CH 10

Financial Accounting
IFRS 4th Edition

Weygandt ● Kimmel ● Kieso
Chapter 10
Current Liabilities
Chapter Outline
Learning Objectives
LO 1 Explain how to account for current liabilities.
LO 2 Discuss how current liabilities are reported and
analyzed.
Copyright ©2019 John Wiley & Sons, Inc. 2

Learning Objective 1
Explain How to Account for Current
Liabilities

Accounting for Current Liabilities
What is a Current Liability?
A debt that a
company expects to pay within one year or
the operating cycle, whichever is longer.
Current liabilities include notes payable, accounts
payable, unearned revenues, and accrued liabilities
such as taxes payable, salaries and wages payable,
and interest payable.
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What Is a Current Liability? (1 of 2)
Review Question
To be classified as a current liability, a debt must be
expected to be paid within:
a. 1 year.
b. the operating cycle.
c. 2 years.
d. (a) or (b), whichever is longer.

What Is a Current Liability? (2 of 2)
Review Question
To be classified as a current liability, a debt must be
expected to be paid within:
a. 1 year.
b. the operating cycle.
c. 2 years.
d. (a) or (b), whichever is longer.

Notes Payable (1 of 4) Slide Edited
• A written formal (legally executable) document

witnessing a loan transaction
• Usually used in nontraditional lending (say in trading
transaction)
• Usually requires borrower to pay interest
• Frequently issued to meet short-term financing needs
• Issued for varying periods of time
• Usually classified as current liability if due for
payment within one year of statement of financial
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Notes Payable (2 of 4)
Illustration: First Hunan Bank agrees to lend ¥100,000 on
September 1, 2020, by Yang Enterprises signs a ¥100,000,
12%, four-month note maturing on January 1. When a
company issues an interest-bearing note, the amount of
assets it receives upon issuance of the note generally equals
the note’s face value. Yang therefore will receive ¥100,000
cash and will make the following journal entry.
Sept. 1 Cash 100,000

Notes Payable 100,000

Illustration: If Yang prepares financial statements annually, it
makes an adjusting entry at December 31 to recognize
interest expense and interest payable. Compute the interest
for the four months ended December 31, 2020.
¥100,000 x 12% x 4/12 = ¥4,000
Yang makes an adjusting entry as follows.

Dec. 31 Interest Expense 4,000
Interest Payable 4,000

Illustration: At maturity (January 1, 2021), Yang must pay the
face value of the note plus interest. It records payment of the
note and accrued interest as follows.
Jan. 1 Notes Payable 100,000

Cash 104,000

Notes Payable (2 of 4) My Slide
Illustration: First Hunan Bank agrees to lend ¥100,000 on

October 1, 2020, if Yang Enterprises signs a ¥100,000, 12%,
120 days note.
Oct. 1 Cash 100,000
Notes Payable 100,000
1. What is the due date of the Note

2. What adjusting entry should be recorded on 31st
December, year end
3. What entry will be made on the due date?
My Slide
Notes Payable
Illustration: First Hunan Bank agrees to lend ¥100,000 on October 1,
2020, if Yang Enterprises signs a ¥100,000, 12%, 120 days note.
• What is the due date of the Note
• In days calculation, count the first day but do not count the
repayment day
• Oct (1 to 31) = 31 days
• Nov (1 to 30) = 30 days  61 days so far
• Dec (1 to 31) = 31 days  92 days so far
• Jan (1 to 28) = 28 days  120 days
• So the due date is 29th January
• In 120 days calculation, the day of transaction is counted but the
day of repayment is 121st Day.
• So for recalling assume that the transaction takes place early in the
morning

My Slide
Notes Payable
• What adjusting entry should be recorded on 31st December,
year end?
• Oct (1 to 31) = 31 days
• Nov (1 to 30) = 30 days  61 days so far
• Dec (1 to 31) = 31 days  92 days so far
• Jan (1 to 28) = 28 days  120 days
• 100 000 x 92 / 360 (or 365) * 0.12 = 3067
Yang makes an adjusting entry as follows.

