Chapter 9, Part 1 Current Liabilities

1. Chapter 9, Part 1Current Liabilities

2. What is a liability? “Probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” Future sacrifice. Present obligations. Past transactions or events. Definition

3. Classification of current liabilities expected to require the use of current assets (or the creation of other current liabilities) to settle the obligation. Reporting current liabilities Primary problem is ensuring that all existing current liabilities are reported on the balance sheet. Allows for analysis of: Working Capital = Current Assets – Current Liab. Current Ratio = Current Assets / Current Liab. Current Liabilities

4. 1. Accounts payable - covered in Chapter 5. 2.Unearned revenues (see Chapter 4) - liability until goods/services are delivered. 3. Short-term notes - record face value, and accrue interest until maturity (Principal x Rate x Time) 4. Non-interest bearing notes - use discount account to record interest, and allocate to interest expense over the life of the note. Current Liabilities

5. 5. Current portion of long-term debt – reclassified to current liabilities since current assets (cash) will be used to pay the current portion. 6. Income tax payable - accrue based on tax return. 7. Other accrued liabilities - owed at the end of the period: interest, rent, utilities, property taxes, salaries (recognize expense and payable). Current Liabilities

6. Payroll taxes - record separately from wages/salaries and reflect in liability accounts until remitted to taxing agencies. Payroll taxes deducted from employees paychecks: FICA (Social Security) 6.2% of FICA base FICA (Medicare) 1.45% of every dollar earned FIT (federal income tax) - varying percentages SIT (state income tax) - most states Payroll taxes paid separately by employer include: Matching FICA (both SS and Medicare) FUT (federal unemployment taxes) - approx. 1% of wages to $7,000 per employee. SUT (state unemployment taxes) - varying % of wages to state maximum wage base per emp. Payroll Taxes - Not on Exam

7. Contingent liability is a potential obligation dependent some future event or activity in order to know the occurrence and amount. Warranties, premiums, coupons, lawsuits are examples. Alternative treatments for Accrue (and disclose) – if probable and reasonably estimated. Disclose - if only reasonably possible, or probable but not reasonably estimated. Ignore (if remote) – no entry, no disclosure. Changes in estimate may be made in subsequent periods, when future event is concluded. Contingent Liabilities

8. Warranties - usually accrue. Accrue the estimated amount of liability in the same period as the sales revenue: Warranty Expense xx Estimated Warr. Liability xx When the repair services are performed, charge against the accrued liability: Estimated Warr. Liability xx Cash, Parts Inventory, etc. xx (Similar treatment for premiums and coupons) Contingent Liabilities

9. Lawsuits (1)Accrue if the loss contingency is probable and reasonably estimated (and also disclose in the notes to the financials): Loss on Lawsuit xx Estimated Liability xx (2)Disclose in the notes to the financials if the loss contingency is only reasonably possible, or if it is not reasonably estimated. Most lawsuits fall into this category. The disclosure is written by attorneys and does not admit guilt. (3)Do nothing if the probability is remote. Contingent Liabilities

10. Sale: $325 x 100,000 = $32,500,000 Cash, A/R 32,500,000 Sales Revenue 32,500,000 Warranties: 12% of 100,000 = 12,000 x $14 = $168,000 estimated warranties Warranty Expense 168,000 Estimated Warr. Liab. 168,000 Expenditures: Estimated Warr. Liab. 150,000 Cash, etc. 150,000 Exercise 9-11

11. Ending Balance? Estimated Warr. Liab. Exercise 9-11 120,000 Begin Actual 150,000 168,000 Estimate 138,000 End