CHAPTER 13
Current Liabilities, Provisions, and Contingencies
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Concept of liabilities;
definition and classification
of current liabilities.
1, 2, 3,
4, 6, 8
1, 5
1, 2
1
2.
Accounts and notes
payable; dividends payable.
7, 11
1, 2, 3
2
1, 2
1, 2
3.
Short-term obligations
expected to be refinanced.
9, 10
4, 5
3, 4, 5
3
4.
Deposits and advance
payments.
5, 12
6
2
5.
Compensated absences
and bonuses.
13, 14, 15
10, 11
6, 7
6.
Collections for third parties.
16, 17
7, 8, 9
8, 9, 10,
11, 22
3, 4
7.
Provisions and contingent
liabilities (General).
18, 19, 20,
21, 22, 24,
26
12, 13
17, 20,
21, 22
10, 11, 13
4, 5, 6
8.
Warranties.
23, 25
15, 16
12, 13,
22, 21
5, 6, 7,
12, 14
6, 7
9.
Consideration Payables
17
14, 19, 22
8, 9,
12, 14
Presentation and analysis.
31, 32, 33
1, 23, 24,
25
9
3
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Exercises
Problems
Concepts
for
Analysis
2. Explain the accounting for
12, 13, 14,
15, 16, 17,
2, 5, 6, 7, 8,
9, 10, 11,
5, 6, 7
1. Describe the nature,
1, 2, 3, 4, 5,
1, 2, 3, 4
1, 2, 3
3. Explain the accounting for
loss and gain contingencies.
17
10, 11, 13
4
4. Indicate how to present and
22, 23,
9, 13
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E13.1
Statement of financial position classification.
Simple
10–15
E13.2
Accounts and notes payable.
Moderate
15–20
E13.3
Refinancing of short-term debt.
Simple
10–12
E13.4
Refinancing of short-term debt.
Simple
10–15
Debt classifications
Simple
E13.6
Compensated absences.
25–30
E13.7
Compensated absences.
Moderate
25–30
E13.8
Adjusting entry for sales tax and VAT.
Simple
E13.9
Adjusting entry for sales tax and VAT.
Simple
E13.10
Payroll tax entries.
Simple
10–15
E13.11
Payroll tax entries.
Simple
15–20
E13.12
Warranties.
Simple
10–15
E13.13
Warranties.
Moderate
15–20
E13.14
Premium entries.
Simple
15–20
E13.15
Restructuring issues.
Simple
15–20
Restructuring.
Simple
15–20
E13.17
Provisions and contingencies.
Moderate
20–30
E13.18
Environmental liability.
25–30
E13.19
Premiums.
Moderate
Provisions.
Moderate
20–30
E13.21
Provisions.
20–30
E13.22
Financial statement impact of liability transactions.
Moderate
20–25
E13.23
Ratio computations and discussion.
Simple
10–15
E13.24
Ratio computations and analysis.
Simple
20–25
E13.25
Ratio computations and effect of transactions.
Moderate
15–25
P13.1
Current liability entries and adjustments.
Simple
25–30
P13.2
Liability entries.
Simple
25–35
P13.3
Payroll tax entries.
Moderate
20–30
P13.4
Payroll tax entries.
Simple
20–25
P13.5
Warranties.
Simple
15–20
P13.6
Extended warranties.
Simple
10–20
P13.7
Warranties.
25–35
P13.8
Premium entries.
Moderate
15–25
P13.9
Premium entries and financial statement presentation.
Moderate
30–45
P13.10
Litigation claim: entries and essay.
Simple
25–30
Assignment Characteristics Table (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
P13.11
Contingencies: entries and essays.
Moderate
35–45
P13.12
Warranties and premiums.
Moderate
20–30
P13.13
Liability errors.
Moderate
25–35
P13.14
Warranty and coupon computation.
Moderate
20–25
CA13.1
Nature of liabilities.
Moderate
20–25
CA13.2
Current versus non-current classification.
Moderate
15–20
CA13.3
Refinancing of short-term debt.
Moderate
30–40
CA13.4
Contingencies.
15–20
CA13.5
Possible environmental liability.
15–20
CA13.6
Warranties and litigation provisions.
15–20
CA13.7
Ethics of Warranties.
