accounting assighment
arabella
CurrentLiabilitiesandContingencies.docxAccounting for Current Liabilities and Contingencies
Unit – I
Meaning of current Liabilities:
Current liabilities are “obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities.”
On the other hand, we can say that current liabilities are those liabilities which can be paid out of current assets or by creating current liabilities within the normal operating cycle of the business which is generally one year. Following are example of some current liabilities.
1. Accounts payable 6. Short term obligations expected to be refinanced
2. Notes Payable 7. Current maturities of long-term debt
3. Customer advances and deposits 8. Employee-related liabilities
4. Unearned revenues 9. Income taxes payable
5. Dividend payable 10. Sales taxes payable
Accounts Payable:
Accounts payable or trade accounts payable are balances owed to others for goods, supplies, or services purchased on open account. Accounts payable arise because of the time lag between the receipt of services or acquisition of title to assets and the payment for them. Most companies record liabilities for purchases of goods upon receipt of the goods. If title has passed to the purchaser before receipt of the goods, the company should record the transaction at the time of title passage. It is also necessary that the record of goods received must agree with the liability (accounts payable).
Measuring the amount of an account payable poses no particular difficulty. The invoice received from the creditor specifies the due date and the exact outlay in money that is necessary to settle the account. The only calculation that may be necessary concerns the amount of cash discount.
Notes Payable:
Notes payable or trade notes payable are written promises to pay a certain sum of money on a specified future date. They may arise from purchases, financing, or other transactions. Some industries require notes as part of the sales/purchase transactions in lieu of the normal extension of open account credit. Notes payable to bank or loan companies arise from cash loan. Generally, notes payable within one year come in the category of short-term obligation. Notes may also be interest-bearing or zero-interest bearing.
Interest-bearing Notes Issued:
A company can issue interest bearing note. The rate of interest clearly states on the face of the note. The borrower must pay back the amount with interest at the time of maturity. The company will pass the following entries for issuing interest bearing notes in its books.
1. At the time of issuing interest bearing notes:
Cash debited ---
Notes Payable credited ---
2. When interest is due
Interest expenses debited ---
Interest Payable credited ---
3. At the time of maturity of notes.
Notes Payable debited ---
Interest Payable debited ---
Cash credited ---
Zero Interest-bearing Notes Issued:
A company may issue a zero-interest bearing note instead of an interest-bearing note. A zero-interest-bearing note does not explicitly state an interest rate on the face of the note. However, interest is still charged. At maturity the borrower must pay back an amount greater than the cash received at the issuance date. Following entries will be passed at the time of issuing zero-interest bearing note.
1. At the time of issuing zero interest bearing notes:
Cash debited ---
Discount on notes payable debited ---
Notes payable credited ---
2. At the time of adjusting discount on notes payable:
Interest expenses debited ---
Discount on notes payable credited ---
3. At the time of maturity of notes
Notes payable debited ---
Cash credited ---
Short term obligations expected to be refinanced:
Short term obligations are debts scheduled to mature within one year after the date of a company’s balance sheet or within its operating cycle, whichever is longer. Some short term obligations are expected to be refinanced as a long term basis. These short term obligations will not require the use of working capital during the next year.
Refinancing Criteria:
A company is required to exclude a short-term obligation from current liabilities if both of the following conditions are met:
1. It must intend to refinance the obligation on a long-term basis.
2. It must demonstrate an ability to refinance by:
· Actual refinancing
· Enter into a financing agreement
Customer Advances and Deposits:
Current liabilities may include returnable cash deposits received from customer and employees. Companies may receive deposits from customers to guarantee performance of a contract or service or a guarantees to cover payment of expected future obligations. The classification of these items as current or noncurrent liabilities depends on the time between the date of the deposits and the termination of the relationship that required the deposit.
Contingencies:
Definition: A contingency is, “an existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.”
Company often are involved in situations where uncertainty exists about whether an obligation to transfer cash or the amount that will be required to settle the obligation. Any payment is contingent upon the outcome of a settle or an administrative or court proceeding.
