Current Liabilities,

Provisions and
Contingencies
Chapter 13
Pertemuan 1 dan 2
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 Mahasiswa dapat menjelaskan
konsep dan menyusun
akuntansi current liabilities,
provision dan contigencies

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 Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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 Current Liabilities, CHAPTER 13
Provisions, and Contingencies
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the nature, valuation, 3. Explain the accounting for
and reporting of current loss and gain contingencies.
liabilities.
4. Indicate how to present and
2. Explain the accounting for analyze liability-related
different types of provisions. information.

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 PREVIEW OF CHAPTER 13

Intermediate Accounting
IFRS 3rd Edition
13-5 Kieso ● Weygandt ● Warfield
 LEARNING OBJECTIVE 1
Current Liabilities Describe the nature, valuation,
and reporting of current
liabilities.

Three essential characteristics:

1. Present obligation.

2. Arises from past events.

3. Results in an outflow of
resources (cash, goods,
services).

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 Current Liabilities

A current liability is reported if one of two conditions exists:

1. Liability is expected to be settled within its normal operating

cycle; or

2. Liability is expected to be settled within 12 months after the

reporting date.

The operating cycle is the period of time elapsing between the

acquisition of goods and services and the final cash realization resulting
from sales and subsequent collections.

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 Current Liabilities

Typical Current Liabilities:

1. Accounts payable. 6. Customer advances and
deposits.
2. Notes payable.
7. Unearned revenues.
3. Current maturities of long-
term debt. 8. Sales and value-added
taxes payable.
4. Short-term obligations
expected to be refinanced. 9. Income taxes payable.

5. Dividends payable. 10. Employee-related liabilities.

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 Current Liabilities

Accounts Payable (trade accounts payable)

Balances owed to others for goods, supplies, or services
purchased on open account.
 Time lag between the receipt of services or acquisition
of title to assets and the payment for them.

 Terms of the sale (e.g., 2/10, n/30 or 1/10, E.O.M.)

usually state period of extended credit, commonly 30 to
60 days.

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 Current Liabilities

Notes Payable
Written promises to pay a certain sum of money on a
specified future date.
 Arise from purchases, financing, or other transactions.

 Notes classified as short-term or long-term.

 Notes may be interest-bearing or zero-interest-bearing.

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 Current Liabilities

Interest-Bearing Note Issued

Illustration: Castle Bank agrees to lend €100,000 on March 1,
2019, to Landscape Co. if Landscape signs a €100,000, 6
percent, four-month note. Landscape records the cash
received on March 1 as follows:

Cash 100,000
Notes Payable 100,000

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 Interest-Bearing Note Issued

If Landscape prepares financial statements semiannually, it

makes the following adjusting entry to recognize interest
expense and interest payable at June 30, 2019:

Interest calculation = (€100,000 x 6% x 4/12) = €2,000

Interest Expense 2,000

Interest Payable 2,000

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 Interest-Bearing Note Issued

At maturity (July 1, 2020), Landscape records payment of the

note and accrued interest as follows.

Notes Payable 100,000

Interest Payable 2,000
Cash 102,000

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 Current Liabilities

Zero-Interest-Bearing Note Issued

Illustration: On March 1, Landscape issues a €102,000, four-
month, zero-interest-bearing note to Castle Bank. The present
value of the note is €100,000. Landscape records this
transaction as follows.

Cash 100,000
Notes Payable 100,000

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 Zero-Interest-Bearing Note Issued

If Landscape prepares financial statements semiannually, it

makes the following adjusting entry to recognize interest
expense and the increase in the note payable of €2,000 at
June 30.
Interest Expense 2,000
Notes Payable 2,000

At maturity (July 1), Landscape must pay the note, as follows.

Notes Payable 102,000

Cash 102,000

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 Current Liabilities

E13-2: (Accounts and Notes Payable) The following are selected

2019 transactions of Darby Corporation.

Sept. 1 - Purchased inventory from Orion Company on account

for $50,000. Darby records purchases gross and uses a
periodic inventory system.

Oct. 1 - Issued a $50,000, 12-month, 8% note to Orion in

payment of account.

Oct. 1 - Borrowed $75,000 from the Shore Bank by signing a

12-month, zero-interest-bearing $81,000 note.

Prepare journal entries for the selected transactions.

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 Current Liabilities

Sept. 1 - Purchased inventory from Orion Company on

account for $50,000. Darby records purchases gross and
uses a periodic inventory system.

Sept. 1 Purchases 50,000

Accounts Payable 50,000

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 Current Liabilities

Oct. 1 - Issued a $50,000, 12-month, 8% note to Orion in

payment of account.

