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CHAPTER 13: CURRENT LIABILITIES AND CONTINGENCIES 1. OVERVIEW / OBJECTIVES a. Define current liabilities b. Account for different types of current liabilities c. Identify the nature and types of contingent liabilities d. Account for contingent liabilities e. Identify the criteria used to account for and disclose gain and loss contingencies f. Indicate how current liabilities and contingencies are presented and analyzed 2. DEFINITION OF A LIABILITY a. Claims of creditors against an entity’s resources b. FASB Concept No. 6: 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 .” Emphasis added. 3. CURRENT LIABILITIES a. FASB Concept No. 6: 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.” b. Why do we care about classification? 4. DEBT CLASSIFICATION: a. Types of CL include: i. Accounts Payable ii. Notes Payable Interest-Bearing Notes: Ex. ABC Co. borrows $1 million by signing a 12%, 9 month note on 9/1/04. Prepare entries to record the borrowing, accrued interest at 12/31/04 and maturity of the note. Zero-Interest-Bearing Notes Discount on Notes Payable is a CONTRA LIABILITY account iii. Classification of Obligations that are Callable by the Creditor (SFAS 78) Debts which are due on demand (callable by creditor) Impact on debt classification when debtor is in violation of a loan agreement – loan usually becomes callable. Treated as a CL unless company shows that it is probable that the violation will be cured within the grace period. iv. Current Maturities of Long-Term Debt Generally classified as a current liability Exclude debt from current liabilities (i.e., treat them as Long-Term) if: The debt will be retired using assets accumulated for this purpose that properly have not been shown as CA Debt will be refinanced or retired from the proceeds of a new debt issue; or 1
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Debt will be converted into capital stock. v. Short-term Obligations Expected to be Refinanced Refinancing a short-term obligation on a long-term basis: exclude from CL Refinancing criteria – Must satisfy BOTH of the following criteria to be excluded from CL: Company intends to refinance Company demonstrates an ability to refinance by: actually refinancing after the date of the balance-sheet but before it is issued reaching a firm agreement that clearly provides for refinancing on a long-term basis. Specific Refinancing Conditions
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This note was uploaded on 09/30/2008 for the course ACCT 322 taught by Professor Chandar during the Fall '08 term at Drexel.

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