Ch 13 : Current Liabilities and Contingencies
► What is a Liability:
Three Main Characteristics:
1. Present obligation.
2. Arises from past events.
3. Results in an outflow of resources (cash, goods, services).
► What is the Types of Liabilities:
Three are two Types of Liabilities
1. Current Liabilities
[ Chapter 13 ]
2. Non Current Liabilities [ Chapter 14 ]
► What is a Current Liability?:
Current liability is reported if one of two conditions exists:
1. Liability is expected to be settled within its normal operating cycle; or
2. Liability is expected to be settled within 12 months after the reporting date.
The operating cycle is the period of time elapsing between the acquisition of goods and services
and the final cash realization resulting from sales and subsequent collections.
► Types of Current Liability?:









Accounts payable.
Notes payable.
Unearned revenues.
Sales taxes payable.
Income taxes payable.
Current maturities of long-term debt.
Short-term obligations expected to be refinanced.
Dividends payable.
Employee-related liabilities.
 Accounts Payable (trade accounts payable)
Balances owed to others for goods, supplies, or services purchased on open account.
Illustration:
On October 1, 2011, Landscape Co. Purchased inventory for $10,000 Terms 2/10, n30 from
Mary Co.
Date
Accounts
Dr.
Cr.
October 1
Inventory
10,000
Accounts Payable
10,000
On October 9, 2011, Landscape Co. Paid the amount due to Mary Co.
Date
Accounts
Dr.
October 9
Accounts Payable
10,000
Inventory ( $10,000 × 2% )
Cash
Intermediate Accounting 2:IFRS
Page 1 of 8
Cr.
200
9,800
Ehab Abdou 97672930
Ch 13 : Current Liabilities and Contingencies
 Notes Payable
It is a Written promises to pay a certain sum of money on a specified future date.
 Arise from Purchases, financing, or other transactions (Converting A/P to N/P ).
 Notes classified as short-term or long-term.
 Notes may be interest-bearing or zero-interest-bearing.
Interest Bearing Note
Zero Interest Bearing Note
‫فوائد صريحة‬
‫فوائد ضمنية‬
The Note Payable Doesn’t include interest
The Note Payable Includes Interest
The amount of Note Equal to the
The amount of Note More Than the
amount of Credit ( Cash Borrowed )
amount of Credit ( Cash Borrowed )
For Example :
For Example :
Amount of Credit = $10,000
Amount of Credit = $10,000
Amount of Note = $10,000
Amount of Note = $12,000
Interest-Bearing Note
Illustration:
On October 1, 2011, Landscape Co Borrowed $120,000 from Castle National Bank by signs
a $120,000, 6 percent, four-month note.
Date
October 1,
2011
December 31,
2011
February 1,
2012
Accounts
Cash
Note Payable
Interest expenses
Interest Payable (120,000x6%x3/12)
Interest Payable
Interest expenses (120,000x6%x1/12)
Note Payable
Cash
Dr.
120,000
Cr.
120,000
1,800
1,800
1,800
600
120,000
122,400
Zero-Bearing Note Issued
Illustration:
On October 1, Landscape issues a $122,400, four-month, zero-interest-bearing note to
Castle National Bank. The present value of the note is $120,000.
Date
October 1,
2011
December 31,
2011
February 1,
2012
Accounts
Cash
Note Payable
Interest expenses(120,000x6%x3/12)
Note Payable
Interest expenses (120,000x6%x1/12)
Note Payable
Note Payable
Cash
Intermediate Accounting 2:IFRS
Page 2 of 8
Dr.
120,000
Cr.
120,000
1,800
1,800
600
600
122,400
122,400
Ehab Abdou 97672930
Ch 13 : Current Liabilities and Contingencies
 Unearned Revenue
Amounts received before the company delivers goods or provides services.
Accounting Treatment:
1- When Cash is received
Date
Accounts
Cash
Unearned …………………..
Dr.
$$$$$
Cr.
$$$$$
2- When Services is performed
Date
Accounts
Unearned …………………..
………………….. Revenue
Dr.
$$$$$
Cr.
$$$$$
BE13-6:
Sports Pro Magazine sold 12,000 annual subscriptions on August 1, 2010, for $18 each.
Prepare Sports Pro’s August 1, 2010, journal entry and the December 31, 2010, annual
adjusting entry.
Date
August 1
December 31
Accounts
Cash (12,000 × $18)
Unearned subscriptions
Unearned subscriptions
Subscriptions Revenue
(216,000 × 5/12)
Dr.
