Financial accounting IFRS 4 kieoso ch10 PPT

Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes payable, salaries and wages payable, Accounting for Current Liabi

Chapter Outline

Learning Objectives

LO 1 Explain how to account for current liabilities.

LO 2 Discuss how current liabilities are reported and

analyzed.

Learning Objective 1

Explain How to Account for Current

Liabilities

What is a Current Liability?

A debt that a

company expects to pay within one year or

the operating cycle, whichever is longer

Current liabilities include notes payable, accounts

payable, unearned revenues, and accrued liabilities

such as taxes payable, salaries and wages payable,

Accounting for Current Liabilities

What Is a Current Liability? (1 of 2)

Review Question

To be classified as a current liability, a debt must be

expected to be paid within:

What Is a Current Liability? (2 of 2)

Review Question

To be classified as a current liability, a debt must be

expected to be paid within:

Notes Payable (1 of 4)

• Written promissory note

• Usually requires borrower to pay interest

• Frequently issued to meet short-term financing needs

• Issued for varying periods of time

• Usually classified as current liability if due for

payment within one year of statement of financial

position date

Notes Payable (2 of 4)

Illustration: First Hunan Bank agrees to lend ¥100,000 on

September 1, 2020, if Yang Enterprises signs a ¥100,000, 12%, four-month note maturing on January 1 (amounts in

thousands) When a company issues an interest-bearing note, the amount of assets it receives upon issuance of the note

generally equals the note’s face value Yang therefore will

receive ¥100,000 cash and will make the following journal

entry

Notes Payable (3 of 4)

Illustration: If Yang prepares financial statements annually, it

makes an adjusting entry at December 31 to recognize

interest expense and interest payable Compute the interest for the four months ended December 31, 2020

Dec 31 Interest Expense 4,000

¥100,000 x 12% x 4/12 = ¥4,000Yang makes an adjusting entry as follows

Notes Payable (4 of 4)

Illustration: At maturity (January 1, 2021), Yang must pay the

face value of the note plus interest It records payment of the note and accrued interest as follows

Jan 1 Notes Payable 100,000

Interest Payable 4,000

Value-Added Taxes Payable (1 of 2)

• A consumption tax

• Tax is placed on a product or service whenever value

is added at a stage of production and at final sale

• Cost to end user, normally a private individual, similar

to a sales tax

• Tax is collected every time a business purchases

products from another business in the product’s

supply chain

Value-Added Taxes Payable (2 of 2)

Illustration: Hill Farms Wheat grows wheat and sells it to

Sunshine Baking for €1,000 Hill Farms Wheat makes the

following entry to record the sale, assuming the VAT is 10%

Value-Added Taxes Payable 100

Sales Taxes Payable (1 of 3)

• Sales taxes are expressed as a stated percentage of the sales price

• Selling company

 collects tax from customer

 remits collections to taxing authority

Sales Taxes Payable (2 of 3)

Illustration: Cooley Grocery sells loaves of bread totaling

€800 on a given day Assuming a sales tax rate of 6%, Cooley make the following entry record the sale

Sales Taxes Payable (3 of 3)

Sometimes companies do not enter sales taxes separately in the cash register If Cooley Grocery enters total receipts of

€10,600 Because the amount received from the sale is equal

to the sales price 100% plus 6% of sales, we compute the

sales amount as follows:

Revenues received before the company

delivers goods or

provides services.

Account Title Type of Business Unearned Revenue Revenue

Airline Unearned Ticket Revenue Ticket Revenue

Magazine publisher Unearned Subscription Revenue Subscription Revenue Hotel Unearned Rent Revenue Rent Revenue

Unearned Revenues (1 of 2)

Unearned Revenues (2 of 2)

Illustration: Liverpool F.C (GBR) sells 10,000 season soccer

(football) tickets at £50 each for its five-game home schedule The entry for the sale of season tickets is:

As each game is completed, Liverpool records the recognition

of revenue with the following entry

Aug 6 Cash (10,000 x £50) 500,000

Unearned Ticket Revenue 500,000

Sept 7 Unearned Ticket Revenue 100,000

Ticket Revenue (£500,000 ÷ 5) 100,000

Salaries and Wages (1 of 4)

Companies report as a current liability the amounts owed

to employees for salaries or wages at the end of an

Payroll Deduction (1 of 4)

Most common types of payroll deductions: taxes, insurance premiums, employee savings, union dues.

