Intermediate Accounting II - Chapter 13 (Current Liabilities and Contingencies)

liabilities

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

three essential characteristics of liabilities

1. it is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services

2. it is an unavoidable obligation

3. the transaction or other event creating the obligation has already occurred

current liabilities

obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities (recognizes operating cycles of varying lengths)

operating cycle

the period of time elapsing between the acquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections

Discount on Notes Payable

a contra-account to Notes Payable that represents interest expense chargeable to future periods; used with zero-interest bearing notes (charged as Interest Expense over the life of the note)

cash dividend payable

an amount owed by a corporation to its stockholders as a result of its board of directors' authorization

preferred dividends

not shown as a liability because they aren't an obligation until the board of directors authorizes the payment (companies should disclose the amount of cumulative dividends unpaid in a note or show it parenthetically in the capital stock section)

stock dividends

dividends payable in the form of additional shares of stock; not recognized as a liability because they don't require future outlays of assets or services

employee-related liabilities

payroll deductions, compensated absences, and bonuses

payroll deductions

to the extent that a company has not remitted the amounts deducted to the proper authority at the end of the accounting period, it should recognize them as current liabilities

FICA (OASDI)

Federal Insurance Contribution Act//Old Age, Survivor, and Disability Insurance; taxed on employer and employee at 6.2% based on the employee's gross pay up to a $118,500 annual limit

Medicare

paid by both employer and employee at the rate of 1.45% on the employee's total compensation

Social Security tax

the combination of the FICA and federal Hospital Insurance Tax; 7.65% on an employee's wages to $118,500 and 1.45% in excess of $118,500; companies will report the amount unremitted as a current liability

Federal Unemployment Tax Act

generally paid by employers; 6% on the first $7,000 of compensation paid to each employee during the calendar year;

how should accrued but unpaid unemployment taxes be recorded?

as an operating expense and as a current liability

companies should accrue a liability for the cost of compensation for future absences if:

1. the employer's obligation relating to employee's rights to receive compensation for future absences is attributable to employee's services already rendered

2. the obligation relates to the rights that vest or accumulate

3. payment of the compensation is probable

4. the amount can be reasonable estimated

a company is required to exclude short-term obligations from current liabilities if:

BOTH: 1. it intends to refinance the obligation on a long-term basis

2. it must demonstrate an ability to consummate the refinancing (actually refinancing or entering into a financial agreement)

typical gain contingencies

1. possible receipts of monies from gifts, donations, asset sales, etc.

2. possible refunds from the government in tax disputes

3. pending court cases with a probably favorable outcome

4. tax loss carryforwards

companies should accrue an estimated loss from a loss contingency by a charge to expense and a liability recorded if both:

1. it is probable that a liability has been incurred at the date of the financial statements

2. the amount of the loss can be reasonably estimated

criteria for recording litigation, claims, and assessments as liabilities:

1. time period - the cause for litigation must have occurred on or before the date of the financial statements

2. it is probable that a liability has been incurred at the date of the financial statements

3.. the amount of the loss can be reasonably estimated

assurance-type warranty

warranty that the product meets agreed-upon specifications in the contract at the time the product is sold; included in the sales price of the product and should be expensed in the period the goods are provided/services performed and a warranty liability recorded

service-type warranty

warranty that provides an additional service beyond the assurance-type warranty; not included in the sales price of the product and recorded as a separate performance obligation (Unearned Warranty Revenue used)

ARO (asset retirement obligation)

when a company has an existing legal obligation associated with the retirement of a long-lived asset and can be reasonably estimated; should be recorded at FV

self-insurance

risk assumption--incur expenses or losses as they happen

when should a current liability be classified as long-term?

if a long-term asset is used to pay off a currently maturing obligation (ex. retire a bond payable using a bond sinking fund classified as a long-term asset)

notes to include in the financial statements if a company excludes a short-term obligation from current liabilities because of refinancing:

1. a general description of the financing agreement

2. the terms of any new obligation incurred or to be incurred

3. the terms of any equity security issued or to be issued

current ratio/working capital ratio

current assets/current liabilities

acid-test ratio

(cash + short-term investments + net accounts receivables)/current liabilities