Presentation on theme: "Current Liabilities Obligations likely to be paid off using: Current assets or By creating another current liability Generally considered short-term; within."— Presentation transcript:
Current Liabilities Obligations likely to be paid off using: Current assets or By creating another current liability Generally considered short-term; within 1 year or operating cycle
Current Liabilities Types of current liabilities: Accounts Payable Notes Payable Current maturities of long-term debt Short term liabilities expected to be refinanced Dividends Payable Returnable Deposits Unearned Revenues Taxes Payable Employee-Related liabilities
Current Liabilities Accounts Payable: Generally created when you receive goods or services prior to paying for them. e.g. You have been provided one months worth of local phone access, but have not yet been billed. Phone Expense$40 Phone Service Payable$40
Current Liabilities Notes Payable: Written promise to pay, usually with stated interest rate and term to maturity. e.g. Sell 3 month, $50,000 note, 6% interest, on February 1 st. Feb 1:Cash$50,000 Note Payable$50,000 (Note that short-term notes are not recorded with discount or premium like long-term notes, since discount rate will not have enough time to make a material adjustment necessary)
Current Liabilities Current Maturities of Long-Term Debt: The portion of LT Debt that matures within the next year is reported as a current liability unless: it will be retired using non-current assets it will be refinanced using a new long-term debt issue it will be converted into capital stock
Current Liabilities Short-term obligations to be refinanced These are considered current unless: Refinanced on a long-term basis If refinanced on a long-term basis, you can only exclude from current liabilities the amount of proceeds refinanced. e.g. Retiring $800,000 of short-term debt by issuing 10,000 shares of stock worth $70 a share. Still need to show $100,000 of current liabilities, since only $700,000 of proceeds were refinanced.
Current Liabilities Dividends Payable Cash Dividends become a current liability on the date of declaration. Preferred Stock Dividends in arrears are not a liability and require only footnote disclosure. Stock Dividends declared are not a current liability since they will not be paid using current assets.
Preferred Stock refresher: Preferred stock provides preferential dividend treatment to its owners over common stock shareholders. Most preferred certificates carry a stated dividend rate as a percentage of par value. This stated rate is guaranteed to the preferred shareholders only if dividends are declared for the period. e.g. $100 par, 5% rate preferred will pay $5 of dividends, if declared. If dividends are not declared, then the preferred dividends will go into an arrears status. This means that these must be paid-in-full before any dividends can be paid to common shareholders. While dividends in arrears look like a liability, they technically are not, since management does not have any obligation to declare dividends in the future. Once declared, however, they become a current liability.
Current Liabilities Unearned Revenue Record pre-paid revenue as a liability and then record it as a revenue when finally earned. e.g. Beaver Stadium ticket office receives $160 of prepaid ticket revenue for 8 home games Cash$160 Unearned Ticket Revenue $160 After the UCF game, it records a portion of the revenue earned. Unearned Ticket Revenue$20 Ticket Revenue $20
Current Liabilities Collected Tax Receipts Taxes collected for the taxing authority are current liabilities. e.g. McClanahans collects 6% sales tax on $100 of sales Cash$106 Sales Revenue $100 Sales Taxes Payable$6 The Payable reflects the amount they will eventually pay to the taxing authority. Another example is employee withholding taxes collected by an employer.
Current Liabilities Loss Contingencies If there is a possibility of a future loss or expense, a contingent liability is recorded. Common examples: Warranties Lawsuit judgment Rebates Coupons Record expense and liability if both: 1.Probable that liability will be incurred and 2.Loss can be reasonably estimated Footnote the contingency if only reasonably possible or remote
Current Liabilities Warranties If the warranty comes with the product, we usually record expected warranty expense in the year of original product sale (Expense Warranty Approach). The warranty expense is debited against a matching contingent warranty liability credit. e.g. Sell $30,000 truck with 5 year warranty on Feb 1st. Expected warranty costs are $4,000. Feb 1:Cash 30,000 Sales Revenue $30,000 Warranty Exp, Truck$4,000 Estimated Warr. Liability, Truck $4,000
Current Liabilities Warranties An alternative approach is to record warranty expense under the cash basis; that is, record expenses as they are incurred. This will not generate a liability. When the warranty comes with the product sale, this does not best reflect matching expenses to revenues.
Current Liabilities Extended Warranties Extended Warranties are generally sold after-market. Extended Warranties are treated as unearned revenue. They are not directly connected to the product, since they are optional purchases and are usually serviced by someone other than the manufacturer. Revenue is earned as time passes and portions of the warranty period expire. Expenses are generally recorded under the cash basis.
Current Liabilities Promotions, Coupons, and Rebates Record a contingent liability for the estimated expense. Shirts actually cost $5 and the Skellar expects a 60% redemption rate on the promotion (600 shirts sold). e.g. For Halloween, Skellar offers a promotion by offering 1000 coupons that entitles coupon-holders to a Rolling Rock T-shirt for $3 plus one empty bottle.
Current Liabilities e.g. For Halloween, Skellar offers a promotion by offering 1000 coupons that entitles coupon-holders to a Rolling Rock T-shirt for $3 plus one empty bottle. First, record purchase of promotional inventory: Oct 31 Promotional T-shirt Inv $3,000 Cash$3,000 Assume ½ of inventory has been redeemed at years end: Promotional T-shirt inv $1,500 Remove ½ of inv. at cost Cash$900 Promotion Expense$600 Record the cash received (300 x $3) Difference is promo expense.
Current Liabilities e.g. For Halloween, Skellar offers a promotion by offering 1000 coupons that entitles coupon-holders to a Rolling Rock T-shirt for $3 plus one empty bottle. Assume ½ of inventory has been redeemed at years end: Promotional T-shirt inv $1,500 Cash$900 Promotion Expense$600 Finally, record contingent liability for remaining expected redemptions. Promotion Expense $600 Estimated Liability for Promotion $600 This is 300 shirts x [$5 (costs) - $3 (receipts)]