Intermediate Accounting

Seventeenth Edition

Kieso; Weygandt; Warfield

Chapter 13

Current Liabilities and

Contingencies
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Learning Objectives
After studying this chapter, you should be able to:
1. Describe the nature, valuation, and reporting of
current liabilities.
2. Explain the classification issues of short-term debt
expected to be refinanced.
3. Explain the accounting for gain and loss contingencies.
4. Indicate how to present and analyze liabilities and
contingencies.

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Preview of Chapter 13
Current Liabilities and Contingencies
Current Liabilities
• Accounts payable
• Notes payable
• Dividends payable
• Customer advances and deposits
• Unearned revenues
• Taxes payable
• Employee-related liabilities
• Current maturities of long-term debt

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Preview of Chapter 13
Current Liabilities and Contingencies
Short-Term Obligations
• Refinancing illustration

Contingencies
• Gain contingencies
• Loss contingencies

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Preview of Chapter 13
Current Liabilities and Contingencies
Presentation and Analysis
• Presentation of current liabilities
• Presentation of contingencies
• Analysis of current liabilities

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 Learning Objective 1
Describe the Nature, Valuation, and
Reporting of Current Liabilities

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 Current Liabilities
“What is a Liability?”
The FASB, defined liabilities as:
“Probable Future Sacrifices of Economic Benefits arising
from present obligations of a particular entity to transfer
assets or provide services to other entities in the future
as a result of past transactions or events.”

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 Current Liabilities (1 of 2)
Recall: Current assets are cash or other assets that companies
reasonably expect to convert into cash, sell, or consume in
operations within a single operating cycle or within a year.
Current liabilities are “obligations whose liquidation is
reasonably expected to require use of existing resources
properly classified as current assets, or the creation of other
current liabilities.”
Operating cycle: Period of time elapsing between the
acquisition of goods and services and the final cash realization
resulting from sales and subsequent collections.
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 Current Liabilities
Typical Current Liabilities
1. Accounts payable. 6. Sales taxes payable.
2. Notes payable. 7. Income taxes payable.
3. Dividends payable. 8. Employee-related
4. Customer advances and liabilities.
deposits. 9. Current maturities of
5. Unearned revenues. long-term debt.

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 Current Liabilities
Accounts Payable (trade accounts payable)
Balances owed to others for goods, supplies, or services
purchased on open account.
• Time lag between the receipt of services or acquisition
of title to assets and the payment for them.
• Terms of the sale (e.g., 2/10, n/30 or 1/10, E.O.M.)
usually state period of extended credit, commonly 30
to 60 days.

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 Current Liabilities
Notes Payable
Written promises to pay a certain sum of money on a
specified future date.
• Arise from purchases, financing, or other transactions.
• Classified as short-term or long-term.
• May be interest-bearing or zero-interest-bearing.

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 Notes Payable
Interest-Bearing Note Issued
Illustration: Castle National Bank agrees to lend $100,000
on March 1, 2020, to Landscape Co. if Landscape signs a
$100,000, 6 percent, four-month note. Landscape records
the cash received on March 1 as follows:

Cash 100,000
Notes Payable 100,000

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 Interest-Bearing Note Issued
Recording Interest
If Landscape prepares financial statements semiannually,
it makes the following adjusting entry to recognize
interest expense and interest payable at June 30:
Interest calculation = ($100,000 × 6% × 4/12) = $2,000

Interest Expense 2,000

Interest Payable 2,000

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 Interest-Bearing Note Issued
Payment at Maturity
At maturity (July 1), Landscape records payment of the
note and accrued interest as follows.

Notes Payable 100,000

Interest Payable 2,000
Cash 102,000

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 Current Liabilities
Zero-Interest-Bearing Note Issued
Illustration: On March 1, Landscape issues a $102,000,
four-month, zero-interest-bearing note to Castle National
Bank. The present value of the note is $100,000.
Landscape records this transaction as follows.

Cash 100,000
Discount on Notes Payable 2,000
Notes Payable 102,000

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 Zero-Interest-Bearing Note Issued
Balance Sheet Presentation

Current liabilities
Notes payable $102,000
Less: Discount on notes payable 2,000 $100,000

Discount on notes payable:

• Contra account to notes payable.
• Represents the cost of borrowing.
• Debited to interest expense over the life of the note.

