Introduction to Liabilities: Economic Consequences, Current Liabilities, and Contingencies

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Introduction to LiabilitiesEconomic
Consequences, Current Liabilities, and
Contingencies

• Electronic Presentations for Chapter 10

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Key Points

• Definition of a liability.
• Economic consequences associated with reporting
  liabilities on the financial statements.
• Determinable and contingent liabilities.
• Current liabilities.
• Bonus systems and profit-sharing arrangements and
  the reporting incentives they create.
• Methods used to account for contingencies.

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What is a Liability?

• Probable future sacrifice 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.
• Present obligations.
• Unavoidable obligations.
• Transaction or event must have already happened.

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Liabilities/ Total Assets (Industry Averages)
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Liabilities/ Total Assets (Industry Averages)
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Liabilities/ Total Assets (Industry Averages)
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Reporting Liabilities on the Balance Sheet
Economic Consequences

• Stockholders and investors
• Creditors
• Management
• Auditors

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Current Liabilities / Total Liabilities (Industry
Averages)
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Current Liabilities / Total Liabilities (Industry
Averages)
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Current Liabilities / Total Liabilities (Industry
Averages)
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Current Liabilities

• Valuing current liabilities on the balance sheet
• Ignore present value
• Report at face value
• Reporting current liabilities
• Primary problem is ensuring that all existing
  current liabilities are reported on the balance
  sheet.

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Determinable Current Liabilities

• Accounts payable
• Short-term debts
• Short-term notes
• Current maturities of long-term debts
• Dividends payable
• Unearned revenues
• Third-party collections
• Income taxes
• Incentive compensation

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Accrued Liabilities

• Normal accrued liabilities
• Wages payable
• Salary payable
• Interest payable
• Rent payable
• Insurance payable
• Property taxes payable
• Conditional accrued liabilities
• Income tax liabilities
• Incentive compensation

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Contingencies and Contingent Liabilities

• Alternatives to loss contingencies
• Ignore
• Disclose
• Accrue
• Warranties
• Uncertain future costs
• Record expense and liability when products are
  sold (matching concept)
• As costs are incurred, charge expenditure to
  warranty liability

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Accounting for Contingencies
Contingent Loss
Probability of Occurrence
Accounting Treatment
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Accounting for Contingencies
Contingent Gain
Probability of Occurrence
Accounting Treatment
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Current Assets
Current Liabilities
Current Ratio
Beg. Bal. 69,000 38,000 1.82
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(1) Inventory (A) 5,000 Accounts
Payable (L) 5,000 To record merchandise
in-transit.
Current Assets
Current Liabilities
Current Ratio
Beg Bal 69,000 38,000 1.82 (1) 5,000 5,000 1.
72
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(2) Interest Expense (E, -SE)
500 Discount on Note (L) 500 To accrue
interest on note.
Current Assets
Current Liabilities
Current Ratio
Beg Bal 69,000 38,000 1.82 (1) 5,000 5,000 1.
72 (2) 500 1.70
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(3) No entry required for future payment on
long-term debt obligation.
Current Assets
Current Liabilities
Current Ratio
Beg Bal 69,000 38,000 1.82 (1) 5,000 5,000 1.
72 (2) 500 1.70 (3) 1.70
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(4) Unearned Revenue (-L)
1,000 Earned Revenue (R, SE) 1,000 To record
earned revenue.
Current Assets
Current Liabilities
Current Ratio
Beg Bal 69,000 38,000 1.82 (1) 5,000 5,000 1.
72 (2) 500 1.70 (3) 1.70 (4) -1,000 1.74
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(5) Wage Expense (E, -SE)
4,000 Wages/Tax Payable (L) 4,000 To record
wages and taxes owed.
Current Assets
Current Liabilities
Current Ratio
Beg Bal 69,000 38,000 1.82 (1) 5,000 5,000 1.
72 (2) 500 1.70 (3) 1.70 (4) -1,000 1.74 (5)
4,000 1.59
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(5) Tax Expense (E, -SE) 400 Tax
Payable (L) 400 To record accrued taxes.
Current Assets
Current Liabilities
Current Ratio
Beg Bal 69,000 38,000 1.82 (1) 5,000 5,000 1.
72 (2) 500 1.70 (3) 1.70 (4) -1,000 1.74 (5)
4,000 1.59 400 1.58
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(6) Income Tax Expense (E, -SE)
2,000 Income Tax Payable (L) 2,000 To record
income tax liability.
Current Assets
Current Liabilities
Current Ratio
Beg Bal 69,000 38,000 1.82 (1) 5,000 5,000 1.
72 (2) 500 1.70 (3) 1.70 (4) -1,000 1.74 (5)
4,000 1.59 400 1.58 (6) 2,000 1.51
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(7) Contingent Loss (E, -SE)
8,000 Contingent Liability (L) 8,000 To
record contingent loss on lawsuit.
Current Assets
Current Liabilities
Current Ratio
Beg Bal 69,000 38,000 1.82 (1) 5,000 5,000 1.
72 (2) 500 1.70 (3) 1.70 (4) -1,000 1.74 (5)
4,000 1.59 400 1.58 (6) 2,000 1.51 (7) 8,
000 1.30