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ch 13 current liabiltiies

Terms in this set (75)

liabilities
probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
characteristics of liabilities
1. present obligation that entials settlement by probable future transfer or use of cash
2. unavoidable obligation
3. transaction or other event creating the obligation has already occurred
current liabilities
obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of other current liabilities
operating cycle
period of time elapsing between acquisition of goods and services involved in manufacturing process and final cash realization from sales and subsequent collections
accounts payable
balances owed to other for foods, supplies, or services purchased on open account
- time lag between receipt of services/acquisition of assets and payment for them
- usually extend period of credit
if control has passed to purchaser before receipt
purchaser should record transactions at time of transfer of control
notes payable
written promise to pay a certain amount of money on a specified future date
--arise from purchasing/financing/other transactions
zero interest bearing note issued
- does not explicitly state an interest rate on face of note; interest is still charged
- at maturity borrower must pay back amount greater than cash received at the issuance date
- borrower receives in cash the present value of the note
present value of the note =
face value of note at maturity minus the interest (discount) charged by lender
discount on notes payable
contra liability account to notes payable (normal debit balance)
- represents interest expense chargeable to future deposits
cash dividends payable
amount owed by a corporation to its stockholders as a result of its board of directors' authorization

- date of declaration corporation assumes a liability that places the stockholders in the position of creditors in the amount of dividends declared
- classified as current liability
preferred dividends in arrears
not an obligation until board of directors authorizes payment
- note disclosures improves predictive value f the financial statements
returnable cash deposits
to guarantee performance of a contract/service as a guarantee to cover payment of expected future obligations; current liability
--classification as current/non-current L depend on time between dates of deposit and termination of relationship
unearned revenues
1. when a company receives an advance payment it DR cash and CR current liabilities account identifying source of undearned revenue
2. when a company recognizes revenue, it DR unearned rev and CR rev
sales taxes payable
- retailers must collect sales taxes from customers on transfers of tangible personal property and on certain services and then must remit these taxes to government authority
sales taxes payable entry
DR cash
CR sales rev
CR sales taxes payable
income taxes payable
- proprietorships and partnerships are not taxable entities (personal income taxes)
- most corps must make periodic tax payments throughout the year in authorized bank deposits
payroll deductions
taxes, insurance premiums, employee savings, and union dues
social security taxes
FICA
- paid form taxes levied on both employer and employee
- employers collect the employee's shares of tax by deducting it form the employees gross pay and remit it to the government along with their share
- 6.2% rate
- medicare paid by both employee and employer, 1.45%
medicare + fica =
social security tax
unemployment taxes
all employers who meet criteria are subject to fed. unemp. tax act
unemployment taxes criteria
1. those who paid wages of $1500 or more during any calendar quarter in year
2. those who employed at least one individual on at least one day in each of 20 weeks during current or preceding calendar year
federal and state taxes accrue on
earned compensation
- company should record amount of accrued but unpaid employer contributions as an operating expense and a current liability when making year end financial statements
income tax withholding
- federal and some states laws require employers to withhold from each employee the income tax due on those wages
- depends on length of pay period, taxible wages, marital status, claimed dependents
employee pays
income tax withholding
fica
union dues
employer pays
fica
federal unemployment
state unemployment
employee payroll deduction and salaries paid entry
DR sal and wage expense
CR withholding tax payable
CR fica taxes payable
CR union dues payable
CR cash
to record employer payroll taxes
DR payroll tax expense
CR fica taxes payable
CR fed unemployment tax payable
CR state unemployment tax payable
compensated absences
paid absences from employment such as vacation, illness, and holidays
Company should accrue liabilities for cost of compensation of future absences if ALL of the following conditions exts
1. employer's obligation relating to employee's rights to receive compensation for future absences is attributable to employees services already rendered
2. obligation relates to the rights that vest or accumulate
3. payment of the compensation is probable
4. the amount can be reasonably estimated

if employer meets 1, 2, 3, or 4 disclose this
vested rights
exist when an employer has an obligation to make payment to an employee even after terminating his or her employment. Not contingent on an employee's future service
accumulated rights
those that employees can carry forward to future periods if not used in the period in which earned
example of accumulated rights
earn 4 days of vacation pay as of Dec 31, the end of your employer's fiscal year--> company policy is that you'll be paid for this vacation time even if you terminate employment
----4 vacation days are vested
----you can carry over the 4 days into later periods--accumulated rights
--employer must make an accrual
sick pay
- if vested, company accrues them
- if accumulate but not vest, company chooses whether to accrue them
- some companies allow employees to accrue unused sick pay and take compensated time off work even when not ill
----should accrue liability because company will pay it
- company should recognize the expense and related liability for compensated absences in the year earned by employees
- co likely to use current rate to accrue the compensated absence cost
to record accrual of vacation pay
DR salaries and wages expense
CR salaries and wages payable

-difference arises because it accrues the liability account at rates of pay in effect during period when employees EARNED compensated time
to record payment of vacation pay in following year
DR salaries and wages payable
DR salaries and wages expense
CR cash

- cash paid depends on rates in effect during the period when employees USED the compensated time
bonus agreements adjusting entry to record bonuses
DR salaries and wages expense
CR salaries and wages payable
bonus paid entry
DR salaries and wages payable
CR cash
bonus agreements
- expense account is an operating expense
- s&w payable is usually payable in a short period of time--> current liability
current maturities of long term debt
portions of bonds, mortgage notes, and other long term debts that matures within next fiscal year
current maturities of LT debt guidelines
1. retired by assets accumulated for this purpose that properly have not been shown as current assets
2. refinances, or retired form the proceeds of a new debt issue
3. converted into capital stock
plan for liquidation
disclosed through a note to financial statements

