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ACCT 201
FINANCIAL REPORTING
Chapter 11
Dr. Lale Guler
Office: CAS 102
E-Mail: [email protected]
11-1
Chapter 11 Current Liabilities and Contingencies
Plan for the Hour


11-2
Current liabilities

Notes payable

Unearned revenues

Current maturities of long term debt
Contingent liabilities

Recording

Disclosure
Accounting for Current Liabilities
Current liability is debt with two key features:
1. Company expects to pay the debt from existing
current assets or through the creation of other
current liabilities.
2. Company will pay the debt within one year.
Current liabilities include
notes payable,
accounts payable,
unearned revenues, and
accrued liabilities such as taxes payable, salaries payable, and
interest payable.
11-3
Accounting for Current Liabilities
Question
To be classified as a current liability, a debt must be
expected to be paid:
a. out of existing current assets.
b. by creating other current liabilities.
c. within 2 years.
d. both (a) and (b).
11-4
Accounting for Current Liabilities
Notes Payable
11-5

Written promissory note.

Requires the borrower to pay interest.

Issued for varying periods.
Accounting for Current Liabilities
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2012, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1.
Instructions
a) Prepare the entry on September 1st.
b) Prepare the adjusting entry on Dec. 31st, assuming
monthly adjusting entries have not been made.
c) Prepare the entry at maturity (Jan. 1, 2013).
11-6
Accounting for Current Liabilities
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2012, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1.
a) Prepare the entry on Sept. 1st.
b) Prepare the adjusting entry on Dec. 31st.
11-7
Accounting for Current Liabilities
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2012, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1.
c) Prepare the entry at maturity.
11-8
Accounting for Current Liabilities
Unearned Revenue
Cash received before the company

delivers goods or

provides services.
Illustration 11-2
11-9
Accounting for Current Liabilities
Illustration: Superior University sells 10,000 season football
tickets at $50 each for its five-game home schedule. The
university makes the following entry for the sale of season
tickets:
Aug. 6
As the school completes each of the five home games, it would
record the revenue earned.
Sept. 7
11-10
Accounting for Current Liabilities
Current Maturities of Long-Term Debt
11-11

Portion of long-term debt that comes due in the
current year.

Reported as a current liability.

No adjusting entry required.
Statement Presentation and Analysis
Illustration 11-3
11-12
Financial Statement Presentation and Analysis
Illustration 11-4
Liquidity refers to the
ability to pay maturing
obligations and meet
unexpected needs for
cash.
Current ratio permits us
to compare the liquidity of
different-sized companies
and of a single company
at different times.
11-13
Illustration 11-5
Contingent Liabilities
A contingency is an uncertainty as to whether an
obligation
exists.
Thean
uncertainty
willinbe
Potential
liabilityreally
that may
become
actual liability
resolved only when some future events occurs.
the future.
Three levels
of probability:
An excerpt
from Ford Motor Company’s Financials:
Note 12: Litigation and Claims
Various legal actions, governmental investigations and proceedings and claims
pending or maypossible.
be instituted or asserted in the future against the
areReasonably
company and its subsidiaries, including those arising out of alleged

Remote.
defects
in the company’s products, governmental regulations relating to
safety, emissions and fuel economy, financial services, intellectual
property rights, product warranties and environmental matters. Certain
of the pending legal actions are, or purport to be, class actions. Some of
the foregoing matters involve compensatory, punitive or antitrust or
damage claims in very large amounts or demands for recall campaigns,
environmental remediation programs, sanctions, or other relief which if
granted, would require very large expenditures.

11-14
Probable.
Contingencies
A loss contingency is an existing uncertain
situation involving potential loss depending on
whether some future event occurs.
Two factors affect whether a loss contingency must
be accrued and reported as a liability:
1. the likelihood that the confirming event will occur.
2. whether the loss amount can be reasonably estimated.
11-15
Contingencies –
Likelihood of Occurrence

Probable


Reasonably Possible


The chance the confirming event will
occur is more than remote, but less
than likely.
Remote

11-16
A confirming event is likely to occur.
The chance the confirming event will
occur is slight.
Accounting for Contingencies
Dollar Amount of Potential Loss
Likelihood
Probable
Reasonably possible
Remote
11-17
Known
Reasonably
Possible
Record liability
Disclosure note
only
No disclosure
required
Record liability
Disclosure note
only
No disclosure
required
Not Reasonably
Estimable
Disclosure note
only
Disclosure note
only
No disclosure
required
Contingent Liabilities
Question
A contingent liability should be recorded in the accounts when:
a. it is probable the contingency will happen, but the
amount cannot be reasonably estimated.
b. it is reasonably possible the contingency will happen,
and the amount can be reasonably estimated.
c. it is probable the contingency will happen, and the
amount can be reasonably estimated.
d. it is reasonably possible the contingency will happen,
but the amount cannot be reasonably estimated.
11-18
Contingent Liabilities
Recording a Contingent Liability
Product Warranties
Promise made by a seller to a buyer to make good on
a deficiency of quantity, quality, or performance in a
product.
Estimated cost of honoring product warranty contracts
should be recognized as an expense in the period in
which the sale occurs.
11-19
Contingent Liabilities
Illustration: Denson Manufacturing Company sells 10,000
washers and dryers at an average price of $600 each. The
selling price includes a one-year warranty on parts. Denson
expects that 500 units (5%) will be defective and that warranty
repair costs will average $80 per unit. In 2012, the company
honors warranty contracts on 300 units, at a total cost of
$24,000. At December 31, compute the estimated warranty
liability.
Illustration 11-6
Computation of estimated
product warranty liability
11-20
SO 5
Contingent Liabilities
Illustration: Denson Manufacturing Company sells 10,000
washers and dryers at an average price of $600 each in
December 2011. The selling price includes a one-year warranty
on parts. Denson expects that 500 units (5%) will be defective
and that warranty repair costs will average $80 per unit. In
2012, the company honors warranty contracts on 300 units, at
a total cost of $24,000. At December 31, compute the
estimated warranty liability. Make the required adjusting
entry.
11-21
Contingent Liabilities
Illustration: Prepare the entry to record the repair costs
incurred in 2012 to honor warranty contracts on 2012 sales.
.
11-22