Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Revised by: Carolyn Doering, Huron Heights SS Weygandt · Kieso · Kimmel · Trenholm

CURRENT LIABILITIES CHAPTER 11

A current liability is a debt that can reasonably be expected to be paid 1. from existing current assets or in the creation of other current liabilities and 2. within one year or the operating cycle, whichever is longer. ACCOUNTING FOR CURRENT LIABILITIES

Types of liabilities 1) Definitely determinable (known amount, payee, and due date) 2) Estimated (estimate the amount or timing) 3) Contingent (potential liabilities that depend on a future event such as a pending lawsuit)

Definitely determinable current liabilities include : 1. Operating line of credit 2. Accounts and notes payable 3. Sales tax payable 4. Payroll and employee benefits 5. Unearned revenues 6. Current maturities of long-term debt ACCOUNTING FOR CURRENT LIABILITIES

OPERATING LINE OF CREDIT A pre-authorized demand loan, allowing the company to write cheques up to a preset limit when needed. Helps manage temporary cash shortfalls Security called collateral is required (usually a companies assets) Disclosed by footnote and by reporting any resulting bank overdraft as a current liability.

Notes Payable are obligations in the form of written promissory notes that usually require the borrower to pay interest. Notes payable may be used instead of accounts payable because it supplies documentation of the obligation in case legal remedies are needed to collect the debt. Notes due for payment within one year of the balance sheet date are usually classified as current liabilities. NOTES PAYABLE

NOTES PAYABLE EXAMPLE Company B agrees to lend $100,000 to us on March 1 for 4 month note payable at 6% interest (adjusting entries are completed each quarter) Mar 1Cash100,000 Note Payable100,000 To record issue of note payable Mar 31Interest Expense 500 Interest Payable 500 To record interest for one month (end of the accounting quarter) June 30Interest Expense 1,500 Interest Payable 1,500 To accrue interest for April, May and June (end of the quarter) July 1Note Payable100,000 Interest Payable 2,000 Cash 102,000 To record payment to Company B and accrued interest

SALES TAXES PAYABLE Sales tax is expressed as a stated percentage of the sales price of goods sold to customers by a retailer. Sales tax includes the goods and service tax (GST), provincial sales tax (PST) or harmonized sales taxes (GST and PST combined). The retailer (or selling company) collects the tax from the customer when the sale occurs, and periodically (usually monthly) remits the collections to the government.

Salaries or wages payable represent the amounts owed to employees for a pay period. Payroll withholdings include federal and provincial income taxes, Canada Pension Plan (CPP) contributions, and employment insurance (EI) premiums. Employees may also voluntarily authorize withholdings for charity, retirement, medical, or other purposes. Payroll withholdings are remitted to governmental taxing authorities. PAYROLL AND EMPLOYEE BENEFITS

PAYROLL EXAMPLE Mar 7 Salaries and Wages Expense100,000 CPP Payable 3,870 EI Payable 2,250 Income Taxes Payable30,000 United Way Payable 2,445 Union Dues Payable 1,435 Salaries and Wages Payable60,000 To record payroll and deductions There would be other JE’s to record: the actual payment to employees the employers share of payroll costs-EI, CPP, WSIB to remit the payables

Unearned Revenues (advances from customers) occur when a company receives cash before a service is rendered. Examples are when an airline sells a ticket for future flights or when a lawyer receives legal fees before work is done. Sept 6 Cash200,000 Unearned Hockey Ticket Revenue200,000 To record sale of 1,000 season tickets Sept 25 Unearned Hockey Ticket Revenue 8,000 Hockey Ticket Revenue 8,000 To record hockey ticket revenue earned UNEARNED REVENUES

CURRENT MATURITIES OF LONG-TERM DEBT Another item classified as a current liability is current maturities of long-term debt. For example, part of a 5 year note payable must be paid each year. The amount due that year should be recorded as a current liability. Current maturities of long-term debt are often identified on the balance sheet as long-term debt due within one year.

ESTIMATED LIABILTIES Obligation that exists but for which the amount and timing is uncertain. However, the company can reasonably estimate the liability. Examples include property taxes and warranty liabilities (to be discussed). Other examples include vacation pay and pensions.

PROPERTY TAXES Property taxes are accrued monthly based on the prior year’s tax bill. When the property tax bill for the current year is received, the company will adjust its monthly expense for the remainder of the year.

PROPERTY TAX EXAMPLE Tantramar Inc. had property tax of $5520 last year. For January and February of this year they do not know what the tax will be, so their calculation is based on last year’s assessment (ie. an estimated liablity) Jan 31Property Tax Expense (5520/12) 460 Property Tax Payable460 To accrue property tax payable (same for Feb.) The assessment arrives in March for $6000, payable on May 31 Mar 31Property Tax Expense ( )/ Property Tax Payable508 To accrue property tax payable (repeat for April) May 31Property Tax Payable (460x2 +508x2)1,936 Property Tax Expense 508 Prepaid Property Tax (508x7)3,556 Cash6,000 To pay property tax June 30Property Tax Expense508 Prepaid Property Tax508 To record property tax expense (repeat at the end of July to December)

PRODUCT WARRANTIES Warranty contracts may lead to future costs for replacement or repair of defective units. Using prior experience with the product, the company estimates what the cost of servicing the warranty will be. Estimated warranty costs are accrued with a debit to warranty expense and a credit to estimated warranty liability.

CONTINGENT LIABILITIES Contingent liabilities exist when there is uncertainty about the outcome. Contingencies are accrued by a debit to an expense account and a credit to a liability account if both of the following conditions are met: 1. The contingency is likely, and 2. The amount of the contingency can be reasonably estimated. They should be disclosed in the notes to the financial statements.

FINANCIAL STATEMENT PRESENTATION Each major type of current liability is listed separately. Often list bank loans, notes payable, and accounts payable first, then other liabilities. COMINCO LTD. Current liabilities (Millions ) Bank loans and notes payable$ 5 Accounts payable and accrued liabilities 230 Income and resource taxes 36 Long-term debt due within one year 30 $301

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