Chapter 13
Intermediate Accounting II
Otto Chang
Professor of Accounting
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Definition of A Liability
• Probable future sacrifice of economic
benefits arising from present obligations to
transfer assets or provide services to other
entities in the future as a result of past
transactions or events.
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Current Liabilities
• Liabilities whose liquidation is reasonably
expected to require use of existing current
assets or the creation of other current
liabilities
• No discounting is necessary if less than one
year.
• Include liability due on demand (callable by
the creditor)
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Determinable current liabilities
•
•
•
•
•
•
•
•
•
Accounts payable
Notes payable
Current portion of long-term debt*
other short-term obligation*
Dividends payable
Returnable deposits
Unearned revenues
Taxes payable
Employee related liabilities
* unless liquidated with non-current assets or
refinanced on a L-T basis, or converted into equity
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S-T Notes Expected to be
Refinanced
• An entity can exclude a S-T note from C.L.
if it intends to refinance on a L-T basis and
demonstrates an ability to refinance
• Ability to refinance can be evidenced by:
– actual refinancing before issuing B/S or
– entering into a financing agreement
• S-T debt paid off after B/S date and later
replaced by L-T debt can not be excluded
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Sales Taxes Payable
• Sales taxes(5%) separable from sales ($100)
Dr. Cash or A/R
$105
Cr. Sales
$100
Cr. Sales Taxes payable
$5
• Sales taxes (5%) included in sales ($105)
Dr. Sales
$5
Cr. Sales Taxes Payable $5
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Property Taxes Payables
• Property taxes should be accrued monthly
before payments, and amortized monthly
after payment.
• Example: $36,000 assessed for 5/1-4/30, two
equal installments due on 7/1 and 9/1
– Journal entries on 5/31 and 6/30
Dr. Property taxes expenses $3,000
Cr. Property taxes payable $3,000
– Journal entries on 7/1:
Dr. Prepaid Property Taxes $12,000
Property taxes payable
6,000
Cr. Cash
$18,000
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Payroll Taxes Payables
• Recording salaries payment:
Dr. Wages and salaries expense $10,000
Cr. Withheld taxes payable
$1,320
FICA taxes payable
765
Union dues payable
88
Cash
7,827
• Recording payroll taxes expense:
Dr. Payroll taxes expense
$1,245
Cr. FICA taxes payable
$765
FUTA taxes payable
80
State unemployment taxes payable 400
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Compensated Absences
• The expense and related liability should be
accrued if
– employee already rendered the services
– benefits vested or accumulated
– payment is probable and can be estimated
• Journal entries:
Dr. Wages expenses
$9,600
Cr. Vacation wages payable
$9,600
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Bonus Agreement
• Amount of Bonus = applicable rate x (Net
income - Bonus - Income taxes)
• Where Income taxes = Tax rate x (Net
income - Bonus)
• Simultaneously solve the two equations to
determine the amount of bonus
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Contingencies
• Gain contingencies: disclosed in footnote if
highly probable.
• Losses contingencies:
–
–
–
–
Probable & can be reasonably estimated: accrue
Probable but can not be estimated: disclose
Reasonably possible: disclose
remotely possible: ignore
• Amount accrued: lower bound of an
estimate. Disclose higher bound in footnote
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Product Warranty Costs
• Cash basis: recognize expense when it is
incurred
• Accrual basis:
– Expense warranty approach: recognize
estimated liability under warranty as expense
– Sales warranty approach: used when warranty
is sold separately from the product. Revenue is
deferred ( Cr. Unearned Warranty Rrevenues)
and amortized in proportion to costs incurred.
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Premiums and Coupons
• To record purchase of premium inventory
Inventory of premium goods
Cash
$15,000
$15,000
• To record actual redemption of premium
Cash
$1,500
Premium expense $3,000
Inventory of premium goods $4,500
• End of year adjusting entries:
Premium expenses $6,000
Estimated Liabilities for premiums $6,000
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Other Contingencies
• Environmental liabilities: difficult to
estimate legal implications, therefore
disclosure is the most common treatment.
• Self-insurance: accrual is not required prior
to the occurrence of the loss event.
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