CHAPTER
13
Current Liabilities
and
Contingencies
……..…………………………………………………………...
Liability
 Present, unavoidable obligation
 Requiring probable future transfer of assets
 Resulting from past transactions or events
Current Liability
 Requiring use of existing current assets
Present, unavoidable obligation
12/31 Liability
11/1 Borrowed $100,000, 12%, 6
months.
11/1 Issued $100,000 non-interest 6month note; rec’d $94,340.
$500,000 of 8% cumulative preferred
is outstanding for the entire year.
12/1 Declared 8% cash dividend on
$500,000 preferred, payable 1/15.
Future transfer of assets
12/31 Liability
12/1 Declared a 5% stock dividend on
100,000 shares of common stock
($1 par, $11 market value).
12/1 Restaurant received $2,200 from
sale of gift certificates.
From past transactions or events
12/31 Liability
11/1 Signed contract to purchase
inventory next year for $600,000
(inventory worth $570,000 12/31).
12/31 Ordered $32,000 of inventory to
be shipped FOB destination.
Deferred income tax liability = $8,000
(on current income, paid in the future).
$8,600 sick pay earned but not taken
during past year.
Current Liability
= use of existing current assets
Current Liability
12/28 Purchased on account and
received $3,000 on inventory,
$500,000 of 8% serial bonds are
outstanding. Interest plus $100,000
principal payable each July 1.
$60,000, 10% note payable due March
of next year is outstanding. Firm plans
to refinance with a 2-year note.
Payroll Deductions
To record payroll:
Salary Expense
Withholding Taxes Payable
FICA Taxes Payable
Union Dues Payable
Cash
Based on
federal & state
schedules
10,000
7.65% on first $102,000
1.45% on excess
1,320
765
88
7,827
To record employer payroll tax:
Payroll Tax Expense
FICA Taxes Payable
Fed Unemploy Tax Payable
State Unemploy Tax Payable
1,245
765
80
400
6.2%* on first $7000.
* 0.8% if state unemployment taxes have been paid
Compensated Absences Liability
 Obligation from services already rendered
 Vested or accumulated
 Probable and reasonably estimated
If future compensation
exceeds the liability,
the difference is charged
to wage expense.
Sick pay that accumulates
need not be accrued
CONTINGENCIES
Gain Contingencies
 Possible donations, lawsuit awards, etc.
 Not recorded
Loss Contingencies
 Expense and liability recognized
 Required conditions:
 probable at financial statement date
 reasonably estimated
Litigation, Claims, & Assessments
 Cause of litigation on or before financial
statement date
 “Probability of unfavorable outcome” based on
experience, legal opinion, etc.
 For lawsuits not yet filed
 probable that suit will be filed, and
 probable that outcome will be unfavorable
Guarantee and Warranty Costs
Cash Basis
Warranty Expense
Cash, Inventory, etc.
(Warranty costs incurred.)
20,000
20,000
Not acceptable if warranty liability is probable
and reasonably estimated.
Accrual Basis – Expense Warranty Approach
Cash
3,000,000
Sales
(To record sales for the year.)
3,000,000
(Warranty costs incurred.)
(To accrue warranty costs.)
(Warranty costs incurred on prior year sales.)
Accrual Basis – Sales Warranty Approach
Cash
3,000,000
Sales
Unearned Warranty Rev
(To record sales for the year.)
(Warranty costs incurred.)
(To recognize revenue related to
warranty costs incurred.)
2,850,000
150,000
Premiums and Coupons
 Expense recorded w/ actual redemption
 Additional expense accrued at year end
 a reasonable estimate of the cost of future
redemptions
 matched with current-year revenues
Self-Insurance
 Not insurance
 No liability recorded for events that have not
happened
PRESENTATION AND ANALYSIS
 Current liabilities reported at full maturity value
(i.e. not discounted)
 Bond sinking fund exception
 Supplemental information on secured
liabilities and refinancing arrangements
 Loss contingencies that are reasonably
possible should be disclosed in the notes
Exercise 13-1
Balance Sheet Class
Accrued vacation pay
Estimated taxes payable
Service warranties
Bank overdraft
Injury claim pending
Unpaid bonus
Customer deposits
Sales tax payable
Exercise 13-1 (cont.)
Balance Sheet Class
Unredeemed gift certif.
Premium offers outstand
Discount on notes pay
Unpaid payroll deduct.
Current matur: LT debt
Unpaid cash dividend
Dividends in arrears
Loans from officers