1. Current Liabilities Chapter 08 The chapter is divided into two parts.
Part A: Current Liabilities
Part B: Contingencies

2. Participation Questions – Chapter 8
Which publicly traded company was showing a negative working capital in their 2012 financial results?
Walmart; Eastman Kodak; Apple Computers; or Ford Motors
Current liabilities are usually due in more than one year.
True or False
What account is “air traffic liability” shown on Southwest Airlines balance sheet similar to?
Sales tax payable; Deferred taxes; Unearned revenue; or Accounts Payable
Which public company did we review the contingent liabilities notes for in class?
Southwest Airlines; Target; Apple Computers; or Eastman Kodak
Which publicly traded company was included as an example for their warranty payable estimate?
Southwest Airlines; Eastman Kodak; Apple Computers; or Ford Motors

3. Announcements Exam Results Average
Exam reviews – Webcourses, Calendar, Scheduler
Excel Grade Calculator – Exam 2 Wrap-up Module at the start of Block 3 modules
Assignments – Due 11/13/16
Chapter 8 Homework (Connect) – unlimited attempts
Participation questions for Chapter 8 (Webcourses) – 1 attempt
Syllabus Quiz #2 - Due 11/20/16 (opens 11/6/16)

4. Questions to be Answered
Chapter 8 – How do we account transactions that impact known and unknown (estimate) current liabilities? How do these transactions impact the income statement and balance sheet?

5. Chart of Accounts

6. Current Liabilities Part A
In Part A of this chapter, we focus on current liabilities and their essential characteristics.
Current Liabilities are used to fund current assets in support of the operating cycle.
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7. Current Liabilities
Liability - A present responsibility to sacrifice assets in the future due to a transaction or other event that happened in the past.
Current liabilities are usually, but not always, due within one year.
Note: If a company has an operating cycle longer than one year, its current liabilities are defined by the operating cycle rather than by the length of a year.
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8. Why are Current Liabilities Important
Why are Current Liabilities Important? Working Capital – Informational purposes only – not on exam
Definition - A measure of both a company's efficiency and its short-term financial health. The working capital ratio formula:
Working Capital Ratio = Current Assets / Current Liabilities
This ratio indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.
Investopedia explains 'Working Capital'
If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller. Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.

9. Brunswick – Boats & Engines

10. Brunswick – Boats & Engines

11. Eastman Kodak

12. Eastman Kodak
Why statement of financial position?

13. Current vs. Long-Term Liabilities
With in the
company
Payable within one
year
Payable more than
one year
In a classified balance sheet, we categorize liabilities as either current or long-term. In most cases, current liabilities are payable within one year and long-term liabilities are payable more than one year from now.
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14. Current Liabilities – Two Types
Known Amounts
Accounts Payable
Notes Payable
Unearned Revenue
Sale Tax Payable
Current Portion Long-term Debt
Deferred Taxes
Estimated Amounts
Contingencies
Losses
Warranty Payable
Gains
Current liabilities are obligations due within one year or within the company’s normal operating cycle if longer than a year. Obligations due beyond that period of time are classified as long-term liabilities.
Current liabilities are of two kinds:
■ known amounts.
■ estimated amounts.

15. Current Liabilities: Known Amount
Accounts payable
Amounts owed for products or services purchased on account
Short-term notes payable
Due within one year
Used to borrow cash or purchase asset
Accrue interest at the end of each period
Amounts owed for products or services purchased on account are accounts payable.
Short-term notes payable, a common form of financing, are notes payable due within one year. Companies may issue short-term notes payable to borrow cash or to purchase assets. On its notes payable, a company must accrue interest expense and interest payable at the end of the period.

16. Accounts Payable 1/1/15 - Bought inventory on Account for $15,000 2/15/15 – paid for inventory
JOURNAL
Date
Accounts and explanation
Debit
Credit
1/1/15
Inventory
15,000
Accounts Payable
Purchase of Inventory on account
2/15/15
Cash
Payment of Accounts Payable
An example will illustrate how to account for short-term notes payable. Assume a company purchased $30,000 of inventory on December 1 by signing a 3-month, 9% note payable. Inventory is debited and note payable is credited. On December 31 (year-end) interest needs to be accrued. The principal of the note is multiplied by the interest rate by one over 12. The fraction represents the one month the note has been outstanding. Interest expense is debited and interest payable is credited.

