Chapter 13 Part 2 Current Liabilities

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Chapter 13Part 2 - Current Liabilities

• Short-Term Notes Payable
• Estimated Liabilities
• Contingent Liabilities
• Contingent Gains

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Short-Term Notes Payable

• A written promise to pay a specified amount on a
  specified future date within one year or the
  companys operating cycle, whichever is longer.
• Used to purchase merchandise inventory or to
  replace an account payable.

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Short-Term Notes Payable

• It may be a loan from a bank with a promissory
  note signed instead of an extension of credit
  such as replacing an account payable.
• Have advantages and disadvantages for both the
  creditor and the debtor.

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Short-Term Notes Payable

• Advantages and Disadvantages
• Creditor
• Earns interest
• Dont have cash as quickly
• Debtor
• Keeps cash longer for other uses
• Has to pay interest when amount is finally repaid

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Short-Term Notes Payable

• Interest is accrued at the end of the accounting
  period, using the number of days as the
  measurement of time.
• Balance sheet shows note reported as a current
  liability and interest owing on the note as an
  additional current liability.

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Estimated (or Uncertain) Liabilities

• When we are uncertain about the amount of the
  liability we can sometimes make a reasonable
  estimate of the amount.
• Such liabilities are known as estimated
  liabilities.

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Estimated (or Uncertain) Liabilities

• Common estimated liabilities include
• Warranty Liabilities
• Corporate Income Taxes

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Warranty Liabilities

• The estimated liability that is created when a
  company sells products covered by a warranty.
• The seller reports the estimated warranty expense
  in the period in which the sale was made
  (Matching Principle).

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Warranty Liabilities

• Liability is recorded even though the existence,
  amount, payee, and the date the obligation is
  satisfied are uncertain at the time the revenue
  is earned.
• Past experience can be used as a basis for
  estimating future warranty obligations.

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Warranty Liabilities

• Management must monitor actual warranty claims
  versus the estimated liability and may need to
  adjust the calculations for the liability for
  future sales.
• Note that this is a change in estimate and is
  reported accordingly.

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Corporate Income Taxes

• Recall that Income taxes are not applicable for
  partnerships or proprietorships.
• Taxes are not known until the company knows its
  annual net income, therefore, estimates are made
  monthly.

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Corporate Income Taxes

• Instalment payments are made monthly based on the
  estimated tax liability for the year.
• The final adjustment to Income Taxes Payable is
  made once net income before taxes is known. The
  difference in the estimates accrued monthly
  versus the final amount payable is adjusted to
  the income tax expense account.

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Contingent Liabilities

• A potential future liability that depends on a
  future event arising out of a past transaction.
• If future payment is likely and the amounts can
  be reasonably estimated, the liability should be
  recorded so as to not have net income and net
  assets overstated (conservatism principle).

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Contingent Liabilities

• If future payment is likely but the amount cannot
  be reasonably estimated, then the contingent loss
  and the liability should be disclosed in the
  notes to the financial statements because the
  information is relevant to the financial
  statement users (full disclosure principle).

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Contingent Liabilities

• If the future event is unlikely (remote or slight
  change of occurrence), but would have a negative
  effect on the company if it were to occur, note
  disclosure is required.
• Warranties and Allowance for Doubtful Accounts
  are contingencies related to normal business
  activities therefore they are NOT contingent
  liabilities.

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Contingent Gains

• Never recorded until they are actually realized.
• Gain contingencies that are likely to occur are
  disclosed in the notes to the financial
  statements, however, because of conservatism, one
  must avoid any implication about their
  realization.
• Disclosure of unlikely contingent gains is
  prohibited.

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Short-Term Notes PayableEstimated
LiabilitiesContingent LiabilitiesContingent
Gains

• Questions??

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Assignment Hints

• Exercises
• 13-11
• CR Cash 30,739.73
• 13-13
• 400
• 13-16
• Sales dollar amount irrelevant.
• 13-18
• Dec. 31 CR Discount on Notes Payable 1,078.30

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Assignment Hints

• Problems
• 13-2A
• Ferris payment CR Cash 9,147.95
• Scotia Bank payment CR Cash 20,591.78
• National Bank payment CR Cash 36,035.61
• 13-3A
• Total 945
• Dont forget Cost of Goods Sold
• 13-4A
• For both parts, think of what the journal
  entries are and describe their impact on net
  income and the balance sheet.