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ch13

CHAPTER13

AccountingandReportingofCurrentand

ContingentLiabilities

ASSIGNMENTCLASSIFICATIONTABLE（BYTOPIC）

Topics

Questions

BriefExercises

Exercises

Problems

ConceptsforAnalysis

1.

Conceptofliabilities;definitionandclassificationofcurrentliabilities.

1,2,3,4,5,6,8

1,16

1,2

1

2.

Accountsandnotespayable;dividendspayable.

7,11,29

1,2,3

2,16

1,2

1,2

3.

Short-termobligationsexpectedtoberefinanced.

9,10

4

3,4

3,4

4.

Depositsandadvancepayments.

12

5

2

5.

Compensatedabsences.

13,14,15

8

5,6,16

6.

Collectionsforthirdparties.

16

6,7

7,8,9,16

3,4

7.

Contingentliabilities（General）.

17,18,19,20,22

10,11

13,16

10,11,13

5,6,7

8.

Guarantiesandwarranties.

21,23

13,14

10,11,16

5,6,7,

12,15

7,8

9.

Premiumsandawardsofferedtocustomers.

24,25

15

12,15,16

8,9,12,15

10.

Self-insurance,litigation,claims,andassessments,assetretirementobligations.

26,27,28

12

14

2,10,

11,13

6,7

11.

Presentationandanalysis.

29,30,31

17,18,19

9

3

*12.

Bonuspayments.

9,16

20,21,22

14,15

*ThismaterialiscoveredinanAppendixtothechapter.

ASSIGNMENTCLASSIFICATIONTABLE（BYLEARNINGOBJECTIVE）

LearningObjectives

BriefExercises

Exercises

Problems

1.Describethenature,type,andvaluation

ofcurrentliabilities.

1,2,3,4,

5,6

1,2,7

1,2

2.Explaintheclassificationissuesofshort-termdebtexpectedtoberefinanced.

4

3,4

3.Identifytypesofemployee-relatedliabilities.

7,8,9

5,6,8,9

3,4

4.Identifythecriteriausedtoaccountforanddisclosegainandlosscontingencies.

10,11,12,13,14,15

13

7,10,11,13

5.Explaintheaccountingfordifferenttypes

oflosscontingencies.

10,11,12,13,14,15

10,11,12,13,14,15

2,5,6,7,8,9,10,11,12,13,15

6.Indicatehowtopresentandanalyzeliabilitiesandcontingencies.

16,17,

18,19

9

*7.Computeemployeebonusesunderdifferingarrangements.

16

20,21,22

14,15

ASSIGNMENTCHARACTERISTICSTABLE

Item

Description

LevelofDifficulty

Time

（minutes）

E13-1

Balancesheetclassificationofvariousliabilities.

Simple

10–15

E13-2

Accountsandnotespayable.

Moderate

15–20

E13-3

Refinancingofshort-termdebt.

Simple

15–12

E13-4

Refinancingofshort-termdebt.

Simple

20–25

E13-5

Compensatedabsences.

Moderate

25–30

E13-6

Compensatedabsences.

Moderate

25–30

E13-7

Adjustingentryforsalestax.

Simple

5–7

E13-8

Payrolltaxentries.

Simple

10–15

E13-9

Payrolltaxentries.

Simple

15–20

E13-10

Warranties.

Simple

10–15

E13-11

Warranties.

Moderate

15–20

E13-12

Premiumentries.

Simple

15–20

E13-13

Contingencies.

Moderate

20–30

E13-14

Assetretirementobligation.

Moderate

25–30

E13-15

Premiums.

Moderate

20–30

E13-16

Financialstatementimpactofliabilitytransactions.

Moderate

30–35

E13-17

Ratiocomputationsanddiscussion.

Simple

10–15

E13-18

Ratiocomputationsandanalysis.

Simple

20–25

E13-19

Ratiocomputationsandeffectoftransactions.

Moderate

15–25

*E13-20

Bonuscomputation.

Simple

10–15

*E13-21

Bonuscomputationandincomestatementpreparation.

Simple

15–20

*E13-22

Bonuscompensation.

Moderate

15–20

P13-1

Currentliabilityentriesandadjustments.

Simple

25–30

P13-2

Liabilityentriesandadjustments.

Simple

25–35

P13-3

Payrolltaxentries.

Moderate

20–30

P13-4

Payrolltaxentries.

Simple

20–25

P13-5

Warranties,accrual,andcashbasis.

Simple

15–20

P13-6

Extendedwarranties.

Simple

10–20

P13-7

Warranties,accrual,andcashbasis.

Moderate

25–35

P13-8

Premiumentries.

Moderate

15–25

P13-9

Premiumentriesandfinancialstatementpresentation.

Moderate

30–45

P13-10

Losscontingencies:

entriesandessay.

Simple

25–30

P13-11

Losscontingencies:

entriesandessays.

Moderate

35–45

P13-12

Warrantiesandpremiums.

Moderate

20–30

P13-13

Liabilityerrors.

Moderate

25–35

*P13-14

Bonuscomputation.

Simple

25–30

*P13-15

Warranty,bonus,andcouponcomputation.

Moderate

20–25

CA13-1

Natureofliabilities.

Moderate

20–25

CA13-2

Currentversusnoncurrentclassification.

Moderate

15–20

CA13-3

Refinancingofshort-termdebt.

Moderate

30–40

CA13-4

Refinancingofshort-termdebt.

Moderate

20–25

CA13-5

Losscontingency.