17. Formula to calculate Interest Expense
Short-term Notes Payable – 12/1/15 - ABC Company borrows $30,000 to purchase equipment. Note due 3/1/16, annual interest rate = 9%. Interest and principal paid at maturity. Journal Entry initial transaction, year-end adjusting entry, & maturity
Formula to calculate Interest Expense
Interest = Face value x Annual interest rate x Fraction of the Year

18. Short-Term Notes Payable
JOURNAL
Date
Accounts and explanation
Debit
Credit
Dec 1
Equipment
30,000
Note payable, short-term
Purchase of Equip. using a 3-month note 9%
Dec 31
Interest expense
225
Interest payable
Accrued interest on note payable
(30,000 x 9% x 1/12)
An example will illustrate how to account for short-term notes payable. Assume a company purchased $30,000 of inventory on December 1 by signing a 3-month, 9% note payable. Inventory is debited and note payable is credited. On December 31 (year-end) interest needs to be accrued. The principal of the note is multiplied by the interest rate by one over 12. The fraction represents the one month the note has been outstanding. Interest expense is debited and interest payable is credited.

19. Accounting for Short-Term Notes Payable
JOURNAL
Date
Accounts and explanation
Debit
Credit
Mar 1
Interest expense (30,000 x 9% x 2/12)
450
Interest payable
225
Note payable, short-term
30,000
Cash
30,675
On March 1 of the following year, payment of principal and interest is made. Notes payable is debited for the principal. Interest payable is debited for the amount of the year-end accrual. Interest expense is debited for the two months of interest incurred this year. Finally, cash is credited for the entire amount that is paid to the creditor.

20. In-Class Exercise
4/1/15 $100,000 Land Purchase
20% cash payment and 80% promissory note due in 10 months with 12% annual interest
Prepare journal entries for initial transaction, financial statements at 12/31/15, and at maturity.

21. Deferred Revenues
Definition - Business receives cash before services or products are provided to customers.
Therefore, company cannot recognize any revenue when cash is received. Results in a liability (repay if don’t deliver)
Steps:
Record cash receipt and set up deferred revenue account (liability)
As services or products are provided and revenue is earned, an adjusting journal entry is completed to recognize revenue earned.
Debit deferred revenue and credit revenue account.
Complete Journal Entries:
2/1 – “I am the Best DJ, Inc.” receives $300 deposit in advance for DJ for a Fraternity Party.
2/28 – Performs the best DJ services
Unearned revenues are also called deferred revenues and revenues collected in advance. For all unearned revenue the business has received cash from customers before earning the revenue. The company has a liability—an obligation to provide goods or services to the customer. When the company received payment before service is provided or product is sold, Cash is debited and Unearned revenue is credited. Later, when the revenue (or a portion thereof) is earned, Unearned revenue is decreased (debited) and Revenue is recorded (credited). This is often done through the adjusting process.

22. Unearned Revenues Journal Entry for DJ Example Cash 300
Date
Accounts and explanation
Debit
Credit
2/1
Cash
300
Unearned revenue
Received advance payment from customer
2/28
Deferred revenue
Revenue
To record earned portion of unearned revenue
Unearned revenues are also called deferred revenues and revenues collected in advance. For all unearned revenue the business has received cash from customers before earning the revenue. The company has a liability—an obligation to provide goods or services to the customer. When the company received payment before service is provided or product is sold, Cash is debited and Unearned revenue is credited. Later, when the revenue (or a portion thereof) is earned, Unearned revenue is decreased (debited) and Revenue is recorded (credited). This is often done through the adjusting process.

23. Southwest Airlines
As described in Note 1 to the Consolidated Financial Statements, tickets sold for passenger air travel are initially deferred as “Air traffic liability.” Passenger revenue is recognized and air traffic liability is reduced when the service is provided (i.e., when the flight takes place). “Air traffic liability” represents tickets sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates.
CPLTD
Air traffic liability

24. Current Portion of Long-Term Debt (CPLTD) Example below – $10,000 auto loan payable over 5 years principal due in equal installments each year
CPLTD Definition - Amount of principal (out of total long-term debt) payable within one year (12 months)
What are we doing…
Recognize the portion of long-term debt that will be repaid over the next 12 months and classify it as “Current Portion LTD” to show decision-makers what is due in the coming year.
Steps for recognizing CPLTD:
Initial Transaction
Record (debit) for what is received in the long-term loan – i.e. cash, equipment, auto
Amount of principal due in the next 12 months is recorded into the CPLTD account (Credit).
Amount of principal due after the next 12 months is recorded into the LTD account (Credit).
Some long-term debt must be paid in installments. The current portion of long-term debt (also called current maturity or current installment) is the amount of the principal that is payable within one year from the balance sheet date. At the end of each year, a company reclassifies (from long-term debt to a current liability) the amount of its long-term debt that must be paid next year.

