1. Liabilities Are probable future sacrifices of economic benefitsAre probable future sacrifices of economic benefits Arise from present obligations (to transfer goods or provide services) to other entitiesArise from present obligations (to transfer goods or provide services) to other entities Result from past transactions or eventsResult from past transactions or events---------------------------------------------------- FASB CON 6

2. Current Liabilities … are “obligations whose liquidation is reasonably expected to require the use of existing resources properly classified as current assets, or the creation of other current liabilities.” FASB CON 6

3. 11 Types of Current Liabilities Accounts PayableAccounts Payable Notes PayableNotes Payable Current maturities of LT DebtCurrent maturities of LT Debt Short-term obligations expected to be refinancedShort-term obligations expected to be refinanced Dividends payableDividends payable Returnable depositsReturnable deposits Unearned revenuesUnearned revenues Sales taxes payableSales taxes payable Property taxes payableProperty taxes payable Income taxes payableIncome taxes payable Employee related liabilitiesEmployee related liabilities

4. Current Maturities of Long-Term Debt are classified as Current Liabilities...unless … (1) retired by assets accumulated for this purpose that have not been shown as current assets (2) refinanced, or retired from the proceeds of a new long-term debt issue, or (3) converted into capital stock

5. Short-Term Obligations Expected to be Refinanced on a Long-term basis may be classified as noncurrent if... Refinancing Criteria (both must be met): (1) it intends to refinance on a long-term basis, & (2) it demonstrates an ability to consummate the refinancing

6. Dividends Payable Cash dividends payable are always current liabilities (are always paid within 12 mos.)Cash dividends payable are always current liabilities (are always paid within 12 mos.) Preferred dividends in arrears are NOT liabilities ( while they do represent “probable future economic sacrifice” they do not result from a past transaction until after authorized by the board of directors)Preferred dividends in arrears are NOT liabilities ( while they do represent “probable future economic sacrifice” they do not result from a past transaction until after authorized by the board of directors) Stock dividends are NOT liabilities (do not require future outlays of assets or services)Stock dividends are NOT liabilities (do not require future outlays of assets or services)

7. Returnable Deposits Returnable Cash Deposits may be current liabilities (if they will probably be returned within 12 mos.)

8. Unearned Revenues Accounting for unearned revenues: (a) when advance is received: Dr Cash Cr Current Liability (b) when revenue is earned: Dr Current Liability Cr Revenue

9. Sales Tax Payable When collected at point-of-sale:...if tax is segregated: Dr Cash or Accounts Receivable Cr Sales Cr Sales Tax Payable … if tax is not segregated, prepare a reclassifying JE: Dr Sales Cr Sales Tax Payable When paid: Dr Sales Tax Payable Cr Cash

10. Property Taxes Payable based on assessed value of real & personal property When should property owners record the liability? To which accounting period should the cost be charged? Gov’t fiscal year 0 Gov’t fiscal year 1 Corp. fiscal year 1 Corp. fiscal year 2 May 1 Dec 31 Jan 1 Billsassessed May 1 BillsRec’d7/1,9/1BillsPaid Apr 31 LeinDate …accrue monthly on the taxpayer’s books during the taxing authority’s fiscal period when the taxes are paid…accrue monthly on the taxpayer’s books during the taxing authority’s fiscal period when the taxes are paid …alternative: consistent application from year to year…alternative: consistent application from year to year

11. Income Taxes Payable Varies with taxable incomeVaries with taxable income Is estimated throughout the fiscal year for corporations (owners of sole proprietorships & partnerships pay the tax, rather than the business entity)Is estimated throughout the fiscal year for corporations (owners of sole proprietorships & partnerships pay the tax, rather than the business entity) Is covered in detail in Chapter 20Is covered in detail in Chapter 20