Simple

15–20

CA13-6

Losscontingencies.

Simple

15–20

CA13-7

Warrantiesandlosscontingencies.

Simple

15–20

CA13-8

Warranties.

Moderate

20–25

ANSWERSTOQUESTIONS

1.Currentliabilitiesareobligationswhoseliquidationisreasonablyexpectedtorequireuseofexistingresourcesproperlyclassifiedascurrentassetsorthecreationofothercurrentliabilities.Long-termdebtconsistsofallliabilitiesnotproperlyclassifiedascurrentliabilities.

2.YoumightexplaintoyourfriendthattheaccountingprofessionatonetimepreparedfinancialstatementssomewhatinaccordancewiththebroadorloosedefinitionofaliabilitysubmittedbytheAICPAin1953:

“Somethingrepresentedbyacreditbalancethatisorwouldbeproperlycarriedforwarduponaclosingofbooksofaccountaccordingtotherulesorprinciplesofaccounting,providedsuchcreditbalanceisnotineffectanegativebalanceapplicabletoanasset.Thusthewordisusedbroadlytocomprisenotonlyitemswhichconstituteliabilitiesinthepropersenseofdebtsorobligations（includingprovisionforthosethatareunascertained）,butalsocreditbalancestobeaccountedforwhichdonotinvolvethedebtorandcreditorrelation.”

Sinceyourfriendmaynothavecompletelyunderstoodtheabovedefinition（ifitmaybecalledthat）,youmightindicatethatmorerecentdefinitionsofliabilitiescallforthedisbursementofassetsorservicesinthefutureandthatthepresentvalueofallofaperson’sorcompany’sfuturedisbursementsofassetsconstitutesthetotalliabilitiesofthatpersonorcompany.But,accountantsquantifyormeasureonlythoseliabilitiesorfuturedisbursementswhicharereasonablydeterminableatthepresenttime.And,accountantshaveacceptedthecompletedtransactionasprovidingtheobjectivityorbasisnecessaryforfinancialrecognition.Therefore,aliabilitymaybeviewedasanobligationtoconveyassetsorperformservicesatsometimeinthefutureandisbaseduponapastorpresenttransactionorevent.AformaldefinitionofliabilitiespresentedinConceptsStatementNo.6isasfollows:

Probablefuturesacrificesofeconomicbenefitsarisingfrompresentobligationsofaparticularentitytotransferassetsorprovideservicestootherentitiesinthefutureasaresultofpasttransactionsorevents.

3.Asalenderofmoney,thebankerisinterestedinthepriorityhis/herclaimhasonthecompany’sassetsrelativetootherclaims.Closeexaminationoftheliabilitysectionandtherelatedfootnotesdisclosesamounts,maturitydates,collateral,subordinations,andrestrictionsofexistingcon-tractualobligations,allofwhichareimportanttopotentialcreditors.Theassetsandearningpowerarelikewiseimportanttoabankerconsideringaloan.

4.Currentliabilitiesareobligationswhoseliquidationisreasonablyexpectedtorequiretheuseofexistingresourcesproperlyclassifiedascurrentassets,orthecreationofothercurrentliabilities.

Becausecurrentliabilitiesarebydefinitiontiedtocurrentassetsandcurrentassetsbydefinitionaretiedtotheoperatingcycle,liabilitiesarerelatedtotheoperatingcycle.

5.Unearnedrevenueisaliabilitythatarisesfromcurrentsalesbutforwhichsomefutureservicesorproductsareowedtocustomersinthefuture.Atthetimeofasale,customerspaynotonlyforthedeliveredproduct,buttheyalsopayforfutureproductsorservices（e.g.,anotherplanetrip,hotelroom,orsoftwareupgrade）.Inthiscase,thecompanyrecognizesrevenuefromthecurrentproductandpartofthesaleproceedsisrecordedasaliability（unearnedrevenue）forthevalueoffutureproductsorservicesthatare“owed”tocustomers.Marketanalystsindicatethatanincreaseintheunearnedrevenueliability,ratherthanraisingaredflag,oftenprovidesapositivesignalaboutsalesandprofitability.Whenthesalesaregrowing,itsunearnedrevenueaccountshouldgrow.Thus,anincreaseinaliabilitymaybegoodnewsaboutcompanyperformance.Incontrast,whenunearnedrevenuesdecline,thecompanyoweslessfutureamountsbutthisalsomeansthatsalesofnewproductsmayhaveslowed.

6.Payablesandreceivablesgenerallyinvolveaninterestelement.Recognitionoftheinterestelement（thecostofmoneyasafactoroftimeandrisk）resultsinvaluingfuturepaymentsattheircurrentvalue.Thepresentvalueofaliabilityrepresentsthedebtexclusiveoftheinterestfactor.

QuestionsChapter13（Continued）

7.Adiscountonnotespayablerepresentsthedifferencebetweenthepresentvalueandthefacevalueofthenote,thefacevaluebeinggreaterinamountthanthediscountedamount.Itshouldbetreatedasanoffset（contra）tothefacevalueofthenoteandamortizedtointerestexpenseoverthelifeofthenote.Thediscountrepresentsinterestexpensechargeabletofutureperiods.

8.Liabilitiesthataredueondemand（callablebythecreditor）shouldbeclassifiedasacurrentliability.Classificationofthedebtascurrentisrequiredbecauseitisareasonableexpectationthatexistingworkingcapitalwillbeusedtosatisfythedebt.Liabilitiesoftenbecomecallablebythecreditorwhen