Chapter 9

Current Liabilities and

Contingent Liabilities

Slide 9.1
 Chapter 9 Learning
Objectives
Define the key information needs of decision makers
regarding current liabilities.
Account for the major types of transactions and
events affecting current liabilities.
Discuss key control activities for current liabilities
including the maintenance of a payroll register.
Compute and interpret the current ratio and working
capital.
Define the key characteristics of, and account for,
contingent liabilities.

Slide 9.2
 Introducing . . . Current
Liabilities

Liabilities: probable future sacrifices of

economic benefits . . . or, more simply,
amounts owed to other parties
Current liabilities: liabilities that must
be paid within one year or an
entity’s operating cycle, whichever is
longer
Two types of current liabilities: 1)
those whose $ amount is contractually defined,
2) those whose $
amount must be estimated

Slide 9.3
 Current Liabilities on the
Corporate Balance Sheet. . .
one example
The Home Depot, Inc. (in thousands)

Accounts payable $1,089,736

Accrued expenses 249,356
Sales taxes payable 129,284
Other accrued expenses 322,503
Income taxes payable 48,728
Current portion of long-term debt 2,519
Total $1,842,126

Slide 9.4
 Current Liabilities: Key
Information Needs of Decision
Makers

Completeness: decision makers

must be confident that a company
has disclosed all of its current
liabilities
Valuation methods: particularly
important for estimated current
liabilities
Unusual circumstances:
such as risk of
default

Slide 9.5
 Accounting for Current
Liabilities

Accounts Payable
Notes Payable
Current Portion of Long-Term
Debt
Accrued Liabilities: Product
Warranty Liability, Vacation Pay
Liability, Accrued Payroll Liabilities

Slide 9.6
 Notes Payable . . . obligations
documented by a legally binding written
commitment known as a promissory note. Key
terms . . .
Maker: The party who has signed a promissory note and
is thus obligated to pay a certain amount to another
party by a certain date.
Maturity date: The date that the maker of a promissory
note must pay its maturity value to the payee.
Maturity value: The sum of the principal and interest
due on a promissory note on its maturity date.
Payee: The party to whom the maker of a promissory
note must eventually pay the maturity value.
Principal: The amount initially owed by the maker of a
promissory note.
Term of a note: The number of days
from the date a promissory note is
signed, not counting the signing date,
to the date the note matures.

Slide 9.7
 Computing Interest on a
Note Payable . . .
Interest = Principal x Rate x Time

Year-end adjusting entry for accrued interest expense:

Facts: 12%, $5,000 note with a 120-day term, signed on
October 2
Interest = Principal x Rate x Time
Interest = $5,000 x 12% x 90/360
Interest = $150

Interest Expense 150

Interest Payable 150

Note: “Interest Payable” is an accrued liability.

Slide 9.8
 Product Warranty Liability

Why “book” this liability?

Because of the matching principle.

Example of an adjusting entry to record:

Warranty Expense 14,200
Product Warranty Liability 14,200

Example of a payment entry:

Product Warranty Liability 6,200
Cash 6,200

Slide 9.9
 Vacation Pay Liability

Why “book” this liability?

Because of the matching principle.

Example of an adjusting entry to record:

Vacation Pay Expense 3,100
Vacation Pay Liability 3,100

Example of a payment entry:

Vacation Pay Liability 2,400
Cash 2,400

Slide 9.10
 Accrued Payroll Liabilities

These items must be booked if a

business’s fiscal year-end does not
coincide with the end of a payroll
period.

Payroll items that must be accrued:

1) Unpaid salaries & wages
2) Employer payroll taxes
3) Fringe benefits

Slide 9.11
 Key Control Activities for
Current Liabilities

Establish payment priorities

Aggressively negotiate payment terms
Keep good payables records, such as a
payroll register
Review payables records to identify
developing problems . . . such as
past-due accounts and discounts
being forfeited

Slide 9.12
 Analyzing Current Liabilities

Current Ratio = Current Assets / Current Liabilities

Working
= Current Assets - Current Liabilities
Capital

Both of these measures

are used to assess a
business’s liquidity. . . that
is, its ability to finance its
day-to-day operations and
pay its liabilities as they
come due.

Slide 9.13
Contingent liability. . .

. . . a potential liability that

may become an actual
liability if one or more
events occur or fail to
occur.

Slide 9.14
Accounting for Contingent Liabilities

Potential Loss
Likelihood of Subject to Accounting
Actual Loss Reasonable Estimation Treatment .
Probable Yes Recorded by debiting

an expense account
& crediting a
liability account

Probable No Disclosed in financial

statement footnotes

Reasonable Yes/No Disclosed in financial

Possibility statement footnotes

Remote Yes/No Ignored

Slide 9.15