Current Liabilities and Contingencies

Flashcards covering key concepts related to current liabilities and contingencies as discussed in the lecture notes.

What are the characteristics of liabilities?

Probable, future sacrifices of economic benefits arising from present obligations resulting from past transactions or events.

What defines current liabilities?

Obligations payable within one year or the firm’s operating cycle, satisfied from current assets or creation of other current liabilities.

How are current liabilities recorded?

At present values except for liabilities payable within one year, which are recorded at maturity amounts.

What is accounts payable?

Obligations to suppliers of merchandise or services, payable on open account.

What are trade notes payable?

Credit instruments in the form of a written promissory note that are of longer duration and bear interest.

What is a line of credit?

An agreement to provide short-term financing, with amounts withdrawn by the borrower only when needed.

How is interest on a loan calculated?

Face amount multiplied by the annual rate and time to maturity.

What is the purpose of accrued liabilities?

To represent expenses already incurred but not yet paid.

What are refundable deposits?

Deposits charged to customers for delivered containers, refunded when containers are returned.

What are advances from customers?

Liabilities until the product or service is provided, examples include gift certificates and magazine subscriptions.

What criteria must be met for loss contingencies to be accrued?

The likelihood that the confirming event will occur and whether the amount of loss can be determined.

What is the accounting treatment of product warranties?

Warranty costs are estimated and recorded as expenses in the same accounting period the products are sold.

What are gain contingencies?

Uncertain situations that might result in a gain but are not accrued due to conservatism; disclosed in financial statement notes.

What are the four conditions for the accrual of paid future absences?

1. Obligation attributable to services performed, 2. Paid absence taken in a later year, 3. Payment is probable, 4. Amount can be estimated.

What must be satisfied for short-term obligations to be classified as noncurrent liabilities?

The company must intend to refinance on a long-term basis and demonstrate the ability to refinance.

What is the journal entry when a note is issued for cash?

Debit Cash and Credit Notes Payable.