PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 10 Current Liabilities Prepared by Debbie Musil Kwantlen Polytechnic University 1 Copyright John Wiley amp Sons Canada Ltd ID: 263169
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WEYGANDT . KIESO . KIMMEL . TRENHOLM . KINNEAR . BARLOW . ATKINS
PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITIONChapter 10Current LiabilitiesPrepared by:Debbie MusilKwantlen Polytechnic University
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Determinable (certain) current liabilitiesOperating line of credit and bank overdraftShort-term notes payableCurrent maturities of long-term debtUncertain liabilitiesEstimated liabilitiesContingenciesFinancial statement presentationCurrent LiabilitiesSlide3
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Chapter 10: Current LiabilitiesStudy ObjectivesAccount for determinable or certain current liabilities.Account for estimated liabilities.Account for contingencies.Prepare the current liabilities section of the balance sheet.Slide4
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Obligations that are expected to be settled:Within one year of the balance sheet date, orWithin normal operating cycleRequires existence of a present obligationDeterminable liabilities have known amount, payee, due dateDeterminable (Certain)Current LiabilitiesSlide5
Operating Line of CreditCopyright John Wiley & Sons Canada, Ltd. 5
Pre-authorized borrowingAllows the company to borrow up to a preset limit when neededMay require collateral (security)Such as current assets, investments, or property, plant and equipmentUsed on a short-term basisNegative (overdrawn) cash balance is called bank indebtedness, bank overdraft or bank advancesSlide6
Short-Term Notes PayableCopyright John Wiley & Sons Canada, Ltd. 6
Obligations in the form of written promissory notesUsually require the borrower to pay interestUsed instead of accounts payableGives lender proof of obligation in case legal action is needed to collectIssued for varying periodsIf due within one year of the balance sheet date, classified as current liabilitiesSlide7
Short-Term Notes Payable 2Copyright John Wiley & Sons Canada, Ltd. 7
Interest is recorded in the period the loan is outstanding:At maturity, the face value of the note plus interest must be repaid:Slide8
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The portion of long-term debt that is due within the current yearAmount not due within current year is disclosed as a long-term liabilityNo adjusting entry is required to recognize the current portion of long-term debtThe proper classification is made when the balance sheet is preparedCurrent Maturities of Long-Term DebtSlide9
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Account for determinable or certain current liabilities.Account for estimated liabilities.Account for contingencies.Prepare the current liabilities section of the balance sheet.Chapter 10: Current LiabilitiesStudy ObjectivesSlide10
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Obligation exists but the amount and timing is uncertainWe owe someone, but not sure how much, when or even whoLiability is recognized when:Settlement of the liability is likely, andAmount of the liability can be reasonable estimatedEstimated LiabilitiesSlide11
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Promises made by seller to buyer to repair or replace a product if it is defective or does not perform as intendedWarranties will lead to future costs for replacement or repair of defective unitsCost of warranty is estimated and accrued based on prior experienceProduct WarrantiesSlide12
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Result in an estimated liability:Not known if or when rewards will be redeemedIf redemptions are likely, and can be estimated based on past experience:Record estimated liability as a reduction in revenue (not an expense)Sales discount is a contra revenue accountCustomer Loyalty Programsand Gift CardsSlide13
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Account for determinable or certain current liabilities.Account for estimated liabilities.Account for contingencies.Prepare the current liabilities section of the balance sheet.Chapter 10: Current LiabilitiesStudy ObjectivesSlide14
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Record liability if both conditions are met:It is likely (or probable (“more likely than not”) under IFRS) that an obligation exists, andAmount can be reasonably estimatedIf contingent loss is likely, but cannot be reasonably estimated:No liability is recordedDisclosed in the notes to the statementsIf contingency is unlikely:Still disclosed if event is substantial, otherwise not disclosedContingent Liabilities (or Provisions)Slide15
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Account for determinable or certain current liabilities.Account for estimated liabilities.Account for contingencies.Prepare the current liabilities section of the balance sheet.Chapter 10: Current LiabilitiesStudy ObjectivesSlide16
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Current liabilities are the first category reported in the liabilities section of the balance sheetEach type of current liability is listed separatelyListed in order of liquidity, usually by maturity dateAlso common to show bank loans, notes payable and accounts payable first regardless of sizeTerms of operating lines of credit, notes payable and other information are disclosed in the notesFinancial Statement PresentationSlide17Copyright
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