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CH 13
CH 13
PREVIEW OF CHAPTER 13
Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
13-2
13 Current Liabilities, Provisions,
and Contingencies
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the nature, type, and 4. Explain the accounting for different
valuation of current liabilities. types of provisions.
2. Explain the classification issues of 5. Identify the criteria used to account for
short-term debt expected to be and disclose contingent liabilities and
refinanced. assets.
13-3
CURRENT LIABILITIES
1. Present obligation.
3. Results in an outflow of
resources (cash, goods,
services).
13-4 LO 1
CURRENT LIABILITIES
13-5 LO 1
CURRENT LIABILITIES
13-6 LO 1
CURRENT LIABILITIES
13-7 LO 1
CURRENT LIABILITIES
Notes Payable
Written promises to pay a certain sum of money on a
specified future date.
Arise from purchases, financing, or other transactions.
13-8 LO 1
CURRENT LIABILITIES
Cash 100,000
Notes Payable 100,000
13-9 LO 1
Interest-Bearing Note Issued
13-10 LO 1
Interest-Bearing Note Issued
13-11 LO 1
CURRENT LIABILITIES
Cash 100,000
Notes Payable 100,000
13-12 LO 1
Zero-Interest-Bearing Note Issued
13-13 LO 1
CURRENT LIABILITIES
13-14 LO 1
CURRENT LIABILITIES
13-15 LO 1
CURRENT LIABILITIES
13-16 LO 1
CURRENT LIABILITIES
13-17 LO 1
CURRENT LIABILITIES
13-18 LO 1
13 Current Liabilities, Provisions,
and Contingencies
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the nature, type, and valuation 4. Explain the accounting for different
of current liabilities. types of provisions.
2. Explain the classification issues of 5. Identify the criteria used to account for
short-term debt expected to be and disclose contingent liabilities and
assets.
refinanced.
6. Indicate how to present and analyze
3. Identify types of employee-related
liability-related information.
liabilities.
13-19
CURRENT LIABILITIES
13-20 LO 2
CURRENT LIABILITIES
13-21 LO 2
CURRENT LIABILITIES
13-22 LO 2
CURRENT LIABILITIES
Current Liability
of $50,000 Since the agreement was not in place as of the reporting
date (December 31, 2015), the obligation should be
Dec. 31, 2015 reported as a current liability.
13-23 LO 2
CURRENT LIABILITIES
Dec. 18, 2014 Dec. 31, 2014 Feb. 15, 2015 Mar. 31, 2015
13-24 LO 2
CURRENT LIABILITIES
13-25 LO 2
CURRENT LIABILITIES
Dividends Payable
Amount owed by a corporation to its stockholders as a result of
board of directors authorization.
Reported in equity.
13-26 LO 2
CURRENT LIABILITIES
13-27 LO 2
CURRENT LIABILITIES
Unearned Revenues
Payment received before providing goods or performing
services.
ILLUSTRATION 13-2
Unearned and Earned
Revenue Accounts
13-28 LO 2
CURRENT LIABILITIES
13-29 LO 2
CURRENT LIABILITIES
a sales tax or
13-30 LO 2
Sales Taxes Payable
13-31 LO 2
Value-Added Taxes Payable
Cash 1,100
Sales Revenue 1,000
Value-Added Taxes Payable 100
13-32 LO 2
Value-Added Taxes Payable
Cash 2,200
Sales Revenue 2,000
Value-Added Taxes Payable 200
Sunshine Baking then remits 100 to the government, not 200. The
reason: Sunshine Baking has already paid 100 to Hill Farms Wheat.
13-33 LO 2
Value-Added Taxes Payable
Cash 2,640
Sales Revenue 2,400
Value-Added Taxes Payable 240
13-34 LO 2
CURRENT LIABILITIES
13-35 LO 2
13 Current Liabilities, Provisions,
and Contingencies
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the nature, type, and valuation 4. Explain the accounting for different
of current liabilities. types of provisions.
2. Explain the classification issues of 5. Identify the criteria used to account for
short-term debt expected to be and disclose contingent liabilities and
refinanced. assets.
13-36
CURRENT LIABILITIES
Employee-Related Liabilities
Amounts owed to employees for salaries or wages are
reported as a current liability.
