CURRENT LIABILITIES AND CONTINGENCIES C H A P T E R 13 CURRENT LIABILITIES AND CONTINGENCIES Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield

What is a Current Liability? Illustration (Interest-Bearing Note): Castle National Bank agrees to lend $100,000 on March 1, 2010, to Landscape Co. if Landscape signs a $100,000, 6 percent, four-month note. Landscape records the cash received on March 1 as follows: Cash 100,000 Notes Payable 100,000 LO 1 Describe the nature, type, and valuation of current liabilities.

What is a Current Liability? Illustration (Interest-Bearing Note): If Landscape prepares financial statements semiannually, it makes the following adjusting entry to recognize interest expense and interest payable at June 30: Interest calculation = ($100,000 x 6% x 4/12) = $2,000 Interest expense 2,000 Interest payable 2,000 LO 1 Describe the nature, type, and valuation of current liabilities.

What is a Current Liability? Illustration (Interest-Bearing Note): At maturity (July 1), Landscape records payment of the note and accrued interest as follows. Notes payable 100,000 Interest payable 2,000 Cash 102,000 LO 1 Describe the nature, type, and valuation of current liabilities.

What is a Current Liability? Illustration (Zero-Interest-Bearing Note): On March 1, Landscape issues a $102,000, four-month, zero-interest-bearing note to Castle National Bank. The present value of the note is $100,000. Landscape records this transaction as follows. Cash 100,000 Discount on notes payable 2,000 Notes payable 102,000 LO 1 Describe the nature, type, and valuation of current liabilities.

What is a Current Liability? Illustration (Zero-Interest-Bearing Note): The Discount on Notes Payable is a contra account to Notes Payable. Illustration 13-1 Landscape charges the discount to interest expense over the life of the note. Look page 639 + 640 LO 1 Describe the nature, type, and valuation of current liabilities.

What is a Current Liability? E13-2: (Accounts and Notes Payable) The following are selected 2010 transactions of KC Corporation. Sept. 1 - Purchased inventory from Orion Company on account for $50,000. KC records purchases gross and uses a periodic inventory system. Oct. 1 - Issued a $50,000, 12-month, 8% note to Orion in payment of account. Oct. 1 - Borrowed $75,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $81,000 note. LO 1 Describe the nature, type, and valuation of current liabilities.

What is a Current Liability? Sept. 1 - Purchased inventory from Orion Company on account for $50,000. KC records purchases gross and uses a periodic inventory system. Sept. 1 Purchases 50,000 Accounts payable 50,000 LO 1 Describe the nature, type, and valuation of current liabilities.

What is a Current Liability? Oct. 1 - Issued a $50,000, 12-month, 8% note to Orion in payment of account. Interest calculation = ($50,000 x 8% x 3/12) = $1,000 Oct. 1 Accounts payable 50,000 Notes payable 50,000 Dec. 31 Interest expense 1,000 Interest payable 1,000 LO 1 Describe the nature, type, and valuation of current liabilities.

What is a Current Liability? Oct. 1 - Borrowed $75,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $81,000 note. Oct. 1 Cash 75,000 Discount on notes payable 6,000 Notes payable 81,000 Interest calculation = ($6,000 x 3/12) = $1,500 Dec. 31 Interest expense 1,500 Discount on notes payable 1,500 LO 1 Describe the nature, type, and valuation of current liabilities.

What is a Current Liability? Current Maturities of Long-Term Debt Exclude long-term debts maturing currently as current liabilities if they are to be: 1. Retired by assets accumulated that have not been shown as current assets, 2. Refinanced, or retired from the proceeds of a new debt issue, or 3. Converted into capital stock. LO 1 Describe the nature, type, and valuation of current liabilities.

What is a Current Liability? Short-Term Obligations Expected to Be Refinanced Exclude from current liabilities if both of the following conditions are met: 1. Must intend to refinance the obligation on a long-term basis. 2. Must demonstrate an ability to refinance: Actual refinancing: or Enter into a financing agreement LO 2 Explain the classification issues of short-term debt expected to be refinanced.

What is a Current Liability? Short-Term Obligations Expected to be Refinanced NO Mgmt. Intends of Refinance Classify as Current Liability YES Demonstrates Ability to Refinance NO YES Actual Refinancing after balance sheet date but before issue date Financing Agreement Noncancellable with Capable Lender or Exclude Short-Term Obligations from Current Liabilities and Reclassify as LT Debt LO 2 Explain the classification issues of short-term debt expected to be refinanced.

What is a Current Liability? E13-3 (Refinancing of Short-Term Debt): On December 31, 2010, Alexander Company had $1,200,000 of short-term debt in the form of notes payable due February 2, 2011. On January 21, 2011, the company issued 25,000 shares of its common stock for $36 per share, receiving $900,000 proceeds after brokerage fees and other costs of issuance. On February 2, 2011, the proceeds from the stock sale, supplemented by an additional $300,000 cash, are used to liquidate the $1,200,000 debt. The December 31, 2010, balance sheet is issued on February 23, 2011. Instructions Show how the $1,200,000 of short-term debt should be presented on the December 31, 2010, balance sheet, including note disclosure LO 2 Explain the classification issues of short-term debt expected to be refinanced.

What is a Current Liability? Partial Balance Sheet Current liabilities: Notes payable Long-term debt: Notes payable refinanced Total liabilities $ 300,000 900,000 $1,200,000 LO 2 Explain the classification issues of short-term debt expected to be refinanced.