Current Liabilities and

13 Contingencies

Instructor: Yuanyuan Ma
Department of Accounting
Mihaylo College of Business and Economics
CSUF

Kieso, Weygandt, and Warfield

13-1
 Current Liabilities

Employee-Related Liabilities
Amounts owed to employees for salaries or wages are
reported as a current liability.

Current liabilities related to employee compensation may

include:
Payroll deductions.
Compensated absences.
Bonuses.

13-2 LO 3 Identify types of employee-related liabilities.

 Current Liabilities

Payroll Deductions
Most common types of payroll deductions are taxes,
insurance premiums, employee savings, and union dues.

Social Security Taxes (since January 1, 1937).

Federal Old Age, Survivor, and Disability Insurance (OASDI)
(usually referred to as FICA) and Hospital Insurance tax (for
Medicare).
Funds from taxes levied on both employer and employee.

Current rate 7.65% on an employees wages up to $113,700 and

1.45% in excess of $113,700.

13-3 LO 3
 Current Liabilities

Payroll Deductions
Income Tax Withholding.
Federal and some state income tax laws require employers to
withhold from each employees pay the applicable income tax due on
those wages.

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 Current Liabilities

Unemployment Taxes.

Provides a system of unemployment insurance.

Federal Unemployment Tax Act (FUTA):
Only employers pay the unemployment tax.
Rate is 6.2% on the first $7,000 of compensation paid to
each employee during the calendar year.
The employer receives a tax credit not to exceed 5.4% for
contributions paid for state unemployment tax. Thus if an
employer is subject to a state unemployment tax of 5.4% or
more, it pays only 0.8% tax to the federal government.

13-5 LO 3
 Current Liabilities

Illustration 13-5
Summary of Payroll Liabilities

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 Current Liabilities
Illustration: Assume a weekly payroll of $10,000 entirely subject to F.I.C.A. and
Medicare (7.65%), federal (0.8%) and state (6%) unemployment taxes, with income tax
withholding of $1,320 and union dues of $88 deducted. The company records the
salaries and wages paid and the employee payroll deductions as follows:

Salaries and Wages Expense 10,000

Withholding Taxes Payable 1,320
FICA Taxes Payable 765
Union Dues Payable 88
Cash 7,827

The company records the employers payroll taxes as follows:

Payroll Tax Expense 1,445
FICA Taxes Payable 765
FUTA Taxes Payable 80

13-7
SUTA Taxes Payable 600
 Contingencies

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.*

* FASB ASC 450-10-05-4. [Predecessor literature: Accounting for

Contingencies, Statement of Financial Accounting Standards No. 5
(Stamford, Conn.: FASB, 1975), par. 1.]

13-8 LO 4
 Contingencies

Gain Contingencies
Typical Gain Contingencies are:
1. Possible receipts of monies from gifts, donations, asset
sales, and so on.

2. Possible refunds from the government in tax disputes.

3. Pending court cases with a probable favorable outcome.

4. Tax loss carryforwards (Chapter 19).

Gain contingencies are not recorded.

Disclosed only if probability of receipt is high.

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 Contingencies

Loss Contingencies
Three different treatments
Accrue a loss
Disclose in notes
Do nothing
Treatment depends on
Likelihood of Loss
Whether the amount can be reasonably
estimated

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 Loss Contingencies

Probability Accounting treatment

Probable Accrue

Reasonably
Footnote
Possible

Remote Ignore

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 Loss Contingencies

Illustration: Scorcese Inc. is involved in a lawsuit at December

31, 2014. (a) Prepare the December 31 entry assuming it is
probable that Scorcese will be liable for $900,000 as a result of
this suit. (b) Prepare the December 31 entry, if any, assuming it is
not probable that Scorcese will be liable for any payment as a
result of this suit.
(a) Lawsuit Loss 900,000
Lawsuit Liability 900,000

(b) No entry is necessary.