Gain contingencies:
Gain contingencies are claims or rights to receive assets or have a liability reduced. The typical gain contingencies are:
1. Possible receipts of monies from gifts, donations, and bonuses.
2. Possible refunds from the government in tax disputes.
3. Pending court cases with a probable favorable outcome.
4. Tax losses carry forwards.
A company discloses gain contingencies in the notes only when a high probability exists for realizing them.
Loss Contingencies: Loss contingencies involve possible losses. Contingent liabilities depend on the occurrence of one or more future events to confirm. The likelihood that the future event will confirm the incurrence of a liability can range from probable to remote.
The Financial Accounting Standard Board uses the terms probable, reasonably possible, and remote to identify three areas within that range.
Workout Problems:
Q1- Castle National bank agrees to lend SR 100,000 on march1, 2017, to landscape company. If landscape signs a SR 100,000, 6%, four- month note. On the due date payment made with interest. Pass journal entries.
Q2 – Al Rajhi bank agrees to lend SR 200,000 in March 1, 2017, to Aramco Company. If Aramco signs a SR 200,000 6%, for semi-annual note. Pass the journal entries on interest and note.
Q3- Al Rajhi bank agrees to lend SR 150,000 on March1, 2017, to Aramco Company. If Armco signs a SR 150,000 6%, for monthly note. Pass journal entries.
Q4- Hindalco issues a SR 102000, four- month, Zero-interest bearing note to Arab National Bank on January1, 2017. The present value of the note is SR 100,000. On the due date payment is made on notes.
Q5- A Company Borrowed SR 50,000 from the Shore Bank by signing a 12-month, zero-interest-bearing note of SR 54,000 on January1, 2018. Pass the journal entries of note issue and adjusting of interest with discount.
Q.1. Journal Entries in the Books of Landscape Co.
|
Date |
Name of Accounts |
L.F. |
Amounts-dr. |
Amounts-cr. |
|
March 1, 2017 |
Cash dr Notes Payable
|
|
100,000 |
100,000 |
|
July1, 2017
|
Interest expenses dr Interest payable |
|
2,000 |
2,000
|
|
July 1, 2017 |
Notes Payable dr Interest payable dr Cash |
|
100,000 2,000 |
102,000 |
Q.2. Journal Entries in the books of Aramco Company
|
Date |
Name of Accounts |
L.F. |
Amounts-dr. |
Amounts-cr. |
|
March 1, 2017 |
Cash dr Notes Payable
|
|
200,000 |
200,000 |
|
September1, 2017
|
Interest expenses dr Interest payable |
|
6,000 |
6,000
|
|
September 1, 2017 |
Notes Payable dr Interest payable dr Cash |
|
200,000 6,000 |
206,000 |
Q.3. Journal Entries in the books of Aramco Company
|
Date |
Name of Accounts |
L.F. |
Amounts-dr. |
Amounts-cr. |
|
March 1, 2017 |
Cash dr Notes Payable
|
|
150,000 |
150,000 |
|
April 1, 2017
|
Interest expenses dr Interest payable |
|
750 |
750
|
|
April 1, 2017 |
Notes Payable dr Interest payable dr Cash |
|
150,000 750 |
150,750 |
Q.4. Journal Entries in the books of Hindalco Company
|
Date |
Name of Accounts |
L.F. |
Amounts-dr. |
Amounts-cr. |
|
January1,2017 |
Cash dr Discount on Notes payable Notes Payable
|
|
100,000 2,000 |
102,000 |
|
May 1,2017
|
Interest expenses dr Discount on Notes payable |
|
2,000 |
2,000
|
|
May1,2017 |
Notes Payable dr Cash |
|
102,000
|
102,000 |
Q.5. Journal Entries in the books of a Company
|
Date |
Name of Accounts |
L.F. |
Amounts-dr. |
Amounts-cr. |
|
January1, 2018 |
Cash dr Discount on Notes payable Notes Payable
|
|
50,000 4,000 |
54,000 |
|
December31, 2018
|
Interest expenses dr Discount on Notes payable |
|
4,000 |
4,000
|
|
December31, 2018 |
Notes Payable dr Cash |
|
54,000
|
54,000 |
Enrolment Key= Acc411
