Intermediate accounting 17e by kieso ch13
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Intermediate Accounting
Seventeenth Edition
Kieso ● Weygandt ● Warfield
Chapter 13
Current Liabilities and
Contingencies
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Learning Objectives
After studying this chapter, you should be able to:
1. Describe the nature, valuation, and reporting of
current liabilities.
2. Explain the classification issues of short-term debt
expected to be refinanced.
3. Explain the accounting for gain and loss contingencies.
4. Indicate how to present and analyze liabilities and
contingencies.
Copyright ©2019 John Wiley & Sons, Inc.
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Preview of Chapter 13
Current Liabilities and Contingencies
Current Liabilities
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Accounts payable
Notes payable
Dividends payable
Customer advances and deposits
Unearned revenues
Taxes payable
Employee-related liabilities
Current maturities of long-term debt
Short-term obligations
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Preview of Chapter 13
Current Liabilities and Contingencies
Short-Term Obligations
• Refinancing illustration
Contingencies
• Gain contingencies
• Loss contingencies
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Preview of Chapter 13
Current Liabilities and Contingencies
Presentation and Analysis
• Presentation of current liabilities
• Presentation of contingencies
• Analysis of current liabilities
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Learning Objective 1
Describe the Nature, Valuation, and
Reporting of Current Liabilities
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Current Liabilities
“What is a Liability?”
The FASB, defined liabilities as:
“Probable Future Sacrifices of Economic Benefits arising
from present obligations of a particular entity to transfer
assets or provide services to other entities in the future
as a result of past transactions or events.”
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Current Liabilities
Recall: Current assets are cash or other assets that companies
reasonably expect to convert into cash, sell, or consume in
operations within a single operating cycle or within a year.
Current liabilities are “obligations whose liquidation is
reasonably expected to require use of existing resources
properly classified as current assets, or the creation of other
current liabilities.”
Operating cycle: Period of time elapsing between the
acquisition of goods and services and the final cash realization
resulting from sales and subsequent collections.
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Current Liabilities
Typical Current Liabilities
1. Accounts payable.
6. Sales taxes payable.
2. Notes payable.
7. Income taxes payable.
3. Dividends payable.
8. Employee-related
liabilities.
4. Customer advances and
deposits.
5. Unearned revenues.
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9. Current maturities of
long-term debt.
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Current Liabilities
Accounts Payable (trade accounts payable)
Balances owed to others for goods, supplies, or services
purchased on open account.
• Time lag between the receipt of services or
acquisition of title to assets and the payment for
them.
• Terms of the sale (e.g., 2/10, n/30 or 1/10, E.O.M.)
usually state period of extended credit, commonly 30
to 60 days.
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Current Liabilities
Notes Payable
Written promises to pay a certain sum of money on a
specified future date.
• Arise from purchases, financing, or other
transactions.
• Classified as short-term or long-term.
• May be interest-bearing or zero-interest-bearing.
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Notes Payable
Interest-Bearing Note Issued
Illustration: Castle National Bank agrees to lend $100,000
on March 1, 2020, 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
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100,000
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Interest-Bearing Note Issued
Recording Interest
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
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2,000
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Interest-Bearing Note Issued
Payment at Maturity
At maturity (July 1), Landscape records payment of the
note and accrued interest as follows.
Notes Payable
Interest Payable
Cash
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100,000
2,000
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102,000
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Current Liabilities
Zero-Interest-Bearing Note Issued
Illustration: 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
Discount on Notes Payable
Notes Payable
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100,000
2,000
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102,000
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Zero-Interest-Bearing Note Issued
Balance Sheet Presentation
Current liabilities
Notes payable
Less: Discount on notes payable
$102,000
2,000
$100,000
Discount on notes payable:
• Contra account to notes payable.
• Represents the cost of borrowing.
• Debited to interest expense over the life of the note.
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Accounts and Notes Payable
Illustration
The following are selected 2020 transactions of Astin
Corporation.
Sept. 1 - Purchased inventory from Encino Company on
account for $50,000. Astin records purchases gross and uses
a periodic inventory system.
Oct. 1 - Issued a $50,000, 12-month, 8% note to Encino in
payment of account.
Oct. 1 - Borrowed $50,000 from the Shore Bank by signing a
12-month, zero-interest-bearing $54,000 note.
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Accounts and Notes Payable
Journal Entries
Prepare the journal entries for the selected transactions.
Sept. 1 Purchases
Accounts Payable
Oct. 1
Oct. 1
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50,000
50,000
Accounts Payable
Notes Payable
50,000
Cash
Discount on Notes Payable
Notes Payable
50,000
4,000
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50,000
54,000
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Accounts and Notes Payable
Adjusting Journal Entries
Prepare the adjusting journal entries for the transactions.
Dec. 31 Interest Expense
Interest Payable
1,000
1,000
($50,000 x 8% x 3/12) = $1,000
Dec. 31 Interest Expense
Discount on Notes Payable
1,000
1,000
($4,000 x 3/12) = $1,000
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Accounts and Notes Payable
Balance Sheet December 31
Compute the total net liability to be reported on the
December 31 balance sheet for:
1. Interest-bearing note.
2. Zero-interest bearing note.
1. Notes payable
Interest payable
$50,000
1,000
$51,000
2. Notes payable
Less discount ($4,000 - $1,000)
$54,000
3,000
$51,000
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Current Liabilities
Dividends Payable
Amount owed by a corporation to its stockholders as a
result of board of directors’ authorization.
• Generally paid within three months.
• Undeclared dividends on cumulative preferred stock
not recognized as a liability.
• Dividends payable in the form of additional shares of
stock are reported in stockholders’ equity.
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Current Liabilities
Customer Advances and Deposits
Returnable cash deposits received from customers and
employees.
• To guarantee performance of a contract or service or
• as guarantees to cover payment of expected future
obligations.
• May be classified as current or long-term liabilities.
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Current Liabilities
Unearned Revenues
Payment received before delivering goods or rendering
services.
Account Title
Type of Business
Airline
Unearned Revenue
Earned Revenue
Unearned Ticket Revenue
Passenger Revenue
Magazine publisher Unearned Subscription Revenue Subscription Revenue
Hotel
Unearned Rent Revenue
Rent Revenue
Auto dealer
Unearned Warranty Revenue
Warranty Revenue
Retailers
Unearned Gift Card Revenue
Sales Revenue
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Current Liabilities
Illustration: Allstate University sells 10,000 season football tickets at
$50 each for its five-game home schedule. Allstate University
records the sales of season tickets as follows.
Aug. 6
Cash
Unearned Sales Revenue
(10,000 × $50 = $500,000)
500,000
500,000
As each game is completed, Allstate makes the following entry.
Sept. 7
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Unearned Sales Revenue
100,000
Sales Revenue
($500,000 ÷ 5 games = $100,000 per game)
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100,000
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Current Liabilities
Sales Taxes Payable
Retailers must collect sales taxes from customers on
transfers of tangible personal property and on certain
services and then remit to the proper governmental
authority.
LO 1
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