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 Accounts and Notes Payable
Illustration
The following are selected 2020 transactions of Astin
Corporation.
Sept. 1 - Purchased inventory from Encino Company on
account for $50,000. Astin records purchases gross and uses
a periodic inventory system.
Oct. 1 - Issued a $50,000, 12-month, 8% note to Encino in
payment of account.
Oct. 1 - Borrowed $50,000 from the Shore Bank by signing a
12-month, zero-interest-bearing $54,000 note.
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 Accounts and Notes Payable
Journal Entries
Prepare the journal entries for the selected transactions.
Sept. 1 Purchases 50,000
Accounts Payable 50,000

Oct. 1 Accounts Payable 50,000

Notes Payable 50,000

Oct. 1 Cash 50,000

Discount on Notes Payable 4,000
Notes Payable 54,000
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 Accounts and Notes Payable
Adjusting Journal Entries
Prepare the adjusting journal entries for the transactions.
Dec. 31 Interest Expense 1,000
Interest Payable 1,000
($50,000 × 8% × 3/12) = $1,000

Dec. 31 Interest Expense 1,000

Discount on Notes Payable 1,000
($4,000 × 3/12) = $1,000

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 Accounts and Notes Payable
Balance Sheet December 31
Compute the total net liability to be reported on the
December 31 balance sheet for:
1. Interest-bearing note.
2. Zero-interest bearing note.

1. Notes payable $50,000

Interest payable 1,000 $51,000

2. Notes payable $54,000

Less discount ($4,000 − $1,000) 3,000 $51,000

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 Current Liabilities
Dividends Payable
Amount owed by a corporation to its stockholders as a
result of its board of directors’ authorization.
• Generally paid within three months.
• Undeclared dividends on cumulative preferred stock
not recognized as a liability.
• Dividends payable in the form of additional shares of
stock are reported in stockholders’ equity.

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 Current Liabilities
Customer Advances and Deposits
Returnable cash deposits received from customers and
employees.
• To guarantee performance of a contract or service or
• As guarantees to cover payment of expected future
obligations.
• May be classified as current or long-term liabilities.

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 Current Liabilities
Unearned Revenues
Payment received before delivering goods or rendering
services.
Account Title
Type of Business Unearned Revenue Earned Revenue
Airline Unearned Ticket Revenue Passenger Revenue
Magazine publisher Unearned Subscription Revenue Subscription Revenue
Hotel Unearned Rent Revenue Rent Revenue
Auto dealer Unearned Warranty Revenue Warranty Revenue
Retailers Unearned Gift Card Revenue Sales Revenue

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How do these companies account for unearned revenues that
they receive before delivering goods or rendering services?
1. When a company receives an advance payment, it debits Cash,
and credits a current liability account identifying the source of the
unearned revenue.
2. When a company recognizes revenue, it debits the unearned
revenue account, and credits a revenue account.

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 Current Liabilities (2 of 2)
Illustration: Allstate University sells 10,000 season football tickets
at $50 each for its five-game home schedule. Allstate University
records the sales of season tickets as follows.
Aug. 6 Cash 500,000
500,000
Unearned Sales Revenue
(10,000 × $50 = $500,000)
As each game is completed, Allstate makes the following entry.
Sept. 7 Unearned Sales Revenue 100,000
Sales Revenue 100,000
($500,000 ÷ 5 games = $100,000 per game)
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 Current Liabilities
Sales Taxes Payable
Retailers must collect sales taxes from customers on
transfers of tangible personal property and on certain
services and then remit to the proper governmental
authority.

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 Sales Taxes Payable
Illustration: Prepare the entry to record sales taxes
assuming there was a sale of $3,000 when a 4 percent
sales tax is in effect.

Cash 3,120
Sales Revenue 3,000
Sales Taxes Payable 120
($3,000 × 4% = $120)

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Sales Taxes Payable
Alternate Calculation

Many companies do not segregate the sales tax and the amount of
the sale at the time of sale. Instead, the company credits both
amounts in total in the Sales Revenue account.
Then, to reflect correctly the actual amount of sales and the liability
for sales taxes, the company would debit the Sales Revenue
account for the amount of the sales taxes due the government on
these sales, and would credit the Sales Taxes Payable account for
the same amount.