Oct. 1 Accounts Payable 50,000

Notes Payable 50,000

Interest calculation = ($50,000 x 8% x 3/12) = $1,000

Dec. 31 Interest Expense 1,000

Interest Payable 1,000

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 Current Liabilities

Oct. 1 - Borrowed $75,000 from the Shore Bank by signing a

12-month, zero-interest-bearing $81,000 note.

Oct. 1 Cash 75,000

Notes Payable 75,000

Interest calculation = ($6,000 x 3/12) = $1,500

Dec. 31 Interest Expense 1,500

Notes Payable 1,500

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 Current Liabilities

Current Maturities of Long-Term Debt

Portion of bonds, mortgage notes, and other long-term
indebtedness that matures within the next fiscal year.

Exclude long-term debts maturing currently if they are to be:

1. Retired by assets accumulated for this purpose that

properly have not been shown as current assets,

2. Refinanced, or retired from the proceeds of a new long-

term debt issue, or

3. Converted into ordinary shares.

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 Current Liabilities

Short-Term Obligations Expected to Be

Refinanced
Exclude from current liabilities if both of the following
conditions are met:
1. Must intend to refinance the obligation on a long-term
basis.

2. Must have an unconditional right to defer settlement of

the liability for at least 12 months after the reporting date.

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 Current Liabilities

E13-4 (Refinancing of Short-Term Debt): The CFO for Yong

Corporation is discussing with the company’s chief executive
officer issues related to the company’s short-term obligations.
Presently, both the current ratio and the acid-test ratio for the
company are quite low, and the chief executive officer is
wondering if any of these short-term obligations could be
reclassified as long-term. The financial reporting date is December
31, 2018. Two short-term obligations were discussed, and the
following action was taken by the CFO.

Instructions: Indicate how these transactions should be reported at

Dec. 31, 2018, on Yongs’ statement of financial position.

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 Current Liabilities

Short-Term Obligation A: Yong has a $50,000 short-term

obligation due on March 1, 2019. The CFO discussed with its
lender whether the payment could be extended to March 1, 2021,
provided Yong agrees to provide additional collateral. An
agreement is reached on February 1, 2019, to change the loan
terms to extend the obligation’s maturity to March 1, 2021. The
financial statements are authorized for issuance on April 1, 2019.

Liability of Refinance Liability due Statement

$50,000 completed for payment Issuance

Dec. 31, 2018 Feb. 1, 2019 Mar. 1, 2019 Apr. 1, 2019

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 Current Liabilities

Short-Term Obligation A: Yong has a $50,000 short-term

obligation due on March 1, 2019. The CFO discussed with its
lender whether the payment could be extended to March 1, 2021,
provided Yong agrees to provide additional collateral. An
agreement is reached on February 1, 2019, to change the loan
terms to extend the obligation’s maturity to March 1, 2021. The
financial statements are authorized for issuance on April 1, 2019.

Current Liability
of $50,000 Since the agreement was not in place as of the reporting
date (December 31, 2019), the obligation should be
Dec. 31, 2019 reported as a current liability.

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 Current Liabilities

Short-Term Obligation B: Yong also has another short-term

obligation of $120,000 due on February 15, 2019. In its discussion
with the lender, the lender agrees to extend the maturity date to
February 1, 2020. The agreement is signed on December 18,
2018. The financial statements are authorized for issuance on
March 31, 2019.

Refinance Liability of Liability due Statement

completed $120,000 for payment Issuance

Dec. 18, 2018 Dec. 31, 2018 Feb. 15, 2019 Mar. 31, 2019

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 Current Liabilities

Short-Term Obligation B: Yong also has another short-term

obligation of $120,000 due on February 15, 2019. In its discussion
with the lender, the lender agrees to extend the maturity date to
February 1, 2020. The agreement is signed on December 18,
2018. The financial statements are authorized for issuance on
March 31, 2019.
Non-Current
Refinance Liability of Since the agreement was in place as of
completed $120,000
the reporting date (December 31, 2018),
the obligation is reported as a non-
Dec. 18, 2018 Dec. 31, 2018
current liability.

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 Current Liabilities

Dividends Payable
Amount owed by a corporation to its stockholders as a result of
board of directors’ authorization.

 Generally paid within three months.

 Undeclared dividends on cumulative preference shares are

not recognized as a liability.

 Dividends payable in the form of additional shares are not

recognized as a liability.

► Reported in equity.

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 Current Liabilities

Customer Advances and Deposits

Returnable cash deposits received from customers and
employees.

 May be classified as current or non-current liabilities.

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 Current Liabilities

Unearned Revenues
Payment received before providing goods or performing
services.

