Current
Liabilities
and
Contingencies
.
JOIN KHALID AZIZ
• ACCOUNTING(FINANCIAL & COST) OF
ICMAP STAGE 1,2,3,4 (CRASH CLASSES)
CA..MODULE A,B,C,D
PIPFA (FOUNDATION,INTERMEDIATE,FINAL)
ACCA-F1,F2,F3
BBA,MBA
B.COM(FRESH),M.COM
MA-ECONOMICS..O/A LEVELS
KHALID AZIZ…..0322-3385752
http://finance.groups.yahoo.com/group/cost-accountants
.
CHARACTERISTICS OF
LIABILITIES
 Most liabilities obligate the debtor to pay cash at
specified times and result from legally enforceable
agreements.
 Some liabilities are not contractual obligations and may
not be payable in cash.
A liability has three essential characteristics. Liabilities:
1. are probable, future sacrifices of economic benefits
2. that arise from present obligations (to transfer goods or
provide services) to other entities
3. that result from past transactions or events
.
What is a Current Liability?
LIABILITIES
Current Liabilities
Long-term Liabilities
Generally, payable within one year.
Formally, expected to be satisfied
with current assets (or by the
creation of other current liabilities).
Conceptually, should be recorded at present
value, but ordinarily are reported at maturity
amounts.
.
GENERAL MILLS, INC.
BALANCE SHEET
MAY 30, 2007 AND MAY 28, 2006
(Rs in millions)
ASSETS
[BY CLASSIFICATION]
LIABILITIES
Current Liabilities:
Accounts payable
Current portion of long-term debt
Notes payable
Other current liabilities
Total current liabilities
2007
Rs 778
1,734
1,254
2,079
Rs5,845
Long-term Liabilities:
[LISTED INDIVIDUALLY]
Shareholders’ equity
[BY SOURCE]
.
2006
Rs 673
2,131
1,503
1,831
Rs6,138
8: Notes Payable
The components of notes payable and their respective weighted
average interest rates at the end of the period are as follows:
2007
2006
Dollars in millions:
U.S. commercial paper
5.1%
Euro commercial paper
Financial institutions
Total notes payable
Weighted
Weighted
Average
Average
Note
Interest
Note Interest
Payable Rate
Payable Rate
Rs477
639
138
Rs1,254
.
5.4% Rs 713
5.4
9.8
462 5.1
328 5.2
Rs1,503
8: Notes Payable (cont.)
To ensure availability of funds, we maintain bank
credit lines sufficient to cover our outstanding shortterm borrowings. Our commercial paper borrowings
are supported by Rs2.95 billion of fee-paid
committed credit lines and Rs351 million in
uncommitted lines. As of May 27, 2007, there were
no amounts outstanding on the fee-paid committed
credit lines and Rs133 million was drawn on the
uncommitted lines, all by our international
operations. Our committed lines consist of a Rs1.1
billion credit facility expiring in October 2007, a
Rs750 million credit facility expiring in January 2009,
and a Rs1.1 billion credit facility expiring in October
2010.
.
Interest
Interest on notes is calculated as :
Face
Amount
Amount
borrowed
×
Annual
Rate
Interest rate is
always stated
as an annual
rate.
.
×
Time To
Maturity
Interest owed is
adjusted for the
portion of the year
that the debt is
outstanding.
Note Issued for Cash
On May 1, Affiliated Technologies, Inc., a consumer
electronics firm, borrowed Rs700,000 cash from First
BancCorp under a noncommitted short-term line of credit
arrangement and issued a 6-month, 12% promissory note.
Interest was payable at maturity.
Cash
Notes payable
May 1
November 1
700,000
700,000
Interest expense (Rs700,000 x 12% x 6/12) 42,000
Notes payable
700,000
Cash (Rs700,000 + 42,000)
742,000
.
Example
On September 1, Tru Fashions borrows Rs80,000 from
Second Bank. The note is due in 6 months and has a
stated interest rate of 9%.
Cash
Notes payable
80,000
80,000
How much interest does Tru owe at year-end, on Dec. 31?
a.
Rs 2,400
b.
Rs 3,600
c.
Rs 7,200
d.
Rs87,200
.
Example
On September 1, Tru Fashions borrows Rs80,000 from
Second Bank. The note is due in 6 months and has a
stated interest rate of 9%.
How much interest does Tru owe at year-end, on Dec. 31?
a.
Rs 2,400
Interest is calculated as:
b.
Rs 3,600
Face
Annual
Time to
× Rate
× maturity =
c.
Rs 7,200
Amount
d.
Rs87,200
Rs80,000
9%
4/12 =
×
×
Rs2,400 interest.
.
Noninterest-Bearing Note
 The proceeds of the note are reduced by the interest in a “noninterestbearing” note.
 Situation: Rs700,000 noninterest-bearing note, with a 12% “discount
rate.” The Rs42,000 interest is “discounted” at the outset, rather than
explicitly stated:
May 1
Cash (difference)
Discount on notes (Rs700,000 x 12% x 6/12)
Notes payable (face amount)
658,000
42,000
700,000
November 1
Interest expense
Discount on notes
Notes payable
Cash
42,000
700,000
(face amount)
.
42,000
700,000
Noninterest-Bearing Note
The amount borrowed is only Rs658,000, but the
interest is calculated as the discount rate times the
Rs700,000 face amount. This causes the effective
interest rate to be higher than the 12% stated
rate:
Rs 42,000 interest for 6 months
÷ Rs658,000 amount borrowed
=
6.38% rate for 6 months
12/6
x
to annualize the rate
__________
= 12.76%
effective interest rate
.
