After reading the material in this chapter, you should be able to: Define liabilities and distinguish between current and long-term liabilities, account for the issuance and payment of various forms of notes and record the interest on the notes, characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded,...
Chapter 13 CURRENT LIABILITIES AND CONTINGENCIES © 2013 The McGraw-Hill Companies, Inc Slide Characteristics of Liabilities Present Present Obligation Obligation Arising Arising from from past past events events Result Result in in an an out out flow flow of of resources resources in in the the future future © 2013 The McGraw-Hill Companies, Inc Slide What is a Current Liability? LIABILITIES LIABILITIES Current Current Liabilities Liabilities Long-term Long-term Liabilities Liabilities Obligations Obligations payable payable within within one one year year or or one one operating operating cycle, cycle, whichever whichever is is longer longer Other Other situations: situations: For For trading trading purposes, purposes, or or does does not not have have the the right right to to defer defer settlement settlement for for at at least least 12 12 months months © 2013 The McGraw-Hill Companies, Inc Slide Current Liabilities Accounts payable Taxes payable Unearned revenues Cash dividends payable Current Liabilities Accrued expenses Short-term notes payable © 2013 The McGraw-Hill Companies, Inc Slide Open Accounts and Notes Accounts Accounts Payable Payable Obligations Obligations to to suppliers suppliers for for goods goods purchased purchased on on open open account account Trade Trade Notes Notes Payable Payable Similar Similar to to accounts accounts payable, payable, but but recognized recognized by by aa written written promissory promissory note note Short-term Short-term Notes Notes Payable Payable Cash Cash borrowed borrowed from from the the bank bank and and recognized recognized by by aa promissory promissory note note •• Credit Credit lines lines Prearranged Prearranged agreements agreements with with aa bank bank that that allow allow aa company company to to borrow borrow cash cash without without following following normal normal loan loan procedures procedures and and paperwork paperwork © 2013 The McGraw-Hill Companies, Inc Slide Interest Interest on notes is calculated as follows: Amount Amount borrowed borrowed Interest Interest rate rate is is always always stated stated as as an an annual annual rate rate Interest Interest owed owed is is adjusted adjusted for for the the portion portion of of the the year year that that the the face face amount amount is is outstanding outstanding © 2013 The McGraw-Hill Companies, Inc Slide Interest-Bearing Notes On On September September 1, 1, Eagle Eagle Boats Boats borrows borrows $80,000 $80,000 from from Cooke Cooke Bank Bank The The note note is is due due in in 66 months months and and has has aa stated stated interest interest rate rate of of 9% 9% Record Record the the borrowing borrowing on on September September 1 © 2013 The McGraw-Hill Companies, Inc Slide Interest-Bearing Notes How How much much interest interest is is due due to to Cooke Cooke Bank Bank at at year-end, year-end, on on December December 31? 31? a a b b c c d d $2,400 $2,400 $3,600 $3,600 $7,200 $7,200 $87,200 $87,200 Interest Interestis iscalculated calculatedas: as: Principal Annual Principal Annual × Rate Amount Amount Rate $80,000 $80,000 × 9% 9% × × Time Timeto to = maturity maturity 4/12 4/12 = $2,400 $2,400interest interestdue dueto toCooke CookeBank Bank © 2013 The McGraw-Hill Companies, Inc Slide Interest-Bearing Notes Assume Assume Eagle Eagle Boats’ Boats’ year-end year-end is is December December 31 31 Record Record the the necessary necessary adjustment adjustment at at year-end year-end © 2013 The McGraw-Hill Companies, Inc Slide 10 Interest-bearing Notes Assume Assume Eagle Eagle Boats’ Boats’ year-end year-end is is December December 31 31 Record Record the the necessary necessary journal journal entry entry when when the the note note matures matures on on February February 28 28 © 2013 The McGraw-Hill Companies, Inc Slide 27 Provisions © 2013 The McGraw-Hill Companies, Inc Slide 28 Onerous Contracts © 2013 The McGraw-Hill Companies, Inc Slide 29 Product Warranties Product Product warranties warranties inevitably inevitably entail entail costs costs Like Like other other provisions, provisions, the the amount amount of of those those costs costs can can be be reasonably reasonably estimated estimated using using commonly commonly available available estimation estimation techniques techniques The The estimate estimate requires requires the the following following entry: entry: © 2013 The McGraw-Hill Companies, Inc Slide 30 Extended Warranties Extended Extended warranties warranties are are sold sold separately separately from from the the product product The The related related revenue revenue is is not not earned earned until: until: Claims Claims are are made made against against the the extended extended warranty, warranty, or or The The extended extended warranty warranty period period expires expires (normally (normally recognized recognized on