25. Current Portion of Long-Term Debt (CPLTD) Example below – $10,000 auto loan payable over 5 years principal due in equal installments each year
Steps for recognizing CPLTD:
Second Year and later:
Step 1:
When the principal balance is paid over the next 12 months, the CPLTD account is decreased (debited) and cash is credited.
Step 2 – reset balance in CPLTD account.
Credit amount of principal due in the next 12 months
Debit LTD to reduce balance in this account.
Some long-term debt must be paid in installments. The current portion of long-term debt (also called current maturity or current installment) is the amount of the principal that is payable within one year from the balance sheet date. At the end of each year, a company reclassifies (from long-term debt to a current liability) the amount of its long-term debt that must be paid next year.

26. Southwest Airlines CPLTD Air traffic liability – look up on edgar

27. Current Portion of Long-Term Debt –
Southwest Airlines Example if they just took out million of LTD
JOURNAL
Date
Accounts and explanation
Debit
Credit
12/31
Cash
3,154 Mil.
Long-Term Debt
2,883 Mil.
Current Portion Long-Term Debt
271 Mil.
Some long-term debt must be paid in installments. The current portion of long-term debt (also called current maturity or current installment) is the amount of the principal that is payable within one year from the balance sheet date. At the end of each year, a company reclassifies (from long-term debt to a current liability) the amount of its long-term debt that must be paid next year.

28. Sales Taxes Payable
Company selling products subject to sales taxes is responsible for collecting the sales tax directly from customers and periodically sending the sales taxes collected to the state and local governments.
Sales tax collection DO NOT increase revenue recognized.
Steps for when a sale is made and sales tax is collected:
Record cash receipt or accounts receivable from sale (debit).
Record revenue earned (credit)
Record sales tax collected into the ‘Sales Tax Payable Account’ (credit).
When sales tax payment is made to the to state, county, etc.:
Debit sales tax payable and credit cash.
Each company selling products subject to sales taxes is responsible for collecting the sales tax directly from customers and periodically sending the sales taxes collected to the state and local governments. The selling company records sales revenue in one account and sales taxes payable in another. When the company collects the sales taxes, it increases cash (a debit) and increases sales taxes payable (a credit).
Some companies don’t separately record sales and sales taxes with each sale. Instead, they choose to separate the two amounts later. Suppose you buy lunch in the airport for $21.80 that includes a 9% sales tax. How much did the restaurant charge you for the lunch, and how much does it owe the state for sales taxes? If we divide the total cash paid by 1.09 (1 + 9% sales tax rate), we get $20 ( = $21.80/1.09) as the sales price, leaving $1.80 as sales taxes payable. If the entire amount collected is recorded initially as sales, at some point the company will separate the sales tax portion from sales and record that amount as sales tax payable.
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29. Sales Taxes Payable
Suppose you buy lunch in the airport for $15 plus 9% sales tax. The airport restaurant records the transaction this way:
Florida Sales Tax Form DR-15
Each company selling products subject to sales taxes is responsible for collecting the sales tax directly from customers and periodically sending the sales taxes collected to the state and local governments. The selling company records sales revenue in one account and sales taxes payable in another. When the company collects the sales taxes, it increases cash (a debit) and increases sales taxes payable (a credit).
Some companies don’t separately record sales and sales taxes with each sale. Instead, they choose to separate the two amounts later. Suppose you buy lunch in the airport for $21.80 that includes a 9% sales tax. How much did the restaurant charge you for the lunch, and how much does it owe the state for sales taxes? If we divide the total cash paid by 1.09 (1 + 9% sales tax rate), we get $20 ( = $21.80/1.09) as the sales price, leaving $1.80 as sales taxes payable. If the entire amount collected is recorded initially as sales, at some point the company will separate the sales tax portion from sales and record that amount as sales tax payable.
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30. Deferred Tax
Results from differences between GAAP net income and IRS taxable Income based on different accounting rules.
Definition – Recording GAAP net income now, but deferring payment of some of its income tax expense to future years.
For example – different depreciation methods can be used for GAAP and IRS
Straight Line for financial statements
Double Declining Balance for tax return
Steps:
Calculate both amounts of taxes due based on GAAP and IRS. One of the following two situations will apply:
If GAAP tax amount is greater than IRS amount, a deferred tax liability is created for the difference.
Debit - Income Tax Expense for full amount of GAAP income tax
Credit - Income Tax Payable for the amount due the IRS
Credit – Deferred tax liability for the difference (amount due at a future date)
Net income in the income statement is not the same amount as taxable income reported to the Internal Revenue Service (IRS). Net income is based on financial accounting rules, while taxable income in the corporate tax return is based on tax accounting rules. There are many differences between financial accounting rules and tax accounting rules. For instance, most companies use straight-line depreciation in financial accounting, but a different depreciation method (called MACRS) for tax accounting.
Differences between financial accounting and tax accounting can result in a company recording financial income now, but deferring payment of some of its income tax expense to future years. In such a case, it will report a deferred tax liability. (Or the company may record an expense now, but deduct it for taxes in future years, in which case it will report a deferred tax asset.) As you might guess, deferred taxes can get pretty complex. For now, just remember that there are differences between net income reported on the income statement and taxable income reported on the tax return, and these differences can result in deferred tax liabilities, both current and long-term.
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31. Deferred Tax (Cont.) Steps:
Calculate both amounts of taxes due based on GAAP and IRS.
2.) If GAAP tax amount is less than IRS amount, a deferred tax asset is created for the difference.
Debit - Income Tax Expense for full amount of GAAP income tax
Debit – Deferred tax asset for the difference
Credit - Income Tax Payable for the amount due the IRS
Net income in the income statement is not the same amount as taxable income reported to the Internal Revenue Service (IRS). Net income is based on financial accounting rules, while taxable income in the corporate tax return is based on tax accounting rules. There are many differences between financial accounting rules and tax accounting rules. For instance, most companies use straight-line depreciation in financial accounting, but a different depreciation method (called MACRS) for tax accounting.
Differences between financial accounting and tax accounting can result in a company recording financial income now, but deferring payment of some of its income tax expense to future years. In such a case, it will report a deferred tax liability. (Or the company may record an expense now, but deduct it for taxes in future years, in which case it will report a deferred tax asset.) As you might guess, deferred taxes can get pretty complex. For now, just remember that there are differences between net income reported on the income statement and taxable income reported on the tax return, and these differences can result in deferred tax liabilities, both current and long-term.
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32. Informational purposes only – Target - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year the temporary differences are expected to be recovered or settled. Tax rate changes affecting deferred tax assets and liabilities are recognized in income at the enactment date.