Payroll deductions.
Compensated absences.
Bonuses.
13-37 LO 3
Employee-Related Liabilities
Payroll Deductions
Taxes:
Social Security Taxes
ILLUSTRATION 13-4
Summary of Payroll Liabilities
13-38 LO 3
Employee-Related Liabilities
13-39 LO 3
Employee-Related Liabilities
The employer must remit to the government its share of Social Security tax
along with the amount of Social Security tax deducted from each employees
gross compensation.
13-40 LO 3
Employee-Related Liabilities
Compensated Absences
Paid absences for vacation, illness and maternity, paternity,
and jury leaves.
13-41 LO 3
Employee-Related Liabilities
13-43 LO 3
13 Current Liabilities, Provisions,
and Contingencies
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the nature, type, and valuation 4. Explain the accounting for different
of current liabilities. types of provisions.
2. Explain the classification issues of 5. Identify the criteria used to account for
short-term debt expected to be and disclose contingent liabilities and
refinanced. assets.
3. Identify types of employee-related 6. Indicate how to present and analyze
liabilities. liability-related information.
13-44
PROVISIONS
13-45 LO 4
Recognition of a Provision
13-46 LO 4
Recognition of a Provision
Recognition Examples
A reliable estimate of the amount of the obligation can be determined.
ILLUSTRATION 13-5
Recognition of a ProvisionWarranty
13-47 LO 4
Recognition Examples
13-48 LO 4
Recognition Examples
ILLUSTRATION 13-6
Recognition of a ProvisionRefunds
13-49 LO 4
Recognition Examples
ILLUSTRATION 13-7
Recognition of a ProvisionLawsuit
13-50 LO 4
Measurement of Provisions
IFRS:
Amount recognized should be the best estimate of the
expenditure required to settle the present obligation.
13-51 LO 4
Measurement of Provisions
Measurement Examples
Management must use judgment, based on past or similar
transactions, discussions with experts, and any other pertinent
information.
13-52 LO 4
Measurement of Provisions
Measurement Examples
Management must use judgment, based on past or similar
transactions, discussions with experts, and any other pertinent
information.
13-53 LO 4
Measurement of Provisions
Measurement Examples
13-54 LO 4
Common Types of Provisions
Common Types:
1. Lawsuits 4. Environmental
13-55 LO 4
Common Types of Provisions
Litigation Provisions
Companies must consider the following in determining whether
to record a liability with respect to pending or threatened
litigation and actual or possible claims and assessments.
13-56 LO 4
Litigation Provisions
13-57 LO 4
Litigation Provisions
Warranty Provisions
Promise made by a seller to a buyer to make good on a
deficiency of quantity, quality, or performance in a product.
13-59 LO 4
Warranty Provisions
Assurance-Type Warranty
A quality guarantee that the good or service is free from
defects at the point of sale.
13-60 LO 4
Assurance-Type Warranty
Question: What are the journal entries for the sale and the related
warranty costs for 2015 and 2016?
13-61 LO 4
Assurance-Type Warranty
JulyDecember 2015
Cash 500,000
Warranty Expense 20,000
Warranty Liability 20,000
Sales Revenue 500,000
13-62 LO 4
Assurance-Type Warranty
JulyDecember 2015
13-63 LO 4
Assurance-Type Warranty
13-64 LO 4
Warranty Provisions
Service-Type Warranty
An extended warranty on the product at an additional cost.
13-65 LO 4
Service-Type Warranty
13-66 LO 4
Service-Type Warranty
Solution:
January 2, 2014
13-67 LO 4
Service-Type Warranty
Solution:
13-68 LO 4
Service-Type Warranty
Solution:
13-69 LO 4
Common Types of Provisions
Consideration Payable
Companies often make payments (provide consideration) to
their customers as part of a revenue arrangement.
13-70 LO 4
Consideration Payable
Facts: Fluffy Cake Mix Company sells boxes of cake mix for 3 per
box. In addition, Fluffy Cake Mix offers its customers a large
durable mixing bowl in exchange for 1 and 10 box tops. The
mixing bowl costs Fluffy Cake Mix 2, and the company estimates
that customers will redeem 60 percent of the box tops. The
premium offer began in June 2015. During 2015, Fluffy Cake Mix
purchased 20,000 mixing bowls at 2, sold 300,000 boxes of cake
mix for 3 per box, and redeemed 60,000 box tops.