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 Sales Taxes Payable
Alternate Calculation
Illustration: Assume the Sales Revenue account balance of
$150,000 includes sales taxes of 4 percent. Prepare the entry
to record the amount due the taxing unit.

Tax calculation = ($150,000 ÷ 1.04 = $144,230.77,

$150,000 −$144,230.77 = $5,769.23)
Sales Revenue 5,769.23
Sales Taxes Payable 5,769.23
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 Current Liabilities
Income Taxes Payable
Businesses must prepare an income tax return and
compute the income tax payable.
• Taxes payable are a current liability.
• Corporations must make periodic tax payments.
• Differences between taxable income (tax law) and
accounting income (GAAP) sometimes occur (Chapter
19).

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 Current Liabilities
Employee-Related Liabilities
Amounts owed to employees for salaries or wages are
reported as a current liability.
Current liabilities related to employee compensation may
include:
• Payroll deductions.
• Compensated absences.
• Bonuses.

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 Employee-Related Liabilities
Payroll Deductions
Most common types of payroll deductions are taxes, insurance
premiums, employee savings, and union dues.
Social Security Taxes (since January 1, 1937).
• Federal Old Age, Survivor, and Disability Insurance (OASDI)
benefits for certain individuals and their families.
• Funds from taxes levied on both employer and employee.
• Current rate 6.2 percent based on the employee’s gross pay
up to a $128,400 annual limit.
• OASDI tax is usually referred to as FICA.

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 Payroll Deductions
Social Security Taxes
• In 1965, Congress passed the first federal health insurance
program for the aged—popularly known as Medicare.
• Alleviates high cost of medical care for those over age 65.
• Hospital Insurance tax, paid by both employee and employer
at the rate of 1.45 percent on the employee’s total
compensation.
• OASDI tax (FICA) and the federal Hospital Insurance Tax is
referred to as the Social Security tax.

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 Payroll Deductions
Unemployment Taxes
Federal Unemployment Tax Act (FUTA):
• Only employers pay the unemployment tax.
• Rate is 6 percent on the first $7,000 of compensation
paid to each employee during the calendar year.
• If employer is subject to a state unemployment tax of
5.2 percent or more it receives a tax credit (not to
exceed 5.4 percent) and pays only 0.8 percent tax to
the federal government.

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 Unemployment Taxes
State unemployment compensation laws differ both from
the federal law and among various states.
Employers must refer to the unemployment tax laws in
each state in which they pay wages and salaries.

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 Payroll Deductions
Income Tax Withholdings
Federal and some state income tax laws require
employers to withhold from each employee’s pay the
applicable income tax due on those wages.

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 Payroll Deductions Example Employee
Illustration: Assume a weekly payroll of $10,000 entirely subject
to FICA and Medicare (7.65%), federal (0.8%) and state (4%)
unemployment taxes, with income tax withholding of $1,320 and
union dues of $88 deducted. The company records the salaries
and wages paid and the employee payroll deductions as follows:

Salaries and Wages Expense 10,000

Withholding Taxes Payable 1,320
FICA Taxes Payable (10,000 × .0765) 765
Union Dues Payable 88
Cash 7,827
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 Payroll Deductions Example Employer
Illustration: Assume a weekly payroll of $10,000 entirely subject
to FICA and Medicare (7.65%), federal (0.8%) and state (4%)
unemployment taxes, with income tax withholding of $1,320 and
union dues of $88 deducted. The company records the employers
payroll taxes as follows:

Payroll Tax Expense 1,245

FICA Taxes Payable 765
FUTA Taxes Payable ($10,000 × 0.8%) 80
SUTA Taxes Payable ($10,000 × 4%) 400

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 Employee-Related Liabilities
Compensated Absences
Paid absences for vacation, illness, and holidays.
Accrue a liability if all the following conditions exist.
• The employer’s obligation is attributable to employees’
services already rendered.
• The obligation relates to rights that vest or accumulate.
• Payment of the compensation is probable.
• The amount can be reasonably estimated.

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 Compensated Absences
Balance Sheet Presentation
Clarcor Inc.