Dec. 31 Interest Expense 3,067
My Slide
Notes Payable
What entry will be made on the due date?
To ways to calculate the Interest Expense
Total Interest = 100000 * 120 / 360 * 0.12 = 4000
Less, already recorded 3067 = 933
Or 100000 x 28 / 360 x 0.12 = 933
Jan. 1 Notes Payable 100,000

Interest Expense 933
Cash 104,000
Value-Added Taxes Payable (1 of 2)
• Tax collected every time the goods change ownership,
means on every sale and purchase
• End user bears the burden as the cost is passed on to
the next buyer, as such, a consumption tax
• As every business in supply chain adds some value,
therefore value added tax. Sales tax is also a VAT
• Detailed accounting involved wit respect to recording
sales tax paid on purchases (input tax) and sales tax
collected on sales (output tax).
• Here, we shall only see output tax
Value-Added Taxes Payable (2 of 2)
Illustration: Hill Farms Wheat grows wheat and sells it to
Sunshine Baking for €1,000. Hill Farms Wheat makes the
following entry to record the sale, assuming the VAT is 10%.
Cash 1,100
Sales Revenue 1,000
Value-Added Taxes Payable 100
• What accounting entry will be made when Hill Farms pays

off this tax to the Govt. Treasury?
Sales Taxes Payable (1 of 3)
• Sales taxes are expressed as a stated percentage of
the sales price
• Selling company
 collects tax from customer
 remits collections to taxing authority

Illustration: Cooley Grocery sells loaves of bread totaling
€800 on a given day. Assuming a sales tax rate of 6%, Cooley
make the following entry record the sale.
Cash 848
Sales Revenue 800
Sales Taxes Payable 48

Sometimes companies do not enter sales taxes separately in
the cash register. If Cooley Grocery enters total receipts of
€10,600. Because the amount received from the sale is equal
to the sales price 100% plus 6% of sales, we compute the
sales amount as follows:
€10,600 ÷ 1.06 = €10,000
The journal entry is:
Cash 10,600
Sales Revenue 10,000
Sales Taxes Payable 600
Price Exclusive Sales Tax, Sales Tax, and Price Inclusive Sales Tax
Unearned Revenues (1 of 2)
Revenues received before the company
delivers goods or
provides services.
Account Title
Type of Business Unearned Revenue Revenue
Airline Unearned Ticket Revenue Ticket Revenue
Magazine publisher Unearned Subscription Revenue Subscription Revenue
Hotel Unearned Rent Revenue Rent Revenue

Unearned Revenues (2 of 2)
Illustration: Liverpool F.C. (GBR) sells 10,000 season soccer
(football) tickets at £50 each for its five-game home schedule.
The entry for the sale of season tickets is:
Aug. 6 Cash (10,000 x £50) 500,000
Unearned Ticket Revenue 500,000
As each game is completed, Liverpool records the recognition

of revenue with the following entry.
Sept. 7 Unearned Ticket Revenue 100,000
Ticket Revenue (£500,000 ÷ 5) 100,000

Payroll Related Liabilities
- Salaries and Wages related liabilities; usually accrued every
month and paid subsequently
- Employee’s take home is less than gross salary
- Cost of an employee to employer is more than the gross salary
- That is, if gross salaries are, say USD 10,000 per month,
employees will get (say) USD8500 as net salary, but employer will
record expense for (say) USD11000
- Why:
- Payroll Deductions
- Payroll Taxes

Salaries and Wages (1 of 4)
Companies report as a current liability the amounts owed
to employees for salaries or wages at the end of an
accounting period.
In addition, they often also report as current liabilities the
following items.
1. Payroll deductions.
2. Bonuses.

Payroll Deduction (1 of 4)
Most common types of payroll deductions: taxes,
insurance premiums, employee savings, union dues.
Social Security Taxes
• Social benefits (for retirement, unemployment,
income, disability, and medical benefits) to
individuals and families
• Funds generally come from taxes levied on both the
employer and the employee

Most common types of payroll deductions: taxes,
insurance premiums, employee savings, union dues.
Income Tax Withholding
• Income tax laws generally require employers to
withhold from each employee’s pay the applicable
income tax due on those wages
• Employer computes the amount of income tax to
withhold according to a government-prescribed
formula or withholding tax table

Illustration: Assume Cumberland Company records its payroll
for the week of January 14 as follows:
Jan. 14 Salaries and Wages Expense 10,000
Income Taxes Payable 1,320
Social Security Taxes Payable 800
Union Dues Payable 88
Salaries and Wages Payable 7,792
Record the payment of this payroll on January 14.
Jan. 14 Salaries and Wages Payable 7,792
Cash 7,792
Illustration: As the employer, Cumberland is also required to
pay Social Security taxes and often other taxes as well
(referred to as employer payroll taxes). It records payroll taxes
related to the January 14 payroll as follows.
Jan. 14 Payroll Tax Expense 800

