kieso

weygandt
warfield
INTERMEDIATE team for success

Intermediat
Intermediat
F I F T E E N T H E D I T I O N

ACCOUNTING
e e
Accounting
Accounting

Prepared by
Coby Harmon Prepared by
Coby Harmon
University of California, Santa Barbara
University of California, Santa Barbara
13-1 Westmont College
 PREVIEW OF CHAPTER 13

Intermediate Accounting
15th Edition
Kieso Weygandt Warfield
13-2
 13
Current Liabilities
and Contingencies

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the nature, type, and valuation 4. Identify the criteria used to account for
of current liabilities. and disclose gain and loss contingencies.
2. Explain the classification issues of short- 5. Explain the accounting for different types
term debt expected to be refinanced. of loss contingencies.
3. Identify types of employee-related 6. Indicate how to present and analyze
liabilities. liabilities and contingencies.

13-3
 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.”

13-4 LO 1
 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.

13-5 LO 1 Describe the nature, type, and valuation of current liabilities.

 Current Liabilities

Typical Current Liabilities:

 Accounts payable.
 Notes payable.
 Current maturities of long-
term debt.
 Short-term obligations
expected to be refinanced.
 Dividends payable.
 Customer advances and
deposits.
 Unearned revenues.
 Sales taxes payable.
 Income taxes payable.
 Employee-related
liabilities.

13-6 LO 1 Describe the nature, type, and valuation of current liabilities.

 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.

13-7 LO 1 Describe the nature, type, and valuation of current liabilities.

 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.

13-8 LO 1 Describe the nature, type, and valuation of current liabilities.

 Current Liabilities

Interest-Bearing Note Issued

Illustration: Castle National Bank agrees to lend $100,000 on
March 1, 2014, 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 100,000

13-9 LO 1 Describe the nature, type, and valuation of current liabilities.

 Current Liabilities

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 2,000

13-10 LO 1 Describe the nature, type, and valuation of current liabilities.

 Current Liabilities

At maturity (July 1), Landscape records payment of the note and

accrued interest as follows.

Notes payable 100,000

Interest Payable 2,000
Cash 102,000

13-11 LO 1 Describe the nature, type, and valuation of current liabilities.

 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 100,000
Discount on Notes Payable 2,000
Notes Payable 102,000

13-12 LO 1 Describe the nature, type, and valuation of current liabilities.

 Current Liabilities

Discount on Notes Payable is a contra account to Notes

Payable, and therefore is subtracted from Notes Payable on the
balance sheet. Illustration 13-1
Balance Sheet
Presentation of Discount

Discount on notes payable:

Represents the cost of borrowing.
Debited to interest expense over the life of the note.
Represents interest expense chargeable to future periods.

13-13 LO 1 Describe the nature, type, and valuation of current liabilities.

 Current Liabilities

Illustration: (Accounts and Notes Payable) The following are

selected 2014 transactions of Darby Corporation.

Sept. 1 - Purchased inventory from Orion Company on account

for $50,000. Darby records purchases gross and uses a
periodic inventory system.

Oct. 1 - Issued a $50,000, 12-month, 8% note to Orion in

payment of account.

Oct. 1 - Borrowed $75,000 from the Shore Bank by signing a

12-month, zero-interest-bearing $81,000 note.

Prepare journal entries for the selected transactions.

13-14 LO 1 Describe the nature, type, and valuation of current liabilities.

 Current Liabilities

Sept. 1 - Purchased inventory from Orion Company on

account for $50,000. Darby records purchases gross and uses
a periodic inventory system.

Sept. 1 Purchases 50,000

Accounts Payable 50,000

13-15 LO 1 Describe the nature, type, and valuation of current liabilities.

 Current Liabilities

Oct. 1 - Issued a $50,000, 12-month, 8% note to Orion in payment

of account.

Oct. 1 Accounts Payable 50,000

Notes Payable 50,000

Interest calculation = ($50,000 x 8% x 3/12) = $1,000

Dec. 31 Interest Expense 1,000

Interest Payable 1,000

13-16 LO 1 Describe the nature, type, and valuation of current liabilities.