Current liabilities
Accounts payable $ 6,308
Accrued salaries, wages and commissions 2,278
Compensated absences 2,271
Accrued pension liabilities 1,023
Other accrued liabilities 4,572
$16,452

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 Compensated Absences
Illustration: Amutron Inc. employs 10 individuals and pays each
$480 per week. Employees earned 20 unused vacation weeks in
2020. In 2021, the employees used the vacation weeks, but now
they each earn $540 per week. Amutron accrues the accumulated
vacation pay on December 31, 2020, as follows.
Salaries and Wages Expense 9,600
Salaries and Wages Payable ($480 × 20) 9,600
In 2021, it records the payment of vacation pay as follows.
Salaries and Wages Payable 9,600
Salaries and Wages Expense 1,200
Cash ($540 × 20) 10,800
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 Employee-Related Liabilities
Bonus Agreements
Payments to certain or all employees in addition to their
regular salaries or wages.
• Bonuses paid are an operating expense.
• Unpaid bonuses should be reported as a current
liability.

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 Bonus Agreements
Illustration: Palmer Inc. shows income for the year 2020 of
$100,000. It will pay out bonuses of $10,700 in January 2021. Palmer
makes an adjusting entry dated December 31, 2020, to record the
bonuses as follows.
Salaries and Wages Expense 10,700
Salaries and Wages Payable 10,700

In 2021, it records the payment of the bonus as follows.

Salaries and Wages Payable 10,700
Cash 10,700

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 Current Liabilities
Current Maturities of Long-Term Debt
Portion of bonds, mortgage notes, and other long-term
indebtedness that matures within the next fiscal year.
Exclude debts maturing currently if they are to be:
1. Retired by assets accumulated that have not been
shown as current assets,
2. Refinanced, or retired from the proceeds of a new
debt issue, or
3. Converted into capital stock.

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 Learning Objective 2
Explain the Classification Issues of
Short-Term Debt Expected to Be
Refinanced

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 Short-Term Obligations Expected to Be
Refinanced
Exclude from current liabilities if one or both of the
following conditions are met:
1. The liability is contractually due to be settled more
than one year (or operating cycle, if longer) after the
balance sheet date.
2. The entity has a contractual right to defer settlement
of the liability for at least one year (or operating cycle,
if longer) after the balance sheet date.

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 Refinancing Illustration
On November 30, 2020, Montavon Winery issued a note payable of
$3,000,000. The note is due on February 28, 2021 and their
balance sheet date is December 31, 2020. Montavon issued its
financial statements on March 1, 2021. At that time it plans to
extend the maturity date of the loan to June 30, 2022. The
refinancing events are shown in the following timeline.

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 Questions:
1. What is the accounting treatment for Montavon’s short-term
debt to be refinanced if a contract to refinance is completed on
January 15, 2021?
2. What is the accounting treatment for the short-term debt to be
refinanced if a contract to refinance is completed by December
31, 2020?
Solutions:
1. Classify note payable as a current liability because contract for
refinancing is not completed by December 31, 2020.
2. Classify note payable as noncurrent because it has a contract,
which gives it the right to defer payment to June 30, 2022, and
the contract is in effect as of December 31, 2020.
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 Learning Objective 3
Explain the Accounting for Gain and
Loss Contingencies

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 Contingencies
“An existing condition, situation, or set of circumstances
involving uncertainty as to possible gain (gain
contingency) or loss (loss contingency) to an enterprise
that will ultimately be resolved when one or more future
events occur or fail to occur.”

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 Contingencies
Gain Contingencies
Typical Gain Contingencies are:
1. Possible receipts of monies from gifts, donations, asset
sales, and so on.
2. Possible refunds from the government in tax disputes.
3. Pending court cases with a probable favorable
outcome.
4. Tax loss carryforwards (Chapter 19).
Gain contingencies are not recorded, disclosed only if
probability of receipt is high.
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 Contingencies
Loss Contingencies
• Involves possible losses.

Likelihood of Loss
FASB uses three areas of probability:
• Probable.
• Reasonably possible.
• Remote.