13-12 LO 5
 Loss Contingencies
Illustration 13-10

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 Loss Contingencies

Common loss contingencies:

1. Guarantee and warranty costs.

2. Premiums and coupons.

3. Environmental liabilities.

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 Loss Contingencies

Guarantee and Warranty Costs

Promise made by a seller to a buyer to make good on a
deficiency of quantity, quality, or performance in a product.
Companies often provide one of two types of warranties to
customers:
1.Assurance-type warranty

2.Service-type warranty

13-15 LO 3
 Guarantee and Warranty Costs

Assurance-Type Warranty
Warranty that the product meets agreed-upon
specifications in the contract at the time the product is sold.
Should be expensed in the period the goods are provided or
services performed.

Should record a warranty liability.

13-16 LO 3
 Assurance-Type Warranty

Illustration: Denson Machinery Company begins production of a

new machine in July 2017 and sells 100 of these machines for
$5,000 cash by year-end. Each machine is under warranty for one
year. Denson estimates, based on past experience with similar
machines, that the warranty cost will average $200 per unit.
Further, as a result of parts replacements and services performed
in compliance with machinery warranties, it incurs $4,000 in
warranty costs in 2017 and $16,000 in 2018.

What are the journal entries for the sale and the related warranty
costs for 2017 and 2018?

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 Assurance-Type Warranty

1. Prepare the journal entry to record the sale of the machines

and accrue the warranty liability (JulyDecember 2017).

Cash 500,000
Sales Revenue 500,000

Warranty Expense 20,000

Warranty Liability
20,000
2. Prepare the journal entry to record payment for warranty costs
incurred (JulyDecember 2017).

Warranty Liability 4,000

Cash, Inventory, Accrued Payroll 4,000
13-18 LO 3
 Assurance-Type Warranty

3. Prepare the journal entry to record payment for warranty costs

incurred in 2018 related to 2017 machinery sales (January 1
December 31, 2018).

Warranty Liability 16,000

Cash, Inventory, Accrued Payroll 16,000

At the end of 2018, no warranty liability is reported for the

machinery sold in 2017.

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 Guarantee and Warranty Costs

Service-Type Warranty
Warranty that provides an additional service beyond the
assurance-type warranty.
Recorded as a separate performance obligation.

Usually recorded in an Unearned Warranty Revenue

account.

Recognize revenue on a straight-line basis over the period

the service-type warranty is in effect.

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 Service-Type Warranty

Illustration: You purchase an automobile from Hamlin Auto for

$30,000 on January 2, 2017. Hamlin estimates the assurance-type
warranty costs on the automobile to be $700 (Hamlin will pay for
repairs for the first 36,000 miles or three years, whichever comes
first). You also purchase for $900 a service-type warranty for an
additional three years or 36,000 miles. Hamlin incurs warranty
costs related to the assurance-type warranty of $500 in 2017 and
$200 in 2018. Hamlin records revenue on the service-type
warranty on a straight-line basis.

What entries should Hamlin make in 2017 and 2020?

13-21 LO 3
 Service-Type Warranty

1. Prepare the journal entry to record the sale of the automobile

and related warranties (January 2, 2017).

Cash 30,000
Sales Revenue 30,000

Cash 900
Unearned Warranty Revenue 900

Warranty Expense 700

Warranty Liability
700

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 Service-Type Warranty

2. Prepare the journal entry to record warranty costs incurred in

2017 (January 2December 31 2017).

Warranty Liability 500

Cash, Inventory, Accrued Payroll 500

3. Prepare the journal entry to record revenue recognized in 2020

on the service-type warranty (January 1December 31, 2020).

Unearned Warranty Revenue ($900 3) 300

Warranty Revenue 300

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 Presentation and Analysis

Presentation of Current Liabilities

Usually reported at their full maturity value.
Difference between present value and the maturity
value is considered immaterial.
Companies may list the accounts in
Order of maturity,
Descending order of amount, or
Order of liquidation preference.

13-24 LO 6 Indicate how to present and analyze liabilities and contingencies.

 Presentation and Analysis

Illustration 13-13

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 Presentation and Analysis

Presentation of Contingencies
Disclosure should include:
Nature of the contingency.
An estimate of the possible loss or range of loss or a
statement that an estimate cannot be made.

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 Presentation and Analysis
Illustration 13-15

Disclosure of
Loss
Contingency
through
Litigation

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 Presentation and Analysis
Illustration 13-13
Analysis of
Current Liabilities
Two ratios to help
assess liquidity are:

Illustration 13-19

13-28 Advance slide in presentation mode to reveal answers. LO 6