978-1259722660 Chapter 13 Solution Manual Part 1

A liability involves the past, the present, and the future. It is a present

responsibility, to sacrifice assets in the future, caused by a transaction or other event

1. are probable, future sacrifices of economic benefits

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

In concept, liabilities should be reported at their present values;

that is, the valuation amount is the present value of all future cash

payments resulting from the debt, usually principal and/or interest payments. In this

In practice, liabilities ordinarily are reported at their maturity amounts if payable

within one year because the relatively short time period makes the interest or time

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Chapter 13 Current Liabilities and Contingencies

Questions for Review of Key Topics

Question 13–1

Question 13–2

Question 13–3

Answers to Questions (continued)

Lines of credit permit a company to borrow cash from a bank up

to a prearranged limit at a predetermined, usually floating, rate of

interest. The interest rate often is based on current rates of the prime London

Lines of credit can be noncommitted or committed. A noncommitted line of

credit allows the company to borrow without having to follow formal loan procedures

When interest is “discounted” from the face amount of a note at

the time it is written, it usually is referred to as a

“noninterest-bearing” note. Noninterest-bearing notes do, of course entail interest, but

Commercial paper represents loans from other corporations. It

refers to unsecured notes sold in minimum denominations of $25,000

with maturities ranging from 30 to 270 days. The firm would be required to file a

registration statement with the SEC if the maturity is beyond 270 days. The name

The interest rate usually is lower than in a bank loan because commercial paper

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Question 13–4

Question 13–5

Question 13–6

Answers to Questions (continued)

during the current period, but not yet paid. The expense and related

liability should be recorded as follows:

This achieves a proper matching of this expense with the revenues it helps

An employer should accrue an expense and the related liability for

employees’ compensation for future absences, like vacation pay, if the

obligation meets each of four conditions: (1) the obligation is attributable to

Customary practice should be considered when deciding whether an obligation

exists. For instance, whether the rights to paid absences have been earned by services

already rendered sometimes depends on customary policy for the absence in question.

Similar concerns also influence whether unused rights to the paid absences can be

carried forward or expire. Although holiday time, military leave, maternity leave, and

jury time typically do not accumulate if unused, if it is customary practice that one can

be carried forward, a liability is accrued if it’s probable employees will be

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Question 13–7

Question 13–8

Answers to Questions (continued)

When a company collects cash from a customer as a refundable

deposit or as an advance payment for products or services, a liability

is created obligating the firm to return the deposit or to supply the products or

Gift cards are a particular form of advance collection of

revenues. When the payment is received, the seller debits cash and

credits a deferred revenue liability. Later, deferred revenue is reduced and revenue

Examples of amounts collected for third parties that represent

liabilities until remitted are sales taxes, and payroll-related

The requirement to classify currently maturing debt as a

Short-term obligations can be reported as noncurrent liabilities

Under U.S. GAAP, ability to finance must be demonstrated by

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Question 13–9

Question 13–10

Question 13–11

Answers to Questions (continued)

A loss contingency is an existing situation or set of

circumstances involving potential loss that will be resolved when

The likelihood that the future event(s) will confirm the

REASONABLY POSSIBLE—the chance the confirming event will occur is more than

remote but less than likely.

REMOTE—the chance the confirming event will occur is slight.

A liability should be accrued if it is both probable that the

Under U.S. GAAP, the term “contingent liability” is used to

refer generally to contingent losses, regardless of probability.

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Question 13–15

Question 13–18

Answers to Questions (concluded)

If one or both of the accrual criteria is not met, but there is at

least a reasonable possibility that an obligation exists (the loss will

1. Manufacturers’ product warranties—these inevitably involve

2. Cash rebates and other premium offers—these inevitably involve expenditures,

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

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

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Question 13–19

Question 13–20

Question 13–21

Question 13–22

Answers to Questions (continued)

When a contingency comes into existence only after the

year-end, a liability cannot be accrued because none existed at the

end of the year. Yet, if the loss is probable and can be reasonably estimated, the

In U.S. GAAP, the low end of the range is accrued as a liability,

In IFRS, present values must be used to measure a liability

When an assessment is probable, reporting the possible

obligation would be warranted if an unfavorable settlement is at

1. Is the assessment probable? If it is not, no disclosure is warranted.

2. If the assessment is probable, evaluate (a) the likelihood of an unfavorable

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Question 13–23

Question 13–26

Answers to Questions (continued)

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

You should accrue your gain. Under IFRS, a gain contingency

Brief Exercise 13–1

Brief Exercise 13–2

Brief Exercise 13–3

a.

December 31

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Question 13–27

BRIEF Exercises

b.

September 30

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Brief Exercise 13–4

Cash (difference)…………………………………………………. 11,190,000

…………………………………………………………………Cash

Brief Exercise 13–5

Effective interest rate:

Discount ($10,000,000 x 6% x 9/12)$ 450,000

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