QUIZ 4 - Accounting for Liabilities

 Liability

present obligation from a past event that will result in a future outflow of economic benefits

Current Liability

Settled within 1 year or operating cycle, whichever is longer

Key Characteristics

of Liability

Future economic sacrifice, Short-term in nature

Accounts Payable

• Amounts owed to suppliers for goods/services.

• Usually noninterest-bearing.

Notes Payable (Short-Term)

• Written promises to pay.

• May be interest-bearing or noninterest-bearing.

• Noninterest-bearing: Discounted (includes interest in face amount).

Commercial Paper

• Unsecured notes, sold in $25,000+ denominations.

• Maturities: 30–270 days.

• Issued directly to lenders, usually at discount.

Accrued Liabilities

• Incurred but unpaid expenses (e.g. wages, taxes, interest).

• Require adjusting entries at period-end.

Compensated Absences

• Vacation, sick leave, bonuses.

• Accrue if:

  1. Attributed to services already rendered.

  2. Future use allowed.

  3. Probable and estimable.

Advance Collections

Unearned Revenues like gift cards, deposits, subscriptions.

Liability until goods/services delivered.

Secured Loan

Collateral pledged

Unsecured

No collateral

CONTINGENT LIABILITIES - Probable + Estimable

Accrue (record liability & expense)

CONTINGENT LIABILITIES - Probable but not estimable, Reasonably possible

Disclose in notes

CONTINGENT LIABILITIES - Remote

No need to record or disclose

Warranty

Usually accrued due to high probability & estimability.

Litigation

Usually not accrued unless outcome is likely & measurable.

Unasserted Claims

Assess probability of assertion first before deciding

PROVISIONS - Liability is certain

CONTINGENT LIABILITIES - Liability is uncertain

PROVISIONS - Only amount/timing unknown

CONTINGENT LIABILITIES - Uncertainty about existence itself

PROVISIONS - Accrued

CONTINGENT LIABILITIES - May or may not be accrued

EXTENDED WARRANTIES

Treated as separate performance obligations

Revenue recognized over the contract period, not at point of sale.

Discount

deducting interest in advance on a note

Contingent Liabilities

Possible future liabilities

Premiums

Special deals offered upon return of box tops/labels

Provisions

Liabilities of uncertain timing/amount

Bond

Promise to pay principal and interest

Term Bonds

Bonds that pay back principal at one time

Condition for a Liability to Exist

past transaction/event

Not a Characteristic of Liability

Liquidation

Serial Bond

principal is repaid

Registered Bond

issued in the name of the owner

transfer requires cancellation of bonds

Bearer/Coupon Bond

bond not yet registered

must send in coupons to receive interest payments

Convertible Bond

Converted into ordinary shares

Callable Bond

subject to retirement at stated amount