets or Creation of other current liabilities

Examples of Current Liabilities l Accounts payable – l Notes payable – – l Purchases on open account in the normal course of business Interest bearing Zero-interest-bearing Current maturities of long-term debt

Line of Credit (Interest-Bearing Note) l l Spencer Company took out a line of credit with the Bank of the West on April 1, 2004 for $100, 000. The term is six months and the interest rate is 9%. Prepare the journal entries to record: – – The issuance of the line of credit The payment of the line of credit

Line of Credit (Interest-Bearing Note)

Noninterest-Bearing Note l l Spencer Company took out borrowed $100, 000 from Bank of the West on April 1, 2004. The instrument was a zero-interest bearing note for six months at 9% interest. Prepare the journal entries to record: – – The issuance of the zero-interest bearing note The payment of the zero-interest bearing notes

Noninterest-Bearing Note

Short-Term Obligations Expected to be Refinanced l Refinancing criteria – – Must intend to refinance the obligation on a longterm basis, and Must demonstrate an ability to consummate the refinancing l l Actual refinancing after balance sheet date Entering into a financing agreement

Other Current Liabilities l l l Dividends payable Returnable deposits Unearned revenues Sales taxes payable Property taxes payable Income taxes payable

Sales Taxes Payable l l Spencer Company has sales for the month of March 2004 of $150, 000. All sales are subject to a 6. 5% state sales tax and a 0. 5% local sales tax. Prepare the journal entries: – – To record sales To record the payment of sales taxes

Sales Taxes Payable

Contingencies, SFAS #5 l “An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur”

Gain Contingencies l l Based on the constraint of conservatism gain contingencies are not recorded until resolved Under certain circumstances such contingencies may be disclosed in the notes to the financial statements

Loss Contingencies l Criteria for recording – – It is probable that a liability has been incurred at the balance sheet date, and The loss is reasonably estimated

Contingent Liability

What amount of loss should the company accrue at December 31, 2003? A. $0 B. $250, 000 C. $400, 000 D. $500, 000

Guarantee and Warranty Costs l Cash basis – l Not GAAP but used for tax purposes Accrual basis – Expense warranty approach l l – Integral part of the sale transaction Accrue warranty in year of sale Sales warranty approach l l Sold as a separate contract Extended warranties-deferred revenue

Warranty Expense l Spencer Company sells 100 pet video units for $500 per unit during 2003. The video units have a three-year warranty covering parts and labor. Based on past experience management estimates that warranty costs will be $10 in the first year, $20 in the second year and $25 in the third year. During 2003 the company incurs $900 in warranty costs.

n a l E n t r y t o R e c o r d S a l e s a n d W a r r a n t y

Employee-Related Liabilities l Payroll deductions – – l Compensated absences – – l Payroll expense Payroll tax expense Services already rendered Rights vested or accumulated Compensation is probable Amount is reasonably estimated Bonus Agreements

Gross Payroll

Journal Entry to Record Gross Payroll

Payroll Taxes

Journal Entry to Record Payroll Taxes