WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 10 Current Liabilities Prepared by: Debbie Musil Kwantlen Polytechnic University 1

Copyright John Wiley & Sons Canada, Ltd.2 Determinable (certain) current liabilities – Operating line of credit and bank overdraft – Short-term notes payable – Current maturities of long-term debt Uncertain liabilities – Estimated liabilities – Contingencies Financial statement presentation Current Liabilities

Copyright John Wiley & Sons Canada, Ltd.3 Chapter 10: Current Liabilities Study Objectives 1.Account for determinable or certain current liabilities. 2.Account for estimated liabilities. 3.Account for contingencies. 4.Prepare the current liabilities section of the balance sheet.

Copyright John Wiley & Sons Canada, Ltd.4 Obligations that are expected to be settled: – Within one year of the balance sheet date, or – Within normal operating cycle Requires existence of a present obligation Determinable liabilities have known amount, payee, due date Determinable (Certain) Current Liabilities

Operating Line of Credit Copyright John Wiley & Sons Canada, Ltd.5 Pre-authorized borrowing – Allows the company to borrow up to a preset limit when needed May require collateral (security) – Such as current assets, investments, or property, plant and equipment Used on a short-term basis Negative (overdrawn) cash balance is called bank indebtedness, bank overdraft or bank advances

Short-Term Notes Payable Copyright John Wiley & Sons Canada, Ltd.6 Obligations in the form of written promissory notes Usually require the borrower to pay interest Used instead of accounts payable – Gives lender proof of obligation in case legal action is needed to collect Issued for varying periods – If due within one year of the balance sheet date, classified as current liabilities

Short-Term Notes Payable 2 Copyright John Wiley & Sons Canada, Ltd.7 Interest is recorded in the period the loan is outstanding: At maturity, the face value of the note plus interest must be repaid:

Copyright John Wiley & Sons Canada, Ltd.8 The portion of long-term debt that is due within the current year – Amount not due within current year is disclosed as a long-term liability No adjusting entry is required to recognize the current portion of long- term debt – The proper classification is made when the balance sheet is prepared Current Maturities of Long- Term Debt

Copyright John Wiley & Sons Canada, Ltd.9 1.Account for determinable or certain current liabilities. 2.Account for estimated liabilities. 3.Account for contingencies. 4.Prepare the current liabilities section of the balance sheet. Chapter 10: Current Liabilities Study Objectives

Copyright John Wiley & Sons Canada, Ltd.10 Obligation exists but the amount and timing is uncertain – We owe someone, but not sure how much, when or even who Liability is recognized when: – Settlement of the liability is likely, and – Amount of the liability can be reasonable estimated Estimated Liabilities

Copyright John Wiley & Sons Canada, Ltd.11 Promises made by seller to buyer to repair or replace a product if it is defective or does not perform as intended Warranties will lead to future costs for replacement or repair of defective units Cost of warranty is estimated and accrued based on prior experience Product Warranties

Copyright John Wiley & Sons Canada, Ltd.12 Result in an estimated liability: – Not known if or when rewards will be redeemed If redemptions are likely, and can be estimated based on past experience: – Record estimated liability as a reduction in revenue (not an expense) – Sales discount is a contra revenue account Customer Loyalty Programs and Gift Cards

Copyright John Wiley & Sons Canada, Ltd.13 1.Account for determinable or certain current liabilities. 2.Account for estimated liabilities. 3.Account for contingencies. 4.Prepare the current liabilities section of the balance sheet. Chapter 10: Current Liabilities Study Objectives

Copyright John Wiley & Sons Canada, Ltd.14 Record liability if both conditions are met: – It is likely (or probable (“more likely than not”) under IFRS) that an obligation exists, and – Amount can be reasonably estimated If contingent loss is likely, but cannot be reasonably estimated: – No liability is recorded – Disclosed in the notes to the statements If contingency is unlikely: – Still disclosed if event is substantial, otherwise not disclosed Contingent Liabilities (or Provisions)

Copyright John Wiley & Sons Canada, Ltd.15 1.Account for determinable or certain current liabilities. 2.Account for estimated liabilities. 3.Account for contingencies. 4.Prepare the current liabilities section of the balance sheet. Chapter 10: Current Liabilities Study Objectives

Copyright John Wiley & Sons Canada, Ltd.16 Current liabilities are the first category reported in the liabilities section of the balance sheet Each type of current liability is listed separately Listed in order of liquidity, usually by maturity date – Also common to show bank loans, notes payable and accounts payable first regardless of size Terms of operating lines of credit, notes payable and other information are disclosed in the notes Financial Statement Presentation

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