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WEYGANDT . KIESO . KIMMEL . TRENHOLM . KINNEAR . BARLOW .

ATKINS

PRINCIPLES OF
FINANCIAL ACCOUNTING
CANADIAN EDITION

Chapter 10
Current Liabilities
Prepared by:

Debbie Musil
Kwantlen Polytechnic University
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Current Liabilities
Determinable (certain) current
liabilities

Operating line of credit and bank


overdraft
Short-term notes payable
Current maturities of long-term debt

Uncertain liabilities
Estimated liabilities
Contingencies

Financial statement presentation

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Chapter 10: Current


Liabilities
Study Objectives
1. Account for determinable or
certain current liabilities.
2. Account for estimated
liabilities.
3. Account for contingencies.
4. Prepare the current liabilities
section of the balance sheet.
Copyright John Wiley & Sons
Canada, Ltd.

Determinable (Certain)
Current Liabilities
Obligations that are expected to
be settled:
Within one year of the balance
sheet date, or
Within normal operating cycle

Requires existence of a present


obligation
Determinable liabilities have
known amount, payee, due date
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Operating Line of Credit


Pre-authorized borrowing
Allows the company to borrow up to a
preset limit when needed

May require collateral (security)


Such as current assets, investments,
or property, plant and equipment

Used on a short-term basis


Negative (overdrawn) cash balance
is called bank indebtedness, bank
overdraft or bank advances
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Short-Term Notes
Payable

Obligations in the form of written


promissory notes
Usually require the borrower to pay
interest
Used instead of accounts payable
Gives lender proof of obligation in case
legal action is needed to collect

Issued for varying periods


If due within one year of the balance
sheet date, classified as current
liabilities

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Canada, Ltd.

Short-Term Notes
Payable 2
Interest is recorded in the period the loan
is outstanding:

At maturity, the face value of the note plus


interest must be repaid:

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Current Maturities of
Long-Term Debt
The portion of long-term debt
that is due within the current
year
Amount not due within current
year is disclosed as a long-term
liability

No adjusting entry is required


to recognize the current
portion of long-term debt
The
proper classification is made
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Canada, Ltd.
when the balance sheet is

Chapter 10: Current


Liabilities
Study Objectives
1. Account for determinable or
certain current liabilities.
2. Account for estimated
liabilities.
3. Account for contingencies.
4. Prepare the current liabilities
section of the balance sheet.
Copyright John Wiley & Sons
Canada, Ltd.

Estimated Liabilities
Obligation exists but the
amount and timing is uncertain
We owe someone, but not sure
how much, when or even who

Liability is recognized when:


Settlement of the liability is
likely, and
Amount of the liability can be
reasonable estimated
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Product Warranties
Promises made by seller to buyer to
repair or replace a product if it is
defective or does not perform as
intended
Warranties will lead to future costs
for replacement or repair of
defective units
Cost of warranty is estimated and
accrued based on prior experience

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Customer Loyalty
Programs
and
Gift
Cards

Result in an estimated liability:


Not known if or when rewards will be
redeemed

If redemptions are likely, and can be


estimated based on past experience:
Record estimated liability as a reduction in
revenue (not an expense)

Sales discount is a contra revenue account


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12

Chapter 10: Current


Liabilities
Study Objectives
1. Account for determinable or
certain current liabilities.
2. Account for estimated
liabilities.
3. Account for contingencies.
4. Prepare the current liabilities
section of the balance sheet.
Copyright John Wiley & Sons
Canada, Ltd.

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Contingent Liabilities
(or Provisions)
Record liability if both conditions are
met:
It is likely (or probable (more likely than
not) under IFRS) that an obligation exists,
and
Amount can be reasonably estimated

If contingent loss is likely, but cannot be


reasonably estimated:
No liability is recorded
Disclosed in the notes to the statements

If contingency is unlikely:
Still disclosed if event is substantial,
otherwise
not disclosed
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Chapter 10: Current


Liabilities
Study Objectives
1. Account for determinable or
certain current liabilities.
2. Account for estimated
liabilities.
3. Account for contingencies.
4. Prepare the current liabilities
section of the balance sheet.
Copyright John Wiley & Sons
Canada, Ltd.

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Financial Statement
Presentation
Current liabilities are the first category
reported in the liabilities section of the
balance sheet
Each type of current liability is listed
separately
Listed in order of liquidity, usually by
maturity date
Also common to show bank loans, notes
payable and accounts payable first regardless
of size

Terms of operating lines of credit, notes


payable and other information are
Copyright
Wiley notes
& Sons
disclosed
inJohnthe
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