on aa straight-line straight-line basis basis over over the the period) period) © 2013 The McGraw-Hill Companies, Inc Slide 31 Litigation Claims The The majority majority of of medium medium and and large-size large-size corporations corporations annually annually report report contingent contingent liabilities liabilities due due to to litigation litigation The The most most common common disclosure disclosure is is aa note note to to the the financial financial statements statements © 2013 The McGraw-Hill Companies, Inc Slide 32 Subsequent Events When When the the cause cause of of aa loss loss contingency contingency occurs occurs before before the the year-end, year-end, an an adjusting adjusting event event before before financial financial statements statements are are issued issued can can be be used used to to determine determine how how the the contingency contingency is is reported reported If an event giving rise to a loss contingency occurs after the year-end, a liability should not be accrued Instead, a disclosure note should be made © 2013 The McGraw-Hill Companies, Inc Slide 33 Unasserted Claims and Assessments IAS 37 does not deal specifically with these claims; this process is from U.S GAAP Unasserted Unasserted claim claim Yes No No disclosure disclosure needed needed No Q1 Q1 Is Is aa claim claim or or assessment assessment probable? probable? Q2 Q2 Evaluate Evaluate (a) (a) the the likelihood likelihood of of an an unfavorable unfavorable outcome outcome and and (b) (b) whether whether the the dollar dollar amount amount can can be be estimated estimated If the answer to question and are _ and _ respectively No, [n.a.] Make a subjective evaluation whether the likelihood of loss is remote or possible No disclosure is required for contingencies where the likelihood of loss is remote Yes, Yes Yes, No Recognize a provision Disclose a contingent liability © 2013 The McGraw-Hill Companies, Inc Slide 34 Contingent Assets Note that the we have to record liabilities even if the likelihood is “probable” and not certain As a general principle, we never record contingent assets © 2013 The McGraw-Hill Companies, Inc Slide 35 Appendix 13 ─ Payroll-Related Liabilities Employers incur several expenses and liabilities from having employees McGraw-Hill /Irwin © 2013 The McGraw-Hill Companies, Inc Slide 36 Payroll-Related Liabilities Gross Pay Social Security Taxes Medical Insurance National Income Tax State and Local Voluntary Income Taxes Deductions Net Pay © 2013 The McGraw-Hill Companies, Inc Slide 37 Employees’ Withholding Taxes State and Local Income Taxes National Income Tax Amounts withheld depend on each country’s laws, the employee’s earnings, tax rates, and number of withholding allowances Employers Employers must must pay pay the the taxes taxes withheld withheld from from employees’ employees’ gross gross pay pay to to the the appropriate appropriate government government agency agency © 2013 The McGraw-Hill Companies, Inc Slide 38 Voluntary Deductions Voluntary Deductions Amounts withheld depend on the employee’s request Examples Examples include include union union dues, dues, savings savings accounts, accounts, pension pension contributions, contributions, insurance insurance premiums, premiums, charities charities Employers Employers owe owe voluntary voluntary amounts amounts withheld withheld from from employees’ employees’ gross gross pay pay to to the the designated designated agency agency © 2013 The McGraw-Hill Companies, Inc Slide 39 Employers’ Payroll Taxes Social Security Taxes Medical insurance Payroll taxes and other welfare-related taxes payable by employer Employers Employers pay pay amounts amounts equal equal to to that that withheld withheld from from the the employee’s employee’s gross gross pay pay © 2013 The McGraw-Hill Companies, Inc Slide 40 Fringe Benefits In In addition addition to to salaries salaries and and wages, wages, withholding withholding taxes, taxes, and and payroll payroll taxes, taxes, most most companies companies provide provide aa variety variety of of fringe fringe benefits benefits Private Private health health insurance insurance premiums premiums Life Life insurance insurance premiums premiums Retirement Retirement plan plan contributions contributions Employers Employers must must pay pay the the amounts amounts promised promised to to fund fund employee employee fringe fringe benefits benefits to to the the designated designated agency agency © 2013 The McGraw-Hill Companies, Inc End of Chapter 13 McGraw-Hill /Irwin © 2013 The McGraw-Hill Companies, Inc ... future © 2013 The McGraw-Hill Companies, Inc Slide What is a Current Liability? LIABILITIES LIABILITIES Current Current Liabilities Liabilities Long-term Long-term Liabilities Liabilities Obligations... borrowed and and the the interest interest © 2013 The McGraw-Hill Companies, Inc Slide 12 Noninterest-Bearing Notes On On May May 1, 1, Batter-Up Batter-Up Ltd Ltd issued issued aa one-year, one-year,... The McGraw-Hill Companies, Inc Slide 13 Noninterest-Bearing Notes On On May May 1, 1, Batter-Up Batter-Up Ltd Ltd issued issued aa one-year, one-year, noninterest-bearing noninterest-bearing