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 Loss Contingencies

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 Loss Contingencies
Illustration
Scorcese Inc. is involved in a lawsuit at December 31, 2020. (a)
Prepare the December 31 entry assuming it is probable that
Scorcese will be liable for $900,000 as a result of this suit. (b)
Prepare the December 31 entry, if any, assuming it is not probable
that Scorcese will be liable for any payment as a result of this suit.

(a) Lawsuit Loss 900,000

Lawsuit Liability 900,000

(b) No entry is necessary. The loss is not accrued because it is not

probable that a liability has been incurred at 12/31/20.

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 Loss Contingencies
Usually Accrued
Loss Related to:
1. Collectibility of receivables.
2. Obligations related to product warranties and product
defects.
3. Premiums offered to customers.

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 Loss Contingencies
Not Accrued
Loss Related to:
4. Risk of loss or damage of enterprise property by fire,
explosion, or other hazard.
5. General or unspecified business risk.
6. Risk of loss from catastrophes assumed by property
and casualty insurance companies,
including reinsurance companies

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Loss Contingencies
May Be Accrued*
Loss Related to:
7. Threat of expropriation of assets.
8. Pending or threatened litigation.
9. Actual or possible claims and assessments.
10. Guarantees of indebtedness of others.

*Should be accrued when both criteria—probable and

reasonably estimable—are met.

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Loss Contingencies
May Be Accrued*
Loss Related to:
11. Obligations of commercial banks under "standby
letters of credit.“
12. Agreements to repurchase receivables (or the related
property) that have been sold

*Should be accrued when both criteria—probable and

reasonably estimable—are met.

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 Loss Contingencies
Common loss contingencies:
1. Litigation, claims, and assessments.
2. Guarantee and warranty costs.
3. Consideration payable (e.g., premiums and coupons).
4. Environmental liabilities.

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 Loss Contingencies
Litigation, Claims, and Assessments
Companies must consider the following factors, in
determining whether to record a liability with respect to
pending or threatened litigation and actual or possible
claims and assessments.
• Time period in which the action occurred.
• Probability of an unfavorable outcome.
• Ability to make a reasonable estimate of the loss.

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 Loss Contingencies
Guarantee and Warranty Costs
Promise made by a seller to a buyer to make good on a
deficiency of quantity, quality, or performance in a
product.
Companies often provide one of two types of warranties
to customers:
1. Assurance-type warranty
2. Service-type warranty

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 Guarantee and Warranty Costs
Assurance-Type Warranty
Warranty that the product meets agreed-upon
specifications in the contract at the time the product is
sold.
• Should be expensed in the period the goods are
provided or services performed.
• Should record a warranty liability.

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 Assurance-Type Warranty
Illustration: Denson Machinery Company begins production
of a new machine in July 2020 and sells 100 of these machines
for $5,000 cash by year-end for a total sales revenue of
$500,000 (100 × $5,000). Each machine is under warranty for
one year. Denson estimates, based on past experience with
similar machines, that the warranty cost will average $200 per
unit for a total expected warranty expense of $20,000 (100 ×
$200). Further, as a result of parts replacements and services
performed in compliance with machinery warranties, it incurs
$4,000 in warranty costs in 2020 and $16,000 in 2021.

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 Assurance-Type Warranty
Recognize Sale of Machines
1. Prepare the journal entry to record the sale of the
machines and related warranty costs (July-Dec. 2020).

Cash 500,000
Sales Revenue ($5,000 × 100) 500,000

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 Assurance-Type Warranty
Record Payment 2020
2. Prepare the journal entry to record payment for warranty
costs incurred (July-Dec. 2020).
Warranty Expense 4,000

Cash, Inventory, Accrued Payroll 4,000

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 Assurance-Type Warranty
Adjusting Entry
3. Prepare the adjusting entry to record estimated warranty
expense and warranty liability for expected warranty
claims in 2021 (Dec. 31, 2020):
Warranty Expense 16,000

Warranty Liability ($20,000 − $4,000) 16,000

Balance sheet reports a warranty liability (current) of $16,000

($20,000 – $4,000).
Income statement for 2020 reports sales revenue of $500,000
and warranty expense of $20,000.
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 Assurance-Type Warranty
Record Payment 2021
4. Prepare the entry to record the payment for warranty
costs incurred in 2021 related to 2020 machinery sales
(Jan. 1 – Dec. 31, 2021):

Warranty Liability 16,000

Cash, Inventory, Accrued Payroll 16,000

At the end of 2021, no warranty liability is reported for the

machinery sold in 2020.

