Chapter 13, Current Liabilities and Contingencies, Part 1

Summary

This presentation covers Chapter 13 on current liabilities and contingencies, focusing on their nature, valuation, and reporting. It addresses common liabilities such as accounts payable, notes payable, dividends, unearned revenue, and taxes. The presentation highlights key concepts, including the criteria for recording liabilities, the classification of short-term debts, and employee-related liabilities like wages and bonuses. Real-world examples are used to explain various accounting processes, such as recording interest-bearing and zero-interest notes, payroll deductions, and accounting for compensated absences. Additionally, it discusses how to handle short-term debts expected to be refinanced.

Takeaways

• 😀 Current liabilities are obligations that a business expects to settle with current assets or by creating other current liabilities, usually within one year or one operating cycle.
• 😀 A liability is defined as a present obligation arising from past events, expected to result in an outflow of resources in the future.
• 😀 Common types of current liabilities include accounts payable, notes payable, dividends payable, deposits, unearned revenues, sales tax payable, income taxes payable, payroll liabilities, and compensated absences.
• 😀 Accounts payable are amounts owed to suppliers for goods or services purchased on account, typically due within 30 days with potential discounts for early payment.
• 😀 Notes payable are formal written promises to pay a specific amount at a future date and can be either interest-bearing or zero-interest (discounted) notes.
• 😀 Sales tax payable is collected from customers and remitted to authorities, not being an expense of the company but a liability until paid.
• 😀 Payroll liabilities include wages, taxes, and deductions, with employers required to match Social Security and Medicare contributions and pay unemployment taxes.
• 😀 Compensated absences like vacation or sick leave must be accrued if they vest or accumulate, with accrual required based on the employee's future benefit.
• 😀 Bonuses are treated as an operating expense and recorded as a current liability until paid in the subsequent period.
• 😀 Short-term debt expected to be refinanced can remain classified as long-term if the refinancing is completed within one year or the company's operating cycle.
• 😀 When refinancing a debt, the classification depends on when it is completed; if refinancing happens by the balance sheet date, it can be classified as long-term, otherwise, it remains short-term.

Q & A

What is the definition of a liability according to the presentation?

A liability is an obligation that is expected to result in an outflow of resources, and it must be a present obligation due to a past event. It must be probable that the amount will be due in the future.

How are current liabilities defined and classified?

Current liabilities are those expected to result in the use of current assets or the creation of other current liabilities, typically due within a year or within one operating cycle, whichever is longer.

What is the distinction between accounts payable and notes payable?

Accounts payable are amounts owed to suppliers for goods and services purchased on account, typically with a 30-day payment term. Notes payable, however, are more formal written promises to pay a certain amount at a specified future date, often involving larger amounts and possibly interest.

How does a zero interest-bearing note (discounted note) work in the context of liabilities?

A zero interest-bearing note, also known as a discounted note, has no stated interest rate, and the interest is deducted upfront from the principal. The difference between the principal and the cash received is recorded as a discount on notes payable, which is amortized to interest expense over the note's life.

What is the treatment of dividends payable as a current liability?

Dividends payable are amounts owed to shareholders once authorized by the board of directors. They are considered current liabilities because they are typically paid within a short period after declaration.

What are unearned revenues, and how are they recorded?

Unearned revenues are amounts received before a company has fulfilled its performance obligations. These amounts are recorded as a liability (unearned revenue) until the obligation is satisfied, at which point they are recognized as revenue.

How are sales taxes payable recorded in the accounting system?

Sales taxes collected from customers are not considered company revenue but are recorded as a liability (sales tax payable). The company collects the tax and remits it to the relevant tax authorities, usually in a short period.

How does the company handle income taxes payable as a current liability?

Income taxes payable represent taxes owed on a company's income, which are typically offset by periodic estimated tax payments. Any difference between the estimated tax payments and the actual amount due is reported as a current liability.

What payroll-related liabilities must companies account for?

Companies must account for salaries or wages owed to employees, payroll deductions (like taxes and insurance), and other employee benefits such as vacation and sick leave. The employer also matches certain taxes, including Social Security and unemployment taxes.

How should bonuses be treated in financial reporting?

Bonuses must be recorded as an operating expense in the period they are earned, and they are typically current liabilities because they are paid in the next period. The bonus liability is recognized when the employees have earned the bonus, even if it is paid later.