Chapter 11 Current Liabilities

unearned revenues

1. when a company receives the advance payment, it debits cash, and credits a current liability account identifying the source of the unearned revenue 2. when the company recognizes revenue, it debits an unearned revenue account, and credits a revenue account

current liability

a debt that a company expects to pay within one year or the operating cycle, whichever is longer

contingent liability

a potential liability that may become an actual liability in the future

contingency

an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss

all other loss contingencies require footnote disclosure unless they

are remote (slight change of occurrence) and don't involve a guarantee

working capital calculation

current assets-current liabilities

current ratio calculation

current assets/ current liabilities

interest bearing trade notes payable

due within one year are valued at their face value amount

sales taxes payable

expressed as a percentage of the sales price, company serves as a collection agent

interest calculation

face value of note x annual interest rate x times of terms of one year

discounted noted (noninterest bearing)

if they are nontrade, these notes are recorded at their present value (net of interest inherent in the note)

if the contingency is remote (if it is unlikely to occur)

it need not be recorded or disclosed

identifies current maturities of long-term debt on the balance sheet as

long-term debt due within one year

if the contingency is only reasonably possible (if it could happen) then it

needs to be disclosed only in the notes that accompany the financial statements

present current liabilities in order of magnitude

notes payable then accounts payable

if there is only a remote chance that a company will have to pay,

nothing is recorded and the footnote is optional

notes payable

obligations in the form of written notes, give the lender formal proof of the obligation in case legal remedies are needed to collect the debt

if it is only reasonably possible (less than probable and more likely than remote)

only a footnote is required

current ratio

permits us to compare the liquidity of different-sized companies and of a single company at different times

loss contingencies are only recorded if

probable (likely to occur) and reasonably estimated

the estimated cost of honoring product warranty contracts should be

recognized as an expense in the period in which the sale occurs.

most current liabilities are expected to

require the use of existing current assets or the creation of other current liabilities

full disclosure principle

requires that companies disclose all circumstances and events that would make difference to financial statement users

liquidity

the ability to pay maturing obligations and meet unexpected needs for cash

working capital

the excess of current assets over current liabilities

if the contingency is probable (it is is likely to occur) and the amount can be reasonably estimated,

the liability should be recorded in the accounts

gain contingencies may be disclosed but

they are generally not recorded

those due for payment within one year of the balance sheet date are

usually classified as current liabilities