Unit 11 - Current Liabilities and Contingent Liabilities

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Unit 11 - Current Liabilities and Contingent Liabilities

  1. 1. Current Liabilities and Payroll 11
  2. 2. Learning Objective 1 3-1 Describe the nature of the adjusting process. Learning Objective 1 3-1 Describe the nature of the adjusting process. 9- Insert Chapter Objectives Current Liabilities and Payroll The objectives for this Slidecast are: 11-2 1 Define and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. 2 Describe the accounting treatment for contingent liabilities and journalize entries for product warranties.
  3. 3. Liabilities that are to be paid out of current assets and are due within a short time, usually within one year, are called current liabilities . <ul><li>Accounts payable </li></ul><ul><li>Current portion of long-term debt </li></ul><ul><li>Notes payable </li></ul>1
  4. 4. Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale. 1
  5. 5. Current Portion of Long-Term Debt Long-term liabilities are often paid back in periodic payments, called installments . Installments that are due within the coming year must be classified as a current liability. 1
  6. 6. The total amount of the installments due after the coming year is classified as a long-term liability. 1
  7. 7. Short-Term Notes Payable <ul><li>Discussed in Chapter 9 </li></ul><ul><li>Often issue to replace an accounts payable </li></ul><ul><li>Notes payable have a longer term than an accounts payable (> 60 days) </li></ul>1
  8. 8. A firm issues a 90-day, 12% note for $1,000, dated August 1, 2008 to Murray Co. for a $1,000 overdue account. Short-Term Notes Payable 1
  9. 9. On October 30, when the note matures, the firm pays the $1,000 principal plus $30 interest. 1 Interest Expense appears on the income statement as an “Other Expense.” Calculation: $1,000 x 12% x (90/360) = $30
  10. 10. On September 19, Iceburg Company issues a $4,000, 90-day, 15% note to First National Bank. 1
  11. 11. On the due date of the note (December 18), Iceburg Company owes $4,000 plus interest of $150. 1 Calculation: $4,000 x 15% x (90/360) = $150
  12. 12. Discounting a Note A discounted note has the following characteristics: <ul><li>The creditor (lender) requires an interest rate, called the discount rate . </li></ul><ul><li>Interest, called the discount , is computed on the face amount of the note. </li></ul><ul><li>The debtor (borrower) receives the face amount of the note less the discount, called the proceeds . </li></ul><ul><li>The debtor pays the face amount of the note on the due date. </li></ul>1
  13. 13. Describe the accounting treatment for contingent liabilities and journalize entries for product warranties. * Note: This is objective #5 in your text 2 11-79
  14. 14. Some liabilities may arise from past transactions if certain events occur in the future. These potential obligations are called contingent liabilities . 5 Contingent Liabilities
  15. 15. The accounting for contingent liabilities depends on the following two factors: <ul><li>Likelihood of occurring: Probable, reasonably possible, or remote. </li></ul><ul><li>Measurement: Estimable or not estimable. </li></ul>5 If probable AND estimable , the contingent liability must be recorded and disclosed
  16. 16. 5 Accounting Treatment of Contingent Liabilities Exhibit 10
  17. 17. During June, a company sells a product for $60,000 on which there is a 36-month warranty. Past experience indicates that the average cost to repair defects is 5% of the sales price over the warranty period. Recording Contingent Liabilities 5
  18. 18. If a customer required a $200 part replacement on August 16, the entry would be: 5
  19. 19. Example Exercise 10-2 Estimated Warranty Liability 5 Example Exercise 11-7 Cook-Rite Inc. sold $140,000 of kitchen appliances during August under a 6 month warranty. The cost to repair defects under the warranty is estimated at 6% of the sales price. On September 11, a customer required a $200 part replacement, plus $90 labor under the warranty. Provide the journal entries for (a) the estimated warranty expense on August 31 and (b) the September 11 warranty work. 11-85
  20. 20. Example Exercise 11-7 (continued) 5 a. Product Warranty Expense………………… 8,400 Product Warranty Payable…………….. 8,400 To record warranty expense for August, 6% × $140,000. b. Product Warranty Payable…………………. 290 Supplies…………………………………… 200 Wages Payable…………………………… 90 Replaced defective part under warranty. 11-86 For Practice: PE 11-7A, PE11-7B Follow My Example 11-7

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