Moderate
20–25
ANSWERS TO QUESTIONS
1. Current liabilities are obligations reasonably expected to be settled within the normal operating
2. You might explain to your friend that the IASB defines a liability as part of its conceptual
framework. The formal definition of liabilities is a present obligation of the enterprise arising from
3. As a lender of money, the banker is interested in the priority his/her claim has on the company’s
assets relative to other claims. Close examination of the liability section and the related footnotes
4. By definition, current liabilities are obligations reasonably expected to be settled within its normal
operating cycle or within twelve months after the reporting date.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
5. Unearned revenue is a liability that arises from current sales but for which some future services or
products are owed to customers in the future. At the time of a sale, customers pay not only for the
delivered product, but they also pay for future products or services (e.g., another plane trip, hotel
6. Payables and receivables generally involve an interest element. Recognition of the interest element
(the cost of money as a factor of time and risk) results in valuing future payments at their current
value. The present value of a liability represents the debt exclusive of the interest factor.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
7. A zero-interest-bearing note is initially recorded at the amount of cash received (or the present
value of the note). The present value of the note equals the face value of the note at maturity less
Questions Chapter 13 (Continued)
8. Liabilities that are due on demand (callable by the creditor) should be classified as a current
liability. Classification of the debt as current is required because it is a reasonable expectation that
9. A company should exclude a short-term obligation from current liabilities only if (1) it intends to
10. The ability to defer settlement of short-term debt may be demonstrated by entering into a financing
agreement that clearly permits the company to refinance the debt on a long-term basis on terms that
are readily determinable before the next reporting date.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
11. A cash dividend formally authorized by the board of directors would be recorded by a debit to
Retained Earnings and a credit to Dividends Payable. The Dividends Payable account should be
classified as a current liability.
12. Unearned revenue arises when a company receives cash or other assets as payment from a
customer before conveying (or even producing) the goods or performing the services which it has
committed to the customer.
Unearned revenue is assumed to represent the obligation to the customer to refund the assets
Unearned revenues arise from the following activities:
(1) The sale by a transportation company of tickets or tokens that may be exchanged or used to
pay for future fares.
Questions Chapter 13 (Continued)
13. Compensated absences are employee absences such as vacation, illness, maternity, paternity,
and jury leaves for which it is expected that employees will be paid.
LO: 2,3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
14. A liability should be accrued for the cost of compensated absences if the employer has an
obligation to make payment to an employee even after terminating his or her employment (vested
15. Vested rights with respect to compensated absences exist if the employer has an obligation to
make payment to an employee even after terminating his or her employment. Accumulated rights
16. Employers generally hold back from each employee’s wages amounts to cover income taxes
(withholding), the employee’s share of social security taxes, and other items such as union dues or
17. Value-added taxes (VAT) are used by tax authorities more than sales taxes (over 100 countries
require that companies collect a value-added tax). A value-added tax is a consumption tax. This
tax is placed on a product or service whenever value is added at a stage of production and at final
18. A provision is defined as a liability of uncertain timing or amount and is sometimes referred to as an
estimated liability. Common types of provisions are obligations related to litigation, warranties,
product guarantees, business restructurings, and environmental damage.
LO: 2,3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
19. A provision should be recorded and a charge accrued to expense only if:
(a) the company has a present obligation (constructive or legal) as a result of a past event,
Questions Chapter 13 (Continued)
20. A current liability such as accounts payable is susceptible to precise measurement because the date
of payment, the payee, and the amount of cash needed to discharge the obligation are reasonably
21. In determining whether a provision should be recognized, in addition to assessing whether a past
event has occurred and a reliable estimate can be developed, a company must also assess
whether the outflow of resources is probable. The term probable is defined as “more likely than
not” to occur. This phrase is interpreted to mean the probability of occurrence is greater than 50
22. A legal obligation generally results from a contract or legislation. A constructive obligation is an
obligation derived from the company’s actions where (a) by an established pattern of past practice,
23. Assurance-type warranties guarantee that the product meets agreed–upon specifications in the
contract at the time the product is sold. This type of warranty is included in the sales price of the
24. Under IFRS, companies may not record provisions for future operating losses. Such provisions do
not meet the definition of a liability, since the amount is not the result of a past transaction (the
Questions Chapter 13 (Continued)
25. Assurance-type warranties guarantee that the product meets agreed–upon specifications in the
contract at the time the product is sold. This type of warranty is included in the sales price of the
26. Onerous contracts are ones in which the unavoidable costs of meeting the obligations exceed the
economic benefits expected to be received. Examples include a loss to be recognized on an
27. A restructuring is a program that is planned and controlled by management and materially changes
either (1) the scope of a business undertaken by the company; or (2) the manner in which the
28. An environmental provision must be recognized when a company has an existing legal obligation
29. The absence of insurance does not mean that a liability has been incurred at the date of the financial
statements. Until the time that an event occurs there can be no diminution in the value of property
or incurrence of a liability. If an event has occurred which exposes an enterprise to risks of injury to
30. In determining whether or not to record a liability for pending litigation, the following factors must
be considered:
(a) The time period in which the underlying cause for action occurred.
