CHAPTER 13 Current Liabilities and Contingencies

CHAPTER 13 Current Liabilities and Contingencies -...

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Unformatted text preview: 13-1CHAPTER 13Current Liabilities and Contingencies13-2LECTURE OUTLINEThis chapter can be covered in two or three class sessions. Students should befamiliar with trade and payroll liabilities. Short-term obligations expected to berefinanced and the accounting for loss contingencies are the conceptually challengingareas for many students.Section 1—Current LiabilitiesA. The Concept of Liabilities.1.The question of what is a liabilityis not a simple issue to resolve. This can beseen if the example of preferred stock is analyzed.2.In SFAC No. 6,the FASB defined liabilities as "probable future sacrifices ofeconomic benefits arising from present obligations of a particular entity totransfer assets or provide services to other entities in the future as a result ofpast transactions or events."B. Current Liabilities.1.Nature of current liabilities: Obligations whose liquidation is reasonablyexpected 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 determinableor contingent.C.DeterminableCurrent Liabilities: Such liabilities can be measured with a fairdegree of precision and the amount and timing of the cash outflows are reasonablycertain.13-31.Accounts Payable.2.Notes Payable.a.Trade notes.b.Short-term loan notes: Such notes represent a current liability andgenerally are the result of cash loans. The notes may be interest bearingor zero-interest bearing.(1) Interest bearing notes: the borrower receives the face value of thenote and records the note at face value.(2) Zero-interest bearing notes: the borrower receives an amount equalto the face value of the note less the interest. The note is recorded atits face value and the "prepaid" interest is recorded in a Discount onNotes Payable account.c.Current maturities of long-term debt: That portion of long-term debt thatmatures within the next fiscal year is reported as a current liability, unless itis to be refinanced by a new debt issue or by conversion into stock.3.Short-term obligations expected to be refinanced.TEACHING TIPIllustration 13-1can 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)Intendsto refinance, and(2)Demonstrates an abilityto refinance.b.Ability can be evidenced by:(1)Actual refinancing,or13-4(2)Signing a refinancing agreement(with a capable lender)which isnoncancellableand not violated....
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This note was uploaded on 01/10/2011 for the course FSD 201 taught by Professor Huong during the Spring '10 term at Beacon FL.

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CHAPTER 13 Current Liabilities and Contingencies -...

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