1. A U s e r P e r s p e c t i v e Third Canadian Edition
FINANCIAL
ACCOUNTING
A U s e r P e r s p e c t i v e Third Canadian Edition
Hoskin  Fizzell

2. C h a p t e r 9
Liabilities

3. Recognition for Liabilities
Classify as liabilities if:
Transfer of assets or the performance of services or other benefits
Company has little or no discretion
Result from an event that has already occurred

4. Contingent Liability
If there is a possibility of the future transfer of assets, and
If the future obligation is contingent on certain events occurring, then
Company should disclose in the notes to the financial statements

5. Valuation Methods Gross amount of the obligation
Net present value of the obligation

6. Valuation Methods Gross amount of the obligation
The total of the payments to be made
May not measure obligation accurately
Ignores the time value of money

7. Valuation Methods Net present value of the obligation
Recognizes the time value of money
Future payments of principal and interest are discounted back to the current period using a discount rate

8. Valuation Methods Canadian practice
Record liabilities at the present value of the future payments
Exception: short-term liabilities

9. Working Capital Loans and Lines of Credit
Short-term loans from a bank
Often secured by accounts receivable or inventory balances
Results in negative cash balance

10. Accounts Payable Occur when a company buys goods or services on credit
Called trade accounts payable
Payment deferred for days
Generally do not carry interest charges, unless payment is delayed

11. Wages and Other Payroll Payables
Accrual of wages since the last pay period
Fringe benefits
Health care, pensions, vacation pay
Company acts as government agent in collecting taxes
Income taxes, CPP (QPP), EI, WCB

12. Wages and Other Payroll Payables
Deductions from employees’ earned income
SE-Wages expense ,500.00
L-Employee income tax payable
L-CPP contribution payable
L-EI taxes payable
A-Cash ,992.50

13. Wages and Other Payroll Payables
Additional amounts paid by employer
SE-Wages expense
L-CPP contribution payable
L-EI taxes payable

14. Short-Term Notes and Interest Payable
Borrowings that required repayment in the next year or operating cycle
Carry explicit interest rates, or are structured to include implicit interest amounts
Interest expense and payable
Recognized over the life of the loans

15. Short-Term Notes and Interest Payable
Example:
Borrowing of $10,000 at 9%
Six monthly payments of $1,710.70
Monthly instalments including reductions of the principal, plus interest
Interest is calculated on the decreasing amount of principal

16. Short-Term Notes and Interest Payable

17. Short-Term Notes and Interest Payable
Entry at the end of the first month
SE-Interest expense
L-Short-term note payable 1,635.70
A-Cash ,710.70

18. Income Taxes Payable Companies are subject to taxes
Federal corporate income taxes
Provincial corporate taxes
Payment of taxes does not always coincide with the incurrence of the tax
Results in taxes payable

19. Warranty Payable
Goods or services sold may result in guarantees to the buyer
May result in warranty service
Estimate the amount of warranty expense to match to the revenue from the sale
Estimate percentage based on past history

20. Warranty Payable
Record the estimated warranty obligation (in the period of the sale)
SE-Warranty expense
L-Estimated warranty obligation

21. Warranty Payable
Record the repair work (in the period when the work is done)
L-Estimated warranty obligation 126
A-Cash

22. Unearned Revenues
If customers are required to make down payments prior to the receipt of goods or services
Defer the recognition of revenue
Liabilities
Unearned revenues, or
Deferred revenues

23. Current Portion of Long-term Debt
When long-term debt comes within a year of being due
Must be reclassified as a current liability

24. Commitments Purchase commitment
An agreement to purchase items in the future for a negotiated price
Discuss in a note to the financial statements if this results in a material effect to future operations

25. Contingencies Contingent liabilities (losses)
Arise when the incurrence of the liability is contingent upon some future event
Examples
Settlement of a lawsuit
Guarantee of another company’s loan
Selling accounts receivable with recourse

26. Contingencies In Canada, recognize a contingent loss if:
The use of assets or performance of services will result
The amount of the loss can be reasonably estimated

27. Future Income Taxes Differing calculations:
Income tax expense from the income statement
Income tax payable according to CCRA
Canadian practice uses the liability method

28. Liability Method Focuses on the balance sheet
Attempts to measure the liability to pay taxes based on a set of assumptions about future revenues and expenses

29. Liability Method
Calculate (pro forma) future income taxes payable based on temporary differences existing in the current period
A liability in the current period will become a tax deduction as actual costs are incurred

30. Liability Method Assumptions Income before tax and warranties: $10,000
Tax rate: 40 percent
Warranty expense recorded:
Year 1: $ 200
Actual warranty costs incurred:
Year 1: $ 50
Year 2: $ 70
Year 3: $ 80

31. Liability Method

32. Liability Method

33. Copyright
Copyright © 2003 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.