ILLUSTRATION 13.2
Unearned and Earned Revenue Accounts

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 Current Liabilities

BE13-6: Sports Pro Magazine sold 12,000 annual subscriptions

on August 1, 2019, for €18 each. Prepare Sports Pro’s August 1,
2019, journal entry and the December 31, 2019, annual adjusting
entry.

Aug. 1 Cash 216,000

Unearned Revenue 216,000
(12,000 x €18)

Dec. 31 Unearned Revenue 90,000

Subscription Revenue 90,000
(€216,000 x 5/12 = €90,000)

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 Current Liabilities

Sales and Value-Added Taxes Payable

Consumption taxes are generally either

 a sales tax or

 a value-added tax (VAT).

Purpose is to generate revenue for the government.

The two systems use different methods to accomplish this

objective.

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 Sales Taxes Payable

Illustration: Halo Supermarket sells loaves of bread to

consumers on a given day for €2,400. Assuming a sales tax
rate of 10 percent, Halo Supermarket makes the following entry
to record the sale.
Cash 2,640
Sales Revenue 2,400
Sales Taxes Payable 240

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 Value-Added Taxes Payable

Illustration: The VAT is collected every time a business

purchases products from another business in the product’s supply
chain. To illustrate,

1. Hill Farms Wheat Company grows wheat and sells it to

Sunshine Baking for €1,000. Hill Farms Wheat makes the
following entry to record the sale, assuming the VAT is 10
percent.

Cash 1,100
Sales Revenue 1,000
Value-Added Taxes Payable 100

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 Value-Added Taxes Payable

2. Sunshine Baking makes loaves of bread from this wheat and

sells it to Halo Supermarket for €2,000. Sunshine Baking
makes the following entry to record the sale, assuming the
VAT is 10 percent.

Cash 2,200
Sales Revenue 2,000
Value-Added Taxes Payable 200

Sunshine Baking then remits €100 to the government, not

€200. The reason: Sunshine Baking has already paid €100 to
Hill Farms Wheat.
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 Value-Added Taxes Payable

3. Halo Supermarket sells the loaves of bread to consumers for

€2,400. Halo Supermarket makes the following entry to
record the sale, assuming the VAT is 10 percent.

Cash 2,640
Sales Revenue 2,400
Value-Added Taxes Payable 240

Halo Supermarket then sends only €40 to the tax authority as it

deducts the €200 VAT already paid to Sunshine Baking.

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 Current Liabilities

Income Tax Payable

Businesses must prepare an income tax return and compute
the income tax payable.

 Taxes payable are a current liability.

 Corporations must make periodic tax payments.

 Differences between taxable income and accounting

income sometimes occur (Chapter 19).

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 Current Liabilities

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

Current liabilities may include:

 Payroll deductions.

 Compensated absences.

 Bonuses.

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 Employee-Related Liabilities

Payroll Deductions
Taxes:
► Social Security Taxes

► Income Tax Withholding

ILLUSTRATION 13.4
Summary of Payroll Liabilities

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 Employee-Related Liabilities

Illustration: Assume a weekly payroll of $10,000 entirely subject to

Social Security taxes (8%), with income tax withholding of $1,320 and
union dues of $88 deducted. The company records the wages and
salaries paid and the employee payroll deductions as follows.

Wages and Salaries Expense 10,000

Withholding Taxes Payable 1,320
Social Security Taxes Payable 800
Union Dues Payable 88
Cash 7,792

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 Employee-Related Liabilities

Illustration: Assume a weekly payroll of $10,000 entirely subject to

Social Security taxes (8%), with income tax withholding of $1,320 and
union dues of $88 deducted. The company records the employer
payroll taxes as follows.

Payroll Tax Expense 800

Social Security Taxes Payable 800

The employer must remit to the government its share of Social Security tax
along with the amount of Social Security tax deducted from each employee’s
gross compensation.

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 Employee-Related Liabilities

Compensated Absences
Paid absences for vacation, illness and maternity, paternity,
and jury leaves.

Vested rights - employer has an obligation to make payment to an

employee even after terminating his or her employment.

Accumulated rights - employees can carry forward to future

periods if not used in the period in which earned.

Non-accumulating rights - do not carry forward; they lapse if not

used.

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 Employee-Related Liabilities

Illustration: Amutron NV began operations on January 1, 2019. The

company employs 10 individuals and pays each €480 per week.
Employees earned 20 unused vacation weeks in 2019. In 2020, the
employees used the vacation weeks, but now they each earn €540
per week. Amutron accrues the accumulated vacation pay on
December 31, 2019, as follows.

Salaries and Wages Expense 9,600

Salaries and Wages Payable 9,600

In 2020, it records the payment of vacation pay as follows.