Social Security Taxes Payable 800

Profit-Sharing and Bonus Plans (4 of 4)
Many companies give a bonus to certain or all employees in
addition to their regular salaries or wages.
Illustration: Palmer Group will pay out bonuses of NT$10,700
in January 2021. Palmer makes an entry dated December 31,
2020, to record the bonuses as follows.
Salaries and Wages Expense 10,700
In January 2021, Palmer pays the bonus.
Cash 10,700
Current Maturities of Long-Term Debt
• Portion of long-term debt that comes due in current year
• No adjusting entry required
Illustration: Wendy Construction issues a five-year, interest-
bearing €25,000 note on January 1, 2020. This note specifies that
each January 1, starting January 1, 2021, Wendy should pay
€5,000 of the note. When the company prepares financial
statements on December 31, 2020, what amount should be
reported as a
1. Current liability? €5,000
2. Long-term liability? €20,000

Do It! 1: Current Liabilities (1 of 4)
You and several classmates are studying for the next
accounting examination. They ask you to answer the following
questions.
1. If cash is borrowed on a HK$50,000, 6-month, 12% note on
September 1, how much interest expense would be
incurred by December 31?
HK$50,000 x 12% x 4/12 = HK$2,000

questions (amounts in thousands).
2. How is the sales tax amount determined when the cash
register total includes sales taxes?
First, divide the total cash register receipts by 100% plus the
sales tax percentage to find the sales revenue amount.
Second, subtract the sales revenue amount from the total
cash register receipts to determine the sales taxes.

questions.
3. If HK$15,000 is collected in advance on November 1 for 3
months’ rent, what amount of rent revenue should be
recognized by December 31?
HK$15,000 x 2/3 = HK$10,000

questions.
4. Gross earnings for the month by employees is HK$80,000.
All earnings are subject to an 8% Social Security tax and
income taxes withheld of HK$15,600. What is the amount
of net pay?
HK$80,000 – (8% × HK$80,000) – HK$15,600 = HK$58,000

Discuss How Current Liabilities are
Reported and Analyzed

Reporting and Analyzing Current
Liabilities
Reporting Uncertainty
Provision - Potential liability that may become an actual
liability in the future.
Three levels of probability:
Probable
Reasonably possible
Remote

Recognition of a Provision
Companies accrue an expense and related liability for a
provision only if the following three conditions are met:
1. A company has a present obligation as a result of a
past event;
2. It is probable that an outflow of resources will be
required to settle the obligation; and
3. A reliable estimate can be made of the amount of the
obligation.

Reporting a Provision (1 of 5)
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.

Illustration: Denson Manufacturing 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 2020, the company honors
warranty contracts on 300 units, at a total cost of €24,000.
Denson records those repair costs incurred in 2020 to honor
warranty contracts on 2020 sales as follows.
Warranty Expense 24,000
Repair Parts 24,000

At December 31, to accrue the estimated warranty costs on
the 2020 sales, less the amount already honored in 2020 of
€24,000, Denson computes the warranty liability at December
31 as follows.
Number of units sold 10,000
Estimated rate of defective units x 5%
Total estimated defective units 500
Average warranty repair cost x €80
Estimated warranty liability €40,000
Less: Warranty claims honored 24,000
Warranty liability at December 31, 2020 €16,000

The company makes the following adjusting entry at
December 31 for €16,000 after it adjusts for €24,000 of
warranty claims honored during 2020.
Warranty Expense 16,000

Warranty Liability 16,000
The company reports

warranty expense under selling expenses
warranty liability as a current liability

In the following year, assuming that the company replaces 20
defective units in January 2021, at an average cost of €80 in
parts and labor. The company would record all expenses
incurred in honoring warranty contracts on 2020 sales as
follows.
Warranty Liability 1,600

Repair Parts 1,600

Reporting Current Liabilities
Croix Beverages
Statement of Financial Position
December 31, 2020 (partial, in thousands)
Current liabilities
Notes payable € 4,157
Accounts payable 3,990
Accrued expenses 1,847
Salaries and wages payable 1,730
Unearned revenues 555
Income taxes payable 259
Warranty liability 141
Long-term debt due within one year 3,531
Total current liabilities €16,210

