CHAPTER THREE

CURRENT LIABILITIES

(Conceptual Framework and IAS 1)

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 Chapter 3 Current Liabilities

Learning Objectives
After studying this chapter, you should be able to:

1. Explain a current liability, and identify the major types of current

liabilities.
2. Describe the accounting for notes payable.
3. Explain the accounting for other current liabilities.

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 Preview of Chapter 3

Financial Accounting
IFRS Second Edition
Weygandt Kimmel Kieso
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 Current Liabilities

Current liability
 A debt that the company expects to pay within one
year or the operating cycle, whichever is longer.
 Most companies pay current liabilities by using current
assets.

Current liabilities include notes payable, accounts payable, unearned

revenues, and accrued liabilities such as taxes, salaries and wages, and
interest payable.

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LO 1 Explain a current liability, and identify the
major types of current liabilities.
 Current Liabilities

Question
The time period for classifying a liability as current is one
year or the operating cycle, whichever is:

a. longer

b. shorter

c. probable

d. possible

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LO 1 Explain a current liability, and identify the
major types of current liabilities.
 Current Liabilities

Notes Payable
 Recorded obligation in the form of written notes.

 Usually require the borrower to pay interest.

 Issued for varying periods of time.

 Those due for payment within one year of the statement

of financial position date are usually classified as current
liabilities.

10-6 LO 2 Describe the accounting for notes payable.

 Current Liabilities

Illustration: Hong Kong National Bank agrees to lend

HK$100,000 on September 1, 2014, if C.W. Co. signs a
HK$100,000, 12%, four-month note maturing on January 1.

Instructions

a) Prepare the journal entry on September 1.

b) Prepare the adjusting journal entry on December 31,

assuming monthly adjusting entries have not been made.

c) Prepare the journal entry at maturity (January 1, 2015).

10-7 LO 2 Describe the accounting for notes payable.

 Current Liabilities

Illustration: Hong Kong National Bank agrees to lend

HK$100,000 on September 1, 2014, if C.W. Co. signs a
HK$100,000, 12%, four-month note maturing on January 1.

a) Prepare the journal entry on September 1.

Cash 100,000
Notes payable

b) Prepare100,000
the adjusting journal entry on Dec. 31.

Interest expense 4,000

Interest payable
HK$100,000 x 12% x 4/12 = HK$4,000
4,000
10-8 LO 2 Describe the accounting for notes payable.
 Current Liabilities

Illustration: Hong Kong National Bank agrees to lend

HK$100,000 on September 1, 2014, if C.W. Co. signs a
HK$100,000, 12%, four-month note maturing on January 1.

c) Prepare the journal entry at maturity (January 1, 2015).

Notes payable 100,000

Interest payable 4,000
Cash

104,000

10-9 LO 2 Describe the accounting for notes payable.

 Current Liabilities

Sales Tax Payable

 Sales taxes are expressed as a stated percentage of
the sales price.

 Either rung up separately or included in total receipts.

 Retailer collects tax from the customer (consumption

tax).

 Retailer remits the collections to the government’s

department of revenue.

10-10 LO 3 Explain the accounting for other current liabilities.

 Current Liabilities

Illustration: The March 25 cash register reading for Cooley

Grocery shows sales of NT$10,000 and sales taxes of NT$600
(sales tax rate of 6%), the journal entry is:

Cash 10,600
Sales revenue
Sales tax payable
10,000
600

10-11 LO 3 Explain the accounting for other current liabilities.

 Current Liabilities

Unearned Revenue
Revenues that are received before the company delivers goods
or provides services.

1. Company debits Cash, and credits

a current liability account
(Unearned Revenue).

2. When the company earns the

revenue, it debits the
Unearned Revenue account,
and credits a Revenue account.

10-12 LO 3 Explain the accounting for other current liabilities.

