Current Liabilities

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Chapter 12

• Current Liabilities

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Estimated Liabilities

• Liabilities whose exact amount is not known at
  the time of recognition
• interim estimates of a year end amount
• federal state income taxes
• vacation pay accrual
• initial estimates of amount that will not be
  known for several months
• property tax expense

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Estimated Liabilities

• estimates of amounts that may not be known for
  several years
• warranty
• pension

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Income Taxes Payable

• Cant know exact amount until you do tax return
• Rather than wait until the end of the year when
  the tax return is prepared, estimate taxes for
  each month or quarter during the year
• Apply a percentage to net income for interim
  period making allowances for non taxable income
  non deductible expenses

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Property Taxes Payable

• Often applies to land and buildings
• Often also applies to machinery and equipment
• Can also apply to inventory
• Problem arises when taxing jurisdictions fiscal
  year begins prior to when the property being
  taxed is valued and bills are sent out

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Property Taxes Payable

• In Vermont towns fiscal years run from July 1 to
  June 30
• Tax bills may not be calculated or sent to
  taxpayers until August or September.
• Need to estimate total bill and accrue property
  taxes until bill arrives
• Payment of taxes may not only pay down liability,
  but may create a prepaid expense

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SourceExcel/AC 205 Classes/Chapter
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Warranty Liability

• Need to match the future cost of warranty repairs
  or replacements with revenue in the period in
  which revenue was generated
• Estimate of failure should be based on reasonable
  assumptions
• prior experience
• product testing

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Warranty Liability

• Operations is charged in period of sales and
  liability recognized
• Warranty Expense xxx
• Warranty Liability xxx
• When warranty claim is asserted by customer, go
  against liability
• Warranty Liability yy
• Inventory yy

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Vacation Liability

• Where it vests with the employee, FASB says you
  must recognize liability for unused vacation pay
• if employee leaves company still gets paid
• not really an estimate since amount can be
  precisely calculated at the end of any period

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Vacation Liability

• Where it does not vest is where estimates come in
• employee leaves before becoming eligible to take
  it
• employee doesnt utilize full amount under a Use
  It or Lose It plan

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Contingent Liabilities

• Potential liability that is dependent upon
  something happening in the future
• bonuses to be paid if certain sales target hit
• make good on a guarantee of payment by another
• lawsuits threatened or pending
• make good on factored receivable sold with
  recourse that are uncollected

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Contingent Liabilities

• Evaluation in terms of whether probability
  liability incurred (or asset impaired) is
• probable
• reasonable possible
• remote
• can the amount be reasonably estimated

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Contingent Liabilities

• Do nothing where probability is remote
• Disclose
• event is probable, but amount cannot be estimated
• event is reasonable possible
• if amount can be reasonably estimated, state
  amount
• if amount cannot be reasonably estimated, state
  that amount cannot be estimated

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Contingent Liabilities

• Recognize it as a real liability
• event is probable and amount can be reasonably
  estimated