Chapter 13

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

obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities

Current liabilities may be longer than one year if the operating cycle is longer than one year.

• accounts payable
• notes payable
• current maturities of long-term debt
• short-term obligations expected to be refinanced
• dividends payable
• customer advances and deposits
• unearned revenues
• sales taxes payable
• income taxes payable
• employee-related liabilities

A company is required to exclude a short-term obligation from current liabilities if it INTENDS to refinance and can DEMONSTRATE AN ABILITY to do so.

Demonstration of ability is to actually refinance or enter into a financing agreement

They are not recognized as current liabilities

an existing condition, situation or set of circumstances involving uncertainty as to a possibly gain or loss to an enterprise

Any claims or rights to receive assets whose existence is uncertain but which may become valid eventually

• possible receipts of money
• possible refunds from tax disputes
• pending court cases with favorable outcomes
• tax loss carryforwards

NOT RECORDED unless there is a high probability for realizing them and then they are disclosed in the notes

possible losses that can be classified as PROBABLE (likely to occur), REASONABLY POSSIBLE (less than likely, more than remote) or REMOTE (slight chance)

If info available prior to ISSUANCE of the financial statements indicate that the liability is PROBABLE and REASONABLY ESTIMABLE

• payroll deductions
• compensated absences
• bonus agreements

The expenses are accrued and charged to the period of sale

The cash-basis method expenses warranty costs as incurred and does not match them with the period of sale.

The accrual method is used when warranty expenses are PROBABLE and ESTIMABLE and charges this amount to warranty expense and credits warranty liability.

When warranties are sold independent of the item, then it is recorded as unearned warranty revenue. As the warranties expire and haven't been used, the company can make this earned warranty revenue.

coupon rate, nominal rate or stated rate

as a deduction from notes payable