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We will not use class time to introduce the present value co mputations that are presented in this chapter. If you are not familiar with present value computations , you should review this part of the chapter on your own for use in future chapters. After studying this chapter, you should be able to: 3. Define an estimated liability and prepare jour nal entries required to account for this type of liability. 4. Define a contingent liability and discuss th e accounting treatment of contingent liabilities. 1. General rules for accounting for liabilities Liability recognition rules - liabilities must be r occurred which created the liability. Classification rules - liabilities must be classified as either current or long-term based on their maturity date 2. Common categories of current liabilities Contingent liabilities - potential future liability that 3. Accounting for estimated liabilities Adjusting journal entry to record the estimated liability at year end (Example: Warranty Expense) Warranty Expense $$ Estimated Liability for Warranties $$ 4. Accounting for contingent liabilities Jounal entries to record contingent liabilities are the same as the entries for estimated liabilities If the contingency is statements 2 5. Accounts Payable ratios: Payables turnover = Cost of Goods Sold + Change in Merchandise Inventory Average Accounts Payable (This ratio indicates how long, on average, the company takes to pay its accounts payable.) Days’ Payable = Payables Turnover 1. Legal obligations for the future payment of 3. Definite debts or obligations for which th e exact amounts cannot be known until a later date are 4. Potential future liabilities whose existe nce is dependent on some future event are 5. Under GAAP, contingent liabilities are record ed as liabilities only if the potential liability is ______________ and its amount can be ________________. II. MULTIPLE CHOICE 1. Current liabilities are debts that ar a. one year. b. the normal operating cycle. c. one year or operating cycle, whichever is shorter. d. one year or operating cycle, whichever is longer. 2. Which of the following would most likely be classified as a current liability? a. Mortgage payable b. Bonds payable c. Dividends payable d. Five-year notes payable 3 3. On January 1, 20X1, Hillcrest Company, a cal endar-year company, issued $80,000 of notes payable, of which $20,000 is due on January 1 for each of th a. Current Liabilities, $80,000. b. Long-Term Liabilities, $80,000. c. Current Liabilities, $20,000; Long-Term Liabilities, $60,000. d. Current Liabilities, $60,000; Long-Term Liabilities, $20,000. 4. Recording estimated warranty expense in the year of the sale is required by which accounting a. Consistency c. Full disclosure d. Historical cost 5. Contingent liabilities are those liabilities a. whose final resolution depends on some future event. b. whose amount can be reasonably estimated. c. such as pending litigation. d. all of the above. 1. A company enters into a contract to purch ase a certain quantity of goods from another company during the following month. At this point, would a liability exist? Explain why or why not. 2. What are contingent liabilities? Give an exam ple of a contingent liability that is accrued and one that is just disclosed in the financial statemen 1. liabilities 3. estimated 4. contingent 5. probable, reasonably estimated 6. footnotes II. MULTIPLE CHOICE 1. d 4. b 2. c 5. d 3. c 4 1. A liability would not exist because, at this 2. A contingent liability arises when the existe nce of the obligation, the amount due, and/or the