Croix
Analysis of Current Liabilities Beverages
Liquidity refers to the ability to pay maturing obligations and
meet unexpected needs for cash.
Current Assets - Current Liabilities = Working Capital

€20,856 - €16,210 = €4,646
Current ratio permits us to compare liquidity of different-sized

companies and of a single company at different times.
Current Assets ÷ Current Liabilities = Current Ratio

€20,856 ÷ €16,210 = 1.29:1

DO IT! 2: Reporting and Analyzing (1 of 3)
Tron Cellular has the following account balances at December 31, 2020.
Notes payable (NT$80,000 due after 12/31/21) NT$200,000
Unearned service revenue 75,000
Other long-term debt (NT$30,000 due in 2021) 150,000
Other accrued expenses 15,000
In addition, Tron is involved in a lawsuit. Legal counsel feels it is probable
Tron will pay damages of NT$38,000 in 2021.
a. Prepare the current liabilities section of Tron’s December 31, 2020,
statement of financial position.
b. Tron’s current assets are NT$504,000. Compute Tron’s working capital
and current ratio.
a. Prepare the current liabilities section of Tron's December 31, 2020,
statement of financial position.
Current liabilities
Notes payable (NT$200,000 − NT$80,000) NT$120,000
Unearned service revenue 75,000
Lawsuit liability 38,000
Long-term debt due within one year 30,000
Other accrued expenses 15,000
Total current liabilities NT$400,000

b. Tron's current assets are NT$504,000. Compute Tron's working capital
and current ratio.
Working capital = Current assets − Current liabilities =
NT$504,000 − NT$400,000 = NT$104,000
Current ratio = Current assets ÷ Current liabilities =
NT$504,000 ÷ NT$400,000 = 1.26:1

Compare the Accounting for Current
Liabilities Under I F R S and U.S. G A A P

A Look at U.S. GAAP (1 of 4)
Key Points
Similarities
• The basic definition of a liability under G A A P and I F R S is
very similar. In a more technical way, liabilities are defined by
the I A S B as a present obligation of the entity arising from
past events, the settlement of which is expected to result in an
outflow from the entity of resources embodying economic
benefits.

Similarities
• The accounting for current liabilities such as notes payable,
unearned revenue, and payroll taxes payable are similar
between G A A P and I F R S.
• Under both G A A P and I F R S, liabilities are classified as
current if they are expected to be paid within 12 months.

Differences
• Companies using GAAP show assets before liabilities. Also,
they will show current liabilities before non-current liabilities.
• Under GAAP, some contingent liabilities are recorded in the
financial statements, others are disclosed, and in some cases
no disclosure is required. IFRS reserves the use of the term
contingent liability to refer only to possible obligations that
are not recognized in the financial statements but may be
disclosed if certain criteria are met.

Looking to the Future
The FASB and IASB are currently involved in two projects, each of which
has implications for the accounting for liabilities. One project is
investigating approaches to differentiate between debt and equity
instruments. The other project, the elements phase of the conceptual
framework project, will evaluate the definitions of the fundamental
building blocks of accounting. The results of these projects could change
the classification of many debt and equity securities.

Copyright
Copyright © 2019 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in
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copyright owner is unlawful. Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies
for his/her own use only and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the use of these programs or
from the use of the information contained herein.

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Financial Accounting

IFRS 4th Edition

Copyright ©2019 John Wiley & Sons, Inc. 2

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• A written formal (legally executable) document

Sept. 1 Cash 100,000

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Yang makes an adjusting entry as follows.

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Jan. 1 Notes Payable 100,000

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Illustration: First Hunan Bank agrees to lend ¥100,000 on

1. What is the due date of the Note

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Yang makes an adjusting entry as follows.

Jan. 1 Notes Payable 100,000

• What accounting entry will be made when Hill Farms pays

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As each game is completed, Liverpool records the recognition

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Jan. 14 Payroll Tax Expense 800

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HK$15,000 x 2/3 = HK$10,000

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HK$80,000 – (8% × HK$80,000) – HK$15,600 = HK$58,000

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Warranty Expense 16,000

The company reports

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Warranty Liability 1,600

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Current Assets - Current Liabilities = Working Capital

Current ratio permits us to compare liquidity of different-sized

Current Assets ÷ Current Liabilities = Current Ratio

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