The document discusses current liabilities such as accounts payable, the current portion of long-term debt, and notes payable. It also describes contingent liabilities like product warranties. Companies estimate potential warranty costs based on past experience and record an expense and liability if the warranty obligations are probable and estimable. Journal entries are provided to record estimated warranty expenses and adjustments when warranty work is performed.

1. Current Liabilities and Payroll 11

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. 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 . Accounts payable Current portion of long-term debt Notes payable 1

4. Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale. 1

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. The total amount of the installments due after the coming year is classified as a long-term liability. 1

7. Short-Term Notes Payable Discussed in Chapter 9 Often issue to replace an accounts payable Notes payable have a longer term than an accounts payable (> 60 days) 1

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. 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. On September 19, Iceburg Company issues a $4,000, 90-day, 15% note to First National Bank. 1

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. Discounting a Note A discounted note has the following characteristics: The creditor (lender) requires an interest rate, called the discount rate . Interest, called the discount , is computed on the face amount of the note. The debtor (borrower) receives the face amount of the note less the discount, called the proceeds . The debtor pays the face amount of the note on the due date. 1

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. 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. The accounting for contingent liabilities depends on the following two factors: Likelihood of occurring: Probable, reasonably possible, or remote. Measurement: Estimable or not estimable. 5 If probable AND estimable , the contingent liability must be recorded and disclosed

16. 5 Accounting Treatment of Contingent Liabilities Exhibit 10

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. If a customer required a $200 part replacement on August 16, the entry would be: 5

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. 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