Current Liabilities - Topics:. Accounts payable Short term notes payable Current portion of non-current liabilities Non-current liabilities expected to be refinanced Contingent liabilities. Current Liabilities - examples:. Accounts payable Salaries payable – see slides at end
60 day, 8% note payable issued 12/1/02, $ 10,000.
Dr. purchases $10,000
cr. Note payable $ 10,000
On 12/31: determine and recognize interest :
10,000 * .08 * 30/360 = $67
Dr. interest expense $67
cr. Interest payable $67
As non-current liabilities mature, they must be reported as current. Also, if in default!
Useful info IF debt will really be paid in the coming period.E.g., current portion of income taxes payable.
Not useful, if debt will be refinanced therefore:
If company has the intent AND the ability to refinance debt (e.g., issue new bonds to repay old bonds) then “current portion of non-current debt to be refinanced” is shown in separate section between current and non-current liabilities
Conditions that must be met: Company must be able to demonstrate that it has the
Ability to refinance debt:
Potential liabilities – triggered by some specified future event. Rule:
If the trigger event is probable and the amount can be determined -- accrue the liability
If the potential liability is expected to be material, but the amount cannot be estimated, disclose in footnote
Both probable and can be estimated -- accrue when sales made: Based on experience, warranty costs resulting from current sales should total $15,000.
Dr. Warranty expense $15,000.
Cr. Warranties (liability) $15,000.
Essentially treated the same as warranties: Based on past experience, X% of (whatever) will be redeemed at Y cost. The amount can be estimated and must be accrued as a liability (some may be non current, most current).
Journal entry depends. I.e., coupons - advertising expense; miles reduction of revenue recognized
Unless there is no likelihood of winning, NEVER accrue lawsuit liability. Instead:
The company is being sued for $50 million for alleged racial discrimination. We deny the charges and expect to prevail. Even if we should not prevail we do not believe that this case would have a material effect on the company.
Company may chose to accrue liability to force the action into bankruptcy court. This applies to unusual situations, original case: Johns Manville (The granddaddy of asbestos litigation)
Company accrued the potential liability, triggered debt/equity covenants – led to technical bankruptcy, etc.
Dow Corning (Breast implants)
Dr. Strip mine $375,500
cr. Asset retirement obligation $375,500
Dr. depreciation expense $75,100
cr. Accumulated depreciation $75,100
Dr. interest expense expense $37,550
cr. Asset retirement obligation $37,550
Accrue as earned (i.e., 2 hours per week)
Dr. compensation expense xxx
cr. Compensated absences (vacation, sick days) xxx