Social Security Taxes

• Social benefits (for retirement, unemployment,

income, disability, and medical benefits) to

individuals and families

• Funds generally come from taxes levied on both the employer and the employee

Payroll Deduction (2 of 4)

Most common types of payroll deductions: taxes, insurance premiums, employee savings, union dues.

Income Tax Withholding

• Income tax laws generally require employers to

withhold from each employee’s pay the applicable

income tax due on those wages

• Employer computes the amount of income tax to

withhold according to a government-prescribed

Illustration: Assume Cumberland Company records its payroll

for the week of January 14 as follows:

Payroll Deduction (3 of 4)

Jan 14 Salaries and Wages Expense 10,000

Social Security Taxes Payable 800

Salaries and Wages Payable 7,792Record the payment of this payroll on January 14

Salaries and Wages Payable 7,792

Jan 14

Payroll Deduction (4 of 4)

Illustration: As the employer, Cumberland is also required to

pay Social Security taxes and often other taxes as well

(referred to as employer payroll taxes) It records payroll taxes related to the January 14 payroll as follows

Jan 14 Payroll Tax Expense 800

Social Security Taxes Payable 800

Profit-Sharing and Bonus Plans (4 of 4)

Many companies give a bonus to certain or all employees in

addition to their regular salaries or wages

Illustration: Palmer Group will pay out bonuses of NT$10,700

in January 2021 Palmer makes an entry dated December 31,

2020, to record the bonuses as follows

Salaries and Wages Expense 10,700

Salaries and Wages Payable 10,700

In January 2021, Palmer pays the bonus

Salaries and Wages Payable 10,700

Current Maturities of Long-Term Debt

• Portion of long-term debt that comes due in current year

• No adjusting entry required

Illustration: Wendy Construction issues a five-year,

interest-bearing €25,000 note on January 1, 2020 This note specifies

that each January 1, starting January 1, 2021, Wendy should pay

€5,000 of the note When the company prepares financial

statements on December 31, 2020, what amount should be

reported as a

Do It! 1: Current Liabilities (1 of 4)

You and several classmates are studying for the next

accounting examination They ask you to answer the following questions

1 If cash is borrowed on a HK$50,000, 6-month, 12% note on September 1, how much interest expense would be

incurred by December 31?

HK$50,000 x 12% x 4/12 = HK$2,000

You and several classmates are studying for the next

accounting examination They ask you to answer the following questions (amounts in thousands)

2 How is the sales tax amount determined when the cash

register total includes sales taxes?

First, divide the total cash register receipts by 100% plus the

sales tax percentage to find the sales revenue amount

Second, subtract the sales revenue amount from the total

Do It! 1: Current Liabilities (2 of 4)

Do It! 1: Current Liabilities (3 of 4)

You and several classmates are studying for the next

accounting examination They ask you to answer the following questions

3 If HK$15,000 is collected in advance on November 1 for 3 months’ rent, what amount of rent revenue should be

recognized by December 31?

HK$15,000 x 2/3 = HK$10,000

Do It! 1: Current Liabilities (4 of 4)

You and several classmates are studying for the next

accounting examination They ask you to answer the following questions

4 Gross earnings for the month by employees is HK$80,000 All earnings are subject to an 8% Social Security tax and

income taxes withheld of HK$15,600 What is the amount

of net pay?

HK$80,000 – (8% × HK$80,000) – HK$15,600 = HK$58,000

Learning Objective 2

Discuss How Current Liabilities are

Reported and Analyzed

Reporting Uncertainty

Provision - Potential liability that may become an actual

liability in the future.

Three levels of probability:

Probable

Reasonably possible

Reporting and Analyzing Current

Liabilities

Companies accrue an expense and related liability for a

provision only if the following three conditions are met:

1 A company has a present obligation as a result of a

past event;

2 It is probable that an outflow of resources will be

required to settle the obligation; and

3 A reliable estimate can be made of the amount of the

obligation.

Recognition of a Provision

Product Warranties

Promise made by a seller to a buyer to make good on a deficiency of quantity, quality, or performance in a

product.

Estimated cost of honoring product warranty contracts

should be recognized as an expense in the period in

which the sale occurs.