12. Employee-Related Liabilities Payroll DeductionsPayroll Deductions –Income Tax (Federal, State & Local) [employee only] –Social Security (FICA & Medicare)[both] –Unemployment (FUTA & State)[employer only] –Health & Life Insurance Premiums[possibly both] –Employee Savings –Union Dues, etc. Compensated AbsencesCompensated Absences –Vacation Pay -- accrue at current or expected earnings –Sick Leave (accrue generally if vested) Post-retirement Benefits (Chapter 21)Post-retirement Benefits (Chapter 21) Bonuses (appendix … skipping)Bonuses (appendix … skipping)

13. Contingency … “an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.” (FAS 5) Typical Gain Contingencies: Possible receipts of monies from gifts, donations, bonuses, etc.Possible receipts of monies from gifts, donations, bonuses, etc. Possible refunds from the government in tax disputesPossible refunds from the government in tax disputes Pending court cases where the probable outcome is favorablePending court cases where the probable outcome is favorable Tax loss carryforwards (Ch 20)Tax loss carryforwards (Ch 20) Typical Loss Contingencies: Litigation, claims & assessmentsLitigation, claims & assessments Guarantees and warranty costsGuarantees and warranty costs Premiums and couponsPremiums and coupons Environmental liabilitiesEnvironmental liabilities Self-insurance risksSelf-insurance risks

14. Contingent liabilities are obligations that are dependent upon future event(s) to confirm: Who is to be paid (the payee),Who is to be paid (the payee), How much will be paid,How much will be paid, When it is to be paid, &/orWhen it is to be paid, &/or If the debt really existsIf the debt really exists How likely are the future events? Probable -- the future event(s) are likely to occurProbable -- the future event(s) are likely to occur Reasonably possible -- the chance of the future event(s) is more than remote but less than likelyReasonably possible -- the chance of the future event(s) is more than remote but less than likely Remote -- the chance of the future event(s) occurring is slightRemote -- the chance of the future event(s) occurring is slight

15. Record a Contingent Loss if both of the following conditions are met: Dr Loss / Cr Liability (1) the information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements, (probable future economic sacrifice … arising from present obligations …resulting from past transactions or events) & (2) the amount of the loss can be reasonably estimated (based on past experience, industry experience, an expert opinion, or educated guess)

16. Accounting for Litigation, Claims & Assessments Book the Liability (and Loss) if: (1) The underlying cause for action occurred prior to the end of the reporting period, (2) An unfavorable outcome is probable, & (3) a reasonable estimate on the loss can be made

17. Required Disclosures for Loss Contingencies If the contingent loss is either probable or estimable (but not both), disclose:If the contingent loss is either probable or estimable (but not both), disclose: –The nature of the contingency –An estimate of the possible loss or range of loss or a statement that an estimate cannot be made The following other contingent losses are disclosed … even if remote:The following other contingent losses are disclosed … even if remote: –Guarantees of indebtedness of others –Obligations of commercial banks under “stand-by letters of credit” –Guarantees to repurchase receivables (or any related property) that have been sold or assigned

18. Accounting for Guarantee & Warrantee Costs CASH BASIS:CASH BASIS: –expense in the period incurred –justifiable under some (probably rare) circumstances: it is not probable that a liability has been incurred, orit is not probable that a liability has been incurred, or the amount of the liability cannot be reasonably estimatedthe amount of the liability cannot be reasonably estimated ACCRUAL BASIS:ACCRUAL BASIS: –EXPENSE WARRANTY APPROACH: expense the total expected costs in the period of salesexpense the total expected costs in the period of sales –SALES WARRANTY APPROACH: used when the warrantee is sold separatelyused when the warrantee is sold separately may defer revenue over the life of the contract using the straight line method over time, ormay defer revenue over the life of the contract using the straight line method over time, or may defer revenue proportionately based on expected costsmay defer revenue proportionately based on expected costs

19. Accounting for Compensated Absences Record the Payroll Expense & the related Liability in the year the benefits are earnedRecord the Payroll Expense & the related Liability in the year the benefits are earnedOptions: –may accrue at current earnings level, or –may accrue at expected future earnings level –accrual for sick pay is optional if it does not vest (that is, if it is not used, it is not paid) –consistency of application from year to year is important