216,000
Cr.
216,000
90,000
90,000
 Sales Tax Payable.
 Sales taxes are expressed as a stated percentage of the sales price. ‫نسبة مئوية من ثمن البيع‬
 Retailer collects tax from the customer. ‫يقوم تاجر التجزئة بتحصيلها من العميل‬
 Retailer remits the collections to the state’s department of revenue.
‫ثم يحولها إلى إدارة الضرائب المختصة في الدولة‬
 Either rung up separately or included in total receipts
Exercise 3:
In Providing accounting services to small business, you encounter the following situations
pertaining to cash sales.
1. Kemer Company rings up sales and sales tax separately on its cash register. On April 10,
the register totals are sales TL30,000 and sales tax TL1.500.
2. Bodrum company doesn’t segregate sales and sales taxes. Its register total for April 15 is
TL23,540, which includes a 7% sales tax.
Instructions
Prepare the entry to record the sales transactions and related taxes for each client
Intermediate Accounting 2:IFRS
Page 3 of 8
Ehab Abdou 97672930
Ch 13 : Current Liabilities and Contingencies
Solution:
Apr. 10
15
KEMER COMPANY
Cash ................................................................. 31,500
Sales ...................................................................
Sales Taxes Payable ..........................................
BODRUM COMPANY
Cash ............................................................... 23,540
Sales (TL23,540 ÷ 1.07)......................................
Sales Taxes Payable ..........................................
($23,540 - $22,000)
30,000
1,500
22,000
1,540
 Income tax Payable.
Businesses must prepare an income tax return and compute the income tax payable.
 Taxes payable are a current liability.
 Corporations must make periodic tax payments.
 Differences between taxable income and accounting income sometimes occur
(Chapter 19).
 Current Maturity of Long Term Debt.
Portion of bonds, mortgage notes, and other long-term indebtedness that matures within
the next fiscal year.
Exclude long-term debts maturing currently if they are to be:
1. Retired by assets accumulated that have not been shown as current assets,
2. Refinanced, or retired from the proceeds of a new debt issue, or
3. Converted into ordinary shares.
 Short Term Obligations expected to be Refinanced .
Exclude from current liabilities if both of the following conditions are met:
1. Must intend to refinance the obligation on a long-term basis.
2. Must have an unconditional right to defer settlement of the liability for at least 12
months after the reporting date.
 Customers Advances and Deposits .
Returnable cash deposits received from customers and employees.
 May be classified as current or non-current liabilities.
 Employee Related Liability .
Amounts owed to employees for salaries or wages are reported as a current liability, it may
includes:
 Payroll deductions.
 Compensated absences.
 Bonuses.
Intermediate Accounting 2:IFRS
Page 4 of 8
Ehab Abdou 97672930
Ch 13 : Current Liabilities and Contingencies
► Provisions.
 Provision is a liability of uncertain timing or amount.
 Reported either as current or non-current liability.
 Common types are
► Obligations related to litigation.
► Warrantees or product guarantees.
► Premiums
BE13-10: ( Litigation )
Scorcese Inc. is involved in a lawsuit during 2010.
Instructions:
(a) Prepare the December 31 entry assuming it is probable that Scorcese will be liable for
$900,000 as a result of this suit.
(b) Prepare the December 31 entry, if any, assuming it is not probable that Scorcese will be liable
for any payment as a result of this suit.
Date
(a)
Date
(b)
Accounts
Lawsuit Loss
Lawsuit Liability
Dr.
900,000
Cr.
900,000
Accounts
No entry is necessary
because it is not Probable that a liability
has been incurred at December 31, 2010.
Dr.
Cr.
Illustration : (Warranty )
During December 2011, Cap City Inc. introduced a new line of televisions that carry a two-year
warranty against manufacturer's defects. Based on past experience with similar products,
warranty costs are expected to be approximately 1% of sales during the first year of the warranty
and approximately an additional 3% of sales during the second year of the warranty. Sales were
$6,000,000 for the first year of the product's life and actual warranty expenditures were $29,000.
Assume that all sales are on credit.
Required:
1. Prepare journal entries to summarize the sales and any aspects of the warranty for 2011
assuming that actual warranty costs incurred during 2011.
2. What amount should Cap City report as a liability at December 31, 2011?
3. Repeat the answer of (1) and (2) above, assuming the actual warranty costs incurred during
2012.