- report the maturing portion of long-term debt as a current liability and remaining portion as LT debt
classify an CL that is due on demand (callable by creditor)
true
short term obligations
expected to be refinanced on a long-term bases; mature within 1 year
- will not require use of WC during next operating cycle
classification of short term obligations
1. liability is contractually due to be settled more than 1 year after BS date
2. entity has a contractual right to defer settlement of liability for at least one year after BS date
contingency
as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will resolve when one or more future events occur or fail to occur
gain contingency
claims or rights to receive assets (or have liability reduced) whose existence is uncertain but which may come by valid eventually
types of gain contingencies
1. possible receipts of monies from gifts/donations/sales
2. possible refunds from gvt in tax disputes
3. pending court cases with a probable favorable outcome
4. tax loss carry forwards
loss contingency
possible losses
contingent liabilities
depend on occurrence of one or more future event s to confirm either the amount payable, the payee, date payable or existence
--liability incurred as a result of a loss contingency
likelihood of loss
- likelihood that the future event(s) will confirm the incurrence of a liability can range from probable to remote
probable
future event(s) are likely to occur
reasonably possible
chance of future event(s) occurring is more than remote but less than likely
remote
chance of future event(s) occurring is slight
accure an estimated loss from contingency by
a charge to expense and a liability recorded only if BOTH conditions met:
1. info available prior to issuance of fin stmts indicates that its probabl that a liability has been incurred at date of fin statments
2. amount of loss can be reasonably estimated
usually accrued
- collectibility of receivables
- obligations related to product warranties/product defects
- premiums offered to customers
not accrued
- risk of loss/damage of enterprise property by fire/explosion/hazard
- general or unspecified bus risks
- risk of loss from catastrophes assumed by property and causality insurance company including reinsurance companies
may be accrued
- threat of expropriation of assets
- pending/threatened litigation
- actual or possible claims and assessments
- guarantees of indebtedness of others
- obligation so of commerical banks under "standby Letters of credit"
- agreements to repurchase receivables that have been sold
common loss contingencies
1. Litigation, claims, and assessments
2. Guarantee and warranty costs
3. Premiums and coupons
4. Environmental liabilities
litigation, claims, and assessments
Companies must consider the following factors, in determining whether to record a liability with respect to pending or threatened litigation and actual or possible claims and assessments
-Time period in which the action occurred
-Probability of an unfavorable outcome
-Ability to make a reasonable estimate of the loss
warantee
promise made by a seller to a buyer to make good on a deficiency of quantity/quality/performance in a product
- entail future costs--> "after/post-sale" costs--> significant
- est liability includes all the costs that the company will incur after sale/delivery and that are incident to the correction of defects required under warranty provisions
assurance type warranty
The warranty, included in the sales price of a company's product, that the product meets agreed-upon specifications in the contract at the time the product is sold.
service-type warranty
An additional warranty, not included in the sales price of the product, that the product meets agreed-upon specifications in the contract at the time the product is sold. A service-type warranty is recorded as a separate performance obligation

- recognize revenue on straight line basis over period of service typ
assurance warranty entries
DR cash
CR sales rev

DR warranty expense
CR cash, inv, accrued payroll

DR warranty exp
CR warranty liability

DR warranty liability
CR cash, inv, accrued payroll
service type warranty entries
DR cash
CR unearned warranty revenue
CR sales revenue

DR warranty expense
CR cash, inv, accrued payroll

DR warranty expense
CR warranty liability

DR unearned warranty revenue
CR warranty revenue
consideration payable
- company makes payment to their customers as part of revenue arrangement
- discounts, volume rebates, free product/services, etc
- performance obligation exists and should be recorded as a liability
- credits outstanding obligations to premium liability
consideration payable entries
DR premium inventory
CR cash

DR cash
CR sales revenue

DR cash
DR premium expense
CR premium inventory

DR premium expense
CR premium liability
asset retirement obligations
must be recognized when it has an existing legal obligation associated with the retirement of a long lived asset and when it can reasonably estimate the amount of liability
obligating events
--decommissioning of nuclear facilities
--dismantling, restoring, and reclaiming of oil and gas properties
--certain closure, reclamation, and removal costs of mining facilities
--closure and post-closure costs of landfills
measurement of asset retirement obligaiton
- measure at fair value ( the amount the company would pay in an active market to settle the ARO)
- estimated based on market prices of similar liabilities; can use PV techniques
recognition and allocation of aro
- To record an ARO in the financial statements, a company includes the cost associated with the ARO in the carrying amount of the
- related long-lived asset, and records a liability for the same amount. It records an asset retirement cost as part of the related asset because these costs are tied to operating the asset and are necessary to prepare the asset for its intended use.
- Companies should not record the capitalized asset retirement costs in a separate account because there is no future economic benefit that can be associated with these costs alone.
asset retirement obligation entries
DR drilling platform (face value of asset)
CR ARO

DR depreciation expense (during life, FV/UL)
CR accumulated depreciation

DR interest expense (interest accrued during period)
CR ARO (FV * i)

DR ARO (dismantle)
DR Gain/Loss settlement of ARO
CR cash
self insurance
risk assumption
- no liability before/after damage
current ratio (wc)
current assets / current liabilities

- doesn't give insight in slow moving inventories
acid test ratio
(cash + short-term investments + accounts receivables) / current liabilities
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