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CHAPTER 13 Current Liabilities and Contingencies

CHAPTER 13 Current Liabilities and Contingencies - CHAPTER...

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13-1 CHAPTER 13 Current Liabilities and Contingencies
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13-2 LECTURE OUTLINE This chapter can be covered in two or three class sessions. Students should be familiar with trade and payroll liabilities. Short-term obligations expected to be refinanced and the accounting for loss contingencies are the conceptually challenging areas for many students. Section 1—Current Liabilities A. The Concept of Liabilities. 1. The question of what is a liability is not a simple issue to resolve. This can be seen if the example of preferred stock is analyzed. 2. In SFAC No. 6, 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." B. Current Liabilities. 1. Nature of current liabilities: Obligations whose liquidation is reasonably expected to require the use of existing resources classified as current assets, or the creation of other current liabilities. 2. Current liabilities can be classified as either determinable or contingent. C. Determinable Current Liabilities: Such liabilities can be measured with a fair degree of precision and the amount and timing of the cash outflows are reasonably certain.
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13-3 1. Accounts Payable. 2. Notes Payable. a. Trade notes. b. Short-term loan notes: Such notes represent a current liability and generally are the result of cash loans. The notes may be interest bearing or zero-interest bearing . (1) Interest bearing notes: the borrower receives the face value of the note and records the note at face value. (2) Zero-interest bearing notes: the borrower receives an amount equal to the face value of the note less the interest. The note is recorded at its face value and the "prepaid" interest is recorded in a Discount on Notes Payable account. c. Current maturities of long-term debt: That portion of long-term debt that matures within the next fiscal year is reported as a current liability, unless it is to be refinanced by a new debt issue or by conversion into stock. 3. Short-term obligations expected to be refinanced. TEACHING TIP Illustration 13-1 can be used to discuss the requirements of SFAS No. 6 , "Classification of Short term Obligations Expected to be Refinanced." a. Can be excluded from current liabilities only if the firm: (1) Intends to refinance, and (2) Demonstrates an ability to refinance.
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