Current Liabilities And Contingencies Chapter 13 Pdf


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Students should be familiar with trade and payroll liabilities. Short-term obligations expected to be refinanced and the accounting for loss contingencies are the conceptually challenging areas for many students.

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Embed Size px x x x x The discussions are organized according to the chapters in Intermediate Accounting 13th or 14th Editions and therefore can be used to supplement the U. GAAP require-ments as presented in the textbook.

Chapter 13 Current Liabilities and Contingencies

To browse Academia. Skip to main content. By using our site, you agree to our collection of information through the use of cookies. To learn more, view our Privacy Policy. Log In Sign Up. Download Free PDF. Chapter 13 Current Liabilities and Contingencies. Jess Ling. Rahul Jain. Download PDF. A short summary of this paper. Question Manufacturers' product warranties-these inevitably involve expenditures, and reasonably accurate estimates of the total liability for a period usually are possible, based on prior experience.

Cash rebates and other premium offers-these inevitably involve expenditures, and reasonably accurate estimates of the total liability for a period usually are possible, based on prior experience.

Question The contingent liability for warranties and guarantees usually is accrued. The estimated warranty guarantee liability is credited and warranty guarantee expense is debited in the reporting period in which the product under warranty is sold. An extended warranty provides warranty protection beyond the manufacturer's original warranty.

A manufacturer's warranty is offered as an integral part of the product package. By contrast, an extended warranty is priced and sold separately from the warranted product. It essentially constitutes a separate sales transaction and is recorded as such. Question Several weeks usually pass between the end of a company's fiscal year and the date the financial statements for that year actually are issued. Any enlightening events occurring during this period should be used to assess the nature of a loss contingency existing at the report date.

Since a liability should be accrued if it is both probable that the confirming event will occur and the amount can be at least reasonably estimated, the contingency should be accrued. Find more slides, ebooks, solution manual and testbank on www.

Yet, if the loss is probable and can be reasonably estimated, the contingency should be described in a disclosure note. The note should include the effect of the loss on key accounting numbers affected. Furthermore, even events other than contingencies that occur after the year-end but before the financial statements are issued must be disclosed in a "subsequent events" disclosure note if they have a material effect on the company's financial position i.

Question In U. GAAP, the low end of the range is accrued as a liability, and the rest of the range is disclosed. In IFRS, the mid-point of the range is accrued. Question In IFRS, present values must be used to measure a liability whenever the time value of money is material.

That requirement does not exist for U. Question When an assessment is probable, reporting the possible obligation would be warranted if an unfavorable settlement is at least reasonably possible.

This means an estimated loss and contingent liability would be accrued if a an unfavorable outcome is probable and b the amount can be reasonably estimated. Otherwise, note disclosure would be appropriate. So, when the assessment is unasserted as yet, a two-step process is involved in deciding how it should be reported Is the assessment probable? If it is not, no disclosure is warranted. If the assessment is probable, evaluate a the likelihood of an unfavorable outcome and b whether the dollar amount can be estimated to determine whether it should be accrued, disclosed only, or neither.

Question You should not accrue your gain. A gain contingency should not be accrued. This conservative treatment is consistent with the general inclination of accounting practice to anticipate losses, but to recognize gains only at their realization. Though gain contingencies are not recorded in the accounts, they should be disclosed in notes to the financial statements. Attention should be paid that the disclosure note not give "misleading implications as to the likelihood of realization.

Brief Exercise Current liability-The requirement to classify currently maturing debt as a current liability includes debt that is callable, or due on demand, by the creditor in the upcoming year even if the debt is not expected to be called.

In this case, the existing violation is expected to be corrected within six months. Brief Exercise This is a loss contingency and the estimated warranty liability is credited and warranty expense is debited in the period in which the products under warranty are sold. A liability should be accrued if it is both probable that the confirming event will occur and the amount can be at least reasonably estimated. If one or both of these criteria is not met as in this case , but there is at least a reasonable possibility that the loss will occur, a disclosure note should describe the contingency.

That's what Bell should do here. Brief Exercise Only the third situation's costs should be accrued. A liability should be accrued for a loss contingency if it is both probable that the confirming event will occur and the amount can be at least reasonably estimated.

If one or both of these criteria is not met, but there is at least a reasonable possibility that the loss will occur, a disclosure note should describe the contingency. Both criteria are met only for the warranty costs. Brief Exercise Under U. Brief Exercise No disclosure is required because an EPA claim is not yet asserted, and an assessment is not probable. Even if an unfavorable outcome is thought to be probable in the event of an assessment and the amount is estimable, disclosure is not required unless an unasserted claim is probable.