33. Check-up…
If I have a balance of $10,000 in the deferred revenue account and I provide the services to earn 50% of this balance, what journal entry do I record?
Debit cash for $5,000 and credit deferred revenue for $5,000
Debit cash for $10,000 and credit deferred revenue for $10,000
Debit revenue for $5,000 and credit deferred revenue for $5,000
Debit deferred revenue for $5,000 and credit revenue for $5,000
I take out a $100,000 loan (and I receive the cash) payable in equal installments (10% of principal each year) over the next 10 years. How do I record the initial transaction?
Debit Cash for ____________, Credit CPLTD for _______________, and Credit LTD for _____________.
I make a $100 sale of merchandise and also collect an additional 10% in sales tax. How much revenue do I recognize for the sale?
$100
$110
$90
None

34. Estimates: Contingencies
Part B
Estimates: Contingencies
Part B: Contingencies
In Part B of this chapter, we focus on contingencies.
Uncertain situations in companies that are involved in litigation disputes, in which the final outcome is uncertain broadly call these situations as contingencies .
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35. LO5 Apply the appropriate accounting treatment for contingencies
Contingent – definition: Subject to chance
Contingent liability:
An existing, uncertain situation that might result in a loss.
Examples: Lawsuits, product warranties, or environmental problems.
A contingent liability may not be a liability at all. Whether it is, depends on whether an uncertain event that might result in a loss occurs or not. Examples include lawsuits, product warranties, environmental problems, and premium offers.
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36. LO5 Apply the appropriate accounting treatment for contingencies
Three possible actions for a contingent liability
Record the loss (Journal entry and post to general ledger account) and denote in the Financial Statement Notes.
Impacts the income statement and balance sheet of the company.
Report in a Financial Statement Note ONLY
Does NOT impact the income statement and balance sheet of the company – only the notes to the financial statements.
Do not report or record
For any contingent liabilities Based on the ensuing criteria, the organization will select one of these three courses of action.
A contingent liability may not be a liability at all. Whether it is, depends on whether an uncertain event that might result in a loss occurs or not. Examples include lawsuits, product warranties, environmental problems, and premium offers.
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37. Contingent Liabilities
The answers to step 1 & 2 below will dictate which action to take for contingent liabilities:
Step #1 – Likelihood of payment - Estimate:
Probable—likely to occur
Reasonably possible—more than remote but less than probable; or
Remote—the chance is slight
Step #2 – Estimate of the payment amount:
Known or reasonably estimable; or
Not reasonably estimable.
Whether we report a contingent liability (option 1) depends on two criteria:
(1) The likelihood of payment can be:
a. Probable —likely to occur;
b. Reasonably possible —more than remote but less than probable; or
c. Remote —the chance is slight.
(2) The ability to estimate the payment amount is either:
a. Known or reasonably estimable; or
b. Not reasonably estimable.
We record a liability if the loss is probable and the amount is at least reasonably estimable. The journal entry to record a contingent liability requires a debit to a loss (or expense) account and a credit to a liability.
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38. Contingent Liabilities – 1 of 2 charts
Likelihood of Payment
Step 1
Probable
Reasonably Possible
Remote
Estimate Amount
NO ACTION
Step 2
REPORT
Known or reasonable estimate
Not reasonably estimable
RECORD
REPORT
Step 1