(b) The probability of an unfavorable outcome.
Questions Chapter 13 (Continued)
31. There are several defensible recommendations for listing current liabilities: (1) in order of maturity,
(2) in descending order of amount, (3) in order of liquidation preference. The authors’ recent review
32. The acid-test ratio and the current ratio are both measures of the short-term debt-paying ability of
the company. The acid-test ratio excludes inventories and prepaid expenses on the basis that these
33. (a) A liability for goods purchased on credit should be recorded when title passes to the purchaser.
If the terms of purchase are f.o.b. destination, title passes when the goods purchased arrive; if
f.o.b. shipping point, title passes when shipment is made by the vendor.
(b) A provision for an onerous contract is recorded when it is determined that the corporation is a
party to a contract that is considered onerous and as a result has a present obligation, it is
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 13.1
July 1
Purchases ……………………………………………………….
60,000
Accounts Payable …………………………………………..
60,000
Cash ……………………………………………………….
Accounts Payable …………………………………………………..
Purchase Returns and Allowances …………………..
Accounts Payable …………………………………………………..
Cash (€54,000 X 98%) ………………………………………
52,920
Purchase Discounts ………………………………………..
BRIEF EXERCISE 13.2
November 1, 2018
Cash ………………………………………………………………………
40,000
Notes Payable…………………………………………………
40,000
December 31, 2018
Interest Expense …………………………………………………….
Interest Payable
($40,000 X 9% X 2/12) ……………………………………
Notes Payable ……………………………………………………….
40,000
Interest Payable ………………………………………………………
Interest Expense …………………………………………………….
Cash [($40,000 X 9%
X 3/12) + $40,000] …………………………………………
40,900
BRIEF EXERCISE 13.3
November 1, 2018
Cash ………………………………………………………………………
60,000,000
Notes Payable …………………………………………………
60,000,000
December 31, 2018
Interest Expense ……………………………………………………..
Notes Payable (¥1,350,000 X 2/3) ……………………..
Interest Expense ……………………………………………………..
Notes Payable …………………………………………………
Notes Payable ……………………………………………………….
Cash ……………………………………………………….
BRIEF EXERCISE 13.4
(a) While Burr has the intent to refinance, Burr did not have the
BRIEF EXERCISE 13.5
The debt becomes payable on demand because of the breach of a covenant
and therefore should be reported as a current liability. The agreement with
BRIEF EXERCISE 13.6
8/1/19
Cash ……………………………………………………….
216,000
Unearned Subscription Revenue
(12,000 X €18) ………………………………………………
12/31/19
Unearned Subscription Revenue …………………………..
90,000
Subscription Revenue
(€216,000 X 5/12 = £90,000) …………………………..
90,000
BRIEF EXERCISE 13.7
(a)
Accounts Receivable ………………………………………………
31,800
Sales Revenue ………………………………………………..
30,000
Value-Added Taxes Payable
(€30,000 X 6% = €1,800) …………………………..
(b)
Cash ………………………………………………………………………
20,670
Sales Revenue (€20,670 ÷ 1.06 = €19,500) …………
Value-Added Taxes Payable …………………………..
BRIEF EXERCISE 13.8
Cash (€5,000 + €750) ……………………………………………….
5,750
Sales Revenue ………………………………………………..
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 13.9
Salaries and Wages Expense …………………………………..
24,000
Social Security Taxes Payable …………………………
1,920
Withholding Taxes Payable ……………………………..
2,990
Insurance Premiums Payable …………………………..
Cash ………………………………………………………………
BRIEF EXERCISE 13.10
Salaries and Wages Expense …………………………………..
42,000
Salaries and Wages Payable (30 X 2 X €700) ……..
BRIEF EXERCISE 13.11
December 31, 2018
Salaries and Wages Expense …………………………………..
350,000
Salaries and Wages Payable …………………………..
Salaries and Wages Payable ……………………………………
350,000
Cash ………………………………………………………………
BRIEF EXERCISE 13.12
(a)
Lawsuit Loss ……………………………………………………….
900,000
Lawsuit Liability ……………………………………………..
BRIEF EXERCISE 13.13
Buchanan should record a litigation accrual on the patent case, since the
BRIEF EXERCISE 13.14
Oil Platform …………………………………………………………….
450,000
BRIEF EXERCISE 13.15
During 2019
Warranty Expense …………………………………………………..
70,000
Inventory ……………………………………………………….
70,000
Cash ……………………………………………………….