 Current Liabilities

Oct. 1 - Borrowed $75,000 from the Shore Bank by signing a 12-

month, zero-interest-bearing $81,000 note.

Oct. 1 Cash 75,000

Discount on Notes Payable 6,000
Notes Payable 81,000

Interest calculation = ($6,000 x 3/12) = $1,500

Dec. 31 Interest Expense 1,500

Discount on Notes Payable 1,500

13-17 LO 1 Describe the nature, type, and valuation of current liabilities.

 Practice question
1. On June 10, Spinner Company purchased $10,000 of
merchandise from Lawrence Company, (terms 2/10, n/30). On
June 19, Spinner pays Lawrence in full, less the purchase
discount. Both companies use a periodic inventory system.

Instructions
(a) Prepare separate entries for each transaction on the books of
Spinner Company.

13-18
 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.

13-19 LO 2
 Dividends Payable

 If a balance sheet is prepared between the date of declaration of

cash dividends and the date of actual payment of cash to
stockholders, the balance in the dividends payable account must be
reported in the current liabilities section of the balance sheet.

 For example, Metro Inc. declares a $500,000 cash dividend on

December 15, 2018 and the cash payment against this dividend is
to be made to stockholders on January 15, 2019. Now, if Metro
prepares its financial statements on December 31, 2018, it must
report dividends payable amounting to $500,000 as current liability
in its balance sheet.

13-20
 1. Journal entry at the time of declaration of dividends:
Dividends are often declared by the company prior to actual cash payment to
the stockholders. When dividends are declared, the retained earnings account
is debited and dividends payable account is credited. The journal entry looks
like the following:
Retained earnings [Dr.]
Dividends payable [Cr.]

The above journal entry creates a dividend payable liability equal to the amount
of dividends declared by the board of directors and reduces the balance in
retained earnings account by the same amount.

2. Journal entry at the time of payment of dividends:

When cash for previously declared dividends is paid to stockholders, dividends
payable account is debited and cash account is credited. The journal entry for
the payment of cash dividends looks like the following:
Dividends payable [Dr.]
Cash [Cr.]

13-21
 During the year 2018, the Manchester Inc. had 500,000 shares of $10
par value common stock and 50,000 shares of 8%, $100 par
value preferred stock outstanding. The board of directors of
corporation declared dividends during the year 2018 as follows:
Declared a cash dividend of $0.5 per share on $10 par value common
stock.
Declared a cash dividend on 8%, $100 par value preferred stock.

Required: Assuming the dividend declaration is recorded in retained

earnings, prepare journal entries required at the time of declaration
and payment of above dividends.

13-22
 Current Liabilities

Unearned Revenues
Payment received before delivering goods or rendering
services? Illustration 13-3
Unearned and Earned
Revenue Accounts

13-23
LO 2 Explain the classification issues of short-term
debt expected to be refinanced.
 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 500,000

Unearned Sales Revenue 500,000
(10,000 x $50 = $500,000)

As each game is completed, Allstate makes the following entry.

Dec. 31 Unearned Sales Revenue 100,000

Sales Revenue 100,000
($500,000 ÷ 5 games = $100,000 per game)

13-24 LO 2
 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.

13-25
LO 2 Explain the classification issues of short-term
debt expected to be refinanced.
 Current Liabilities

Illustration: Prepare the entry to record sales taxes assuming

there was a sale of $3,000 when a 4 percent sales tax is in effect.

Cash 3,120
Sales Revenue 3,000
Sales Taxes Payable ($3,000 x 4% = $120) 120

After a month when the payment has been made to the tax
authority, the journal entries are:
Sales Taxes payable 120
Cash 120

13-26 LO 2
 Current Liabilities

Many companies do not segregate the sales tax and the amount of
the sale at the time of sale. Instead, the company credits both
amounts in total in the Sales Revenue account.

Illustration: Assume the Sales Revenue account balance of

$150,000 includes sales taxes of 4 percent. Prepare the entry to
record the amount due the taxing unit.

Tax calculation =($150,000 ÷ 1.04 = $144,230.77 - $150,000 = $5,769.23)

Sales Revenue 5,769.23

Sales Taxes Payable 5,769.23

13-27 LO 2