Current Liabilities Topics:

1
Current Liabilities - Topics

• Accounts payable
• Short term notes payable
• Current portion of non-current liabilities
• Non-current liabilities expected to be
  refinanced
  
• Contingent liabilities

2
Current Liabilities - examples

• Accounts payable
• Salaries payable see slides at end
• deferred revenue (can be current and/or
  non-current)
  
• Current portion of taxes payable

3
Current Liabilities

• Accounts payable etc., expected to pay very
  quickly ----? interest should not be an issue
  
• Notes payable probably include interest. Make
  sure interest is calculated and recognized
  properly

4
Note Payable (Current)
60 day, 8 note payable issued 12/1/02,
10,000. Dr. purchases 10,000 cr. Note
payable 10,000
On 12/31 determine and recognize interest
10,000 .08 30/360 67 Dr. interest expense
67
cr. Interest payable 67
5
Current portion of non-current liabilities

• As non-current liabilities mature, they must be
  reported as current. Also, if in default!
  
• Useful info or detrimental distraction?
• Useful info IF debt will really be paid in the
  coming period. E.g., current portion of income
  taxes payable.
  
• Not useful, if debt will be refinanced therefore
  
  

6
Current portion of non-current debt to be
refinanced

• Special Rule
• If company has the intent AND the ability to
  refinance debt (e.g., issue new bonds to repay
  old bonds) then current portion of non-current
  debt to be refinanced is shown in separate
  section between current and non-current
  liabilities

7
Current portion of non-current debt to be
refinanced

• Conditions that must be met Company must be able
  to demonstrate that it has the
  
• Ability to refinance debt
• Completed negotiations to issue new debt
• Already issued new debt (after end of fiscal
  year, but before financial statements issued)
  

8
Contingent Liabilities

• Potential liabilities triggered by some
  specified future event. Rule
  
• If the trigger event is probable and the amount
  can be determined --? accrue the liability
  
• If the potential liability is expected to be
  material, but the amount cannot be estimated,
  disclose in footnote

9
Example Warranties

• Both probable and can be estimated --? accrue
  when sales made Based on experience, warranty
  costs resulting from current sales should total
  15,000.
• Journal entry
• Dr. Warranty expense 15,000.
• Cr. Warranties (liability) 15,000.

10
Example Coupons, Premiums, Frequent Flyer Miles,
Etc.

• Essentially treated the same as warranties
  Based on past experience, X of (whatever) will
  be redeemed at Y cost. The amount can be
  estimated and must be accrued as a liability
  (some may be non current, most current).
• Journal entry depends. I.e., coupons -?
  advertising expense miles ? reduction of revenue
  recognized

11
Example Environmental Liabilities contingent
liability must be accrued

• If company named as a PRP (partially responsible
  party) by the EPA
  
• If company activities require future mitigation
  (cleanup, reactor shut downs etc.)

12
Example Lawsuit (not potentially material)

• Unless there is no likelihood of winning, NEVER
  accrue lawsuit liability. Instead
  
• Footnote general for run of the mill lawsuits
  XYZ company is party to several legal actions in
  which we expect to prevail. Even if they should
  result in a negative verdict we do not expect
  them to have a material effect on the company

13
Lawsuit (amount potentially material)

• Footnote
• The company is being sued for 50 million for
  alleged racial discrimination. We deny the
  charges and expect to prevail. Even if we should
  not prevail we do not believe that this case
  would have a material effect on the company.

14
Lawsuit (material, will probably lose)

• Company may chose to accrue liability to force
  the action into bankruptcy court. This applies
  to unusual situations, original case Johns
  Manville (The granddaddy of asbestos litigation)
  
• Company accrued the potential liability,
  triggered debt/equity covenants led to
  technical bankruptcy, etc.
  

15
Lawsuit (material, will probably lose) II

• Other examples
• Dow Corning (Breast implants)
• Dalkon Shield
• Not to be done unless the technical bankruptcy
  route is really considered the only option.

16
Asset Retirement Obligation (ARO)

• Arises in connection with certain asset
  acquisitions
  
• Strip mine
• Power plants
• Land fill (dump)
• Conditions imposed with operating permits that
  require certain actions to clean up after
  operations/use completed

17
Asset Retirement Obligation (ARO)

• Expected cost is discounted (PV) and capitalized
  and then amortized (expensed) over the life of
  the asset
  
• Example Strip mining concession
• Condition restore land to original condition
  expected cost 500,000
  
• Life 50,000 tons of coal 3 years

18
ARO Strip mine continued

• expected cost 500,000, discount rate 10, 3
  years PV(3,10) .751 375,500
  
• Journal entry
• Dr. Strip mine 375,500
• cr. Asset retirement obligation 375,500

19
ARO Strip mine continued

• Amortization
• 375,500/50,000 ton 7.51 per ton
• 10,000 tons mined
• Journal entry
• Dr. depreciation expense 75,100
• cr. Accumulated depreciation 75,100

20
ARO Strip mine continued

• Accrual of interest expense 375,500 .1
  37,550
  
• Journal entry
• Dr. interest expense expense 37,550
• cr. Asset retirement obligation 37,550

21
Payroll related current liabilities I

• Salaries earned, not yet paid
• Benefits earned (vested)
• Compensated absences (sick leave, vacation)
• Pensions
• Accrue as earned (i.e., 2 hours per week)
• Dr. compensation expense xxx
• cr. Compensated absences (vacation, sick days)
  xxx

22
Payroll related current liabilities II

• Payroll deductions
• Social security taxes
• Income taxes (state, federal, local)
• Unemployment tax
• Workmans compensation
• Other deductions (parking, union dues, 401k
  contributions)
  

23
Payroll related current liabilities III

• Note that some of these are subtracted from
  salaries earned, employer acts as collection
  agency for government or other agencies
  Examples
• Income taxes, union dues, 401k contributions,
  other employee savings (deductions) programs,
  employee social security contribution.

24
Payroll related current liabilities IV

• Other items are paid by the employer directly
  (i.e., NOT deducted from cash received by
  employee)
  
• Examples
• Unemployment tax
• Employer portion of social security contribution
• Pension, vacation, sick pay
• Workmans compensation