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 Guarantee and Warranty Costs
Service-Type Warranty
Warranty that provides an additional service beyond the
assurance-type warranty.
• Recorded as a separate performance obligation.
• Usually recorded in an Unearned Warranty Revenue
account.
• Recognize revenue on a straight-line basis over the
period the service-type warranty is in effect.

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 Service-Type Warranty
Illustration: You purchase an automobile from Hamlin Auto
for $30,000 on January 2, 2020. Hamlin estimates the
assurance-type warranty costs on the automobile to be $700
(Hamlin will pay for repairs for the first 36,000 miles or three
years, whichever comes first). You also purchase for $900 a
service-type warranty for an additional three years or 36,000
miles. Hamlin incurs warranty costs related to the assurance-
type warranty of $500 in 2020 and $100 in 2021 and 2022.
Hamlin records revenue on the service-type warranty on a
straight-line basis.
What entries should Hamlin make in 2020 and 2023?
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 Service-Type Warranty
Record the Sale
1. Prepare the journal entry to record the sale of the
automobile and related warranties (January 2, 2020).

Cash ($30,000 + $900) 30,900

Unearned Warranty Revenue 900

Sales Revenue 30,000

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 Service-Type Warranty
Record Warranty Costs
2. Prepare the journal entry to record the warranty costs
incurred in 2020 (January 2, - December 31, 2020).

Warranty Expense 500

Cash, Inventory, Accrued Payroll 500

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 Service-Type Warranty
Adjusting Entry
3. Prepare the adjusting entry to record estimated warranty
expense and warranty liability for expected assurance
warranty claims in 2021 (Dec. 31, 2020):
Warranty Expense 100
Warranty Liability 100

Balance sheet reports a warranty liability of $100 for the

assurance-type warranty costs in 2021.
Income statement for 2020 reports sales revenue of $30,000
and warranty expense of $700.

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 Service-Type Warranty
Revenue Recognized in 2023
4. Prepare the entry to record revenue recognized in 2023 on
the service-type warranty (Jan. 1 – Dec. 31, 2023):

Unearned Warranty Revenue ($900 ÷ 3) 300

Warranty Revenue 300

Warranty costs under the service-type warranty will be

expensed as incurred in 2023 to 2025.

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 Loss Contingencies
Consideration Payable
Companies should charge the costs of premiums and
coupons to expense in the period of the sale that
benefits from the plan.
• Company estimates the number of outstanding
premium offers that customers will present for
redemption.
• Company charges the cost of premium offers to
Premium Expense and credits Premium Liability.

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 Consideration Payable
Illustration: Fluffy Cake Mix Company sells boxes of cake mix for $3
per box. In addition, Fluffy Cake Mix offers its customers a large
durable mixing bowl in exchange for $1 and 10 box tops. The mixing
bowl costs Fluffy Cake Mix $2, and the company estimates that
customers will redeem 60 percent of the box tops. The premium
offer began in June 2020. During 2020, Fluffy Cake Mix purchased
20,000 mixing bowls at $2, sold 300,000 boxes of cake mix for $3 per
box, and redeemed 60,000 box tops.
1. Prepare the journal entry to record the purchase of 20,000
mixing bowls at $2 per bowl.
Premium Inventory (20,000 bowls × $2) 40,000
Cash 40,000
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 Consideration Payable
Sale of Cake Boxes and Redemption of Box Tops
2. Prepare the journal entry to record the sale of the cake mix
boxes in 2020.
Cash (300,000 boxes × $3) 900,000
Sales Revenue 900,000

3. Prepare the entry to record the redemption of 60,000 box tops,

receipt of $1 per 10 box tops, and delivery of mixing bowls:
Cash [(60,000 ÷ 10) × $1] 6,000
Premium Expense 6,000
Premium Inventory [(60,000 ÷ 10) × $2] 12,000

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 Consideration Payable
Adjusting Entry
4. Prepare the adjusting entry to record additional premium
expense and the estimated premium liability at Dec. 31, 2020.
Premium Expense 12,000
Premium Liability 12,000