Intermediate Accounting 2:IFRS
Page 5 of 8
Ehab Abdou 97672930
Ch 13 : Current Liabilities and Contingencies
Solution
Requirement (1)
Date
During
2011
During
2011
Dec 31
2011
Accounts
Accounts Receivables
Sales Revenue
TO RECORD 2011 SALES REVENUE
Warranty Expenses
Cash
TO RECORD ACTUAL WARRANTY COSTS
Warranty Expenses
Warranty Liabilities
[($6,000,000 × 4%) - $29,000 ]
TO RECORD ESTIMATED WARRANTY
Dr.
6,000,000
Cr.
6,000,000
29,000
29,000
331,000
331,000
Requirement (2)
Dr.
Warranty Liability
Dec 31
Ending Bal.
Cr.
331,000
331,000
Requirement (3)
Date
During
2011
Dec 31
2011
During
2012
Accounts
Accounts Receivables
Sales Revenue
TO RECORD 2011 SALES REVENUE
Warranty Expenses
Warranty Liabilities
[($6,000,000 × 4%) ]
TO RECORD ESTIMATED WARRANTY
Warranty Liability
Cash
TO RECORD ACTUAL WARRANTY COSTS
Dr.
Warranty Liability
29,000 Dec 31
Ending Bal.
Intermediate Accounting 2:IFRS
Page 6 of 8
Dr.
6,000,000
Cr.
6,000,000
360,000
360,000
29,000
29,000
Cr.
360,000
331,000
Ehab Abdou 97672930
Ch 13 : Current Liabilities and Contingencies
Illustration 1 : (Premium )
Albertson Corporation began a special promotion in July 2011 in an attempt to increase sales. A
coupon was placed in each box of product which sold at $10 each. Customers could send in 5
coupons for a free prize. Each prize cost Albertson Corporation $3.00. Albertson's management
estimated that 80% of the coupons would be redeemed. For the six months ended December 31,
2011, the following information is available:
Prizes Purchased
Product Sold
Coupons redeemed During 2011
35,000 Prize
200,000 Boxes
56,000 Coupons
Required:
Prepare all required Journal entries to account for Premium.
Solution:
Date
During
2011
During
2011
During
2011
During
2011
Accounts
Inventory – Prizes (35,000 × $3 )
Cash
TO RECORD THE PURCHASE OF PRIZES
Cash ( 200,000 × $10 )
Sales Revenue
TO RECORD THE SALE OF PRODUCT
Premium Expenses
Inventory – Prizes
( 56,000 ÷ 5 ) = 11,200 × $3
TO RECORD THE ACTUAL REDEMTION
Premium Expenses
Premium Liability
TO RECORD ESTIMATED PREMIUM
Total Coupons
× Percentage estimated to be redeemed
= Total Estimated Coupons to be redeemed
- Actual Coupons redeemed
= Unredeemed Coupons
÷ Number of Coupons required for each prize
= Estimated Number of Prizes
× Cost Per Prize
= Estimated Premium Expenses
Dr.
105,000
Cr.
105,000
2,000,000
2,000,000
33,600
33,600
62,400
62,400
200,000
80%
160,000
56,000
104,000
5
20,800
$3
$ 62,400
Illustration 2 : (Premium )
Answer illustration 1, assuming that the actual redemption were incurred during 2012 instead of 2011.
Intermediate Accounting 2:IFRS
Page 7 of 8
Ehab Abdou 97672930
Ch 13 : Current Liabilities and Contingencies
Solution:
Date
During
2011
During
2011
During
2011
During
2012
Accounts
Inventory – Prizes (35,000 × $3 )
Cash
TO RECORD THE PURCHASE OF PRIZES
Cash ( 200,000 × $10 )
Sales Revenue
TO RECORD THE SALE OF PRODUCT
Premium Expenses (Computed Below)
Premium Liability
TO RECORD ESTIMATED PREMIUM
Premium Liability
Inventory – Prizes
( 56,000 ÷ 5 ) = 11,200 × $3
TO RECORD THE ACTUAL REDEMTION
Total Coupons
× Percentage estimated to be redeemed
= Total Estimated Coupons to be redeemed
- Actual Coupons redeemed
= Unredeemed Coupons
÷ Number of Coupons required for each prize
= Estimated Number of Prizes
× Cost Per Prize
= Estimated Premium Expenses
Intermediate Accounting 2:IFRS
Page 8 of 8
Dr.
105,000
Cr.
105,000
2,000,000
2,000,000
96,000
96,000
33,600
33,600
200,000
80%
160,000
0
160,000
5
32,000
$3
$ 96,000
Ehab Abdou 97672930