13-71 LO 4
Consideration Payable
Solution:
13-72 LO 4
Consideration Payable
Solution:
2. Before Fluffy Cake Mix makes the entry to record the sale of
the cake mix boxes, it determines its premium expense and
related premium liability. This computation is as follows.
13-73 LO 4
Consideration Payable
Solution:
2. The entry to record the sale of the cake mix boxes and
premium expense and premium liability is as follows.
13-74 LO 4
Consideration Payable
Solution:
13-75 LO 4
Common Types of Provisions
Environmental Provisions
A company must recognize an environmental liability when it has
an existing legal obligation associated with the retirement of a
long-lived asset and when it can reasonably estimate the amount
of the liability.
13-76 LO 4
Environmental Provisions
13-77 LO 4
Environmental Provisions
13-78 LO 4
Environmental Provisions
13-79 LO 4
Environmental Provisions
Illustration: During the life of the asset, Wildcat allocates the asset
retirement cost to expense. Using the straight-line method, Wildcat
makes the following entries to record this expense.
13-80 LO 4
Environmental Provisions
13-81 LO 4
Environmental Provisions
13-82 LO 4
Common Types of Provisions
13-83 LO 4
Onerous Contract Provisions
13-84 LO 4
Onerous Contract Provisions
Assume the same facts as above for the Sumart example and
the expected costs to fulfill the contract are 200,000. However,
Sumart can cancel the lease by paying a penalty of 175,000. In
this case, Sumart should record the liability as follows.
13-85 LO 4
Common Types of Provisions
Restructuring Provisions
Restructurings are defined as a program that is planned and
controlled by management and materially changes either
Companies are required to have a detailed formal plan for the restructuring
and to have raised a valid expectation to those affected by implementation
or announcement of the plan.
13-86 LO 4
Restructuring Provisions
ILLUSTRATION 13-13
Costs Included/Excluded
from Restructuring Provision
13-87 LO 4
Restructuring Provisions
13-88 LO 4
Common Types of Provisions
Self-Insurance
Self-insurance is not insurance, but risk assumption.
There is little theoretical justification for the establishment of a
liability based on a hypothetical charge to insurance expense.
13-89 LO 4
Disclosure Related to Provisions
In addition,
13-90 LO 4
13 Current Liabilities, Provisions,
and Contingencies
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the nature, type, and valuation 4. Explain the accounting for different
of current liabilities. types of provisions.
2. Explain the classification issues of 5. Identify the criteria used to account
short-term debt expected to be for and disclose contingent
refinanced.
liabilities and assets.
3. Identify types of employee-related
6. Indicate how to present and analyze
liabilities.
liability-related information.
13-91
CONTINGENCIES
Contingent Liabilities
Contingent liabilities are not recognized in the financial
statements because they are
13-92 LO 5
Contingent Liabilities
ILLUSTRATION 13-16
Contingent Liability
Guidelines
13-93 LO 5
CONTINGENCIES
Contingent Assets
A contingent asset is a possible asset that arises from past
events and whose existence will be confirmed by the
occurrence or non-occurrence of uncertain future events not
wholly within the control of the company. Typical contingent
assets are:
ILLUSTRATION 13-18
Contingent Asset Guidelines
13-95 LO 5
13 Current Liabilities, Provisions,
and Contingencies
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the nature, type, and valuation 4. Explain the accounting for different
of current liabilities. types of provisions.
2. Explain the classification issues of 5. Identify the criteria used to account for
short-term debt expected to be and disclose contingent liabilities and
refinanced. assets.
3. Identify types of employee-related 6. Indicate how to present and
liabilities. analyze liability-related information.
13-96
PRESENTATION AND ANALYSIS
13-97 LO 6
Presentation of Current Liabilities
ILLUSTRATION 13-19
Current Assets and
IllustrationCurrent
13-15 Liabilities
13-98
Analysis of Current Liabilities
13-99 LO 6
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13-100