Ch 13.1 (Current Liabilities)

Question 1

Contingent Liabilities

Answer 1

Anticipated Losses/ Pending Liabilities

IFRS: anticipated losses arising from pending transactions disappear

Conceptual problem: hamburger example

FASB: Recently proposed expanded disclosure about the nature of contingencies. Positive outcome for investors but not so much for companies because disclosed info may be used against them in a lawsuit.

Question 2

Preferred Stock

Answer 2

Difficult to classify because it can seem like a liability when stockholder calls the stock within a certain period (when stockholder says he wants his dividend)

Question 3

Liabilities

Answer 3

Probable future sacrifices 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.

Liabilities involve future disbursements of assets or services.

Current liabilities v Long-term debt.

Question 4

Current Liabilities

Answer 4

Obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities.

Increases in CL can sometimes be viewed as good.

Question 5

Operating Cycle

Answer 5

The period of time elapsing between the acquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections.

Question 6

Common Current Liabilities

Answer 6

1. Accounts payable.
2. Notes payable.
3. Dividends payable.
4. Customer advances and deposits.
5. Unearned revenues.
6. Sales taxes payable.
7. Income taxes payable.
8. Employee-related liabilities.
9. Current maturities of long-term debt.

Question 7

Trade Accounts Payable

Answer 7

Accounts Payable.

Balances owed to others for goods, supplies, or services purchased on open account.

Question 8

When do companies record liabilities for purchases of goods?

Answer 8

Most companies record liabilities for purchases of goods upon receipt of the goods. If control has passed to the purchaser before receipt of the goods, the purchaser should record the transaction at the time of transfer of control.

Question 9

Trade Notes Payable

Answer 9

Notes Payable.

Written promises to pay a certain sum of money on a specified future date. They may arise from purchases, financing, or other transactions.

Companies classify notes as short-term or long-term, depending on the payment due date. Notes may also be interest-bearing or zero-interest-bearing.

Question 10

Discount on Notes Payable

Answer 10

A contra account to Notes Payable, and therefore is subtracted from Notes Payable on the balance sheet.

Used when recording transaction of zero-interest bearing Notes Payable.

Represents interest expense chargeable to future periods.

Question 11

Dividends Payable

Answer 11

Amount owed by a corporation to its stockholders as a result of its board of directors’ authorization.

Generally paid within three months so they are considered current liabilities.

Preferred dividends in arrears are not an obligation until the board of directors authorizes the payment. Nevertheless, companies should disclose the amount of cumulative dividends unpaid in a note, or show it parenthetically in the capital stock section.

Question 12

Customer Advances and Deposits

Answer 12

Returnable cash deposits received from customers and employees. Companies may receive deposits from customers to guarantee performance of a contract or service or as guarantees to cover payment of expected future obligations.

Question 13

Unearned Revenues

Answer 13

Revenues that they receive before delivering goods or rendering services.

1. When a company receives an advance payment, it debits Cash, and credits a current liability account identifying the source of the unearned revenue.
2. When a company recognizes revenue, it debits the unearned revenue account, and credits a revenue account.

Question 14

What kind of transactions does the Balance Sheet report(Income Statement)?

Answer 14

The balance sheet reports obligations for any commitments that are redeemable in goods and services. The income statement reports revenues related to performance obligations satisfied during the period..

Question 15

Sales Tax

Answer 15

Retailers must collect sales taxes from customers on transfers of tangible personal property and on certain services and then must remit these taxes to the proper governmental authority.

When a company records taxes for different transactions:

Cash 3,120

 Sales Revenue 3,000

 Sales Taxes Payable 120

When a company records taxes at the end

Sales Revenue 5,769.23

 Sales Taxes Payable 5,769.23

Question 16

Income Taxes Payable

Answer 16

Using the best information and advice available, a business must prepare an income tax return and compute the income taxes payable resulting from the operations of the current period.

Most corporations must make periodic tax payments throughout the year in an authorized bank depository or a Federal Reserve Bank.

Proprietorships and partnerships are not taxable entities because they are subject to personal income taxes on their share of the business’s taxable income.

Question 17

Employee-Related Liabilities

Answer 17

Companies also report as a current liability amounts owed to employees for salaries or wages at the end of an accounting period. In addition, they often also report as current liabilities the following items related to employee compensation.

1. Payroll deductions. (OASDI/FICA, Medicare/Hospital Insurance Tax, => Social Security Tax; FUTA; Income Tax Withholding)
2. Compensated absences. (4 conditions; vested rights, accumulated rights)
3. Bonuses.

Question 18

Current Maturities of Long Term Debt

Answer 18

Exclude long-term debts maturing currently as current liabilities if they are to be:

1. Retired by assets accumulated for this purpose that properly have not been shown as current assets,
2. Refinanced, or retired from the proceeds of a new debt issue, or
3. Converted into capital stock.

When only a part of a long-term debt is to be paid within the next 12 months the company reports the maturing portion of long-term debt as a current liability, and the remaining portion as a long-term debt.

A company should classify as current any liability that is due on demand (callable by the creditor) or will be due on demand within a year (or operating cycle, if longer).