39. Accounting Treatment of Contingent Liabilities – 2 of 2 charts
Circumstance Action Req.
Payment is probable and
Can be reasonably estimated Record
Cannot be reasonably estimated Report
Payment is reasonably possible Report
Payment is remote No Action

40. Contingent Liabilities – Target (Notes)
Legal contingencies    We are exposed to claims and litigation arising in the ordinary course of business and use various methods to resolve these matters in a manner that we believe serves the best interest of our shareholders and other constituents. Historically, adjustments to our estimates have not been material. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities. We do not believe that any of the currently identified claims or litigation matters will have a material adverse impact on our results of operations, cash flows or financial condition. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there may be a material adverse impact on the results of operations, cash flows or financial condition for the period in which the ruling occurs, or future periods.

41. Contingent Liabilities
We RECORD a liability if the loss is probable and the amount is at least reasonably estimable.
How to record a contingent liability - debit to a loss (or expense) account and a credit to a liability.
JOURNAL
Date
Accounts and explanation
Debit
Credit
Loss
50,000
Contingent Liability
Probable Loss on lawsuit
Some long-term debt must be paid in installments. The current portion of long-term debt (also called current maturity or current installment) is the amount of the principal that is payable within one year from the balance sheet date. At the end of each year, a company reclassifies (from long-term debt to a current liability) the amount of its long-term debt that must be paid next year.

43. Warranties
Based on the matching principle, the company needs to record warranty expense in the same accounting period as the sale.
A warranty represents an expense and a liability at the time of the sale, because it meets the criteria for recording a contingent liability.
Step 1 – likelihood: probable, step 2 – payment: amount can be estimated.
When recording warranty expense and warranty payable, the amount is usually estimated as a % of sales.
Steps:
At the time of sale
Calculate warranty estimate
Debit warranty expense and credit warranty payable (creates an account balance used later to actually offset the warranty work when it occurs months or years later).
When warranty work is completed
Debit warranty payable and typically credit cash or inventory.
Warranties are perhaps the most common example of contingent liabilities. When you buy a new Dell notebook, it comes with a warranty covering the hardware from defect for either a 90-day, one-year, or two-year period depending on the product. Why does Dell offer a warranty? To increase sales, of course.
Based on the matching principle, the company needs to record the warranty expense in the same accounting period in which it sells you the product. The warranty for the computer represents an expense and a liability for Dell at the time of the sale because it meets the criteria for recording a contingent liability: Because warranties almost always entail an eventual expenditure, it’s probable that a cost will be incurred. And even though Dell doesn’t know exactly what that cost will be, it can, based on experience, reasonably estimate the amount.
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44. Warranty Example
Warranties are estimated at 1% of Sales =January Sales = $10,000,000.
Warranty claims can be handled in a number of ways, here are two common methods:
Issuing new product (inventory)
Repair old product through certified repair centers (cash paid to repair center)
Exercise:
1. Calculate Warranty Estimate and record expense
2. Calculate and record actual warranty work ($100,000) throughout the year based on the following percentages:
25% are new product issued (inventory)
75% are repairs paid to certified repair centers (Cash)

