Current Liabilities, Provisions, and Contingencies - Prof. Robert, Schemes and Mind Maps of Financial Accounting

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1. Describe the nature, valuation, and reporting of current liabilities.
2. Explain the accounting for different types of provisions. 3. Explain the accounting for loss and gain contingencies. 4. Indicate how to present and analyze liability-related information. After studying this chapter, you should be able to:

Current Liabilities,

Provisions, and Contingencies

CHAPTER 13

LEARNING OBJECTIVES

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PREVIEW OF CHAPTER 13

Intermediate Accounting IFRS 3 rd Edition Kieso ● Weygandt ● Warfield

13 - 4 A current liability is reported if one of two conditions exists:

1. Liability is expected to be settled within its normal operating cycle; or
2. Liability is expected to be settled within 12 months after the reporting date. The operating cycle is the period of time elapsing between the acquisition of goods and services and the final cash realization resulting from sales and subsequent collections.

13 - 5 Typical Current Liabilities:

1. Accounts payable.
2. Notes payable.
3. Current maturities of long- term debt.
4. Short-term obligations expected to be refinanced.
5. Dividends payable.
   6. Customer advances and deposits.
   7. Unearned revenues.
   8. Sales and value-added taxes payable.
   9. Income taxes payable.
   10. Employee-related liabilities.

13 - 7 Notes Payable

Written promises to pay a certain sum of money on a

specified future date.

 Arise from purchases, financing, or other transactions.  Notes classified as short-term or long-term.  Notes may be interest-bearing or zero-interest-bearing.

13 - 8 Illustration: Castle Bank agrees to lend €100,000 on March 1, 2019, to Landscape Co. if Landscape signs a €100,000, 6%, four-month note. Landscape records the cash received on March 1 as follows: Cash 100, Notes Payable 100, Interest-Bearing Note Issued

13 - 10 At maturity (July 1 , 2020 ), Landscape records payment of the note and accrued interest as follows. Notes Payable 100, Interest Payable 2, Cash 102, Interest-Bearing Note Issued

13 - 11 Illustration: On March 1 , Landscape issues a €102,000, four- month, zero-interest-bearing note to Castle Bank. The present value of the note is €100,000. Landscape records this transaction as follows. Cash 100, Notes Payable 100, Zero-Interest-Bearing Note Issued

13 - 13 E 13 - 2 : (Accounts and Notes Payable) The following are selected 2019 transactions of Darby Corporation. Sept. 1 - Purchased inventory from Orion Company on account for $50,000. Darby records purchases gross and uses a periodic inventory system. Oct. 1 - Issued a $50,000, 12 - month, 8 % note to Orion in payment of account. Oct. 1 - Borrowed $75,000 from the Shore Bank by signing a 12 - month, zero-interest-bearing $81,000 note. Prepare journal entries for the selected transactions.

13 - 14 Sept. 1 - Purchased inventory from Orion Company on account for $50,000. Darby records purchases gross and uses a periodic inventory system. Sept. 1 Purchases 50, Accounts Payable 50,

13 - 16 Dec. 31 Interest Expense 1, Notes Payable 1, Oct. 1 Cash 75, Notes Payable 75, ($6,000 x 3 / 12 ) = $1, Oct. 1 - Borrowed $75,000 from the Shore Bank by signing a 12 - month, zero-interest-bearing $81,000 note. Interest calculation =

13 - 17 Portion of bonds, mortgage notes, and other long-term indebtedness that matures within the next fiscal year. Exclude long-term debts maturing currently if they are to be: Current Maturities of Long-Term Debt

1. Retired by assets accumulated for this purpose that properly have not been shown as current assets,
2. Refinanced, or retired from the proceeds of a new long- term debt issue, or
3. Converted into ordinary shares.

13 - 19 E 13 - 4 (Refinancing of Short-Term Debt): The CFO for Yong Corporation is discussing with the company’s chief executive officer issues related to the company’s short-term obligations. Presently, both the current ratio and the acid-test ratio for the company are quite low, and the chief executive officer is wondering if any of these short-term obligations could be reclassified as long-term. The financial reporting date is December 31 , 2018. Two short-term obligations were discussed, and the following action was taken by the CFO. Instructions: Indicate how these transactions should be reported at Dec. 31 , 2018 , on Yongs’ statement of financial position.

13 - 20 Short-Term Obligation A: Yong has a $50,000 short-term obligation due on March 1 , 2019. The CFO discussed with its lender whether the payment could be extended to March 1 , 2021 , provided Yong agrees to provide additional collateral. An agreement is reached on February 1 , 2019 , to change the loan terms to extend the obligation’s maturity to March 1 , 2021. The financial statements are authorized for issuance on April 1 , 2019. Liability of $50, Dec. 31 , 2018 Statement Issuance Apr. 1 , 2019 Liability due for payment Mar. 1 , 2019 Refinance completed Feb. 1 , 2019