 Current Liabilities

Illustration: Busan IPark (KOR) sells 10,000 season football

tickets at W 50,000 each for its five-game home schedule. The
club makes the following entry for the sale of season tickets (in
thousands of W):

Aug. 6 Cash 500,000

Unearned ticket revenue

As each game is500,000

completed, Busan IPark records the revenue
earned.

Sept. 7 Unearned ticket revenue 100,000

Ticket revenue

10-13 100,000
LO 3 Explain the accounting for other current liabilities.
 Current Liabilities

Current Maturities of Long-Term Debt

 Portion of long-term debt that comes due in the
current year.

 Considered a current liability.

 No adjusting journal entry required.

10-14 LO 3 Explain the accounting for other current liabilities.

 Statement Presentation and Analysis

Presentation
 Current liabilities are presented after non-current
liabilities on the statement of financial position.
 A common method of presenting current liabilities is to
list them by order of magnitude, with the largest ones
first.

10-15 LO 3 Explain the accounting for other current liabilities.

 Statement Presentation and Analysis
Illustration 10-3

10-16 LO 3 Explain the accounting for other current liabilities.

 Statement Presentation and Analysis

Analysis
Illustration 10-4
Liquidity refers to the
ability to pay maturing
obligations and meet
unexpected needs for
cash.

The current ratio Illustration 10-5

permits us to compare
the liquidity of different-
sized companies and of
a single company at
different times.

10-17 LO 3 Explain the accounting for other current liabilities.

 ANATOMY OF A FRAUD

Art was a custodial supervisor for a large school district. The district was
supposed to employ between 35 and 40 regular custodians, as well as 3 or 4
substitute custodians to fill in when regular custodians were missing. Instead, in
addition to the regular custodians, Art “hired” 77 substitutes. In fact, almost
none of these people worked for the district. Instead, Art submitted time cards
for these people, collected their checks at the district office, and personally
distributed the checks to the “employees.” If a substitute’s check was for
$1,200, that person would cash the check, keep $200, and pay Art $1,000.

Total take: $150,000

The Missing Control

Human Resource Controls. Thorough background checks should be
performed. No employees should begin work until they have been approved by
the Board of Education and entered into the payroll system. No employees
should be entered into the payroll system until they have been approved by a
supervisor. All paychecks should be distributed directly to employees at the
official school locations by designated employees.
Independent internal verification. Budgets should be reviewed monthly to
identify situations where actual costs significantly exceed budgeted amounts.
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 APPENDIX 10D PAYROLL-RELATED LIABILITIES

Every employer incurs liabilities relating to employees’

salaries and wages.

Salaries and Wages Payable — amounts owed to

employees.

Withholding taxes (U.S. federal and state income

taxes, and Social Security taxes) — amounts owed to
the governmental taxing authorities.

Determining the payroll involves computing three amounts: (1)

gross earnings, (2) payroll deductions, and (3) net pay.

10-19 LO 12 Prepare entries for payroll and payroll taxes under U.S. law.
 Payroll-Related Liabilities

Illustration: Assume a corporation records its payroll for the

week of March 7 as follows:

Mar. 7 Salaries and wages expense 100,000

FICA tax payable
7,650
Federal income tax payable
21,864
State income tax payable
Salaries and wages payable 2,922
67,564
Record the payment of this payroll on March 11.
Mar. 11 Salaries and wages payable 67,564
Cash
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67,564
 Payroll-Related Liabilities

Payroll tax expense results from three taxes that

governmental agencies levy on employers.

These taxes are:

 FICA tax
 Federal unemployment tax
 State unemployment tax

10-21 LO 12 Prepare entries for payroll and payroll taxes under U.S. law.
 Payroll-Related Liabilities

Illustration: Based on the corporation’s $100,000 payroll, the

company would record the employer’s expense and liability for
these payroll taxes as follows.