ACCRUED LIABILITIES



Liabilities accrue for expenses that are
incurred, but not yet paid.
Recorded by adjusting entries at the
end of the reporting period, prior to
preparing financial statements.
Common examples are: salaries and
wages payable, income taxes payable,
and interest payable.
.
ACCRUED INTEREST
PAYABLE
 Assume the fiscal period for Affiliated Technologies ends on
June 30, two months after the 6-month note is issued. The
issuance of the note, intervening adjusting entry, and note
payment would be recorded as shown below:
Issuance of note May 1
Cash
700,000
Note payable
700,000
Accrual of interest on June 30
Interest expense (Rs700,000 x 12% x 2/12)
Interest payable
14,000
14,000
Note payment November 1
Interest expense (Rs700,000 x 12% x 4/12)
28,000
Interest payable (from adjusting entry)
14,000
Note payable
700,000
Cash (Rs700,000 + 42,000)
742,000
.
Liabilities from Advance
Collections
• Refundable Deposits
• Advances from
•
Customers
Collections for Third
Parties
.
Customer Advance
Tomorrow Publications collects magazine subscriptions from
customers at the time subscriptions are sold. Subscription
revenue is recognized over the term of the subscription.
Tomorrow collected Rs20 million in subscription sales during
its first year of operations. At December 31, the average
subscription was one-fourth expired. (Rs in millions)
When Advance is Collected
Cash
Unearned subscriptions revenue
When Product is Delivered
Unearned subscriptions revenue
Subscriptions revenue
20
5
.
20
5
Short-Term Obligations Expected
to Be Refinanced
Short-term obligations can be reported as noncurrent
liabilities only if the company:
(a) intends to refinance on a long-term basis and
(b) demonstrates the ability to do so:
by either an existing
refinancing agreement


by actual financing (prior to the
issuance of the financial
statements)
or
The specific form of the long-term refinancing (bonds,
bank loans, equity securities) is irrelevant.
The concept of substance over form.
.
Contingencies
A loss contingency is an
existing uncertain
situation involving
potential loss
depending on whether
some future event
occurs.
.
Contingencies
Two factors affect whether a loss
contingency must be accrued and
reported as a liability:
1. the likelihood that the confirming
event will occur.
2. whether the loss amount can be
reasonably estimated.
.
Contingencies – Likelihood of
Occurrence
• Probable
– A confirming event is likely to occur.
• Reasonably Possible
– The chance the confirming event will occur is
> remote, but < likely.
• Remote
– The chance the confirming event will occur is
slight.
.
Loss Contingencies
Accounting Treatments
Likelihood
Probable
Reasonably
Possible
Remote
Dollar Amount of Potential Loss
Reasonably
Not Reasonably
Known
Estimable
Estimable
Liability
Liability
Disclosure
Accrued &
Accrued &
Note
Disclosure Note Disclosure Note
Only
Disclosure
Disclosure
Disclosure
Note
Note
Note
Only
Only
Only
No
No
No
Disclosure
Disclosure
Disclosure
Note
Note
Note
.
Product Warranties and
Guarantees
The contingent liability for product warranties almost always is accrued.
Caldor Health introduced a new therapeutic chair carrying a 2-year
warranty against defects. Estimates indicate warranty costs of 3% of
sales during the first 12 months following the sale and 4% the next 12
months. During December of 2009, its first month of availability,
Caldor sold Rs2 million of the chairs.
During December
Cash (and accounts receivable)
Sales revenue
2,000,000
December 31, 2006 (adjusting entry)
Warranty expense ([3% + 4%] x Rs2,000,000)
Estimated warranty liability
.
140,000
2,000,000
140,000
Subsequent Events
If information becomes available that sheds light on a
contingency that existed when the fiscal year ended, that
information should be used in determining the probability
of a loss contingency materializing and in estimating the
amount of the loss.
Cause of Loss Contingency
Clarification
Fiscal Year Ends
Financial Statements
.
UNASSERTED CLAIMS AND
ASSESSMENTS
 It must be probable that an unasserted claim or assessment
or an unfiled lawsuit will occur before considering whether
and how to report the possible loss.
Example: The EPA is in the process of investigating the
possibility of environmental violations at a company’s site, but
has not proposed a penalty assessment. Since the claim or
assessment is unasserted as yet, a two-step process is
involved in deciding how it should be reported:
1. Is a claim or assessment probable? {If not, no disclosure
is needed.}
2. Only if a claim or assessment is probable should we
evaluate (a) the likelihood of an unfavorable outcome and
(b) whether the dollar amount can be estimated.
 If the conclusion of step 1 is that the claim or assessment is
not probable, no further action is required.
.
Gain Contingencies
Desirable to anticipate losses,
but recognizing gains should
await their realization.
As a general rule, we
never record GAIN
contingencies.
 Should be disclosed in notes
to the financial statements.
 Care should be taken that
the disclosure note not give
"misleading implications as to
the likelihood of realization."
.
ATTENTION COMMERCE
STUDENTS
ACCOUNTING(FINANCIAL & COST) OF
ICMAP STAGE 1,2,3,4 (CRASH CLASSES)
CA..MODULE A,B,C,D
PIPFA (FOUNDATION,INTERMEDIATE,FINAL)
ACCA-F1,F2,F3
BBA,MBA
B.COM(FRESH),M.COM
MA-ECONOMICS..O/A LEVELS
KHALID AZIZ…..0322-3385752
http://finance.groups.yahoo.com/group/cost-accountants
.