ACCT 1510 Chapter Notes - Chapter 8: Contingent Liability, Accrued Interest, Accounts Payable
20 Jun 2018
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Chapter 8 – Current Liabilities
Business obligations: current liabilities, contingent liabilities, long-term debt
Current liabilities – obligations that are:
- Considered to be retired with existing current assets or creation of new current assets
- Due within one year or operating cycle (whichever is longer)
! All other liabilities are long-term
Contingent liabilities – either current or long-term, but are “iffy”
- May or may not turn into actual obligations
- For them to become obligations ! timing and amount of required payment is uncertain
Recognition, measurement, and reporting of liabilities
Liabilities – probable future sacrifices of economic benefits, a “debt”
- Characteristics:
- Payment of cash – frequently require payment of cash ! but sometimes a transfer of
assets other than cash, or future performance of services
- Certainty (contingency) – exact amount and timing of future payments are usually
known ! but sometimes not (circumstances change, or event is uncertain – ex.
lawsuit)
- Legal enforceability – usually liabilities are enforceable claims ! but some might be
merely probable claims
- Sometimes liabilities recorded, even if payment can’t be enforced
- Payment recipient – usually identify the entity to be paid ! but also can be to
unknown recipient
- “extinguished liabilities” – liabilities have been paid off
Recognition:
- Liabilities usually recognized when goods or services are received or money is borrowed
- When existence of liability depends on occurrence of future event (ie. Contingency liability –
ex. lawsuit) ! recognition depends on likelihood of occurrence of the future event ! if
reasonable estimate of payment amount can be made
- Ex. recognition of wages owing to employees as current liabilities
Measurement:
𝑻𝒐𝒕𝒂𝒍!𝒑𝒂𝒚𝒎𝒆𝒏𝒕 =𝒑𝒓𝒊𝒏𝒄𝒊𝒑𝒂𝒍 +(𝒑𝒓𝒊𝒏𝒄𝒊𝒑𝒂𝒍!×!𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕!𝒓𝒂𝒕𝒆!×!𝒑𝒆𝒓𝒊𝒐𝒅)
- “Zero interest” rate ! company just includes “interest” (their profit) in sales price
- Current liabilities for NA companies – listed in order of liquidity (their due date) on
statement of financial position (international companies – sometimes reverse order)
Current liabilities = obligations that require a firm to pay cash or another current asset, create a
new current liability, or provide goods or services – within the longer of one year and one
operating cycle (usually is one year)
- Operating line of credit – prepaid maximum amount of funds that the financial institution
will make available for operating purposes
- Company does not need to pay interest on the whole amount, only how much they
borrow at that time
- Accounts payable – when a business purchases goods or serviced on credit (opposite of
accounts receivable ! business you owe has a receivable)
- Usually paid in 30-60 days, without interest
- Don’t need a formal agreement or contract
- Recognized when goods or services change hands
- Accrued Liabilities – are recognized by adjusting entries
- Represent the completed portions of activities that are in process at the end of the
period
- Expense in incurred, but not paid
- Ex. accrued salaries payable, accrued loan interest payable
- Income tax payable – paid on taxable income
- Tax rates dependent on: type of income earned by corporation, type of corporation it
is
- Current portion – actual current tax payable for fiscal year
- Deferred portion – the difference between the IFRS accounting rules and tax rules
used to calculate taxable income ! deferred income tax liability (payment to a future
year)
- Prepare reconciliation of profit on financial statement to profit for tax purposes
- Short-term notes payable – not very common (usually long-term) ! Accrued interest
- Note payable - when a business borrows money or purchases goods/services from a
company that requires a formal agreement or contract (ex. apartment lease, car
purchase)
- Formal agreement – states timing of repayment and amount (principal and/or
interest)
- Mature in 3-12 months (if longer ! long-term)
- Ex. also when supplier needs to be paid immediately ! company has no money to
pay back, can’t borrow from bank ! supplier “loans” money to company ! sign an
agreement ! usually with interest
- Time value of money - interest rate charged for use of money over time (stated on
interest-baring notes)
- Current Portion of a Long-term debt – amount of a long-term debt principal that is due
within 12 months
- At end of each accounting period ! long-term debt that is due during the next year
! reclassified as current liability
- No journal entry required ! usually no change in accounts of amounts involved
Document Summary
Business obligations: current liabilities, contingent liabilities, long-term debt. Considered to be retired with existing current assets or creation of new current assets. Due within one year or operating cycle (whichever is longer) Contingent liabilities either current or long-term, but are iffy . May or may not turn into actual obligations. For them to become obligations timing and amount of required payment is uncertain. Liabilities probable future sacrifices of economic benefits, a debt . Payment of cash frequently require payment of cash but sometimes a transfer of assets other than cash, or future performance of services. Certainty (contingency) exact amount and timing of future payments are usually known but sometimes not (circumstances change, or event is uncertain ex. lawsuit) Legal enforceability usually liabilities are enforceable claims but some might be merely probable claims. Sometimes liabilities recorded, even if payment can"t be enforced. Payment recipient usually identify the entity to be paid but also can be to unknown recipient.