Payroll tax expense 13,850

FICA tax payable
7,650
Federal unemployment tax payable
800
State unemployment tax payable
5,400

10-22 LO 12 Prepare entries for payroll and payroll taxes under U.S. law.
 Payroll-Related Liabilities

Question
Employer payroll taxes do not include:

a. Federal unemployment taxes.

b. State unemployment taxes.

c. Federal income taxes.

d. FICA taxes.

10-23 LO 12 Prepare entries for payroll and payroll taxes under U.S. law.
 Another Perspective

Key Points
 The basic definition of a liability under GAAP and IFRS is very
similar. Liabilities may be legally enforceable via a contract or law
but need not be; that is, they can arise due to normal business
practice or customs.
 Both GAAP and IFRS classify liabilities as current or non-current on
the face of the statement of financial position. IFRS specifically
states, however, that industries where a presentation based on
liquidity would be considered to provide more useful information
(such as financial institutions) can use that format instead.

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 Another Perspective

Key Points
 Under IFRS, companies sometimes show liabilities before assets.
Also, they will sometimes show non-current liabilities before current
liabilities. Neither of these presentations is used under GAAP.
 Under IFRS, companies sometimes will net current liabilities against
current assets to show working capital on the face of the statement
of financial position. This practice is not used under GAAP.
 The basic calculation for bond valuation is the same under GAAP
and IFRS. In addition, the accounting for bond liability transactions is
essentially the same between GAAP and IFRS.

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 Another Perspective

Key Points
 IFRS requires use of the effective-interest method for amortization of
bond discounts and premiums. GAAP allows use of the straight-line
method where the difference is not material.
 GAAP often uses a separate discount or premium account to
account for bonds payable. IFRS records discounts or premiums as
direct increases or decreases to Bonds Payable.
 The accounting for convertible bonds differs between IFRS and
GAAP. GAAP requires that the proceeds from the issuance of
convertible debt be shown solely as debt. Unlike GAAP, IFRS splits
the proceeds from the convertible bond between an equity
component and a debt component. The equity conversion rights are
reported in equity.
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 Another Perspective

Key Points
 IFRS reserves the use of the term contingent liability to refer only to
possible obligations that are not recognized in the financial
statements but may be disclosed if certain criteria are met. Under
GAAP, contingent liabilities are recorded in the financial statements
if they are both probable and can be reasonably estimated. If only
one of these criteria is met, then the item is disclosed in the notes.
 IFRS uses the term provisions to refer to liabilities of uncertain timing
or amount. Examples of provisions would be provisions for
warranties, employee vacation pay, or anticipated losses. Under
GAAP, these are considered recordable contingent liabilities.

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 Another Perspective

Looking to the Future

The FASB and IASB are currently involved in two projects, each of
which has implications for the accounting for liabilities. One project is
investigating approaches to differentiate between debt and equity
instruments. The other project, the elements phase of the conceptual
framework project, will evaluate the definitions of the fundamental
building blocks of accounting. The results of these projects could
change the classification of many debt and equity securities.

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 Another Perspective

GAAP Self-Test Questions

Which of the following is false?

a) Under GAAP, current liabilities are presented before non-

current liabilities.

b) Under GAAP, an item is a current liability if it will be paid within

the next 12 months or the operating cycle, whichever is
longer.

c) Under GAAP, current liabilities are shown in order of

magnitude.

d) Under GAAP, a liability is only recognized if it is a present

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 Another Perspective

GAAP Self-Test Questions

Which of the following is true regarding accounting for amortization

of bond discount and premium?

a) Both IFRS and GAAP must use the effective-interest method.

b) GAAP must use the effective-interest method, but IFRS may

use either the effective-interest method or the straight-line
method.

c) IFRS is required to use the effective-interest method.

d) GAAP is required to use the straight-line method.

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 Another Perspective

GAAP Self-Test Questions

The joint projects of the FASB and IASB could potentially:

a) change the definition of liabilities.

b) change the definition of equity.

c) change the definition of assets.

d) All of the above.

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