Total box tops sold in 2020 $ 300,000

Estimated redemptions (in percent) 60%
Total estimated redemptions $ 180,000
Cost of estimated redemptions [(180,000 box tops ÷ 10) × ($2 − $1)] $ 18,000
Redemptions to date (6,000)
Liability at 12/31/20 $ 12,000

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 Loss Contingencies
Environmental Liabilities
A company must recognize an asset retirement
obligation (ARO) when it has an existing legal obligation
associated with the retirement of a long-lived asset and
when it can reasonably estimate the amount of the
liability.
ARO’s should be recorded as fair value.

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 Environmental Liabilities
Obligating Events
Examples of existing legal obligations, which require
recognition of a liability include, but are not limited to:
• Decommissioning nuclear facilities;
• Dismantling, restoring, and reclamation of oil and gas
properties;
• Certain closure, reclamation, and removal costs of
mining facilities;
• Closure and post-closure costs of landfills.

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 Environmental Liabilities
Illustration
On January 1, 2020, Wildcat Oil Company erected an oil
platform in the Gulf of Mexico. Wildcat is legally required to
dismantle and remove the platform at the end of its useful
life, estimated to be five years. Wildcat estimates that
dismantling and removal will cost $1,000,000. Based on a 10
percent discount rate, the fair value of the asset retirement
obligation is estimated to be $620,920 ($1,000,000 × .62092).
Wildcat records this ARO as follows.
Drilling Platform 620,920
Asset Retirement Obligation 620,920
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 Environmental Liabilities
December 31, 2020, 2021, 2022, 2023, 2024
Illustration: During the life of the asset, Wildcat allocates the
asset retirement cost to expense. Using the straight-line
method, Wildcat makes the following entries to record this
expense.
December 31, 2020 through 2024

Depreciation Expense ($620,920 ÷ 5) 124,184

Accumulated Depreciation—Plant Assets 124,184

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 Environmental Liabilities
December 31, 2020
Illustration: In addition, Wildcat must accrue interest expense
each period. Wildcat records interest expense and the related
increase in the asset retirement obligation on December 31,
2020, as follows.
December 31, 2020

Interest Expense ($620,920 × 10%) 62,092

Asset Retirement Obligation 62,092

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 Environmental Liabilities
January 10, 2025
Illustration: On January 10, 2025, Wildcat contracts with Rig
Reclaimers, Inc. to dismantle the platform at a contract price of
$995,000. Wildcat makes the following journal entry to record
settlement of the ARO.
January 10, 2025
Asset Retirement Obligation 1,000,000
Gain on Settlement of ARO 5,000
Cash 995,000

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 Loss Contingencies
Self-Insurance
Self-insurance is not insurance, but risk assumption.
There is little theoretical justification for the
establishment of a liability based on a hypothetical
charge to insurance expense.

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 Self-Insurance
Disclosure
Molson Coors Brewing Company
Notes to Financial Statements (in part)
Note 21: Insurance. We are self-insured for certain insurable risks
consisting primarily of employee health insurance programs, as
well as workers' compensation, general liability, automobile
liability, and property insurance deductibles or retentions ... we
fully insured future risks for long-term disability, and, in most
states, workers' compensation, but maintained a self-insured
position for workers' compensation for certain self-insured states
and for claims incurred prior to the inception of the insurance
coverage in Colorado in 1997.

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 Learning Objective 4
Indicate How to Present and Analyze
Liabilities and Contingencies

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 Presentation and Analysis
Presentation of Current Liabilities
• Usually reported at their full maturity value.
• Difference between present value and the maturity
value is considered immaterial.
• Companies may list the accounts in
• Order of maturity,
• Descending order of amount, or
• Order of liquidation preference.

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 Current Liabilities Presentation

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 Presentation of Current Liabilities
If a company excludes a short-term obligation from
current liabilities because of refinancing, it should include
the following in the note to the financial statements:
1. A general description of the financing agreement.
2. The terms of any new obligation incurred or to be
incurred.
3. The terms of any equity security issued or to be issued.

