Chapter 9 Notes
Current Liabilities, Contingencies, and Commitments
Liability: the company’s obligations arising from past transactions or events.
Must have the following 3 characteristics:
- represents a duty, responsibility, or obligation that imposes an economic
- exists at the present time
contingent liability: liability has not been recorded in the accounts, because the
obligation is conditional, dependent, or contingent on the occurrence of a low-
probability future event.
Mutually unexecuted contract
Partially executed contract: one in which one party has performed part or all of its
Valuation Methods for Liabilities
-a liability should be valued at its present value on the date it is incurred
-the total of the payments to be made --- however, might not adequately measure
the liability’s value
--- > this ignores the time value of money
current liabilities: obligations that must be fulfilled within one year.
Relating to operating Activities
- accounts payable
- wages and other payroll liabilities
- corporate income taxes
- warranty obligations
o recording the estimated warranty expense and obligation , at the time
2010: warranty expense 3 000
estimated warrant obligation 3 000
- unearned revenues
o contracts, down payments, etc.
EG magazines, newspaper publishers
- Gift certificates and prepaid cards
o Revenue is only recognized when the cards are redeemed for goods or
services (see journal entries page 588)
- Customer rewards or loyalty programs o IFRS measures loyalty program liabilities as the sales value of the
goods or services that will be required to satisfy reward redemptions
EG company estimates that the points awarded in a particular
accounting period wil be redeemed for goods and services that
could have been sold for $4 000, it would record a liability
(unearned revenue) for this amount.
o Treat the original sale as a bundle: the initial goods and services that
are provided at that point, plus the additional goods and services that
may be provided in the future under the rewards program. – part of
the amount that customers pay when they make purchases is deemed
to be fore the rewards that will be provided later.
- Warranty Sales