Reporting a Provision (1 of 5)

Illustration: Denson Manufacturing sells 10,000 washers and

dryers at an average price of €600 each The selling price

includes a one-year warranty on parts Denson expects that

500 units (5%) will be defective and that warranty repair costs will average €80 per unit In 2020, the company honors

warranty contracts on 300 units, at a total cost of €24,000 Denson records those repair costs incurred in 2020 to honor warranty contracts on 2020 sales as follows

Reporting a Provision (2 of 5)

Number of units sold 10,000

Estimated rate of defective units x 5%

Total estimated defective units 500

Average warranty repair cost x €80

Estimated warranty liability €40,000

Less: Warranty claims honored 24,000

At December 31, to accrue the estimated warranty costs on the 2020 sales, less the amount already honored in 2020 of

€24,000, Denson computes the warranty liability at December

31 as follows

Reporting a Provision (3 of 5)

The company makes the following adjusting entry at

December 31 for €16,000 after it adjusts for €24,000 of

warranty claims honored during 2020

Reporting a Provision (4 of 5)

The company reports

warranty expense under selling expenses

warranty liability as a current liability

In the following year, assuming that the company replaces 20 defective units in January 2021, at an average cost of €80 in parts and labor The company would record all expenses

incurred in honoring warranty contracts on 2020 sales as

follows

Reporting a Provision (5 of 5)

Croix Beverages Statement of Financial Position December 31, 2020 (partial, in thousands)

Current ratio permits us to compare liquidity of different-sized

companies and of a single company at different times.

Analysis of Current Liabilities

Liquidity refers to the ability to pay maturing obligations and

meet unexpected needs for cash.

Current Assets - Current Liabilities = Working Capital

Current Assets ÷ Current Liabilities = Current Ratio

Croix Beverages

Tron Cellular has the following account balances at December 31, 2020

Notes payable (NT$80,000 due after 12/31/21) NT$200,000

Unearned service revenue 75,000

Other long-term debt (NT$30,000 due in 2021) 150,000

Salaries and wages payable 22,000

Other accrued expenses 15,000

Accounts payable 100,000

In addition, Tron is involved in a lawsuit Legal counsel feels it is probable Tron will pay damages of NT$38,000 in 2021.

a Prepare the current liabilities section of Tron’s December 31, 2020,

statement of financial position.

b Tron’s current assets are NT$504,000 Compute Tron’s working capital

DO IT! 2: Reporting and Analyzing (1 of 3)

Current liabilities

Notes payable (NT$200,000 − NT$80,000) NT$120,000 Accounts payable 100,000 Unearned service revenue 75,000 Lawsuit liability 38,000 Long-term debt due within one year 30,000 Salaries and wages payable 22,000 Other accrued expenses 15,000

a Prepare the current liabilities section of Tron's December 31, 2020,

statement of financial position.

b Tron's current assets are NT$504,000 Compute Tron's working capital

and current ratio.

Working capital = Current assets − Current liabilities =

Learning Objective 3

Compare the Accounting for Current

Liabilities Under I F R S and U.S G A A P

Key Points

Similarities

• The basic definition of a liability under G A A P and I F R S is

very similar In a more technical way, liabilities are defined by the I A S B 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.

A Look at U.S GAAP (1 of 4)

A Look at U.S GAAP (2 of 4)

Similarities

• The accounting for current liabilities such as notes payable,

unearned revenue, and payroll taxes payable are similar

between G A A P and I F R S.

• Under both G A A P and I F R S, liabilities are classified as

current if they are expected to be paid within 12 months.

A Look at U.S GAAP (3 of 4)

Differences

• Companies using GAAP show assets before liabilities Also,

they will show current liabilities before non-current liabilities.

• Under GAAP, some contingent liabilities are recorded in the financial statements, others are disclosed, and in some cases

no disclosure is required IFRS reserves the use of the term

contingent liability to refer only to possible obligations that

are not recognized in the financial statements but may be

disclosed if certain criteria are met.

Looking to the Future

The FASB and IASB are currently involved in two projects, each of which has implications for the accounting for liabilities One project is investigating approaches to differentiate between debt and equity instruments The other project, the elements phase of the conceptual framework project, will evaluate the definitions of the fundamental building blocks of accounting The results of these projects could change the classification of many debt and equity securities.

A Look at U.S GAAP (4 of 4)

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