Estimated Liabilities

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10 Nov 2010

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Estimated Liabilities
¾ These are obligations that exists but whose amount and timing are uncertain.
However, the uncertainty is not so great that the company cannot reasonably estimate
the liability
Property Taxes
¾ Until the bill is received for property taxes, it must be estimated and accrued. Once
the bill is received, the annual expense must be adjusted for the portion already
Product Warranties
¾ The estimated cost of honouring product warranty contracts should be recognized as
an expense in the period in which the sale occurs. The estimated amount should be
debited to warranty expense, with a credit to warranty liability. The entry to record
the repair costs would be a debit to warranty liability and a credit to repair parts
Contingent Liabilities
¾ A contingency exists when there is uncertainty about the outcome. Although
contingent receivables exist, contingent liabilities are far more common. An example
would be the outcome of a lawsuit. If the lawsuit is lost, there will be liabilities to pay
Recording Contingent Liabilities
¾ If both of the following conditions are met: the contingency is likely, and the amount
of the contingency is reasonably estimated, then the contingent liability should be
Disclosure of Contingent Liabilities
¾ When a contingent liability is likely but cannot be reasonably estimated, or if it not
determinable ± neither likely nor unlikely ± only disclosure of the contingency is
required. If a contingency is unlikely but substantial, it should be recorded as well
Financial Statement Presentation
¾ Current liabilities are usually listed in order of liquidity, by maturity date. Another
common method of presenting current liabilities is to list them by order of magnitude,
with the largest ones first
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