45. Estimated Warranty Payable
Warranty expense is estimated in the year product is sold
Matching principle
JOURNAL
Date
Accounts and explanation
Debit
Credit
Warranty expense
100,000
Warranty payable
Estimate warranty liability for the period
Inventory
25,000
Cash
75,000
Many companies guarantee their products under warranty agreements. The warranty period may extend for 90 days to a year for consumer products.
Whatever the warranty’s life, the matching principle demands that the company record the warranty expense in the same period that the business records sales revenue. After all, the warranty motivates customers to buy products, so the company must record warranty expense with the revenue. At the time of the sale, however, the company doesn’t know which products are defective. The exact amount of warranty expense cannot be known with certainty, so the business must estimate warranty expense and the related liability.
To record estimated warranty liability, an entry is made debiting Warranty expense and crediting Estimated warranty payable. The amount is estimated based on past experience or industry standards. When actual warranty work is performed, the liability is debited and Inventory is credited for any parts used.

46. FORD Motors – Warranty Payable

47. In-class Exercise Beginning Balance in Est. Warranty Payable = $3,000
Sales for 2016 = $161,000
(1) Estimated Warranty Expense = 7% of Sales
(2) During 2016 Paid $8,000 in warranty claims (cash)
Record journal entry for recognizing (1) warrant expense and (2) warranty payments.

48. In the News…
Quality and recall problems continued to weigh on the bottom line. Auto Maker had to shell out an extra $314 million last quarter on top of continuing costs related to warranty and recall repairs -- an expense that lowered its pretax margins in North America by about two percentage points. (WSJ)

49. Contingent Gains
We do not record contingent gains until the gain is CERTAIN.
Though firms do not record contingent gains in the accounts, they sometimes disclose them in notes to the financial statements
A contingent gain is an existing uncertain situation that might result in a gain, which often is the flip side of contingent liabilities. In a pending lawsuit, one side— the defendant—faces a contingent liability, while the other side—the plaintiff—has a contingent gain.
We record contingent liabilities when the loss is probable and the amount is reasonably estimable. However, we do not record contingent gains until the gain is certain. The nonparallel treatment of contingent gains follows the same conservative reasoning that motivates reporting some assets (like inventory) at lower-of-cost-or-market. Specifically, it’s desirable to anticipate losses, but recognizing gains should await their final settlement. Though firms do not record contingent gains in the accounts, they sometimes disclose them in notes to the financial statements.
Unlike contingent liabilities, contingent gains are not recorded until the gain is certain and no longer a contingency.
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50. Check-up’s Auto Air Bag issues – warranty or contingent loss?
Our company stocks and sells bicycle parts in the bicycle part vending machine in UCF’s student Union building. There is a $10 warranty claim 10 months after a part was purchased by a UCF student. We send out a new part to the student - how do we record this transaction?
Debit warranty expense
Debit warranty payable
Credit cash
Debit warranty expanse

53. Notice of Class Action Settlement Regarding Groupon Vouchers
To file a claim go to:
An Important Notice About a Class Action Settlement Involving Groupon Vouchers
IF YOU PURCHASED A GROUPON VOUCHER BETWEEN NOVEMBER 1, 2008 AND DECEMBER 1, 2011, YOU MAY BE ELIGIBLE FOR BENEFITS FROM THE SETTLEMENT
A proposed settlement has been reached in class action litigation concerning Groupon vouchers, In re Groupon, Inc. Marketing and Sales Practices Litigation, No. 3:11-md DMS-RBB, and the related state court action, Dremak v. Groupon, Inc., No. 11-CH-0876 (Ill. Cir. Ct., Kane County). You may be a member of the class whose rights may be affected by this lawsuit. The purpose of this notice is to inform you of the lawsuit and the settlement so that you may decide what steps to take in relation to it.

58. Questions to be Answered
Chapter 8 – How are currently liabilities used in an organization to finance the operating cycle – how do they impact the financial statements?

59. Participation Questions – Chapter 8
Which publicly traded company was showing a negative working capital in their 2012 financial results?
Walmart; Eastman Kodak; Apple Computers; or Ford Motors
Current liabilities are usually due in more than one year.
True or False
What account is “air traffic liability” shown on Southwest Airlines balance sheet similar to?
Sales tax payable; Deferred taxes; Unearned revenue; or Accounts Payable
Which public company did we review the contingent liabilities for in class?
Southwest Airlines; Target; Apple Computers; or Eastman Kodak
Which publicly traded company was included as an example for their warranty payable estimate?
Southwest Airlines; Eastman Kodak; Apple Computers; or Ford Motors

60. End of chapter 08
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