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Actual Refinancing of Short-Term Debt
December 31, 2020
Current liabilities
Accounts payable $ 3,600,000
Accrued payables 2,500,000
Income taxes payable 1,100,000
Current portion of long-term debt 1,000,000
Notes payable refinanced in January 2021 (Note 1) 2,000,000
Total current liabilities $ 10,200,000
Long-term debt
11% bonds due serially through 2031 $ 15,000,000
Total long-term debt $ 15,000,000

Note 1: On January 19, 2021, the Company issued 50,000 shares of common stock and
received proceeds totaling $2,385,000, of which $2,000,000 was used to liquidate notes
payable that matured on February 1, 2021. Such notes payable have been classified as
long-term dept at December 31, 2020, because the refinancing was not completed by the
balance sheet date.

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Presentation of Contingencies
Disclosure should include:
• Nature of the contingency.
• An estimate of the possible loss or range of loss or a
statement that an estimate cannot be made.
Companies should disclose certain other contingent liabilities.
1. Guarantees of indebtedness of others.
2. Obligations of commercial banks under “stand-by letters of
credit.”
3. Guarantees to repurchase receivables (or any related
property) that have been sold or assigned.

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 Disclosure of Loss Contingency through
Litigation

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 Analysis of Current Liabilities
Two ratios to help assess liquidity based on the
information for Best Buy Co. previously provided.

Current assets $10,516

Current ratio = = = 1.48 times
Currents liabilities $7,122
Short-term Accounts
Cash + +
investments receivable (net) $5,268
Acid-test ratio = = = 0.74 times
Current liabilities $7,122

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 Learning Objective 5
Compare the Accounting Procedures
for Current Liabilities and
Contingencies Under GAAP and IFRS

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 IFRS Insights
Relevant Facts – Similarities (1 of 2)
• Similar to U.S. practice, IFRS requires that companies present current
and non-current liabilities on the face of the statement of financial
position (balance sheet), with current liabilities generally presented in
order of liquidity. However, many companies using IFRS present non-
current liabilities before current liabilities on the statement of financial
position.
• The basic definition of a liability under GAAP and IFRS is very similar. In
a more technical way, liabilities are defined by the IASB as a present
obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources
embodying economic benefits. Liabilities may be legally enforceable
via a contract or law but need not be. That is, they can arise due to
normal business practices or customs.
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 IFRS Insights
Relevant Facts – Similarities (2 of 2)
• IFRS requires that companies classify liabilities as current or non-
current on the face of the statement of financial position (balance
sheet), except in industries where a presentation based on liquidity
would be considered to provide more useful information (such as
financial institutions).
• Under IFRS, short-term obligations expected to be refinanced can be
classified as non-current if the refinancing is completed by the
financial statement date. GAAP now also uses the balance sheet date.

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 IFRS Insights
Relevant Facts – Differences (1 of 2)
• Under IFRS, the measurement of a provision related to a contingency
is based on the best estimate of the expenditure required to settle the
obligation. If a range of estimates is predicted and no amount in the
range is more likely than any other amount in the range, the
“midpoint” of the range is used to measure the liability. In GAAP, the
minimum amount in a range is used.
• Both IFRS and GAAP prohibit the recognition of liabilities for future
losses. However, IFRS permits recognition of a restructuring liability,
once a company has committed to a restructuring plan. GAAP has
additional criteria (i.e., related to communicating the plan to
employees) before a restructuring liability can be established.

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 IFRS Insights
Relevant Facts – Differences (2 of 2)
• IFRS and GAAP are similar in the treatment of asset retirement
obligations (AROs). However, the recognition criteria for an ARO are
more stringent under GAAP: The ARO is not recognized unless there is a
present legal obligation and the fair value of the obligation can be
reasonably estimated.
• IFRS uses the term provisions to refer to estimated liabilities. Under IFRS,
contingencies are not recorded but are often disclosed. The accounting
for provisions under IFRS and estimated liabilities under GAAP are very
similar.
• GAAP uses the term contingency in a different way than IFRS. Contingent
liabilities are not recognized in the financials under IFRS, whereas under
GAAP, a contingent liability is sometimes recognized.

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Copyright
Copyright © 2019 John Wiley & Sons, Inc.
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or from the use of the information contained herein.

Copyright ©2019 John Wiley & Sons, Inc. 99