1. Chang, Otto1 Chapter 13 Intermediate Accounting II Otto Chang Professor of Accounting

2. Chang, Otto2 Definition of A Liability Probable future sacrifice of economic benefits arising from present obligations to transfer assets or provide services to other entities in the future as a result of past transactions or events.

3. Chang, Otto3 Current Liabilities Liabilities whose liquidation is reasonably expected to require use of existing current assets or the creation of other current liabilities No discounting is necessary if less than one year. Include liability due on demand (callable by the creditor)

4. Chang, Otto4 Determinable current liabilities Accounts payable Notes payable Current portion of long-term debt* other short-term obligation* Dividends payable Returnable deposits Unearned revenues Taxes payable Employee related liabilities * unless liquidated with non-current assets or refinanced on a L-T basis, or converted into equity

5. Chang, Otto5 S-T Notes Expected to be Refinanced An entity can exclude a S-T note from C.L. if it intends to refinance on a L-T basis and demonstrates an ability to refinance Ability to refinance can be evidenced by: –actual refinancing before issuing B/S or –entering into a financing agreement S-T debt paid off after B/S date and later replaced by L-T debt can not be excluded

6. Chang, Otto6 Sales Taxes Payable Sales taxes(5%) separable from sales ($100) Dr. Cash or A/R $105 Cr. Sales $100 Cr. Sales Taxes payable $5 Sales taxes (5%) included in sales ($105) Dr. Sales $5 Cr. Sales Taxes Payable $5

7. Chang, Otto7 Property Taxes Payables Property taxes should be accrued monthly before payments, and amortized monthly after payment. Example: $36,000 assessed for 5/1-4/30, two equal installments due on 7/1 and 9/1 –Journal entries on 5/31 and 6/30 Dr. Property taxes expenses $3,000 Cr. Property taxes payable $3,000 –Journal entries on 7/1: Dr. Prepaid Property Taxes $12,000 Property taxes payable 6,000 Cr. Cash $18,000

8. Chang, Otto8 Payroll Taxes Payables Recording salaries payment: Dr. Wages and salaries expense $10,000 Cr. Withheld taxes payable $1,320 FICA taxes payable 765 Union dues payable 88 Cash 7,827 Recording payroll taxes expense: Dr. Payroll taxes expense $1,245 Cr. FICA taxes payable $765 FUTA taxes payable 80 State unemployment taxes payable 400

9. Chang, Otto9 Compensated Absences The expense and related liability should be accrued if –employee already rendered the services –benefits vested or accumulated –payment is probable and can be estimated Journal entries: Dr. Wages expenses $9,600 Cr. Vacation wages payable $9,600

10. Chang, Otto10 Bonus Agreement Amount of Bonus = applicable rate x (Net income - Bonus - Income taxes) Where Income taxes = Tax rate x (Net income - Bonus) Simultaneously solve the two equations to determine the amount of bonus

11. Chang, Otto11 Contingencies Gain contingencies: disclosed in footnote if highly probable. Losses contingencies: –Probable & can be reasonably estimated: accrue –Probable but can not be estimated: disclose –Reasonably possible: disclose –remotely possible: ignore Amount accrued: lower bound of an estimate. Disclose higher bound in footnote

12. Chang, Otto12 Product Warranty Costs Cash basis: recognize expense when it is incurred Accrual basis: –Expense warranty approach: recognize estimated liability under warranty as expense –Sales warranty approach: used when warranty is sold separately from the product. Revenue is deferred ( Cr. Unearned Warranty Rrevenues) and amortized in proportion to costs incurred.

13. Chang, Otto13 Premiums and Coupons To record purchase of premium inventory Inventory of premium goods $15,000 Cash $15,000 To record actual redemption of premium Cash $1,500 Premium expense $3,000 Inventory of premium goods $4,500 End of year adjusting entries: Premium expenses $6,000 Estimated Liabilities for premiums $6,000

14. Chang, Otto14 Other Contingencies Environmental liabilities: difficult to estimate legal implications, therefore disclosure is the most common treatment. Self-insurance: accrual is not required prior to the occurrence of the loss event.