ACCT 201 ACCT 201 ACCT 201 1 Reporting and Analyzing Current Liabilities UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee Chapter 9.

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ACCT 201 ACCT 201 ACCT Reporting and Analyzing Current Liabilities UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee Chapter 9

Problem 9-2A is due Today!

Chapter 9 - Day 2 ACCT 201 ACCT 201 ACCT 201 Agenda TopicLOReadHW Estimated LiabilitiesP QS7, 8; E8, 9 Contingent LiabilitiesC QS10, E2 Long-Term LiabilitiesNone None Decision AnalysisA E10, P3A

ACCT 201 ACCT 201 ACCT Reporting and Analyzing Current Liabilities Chapter 9 Estimated Liabilities

ACCT 201 ACCT 201 ACCT Estimated Liabilities An estimated liability is a known obligation of an uncertain amount, but one that can be reasonably estimated.

On October 1, a dealer sold a car with a 12-month warranty. Past experience indicates that the average warranty expense for this car is $200. The dealer would prepare the following entry on October 1. Estimated Liabilities ACCT 201 ACCT 201 ACCT 201

On March 6, the customer brings the car in for $200 of repairs. The dealer would make the following entry. Estimated Liabilities ACCT 201 ACCT 201 ACCT 201

Employer expenses for pensions or medical, dental, life and disability insurance Employee Health and Pension Benefits Employer expenses for paid vacation by employees Vacation Pay Vacation Pay Other Estimated Liabilities ACCT 201 ACCT 201 ACCT 201

10 Corporations pay income taxes quarterly. Income Tax Liabilities

Determined by applying measurement rules established by Internal Revenue Service. Taxable Income GAAP Income GAAP Determined by applying Generally Accepted Accounting Principles (GAAP). Deferred Income Tax Liability ACCT 201 ACCT 201 ACCT 201

Taxable Income GAAP Income  The difference between taxable income and financial statement income results in temporary differences. GAAP Deferred Income Tax Liability ACCT 201 ACCT 201 ACCT 201

13 Reporting and Analyzing Current Liabilities Contingent Liabilities Chapter 9

Contingent Liabilities ACCT 201 ACCT 201 ACCT 201 Probable Reasonably Possible Remote Record Contingent Liability Disclose Liability in Notes No Action Amount Estimable Amount Not Estimable Disclose Liability in Notes No Action Potential obligation depends on a future event arising out of a past transaction or event.

ACCT 201 ACCT 201 ACCT Reporting and Analyzing Current Liabilities Long-Term Liabilities Chapter 9

Estimated Long- Term Liabilities Noncurrent portion of employee benefits, warranties, deferred income taxes, etc. Contingent Long- Term Liabilities Noncurrent portion of debt related to litigation, debt guarantees, environmental assessments, etc. Known Long-Term Liabilities Known obligations of a business such as unearned revenue and notes payable. Long-Term Liabilities ACCT 201 ACCT 201 ACCT 201

17 Reporting and Analyzing Current Liabilities Decision Analysis Chapter 9

Times Interest Earned = Income Before Interest Expense and Income Taxes Interest Expense If income before interest varies greatly from year to year, fixed interest charges can increase the risk that an owner will not earn a positive return and be unable to pay interest charges. Exh. 9.7 When this ratio falls below 1.5 and remains at that level or lower for several periods, the default rate on liabilities increases sharply. Times Interest Earned ACCT 201 ACCT 201 ACCT 201