The specific citation for each of the following items is However, when such debt is to be refinanced on a long-term basis, it may be included with long-term liabilities. The narrative indicates that Sprint has both 1 the intent and 2 the ability "existing long-term credit facilities" to refinance on a long-term basis.

Thus, Sprint reported the debt as long-term liabilities. Exercise Requirement 1Normally, IFRS requires that short-term debt payable within a year be classified as current liabilities.

Requirement 2IFRS requires that the refinancing capability be in place as of the balance sheet date. Therefore, given that the refinancing was not arranged until after year-end, IFRS would require that the debt be classified as a current liability. Information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements.

The amount of loss can be reasonably estimated. There may be a future sacrifice of economic benefits cost of satisfying the warranty due to an existing circumstance the warranted awnings have been sold that depends on an uncertain future event customer claims. The liability is probable because product warranties inevitably entail costs. A reasonably accurate estimate of the total liability for a period is possible based on prior experience.

So, the contingent liability for the warranty is accrued. The estimated warranty liability is credited and warranty expense is debited in , the period in which the products under warranty are sold.

Requirement 1This is not a loss contingency. An extended warranty is priced and sold separately from the warranted product and therefore essentially constitutes a separate sales transaction. Since the earning process for an extended warranty continues during the contract period, revenue should be recognized over the same period. Revenue from separately priced extended warranty contracts are deferred as a liability at the time of sale, and recognized over the contract period on a straight-line basis.

Requirement 2During Requirement 1This is a loss contingency. Some loss contingencies don't involve liabilities at all. Some contingencies when resolved cause a noncash asset to be impaired, so accruing it means reducing the related asset rather than recording a liability. The most common loss contingency of this type is an uncollectible receivable, as described in this situation.

Scenario 2No disclosure is required because an EPA claim is as yet unasserted, and an assessment is not probable. Scenario 3A disclosure note is required because an EPA claim is as yet unasserted, but an assessment is probable. Since an unfavorable outcome is not thought to be probable in the event of an assessment, no accrual is needed, but since an unfavorable outcome is thought to be reasonably possible in the event of an assessment, disclosure in a footnote is required.

Keep in mind, though, that in practice, disclosure of an unasserted claim is rare. Such disclosure would alert the other party, the EPA in this case, of a potential point of contention that may otherwise not surface. The outcome of litigation and any resulting loss are highly uncertain, making difficult the determination of their possibility of occurrence. Scenario 4Accrual of the loss is required because an EPA claim is as yet unasserted, but an assessment is probable.

Since an unfavorable outcome also is thought to be probable in the event of an assessment, accrual is needed. Keep in mind, though, that in practice, accrual of an unasserted claim is rare. Accrual could be offered in court as an admission of responsibility. A loss usually is not recorded until after the ultimate settlement has been reached or negotiations for settlement are substantially completed.

A disclosure note also is appropriate. Requirement 4This is a gain contingency. Gain contingencies are not accrued even if the gain is probable and reasonably estimable.

The gain should be recognized only when realized. A disclosure note is appropriate. Commercial paper.

Noncommitted line of credit. Customer advances.

Chapter 13 Current Liabilities and Contingencies

Explain the classification issues of short-term debt expected to be refinanced. Identify the criteria used to account for and disclose contingent liabilities and assets. Present obligation. Arises from past events. Results in an outflow of resources cash, goods, services. 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.

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Chapter 13 - Test Bank

Current Liabilities and Contingencies. P 13 -1 Current liability entries and adjustments includes notes payable. P 13 -9 Premium entries and financial statement presentation. Vacation Wages Payable Lawsuit Liability

Chapter 13 - Test Bank

Chapter 13 Current Liabilities and Contingencies

E Payroll tax entries. Simple 10—15 E Payroll tax entries. Simple 15—20 E Warranties.

Embed Size px x x x x The discussions are organized according to the chapters in Intermediate Accounting 13th or 14th Editions and therefore can be used to supplement the U. GAAP require-ments as presented in the textbook. Assignment material is provided for each supplementchapter, which can be used to assess and reinforce student understanding of IFRS.

Find more slides, ebooks, solution manual and testbank on www. Views 1, Downloads File size KB. Although schools, departments, and faculty may approach assessment and its documentation differently, one approach is to provide specific questions on exams that become the basis for assessment. It is a present responsibility, to sacrifice assets in the future, caused by a transaction or other event that already has happened. Question 13—2 Liabilities traditionally are classified as either current liabilities or long-term liabilities in a classified balance sheet. Current liabilities are those expected to be satisfied with current assets or by the creation of other current liabilities.

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Ch13 Current Liabilities, Provisions and Contingencies

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3 Comments

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