CHAPTER 13 Current Liabilities and Contingencies ……..…………………………………………………………... Liability  Present, unavoidable obligation  Requiring probable future transfer of assets  Resulting from past transactions or events Current Liability  Requiring use of existing current assets

11/1Borrowed $100,000, 12%, 6 months. 12/31 Liability 11/1Issued $100,000 non-interest 6- month note; rec’d $94,340. $500,000 of 8% cumulative preferred is outstanding for the entire year. 12/1Declared 8% cash dividend on $500,000 preferred, payable 1/15. Present, unavoidable obligation

12/1Declared a 5% stock dividend on 100,000 shares of common stock ($1 par, $11 market value). 12/31 Liability 12/1Restaurant received $2,200 from sale of gift certificates. Future transfer of assets

From past transactions or events 11/1Signed contract to purchase inventory next year for $600,000 (inventory worth $570,000 12/31). 12/31 Liability 12/31Ordered $32,000 of inventory to be shipped FOB destination. Deferred income tax liability = $8,000 (on current income, paid in the future). $8,600 sick pay earned but not taken during past year.

Current Liability = use of existing current assets 12/28Purchased on account and received $3,000 on inventory, $500,000 of 8% serial bonds are outstanding. Interest plus $100,000 principal payable each July 1. Current Liability $60,000, 10% note payable due March of next year is outstanding. Firm plans to refinance with a 2-year note.

Payroll Deductions To record payroll: Salary Expense10,000 Withholding Taxes Payable1,320 FICA Taxes Payable765 Union Dues Payable88 Cash7,827 Based on federal & state schedules 7.65% on first $102, % on excess

To record employer payroll tax: Payroll Tax Expense1,245 FICA Taxes Payable765 Fed Unemploy Tax Payable80 State Unemploy Tax Payable %* on first $7000. * 0.8% if state unemployment taxes have been paid

Compensated Absences Liability  Obligation from services already rendered  Vested or accumulated  Probable and reasonably estimated Sick pay that accumulates need not be accrued If future compensation exceeds the liability, the difference is charged to wage expense.

CONTINGENCIES Gain Contingencies  Possible donations, lawsuit awards, etc.  Not recorded Loss Contingencies  Expense and liability recognized  Required conditions:  probable at financial statement date  reasonably estimated

Litigation, Claims, & Assessments  Cause of litigation on or before financial statement date  “Probability of unfavorable outcome” based on experience, legal opinion, etc.  For lawsuits not yet filed  probable that suit will be filed, and  probable that outcome will be unfavorable

Guarantee and Warranty Costs Cash Basis Warranty Expense20,000 Cash, Inventory, etc.20,000 (Warranty costs incurred.) Not acceptable if warranty liability is probable and reasonably estimated.

Accrual Basis – Expense Warranty Approach (Warranty costs incurred.) (To accrue warranty costs.) Cash3,000,000 Sales3,000,000 (To record sales for the year.) (Warranty costs incurred on prior year sales.)

Accrual Basis – Sales Warranty Approach (Warranty costs incurred.) (To recognize revenue related to warranty costs incurred.) Cash3,000,000 Sales2,850,000 Unearned Warranty Rev150,000 (To record sales for the year.)

Premiums and Coupons  Expense recorded w/ actual redemption  Additional expense accrued at year end  a reasonable estimate of the cost of future redemptions  matched with current-year revenues Self-Insurance  Not insurance  No liability recorded for events that have not happened

PRESENTATION AND ANALYSIS  Current liabilities reported at full maturity value (i.e. not discounted)  Bond sinking fund exception  Supplemental information on secured liabilities and refinancing arrangements  Loss contingencies that are reasonably possible should be disclosed in the notes

Exercise 13-1 Accrued vacation pay Balance Sheet Class Estimated taxes payable Service warranties Bank overdraft Injury claim pending Unpaid bonus Customer deposits Sales tax payable

Exercise 13-1 (cont.) Unredeemed gift certif. Balance Sheet Class Premium offers outstand Discount on notes pay Unpaid payroll deduct. Current matur: LT debt Unpaid cash dividend Dividends in arrears Loans from officers