Current Liabilities - Topics:
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Accounts payable
Short term notes payable
Current portion of non-current liabilities
Non-current liabilities expected to be
refinanced
Contingent liabilities
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Current Liabilities - examples:
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Accounts payable
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Salaries payable – see slides at end
deferred revenue (can be current
and/or non-current)
Current portion of taxes payable
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Current Liabilities:
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Accounts payable etc., expected to pay
very quickly ---- interest should not
be an issue
Notes payable: probably include
interest. Make sure interest is
calculated and recognized properly
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Note Payable (Current):
60 day, 8% note payable issued 12/1/02, $ 10,000.
Dr. purchases
$10,000
cr. Note payable $ 10,000
On 12/31: determine and recognize interest :
10,000 * .08 * 30/360 = $67
Dr. interest expense
cr. Interest payable
$67
$67
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Current portion of non-current
liabilities
As non-current liabilities mature, they must
be reported as current. Also, if in default!
 Useful info or detrimental distraction?
Useful info IF debt will really be paid in the
coming period. E.g., current portion of
income taxes payable.
Not useful, if debt will be refinanced
therefore:
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Current portion of non-current
debt to be refinanced
Special Rule:
If company has the intent AND the ability
to refinance debt (e.g., issue new bonds to
repay old bonds) then “current portion of
non-current debt to be refinanced” is
shown in separate section between current
and non-current liabilities
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Current portion of non-current
debt to be refinanced
Conditions that must be met: Company must
be able to demonstrate that it has the
Ability to refinance debt:

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Completed negotiations to issue new debt
Already issued new debt (after end of fiscal year,
but before financial statements issued)
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Contingent Liabilities
Potential liabilities – triggered by some
specified future event. Rule:
If the trigger event is probable and the
amount can be determined -- accrue
the liability
If the potential liability is expected to be
material, but the amount cannot be
estimated, disclose in footnote
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Example: Warranties
Both probable and can be estimated --
accrue when sales made: Based on
experience, warranty costs resulting
from current sales should total $15,000.
Journal entry:
Dr. Warranty expense
$15,000.
Cr. Warranties (liability)
$15,000.
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Example: Coupons, Premiums,
Frequent Flyer Miles, Etc.
Essentially treated the same as warranties:
Based on past experience, X% of (whatever)
will be redeemed at Y cost. The amount can
be estimated and must be accrued as a
liability (some may be non current, most
current).
Journal entry depends. I.e., coupons -
advertising expense; miles  reduction of
revenue recognized
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Example: Environmental
Liabilities: contingent liability
must be accrued
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If company named as a PRP (partially
responsible party) by the EPA
If company activities require future
mitigation (cleanup, reactor shut downs
etc.)
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Example: Lawsuit
(not potentially
material)
Unless there is no likelihood of winning, NEVER
accrue lawsuit liability. Instead:
 Footnote – general for run of the mill
lawsuits: XYZ company is party to several
legal actions in which we expect to prevail.
Even if they should result in a negative
verdict we do not expect them to have a
material effect on the company
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Lawsuit
(amount potentially material)
Footnote:
The company is being sued for $50
million for alleged racial discrimination.
We deny the charges and expect to
prevail. Even if we should not prevail
we do not believe that this case would
have a material effect on the company.
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Lawsuit
(material, will probably lose)
Company may chose to accrue liability to
force the action into bankruptcy court.
This applies to unusual situations,
original case: Johns Manville (The
granddaddy of asbestos litigation)
Company accrued the potential liability,
triggered debt/equity covenants – led to
technical bankruptcy, etc.
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Lawsuit
(material, will probably lose) II
Other examples:
Dow Corning (Breast implants)
Dalkon Shield
 Not to be done unless the technical
bankruptcy route is really considered
the only option.
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Asset Retirement Obligation
(ARO)
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Arises in connection with certain asset
acquisitions
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Strip mine
Power plants
Land fill (dump)
Conditions imposed with operating permits
that require certain actions to clean up after
operations/use completed
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Asset Retirement Obligation
(ARO)
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Expected cost is discounted (PV) and
capitalized and then amortized
(expensed) over the life of the asset
Example: Strip mining concession
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Condition: restore land to original
condition – expected cost: $500,000
Life: 50,000 tons of coal; 3 years
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ARO Strip mine continued
expected cost: $500,000, discount rate
10%, 3 years: PV(3,10%) .751 =
$375,500
Journal entry:

Dr. Strip mine
$375,500
cr. Asset retirement obligation
$375,500
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ARO Strip mine continued
Amortization:
 $375,500/50,000 ton = $7.51 per ton
 10,000 tons mined:
Journal entry:

Dr. depreciation expense $75,100
cr. Accumulated depreciation
$75,100
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ARO Strip mine continued
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Accrual of interest expense: $375,500
*.1 = 37,550
Journal entry:
Dr. interest expense expense
cr. Asset retirement obligation
$37,550
$37,550
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Payroll related current liabilities I
1.
2.
Salaries earned, not yet paid
Benefits earned (vested)
1.
2.
Compensated absences (sick leave,
vacation)
Pensions
Accrue as earned (i.e., 2 hours per week)
Dr. compensation expense xxx
cr. Compensated absences (vacation, sick days)
xxx
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Payroll related current liabilities II
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Payroll deductions
1.
2.
3.
4.
5.
Social security taxes
Income taxes (state, federal, local)
Unemployment tax
Workman’s compensation
Other deductions (parking, union dues,
401k contributions)
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Payroll related current liabilities III
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Note that some of these are subtracted
from salaries earned, employer acts as
collection agency for government or other
agencies: Examples:
Income taxes, union dues, 401k
contributions, other employee savings
(deductions) programs, employee social
security contribution.
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Payroll related current liabilities IV
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Other items are paid by the employer
directly (i.e., NOT deducted from cash
received by employee)
Examples:
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Unemployment tax
Employer portion of social security
contribution
Pension, vacation, sick pay
Workman’s compensation
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