REVIEW OF CHAPTER 11

Current Liabilities

1.     (S.O. 1)  A current liability is a debt that can reasonably be expected to be paid (1) from existing current assets or in the creation of other current liabilities, and (2) within one year or the operating cycle whichever is longer.  Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities.

Notes Payable

2.     (S.O. 2)  Notes payable are obligations in the form of written promissory notes that usually require the borrower to pay interest.  Notes due for payment within one year of the balance sheet date are usually classified as current liabilities.

3.     When an interest-bearing note is issued, the assets received generally equal the face value of the note.

a.        During the term of the note, it is necessary to accrue interest expense.

b.     At maturity, Notes Payable is debited for the face value of the note and Interest Payable is debited for accrued interest.

Sales Taxes Payable

4.     (S.O. 3)  A sales tax is expressed as a stated percentage of the sales price on goods sold to customers by a retailer.  The entry by the retailer to record sales taxes is as follows:

        Cash......         XXXX

                 Sales               ......          XXXX

                 Sales Taxes Payable....                   XXXX

        When sales taxes are not rung up separately on the cash register, total receipts are divided by 100% plus the sales tax percentage to determine the sales.

Unearned Revenues

5.        Unearned Revenues (advances from customers) are recorded by a debit to Cash and a credit to a current liability account identifying the source of the unearned revenue.  When the revenue is earned, the unearned revenue account is debited and an earned revenue account is credited.

Current Maturities of Long-Term Debt

6.     Another item classified as a current liability is current maturities of long-term debt.  Current maturities of long-term debt are often identified on the balance sheet as long-term debt due within one year.

Financial Statement Presentation and Analysis

7.     (S.O. 4)  Current liabilities is the first category under liabilities on the balance sheet.

        a.     Each of the principal types of current liabilities is listed separately.

        b. Current liabilities are usually in order of magnitude with the largest obligations being listed first.  However, many companies, as a matter of custom, show notes payable and accounts payable first regardless of amount.

8.     The excess of current assets over current liabilities is working capital.  The current ratio is current assets divided by current liabilities.

Contingent Liabilities

9.     (S.O. 5)  A contingent liability is a potential liability that may become an actual liability in the future.  The accounting guidelines require that:

         a..... If the contingency is probable and the amount can be reasonably estimated, the liability should be recorded in the accounts.

         b..... If the contingency is only reasonably possible, then it need be disclosed only in the notes accompanying the financial statements.

         c..... If the contingency is remote, it need not be recorded or disclosed.

10.     Product warranties are a good example of a contingent liability.  They are recorded by estimating the cost of honoring product warranty contracts and expensing the amount in the period in which the sale occurs.  Warranty expense is reported under selling expenses in the income statement, and estimated warranty liability is classified as a current liability on the balance sheet.