Nguyên lý kế toán - Chapter 13: Current liabilities and contingencies

Chapter 13Current Liabilities and ContingenciesCharacteristics of LiabilitiesResult from past transactions or events.Arise from present obligations to other entities.Probable future sacrifices of economic benefits.What is a Current Liability?LIABILITIESLong-term LiabilitiesExpected to be satisfied with current assets or by the creation of other current liabilities.Current LiabilitiesObligations payable within one year or one operating cycle, whichever is longer.Current LiabilitiesCurrent LiabilitiesShort-term notes payableAccrued expensesCash dividends payableTaxes payableAccounts payableUnearned revenuesSalaries, Commissions, and BonusesCompensation expenses such as salaries, commissions, and bonuses are liabilities at the balance sheet date if earned but unpaid.These accrued expenses/accrued liabilities are recorded with an adjusting entry prior to preparing financial statements.Vacations, Sick Days, and OtherPaid Future AbsencesSick pay quite often meets the conditions for accrual, but accrual is not mandatory because future absence depends onfuture illness, which usually is not a certainty. An employer should accrue an expense and the related liabilityfor employees’ compensation for future absences (such asvacation pay) if the obligation meets all four of these conditions:The obligation is for services already performed.The paid absence can be taken in a later year—the benefitvests or the benefit can be accumulated over time.Payment is probable.The amount can be reasonably estimated.Liabilities from Advance CollectionsRefundable depositsAdvances from customersGift cardsCollections for third partiesA Closer Look at the Current andNoncurrent ClassificationDebt that is callable by the lender in the coming year (or operating cycle, if longer) should be classified as a current liability, even if the debt is not expected to be called.Current maturities of long-term obligations usually are reclassified and reported as current liabilities if they are payable within the upcoming year (or operating cycle, if longer than a year).The ability to refinance on a long-term basiscan be demonstrated by an existing refinancing agreement, or actual financing prior to issuance of the financial statements. Short-Term ObligationsExpected to be Refinanced A company may reclassify a short-term liability as long-term if two conditions are met: It has the intent to refinance on a long-term basis. It has demonstrated the ability to refinance.andLoss ContingenciesA loss contingency is an existing uncertain situation involving potential loss dependingon whether some future event occurs. Two factors affect whether a loss contingency must be accrued and reported as a liability:The likelihood that the confirmingevent will occur.Whether the loss amount can bereasonably estimated.Loss ContingenciesA loss contingency is accrued only if a loss is probable and the amount can reasonably be estimated.Product Warranties and GuaranteesProduct warranties inevitably entail costs.The amount of those costs can be reasonably estimated using commonly available estimation techniques.The estimate requires the following entry:Warranty expense ......................................... $,$$$ Estimated warranty liability .............. $,$$$To accrue warranty expense.Extended Warranty ContractsExtended warranties are sold separately from the product.The related revenue is not earned until:Claims are made against the extended warranty, orThe extended warranty period expires.Premiums Premiums included with the product are expensed in the period of sale.Premiums that are contingent on action by the customer require accounting similar to warranties.Litigation ClaimsThe majority of medium- and large-size corporations annually report loss contingencies due to litigation.The most common disclosure is a note to the financial statements.Subsequent EventsEvents occurring between the fiscal year-end date and report date can affect the appearance of disclosures on the financial statements.Fiscal Year EndsFinancial StatementsClarificationCause of Loss ContingencySubsequent EventsEvents occurring after the year-end date but before the financial statements can also affect the appearance of disclosures on the financial statements.Fiscal Year EndsFinancial StatementsClarificationCause of Loss ContingencyUnasserted Claims and Assessments Is a claimor assessmentprobable?NoYesNodisclosureneededUnassertedclaimEvaluate (a) the likelihood of an unfavorable outcome and(b) whether the dollar amount can be estimated. An estimated loss and contingent liability would beaccrued if an unfavorable outcome is probable and theamount can be reasonably estimated. Gain ContingenciesAs a general rule, we never record GAIN contingencies.Note that the prior rules have supported the recording of LOSS contingencies.End of Chapter 13