Ch 9 Current Liabilities Flashcards
Breakage Income
represents the estimated value of gift cards that is not expected to be redeemed by customers and is determined in proportion to the pattern of rights exercised by the customer
common current liabilities
1) bank indebtedness (or line of credit)
2) short-term loans
3) current portion of long-term debt
Current liabilities are recorded at their _______ value
a) present value
b) face value
b) face value since the difference between fair value and the present value is so small it’s immaterial
Bank indebtedness
the first current liability you will see on a B/S.
It’s the amount borrowed on the established line of credit with the bank and that will be repaid with the subsequent cash deposits that the company makes to the account.
When a company runs out of cash in the account, they can still keep writing checks by using that line of credit much like a set-up overdraft facility on personal bank accounts.
Revolving credit facilities
An agreement a company enters into with its bank, enabling it to borrow up to a negotiated limit. The company can use the credit facility as needed and repay it as funds are available.
Standby fees
fees (interest charged) that a company has for just having a line of credit even if the company doesn’t use the line of credit. The line of credit is usually secured by receivables and inventory, so the limit on the line of credit is dependant on those assets and will fluctuate with them.
Blended instalment payments
partial payments of a loan (principal and interest)
Current portion of long term debt
A part of a long term debt that must be repaid this year, since they meet the definition of a current liability, they will be presented on B/S as such
Journal entry for current portion of a long term debt
(how to move it to current portion - reclassification entry)
Long term loan payable XXX
Current portion of long term debt XXX
Current liabilities arising from trade with suppliers
known as trade receivable or trade account receivables
aka “free debt” as there is no interest rate if paid in time (usually 30-60 days but it varies dependant on industry), there are also sometimes discounts for early repayments of these
Current liabilities arising from trade with customers
1) deferred revenue
2) gift card liability
3) customer loyalty provision
4) provision for warranty claims
Provision
means that the liability was estimated
partially executed contract
a customer has paid a downpayment/deposit/retainer or just some part of a good or service that has not been delivered yet. That creates a partially executed contract that will create deferred or unearned revenue liability on a B/S. It’s inappropriate to record those as revenue beef they have been earned
deferred revenue journal entry
Cash XXX
Deferred Revenue XXX
after earning the revenue journal entry (gym membership example)
Deferred Revenue XXX
Membership Revenue XXX
Initial purchase of gift card journal entry
Cash XXX
Deferred revenue (or gift card liability) XXX
Usage of gift card (redemption)
Deferred revenue (or gift card liability) XXX
Sales Revenue XXX
COGS XXX
Inventory XXX
2 types of warranty
assurance warranty
service warranty