1,000,000
Sales ……………………………………………………….
Warranty Expense …………………………………………………..
Warranty Liability …………………………………………………..
55,000
BRIEF EXERCISE 13.16
(a)
Cash ………………………………………………………………………
1,980,000
Unearned Warranty Revenue
(20,000 X €99) ………………………………………………
1,980,000
(b)
Warranty Expense …………………………………………………..
Inventory ……………………………………………………….
(c)
Unearned Warranty Revenue …………………………..
Warranty Revenue
(€1,980,000 ÷ 4) …………………………………………….
BRIEF EXERCISE 13.17
Premium Expense …………………………………………………….
96,000
Premium Liability ……………………………………………..
96,000*
(240,000 ÷ 3) X ($1.10 + $0.60 – $0.50) ……………………..
BRIEF EXERCISE 13.18
Cargo Company’s lawsuit claim represents a contingent asset because the
BRIEF EXERCISE 13.19
Costs that should not be included in a restructuring provision include
BRIEF EXERCISE 13.20
Loss on Lease Contract …………………………………………….
1,450,000
Lease Contract Liability …………………………………….
SOLUTIONS TO EXERCISES
EXERCISE 13.1 (10–15 minutes)
(a) Current liability.
(b) Current liability.
(c) Current liability or non-current liability depending on term of warranty.
(h) Current liability.
(i) Current liability.
(j) Current liability.
EXERCISE 13.2 (15–20 minutes)
(a)
September 1, 2019
Purchases ……………………………………………………….
50,000
Accounts Payable …………………………..
50,000
Accounts Payable …………………………………………………..
50,000
Notes Payable …………………………..
50,000
Cash ……………………………………………………….
75,000
Notes Payable …………………………..
75,000
(b)
December 31, 2019
Interest Expense …………………………………………………….
1,000
Interest Payable
($50,000 X 8% X 3/12) …………………………..
1,000
EXERCISE 13.2 (Continued)
(c)
1.
Notes payable …………………………..
$50,000
Interest payable ………………………..
1,000
2.
Notes payable ($75,000 + $1,500) .
$76,500
EXERCISE 13.3 (10–12 minutes)
ALEXANDER AG
Partial Statement of Financial Position
December 31, 2018
Current liabilities:
Notes payable (Note 1) …………………………………………….
€1,200,000
NOTE 1:
Short-term debt refinanced. As of December 31, 2018, the company had notes
EXERCISE 13.4 (10–15 minutes)
Short-term obligation A. While the maturity of the obligation was extended
to March 1, 2021, the agreement was not reached with the lender until
EXERCISE 13.5 (15–20 minutes)
1. Debt that is callable on demand by the lender at any time should be
2. When there is a breach of a debt covenant, the debt is normally
classified as a current liability. However, if the company is able to
3. Mckee should classify £100,000 of the obligation as a current maturity
4. While the maturity of the obligation was extended to February 15,
2021, the agreement was not reached with the lender until January 15,
EXERCISE 13.6 (25–30 minutes)
(a)
2018
To accrue expense and liability for compensated absences
Salaries and Wages Expense …………………………
13,824
EXERCISE 13.6 (Continued)
2019
To accrue expense and liability for compensated absences
Salaries and Wages Expense …………………………
14,976
Salaries and Wages Payable (Vacation) …
(4)
Salaries and Wages Payable (Sick Pay) …
(5)
To record payment for compensated time when used by employers
Salaries and Wages Expense ………………………..
792
Salaries and Wages Payable (Vacation) …………
(6)
Salaries and Wages Payable (Sick Pay) …………
(7)
Cash ……………………………………………………
(8)
(1)
9 employees X €12.00/hr. X 8 hrs./day X 10 days =
€8,640
(2)
9 employees X €12.00/hr. X 8 hrs./day X 6 days =
€5,184
(3)
9 employees X €12.00/hr. X 8 hrs./day X 4 days =
€3,456
(4)
9 employees X €13.00/hr. X 8 hrs./day X 10 days =
€9,360
(5)
9 employees X €13.00/hr. X 8 hrs./day X 6 days =
€5,616
(6)
9 employees X €12.00/hr. X 8 hrs./day X 9 days =
€7,776
(7)
9 employees X €12.00/hr. X 8 hrs./day X (6–4) days =
€1,728
9 employees X €13.00/hr. X 8 hrs./day X (5–2) days =
+2,808
(8)
9 employees X €13.00/hr. X 8 hrs./day X 9 days =
€8,424
NOTE: Vacation days and sick days are paid at the employee’s current wage.
Also, if employees earn vacation pay at different pay rates, a consistent pattern