Salaries and Wages Payable 9,600

Salaries and Wages Expense 1,200
Cash 10,800
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 Employee-Related Liabilities

Profit-Sharing and Bonus Plans

Payments to certain or all employees in addition to their regular
salaries or wages.

 Bonuses paid are an operating expense.

 Unpaid bonuses should be reported as a current liability.

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 LEARNING OBJECTIVE 2
Provisions Explain the accounting for
different types of provisions.

A provision is a liability of uncertain timing or amount.

Reported either as current or non-current liability.

Common types are

► Obligations related to litigation.

► Warrantees or product guarantees.

► Business restructurings.

► Environmental damage.

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 Recognition of a Provision

Companies accrue an expense and related liability for a

provision only if the following three conditions are met:

1. Company has a present obligation (legal or constructive) as

a result of a past event;

2. Probable that an outflow of resources will be required to

settle the obligation; and

3. A reliable estimate can be made.

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 It is assumed that a
Recognition of a Provision reliable estimate of the
amount of the obligation
can be determined.
Recognition Examples

ILLUSTRATION 13.5
Recognition of a Provision—Warranty

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 Recognition Examples

Constructive obligation is an obligation that derives from a

company’s actions where:

1. By an established pattern of past practice, published

policies, or a sufficiently specific current statement, the
company has indicated to other parties that it will accept
certain responsibilities; and

2. As a result, the company has created a valid expectation

on the part of those other parties that it will discharge those
responsibilities.

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 Recognition Examples

ILLUSTRATION 13.6
Recognition of a Provision—Refunds

It is assumed that a reliable

estimate of the amount of the
obligation can be determined.

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 Recognition Examples

ILLUSTRATION 13.7
Recognition of a Provision—Lawsuit
It is assumed that a reliable
estimate of the amount of the
obligation can be determined.

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 Measurement of Provisions

How does a company determine the amount to report for a

provision?

IFRS:
Amount recognized should be the best estimate of the
expenditure required to settle the present obligation.

Best estimate represents the amount that a company would pay

to settle the obligation at the statement of financial position date.

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 Measurement of Provisions

Measurement Examples
Management must use judgment, based on past or similar
transactions, discussions with experts, and any other pertinent
information.

Toyota warranties. Toyota might determine that 80

percent of its cars will not have any warranty cost, 12
percent will have substantial costs, and 8 percent will have a much
smaller cost. In this case, by weighting all the possible outcomes by
their associated probabilities, Toyota arrives at an expected value for
its warranty liability.

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 Measurement of Provisions

Measurement Examples
Management must use judgment, based on past or similar
transactions, discussions with experts, and any other pertinent
information.

Carrefour refunds. Carrefour sells many items at

varying selling prices. Refunds to customers for products
sold may be viewed as a continuous range of refunds, with each point
in the range having the same probability of occurrence. In this case,
the midpoint in the range can be used as the basis for measuring the
amount of the refunds.

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 Measurement of Provisions

Measurement Examples

Novartis lawsuit. Large companies like Novartis are

involved in numerous litigation issues related to their
products. Where a single obligation such as a lawsuit is being
measured, the most likely outcome of the lawsuit may be the best
estimate of the liability.

Measurement of the liability should consider the time value of money,

if material. Future events that may have an impact on the
measurement of the costs should be considered.

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 Common Types of Provisions

Common Types:
1. Lawsuits 4. Environmental

2. Warranties 5. Onerous contracts

3. Consideration payable 6. Restructuring

IFRS requires extensive disclosure related to provisions in the notes to

the financial statements. Companies do not record or report in the notes
general risk contingencies inherent in business operations (e.g., the
possibility of war, strike, uninsurable catastrophes, or a business
recession).

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 Common Types of Provisions

Litigation Provisions
Companies must consider the following in determining whether
to record a liability with respect to pending or threatened
litigation and actual or possible claims and assessments.

1. The time period in which the underlying cause of action

occurred.

2. The probability of an unfavorable outcome.

3. Ability to make a reasonable estimate of the amount of loss.

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 Litigation Provisions

With respect to unfiled suits and unasserted claims and

assessments, a company must determine

1. the degree of probability that a suit may be filed or a claim

or assessment may be asserted, and

2. the probability of an unfavorable outcome.

If both are probable, if the loss is reasonably estimable, and if the

cause for action is dated on or before the date of the financial
statements, then the company should accrue the liability.

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 Litigation Provisions

BE13-12: Scorcese A.S. is involved in a lawsuit at December 31,

2019. (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. The loss is not accrued because it

is not probable that a liability has been incurred at
12/31/19.
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 Common Types of Provisions

Warranty Provisions
Promise made by a seller to a buyer to make good on a
deficiency of quantity, quality, or performance in a product.

If it is probable that customers will make warranty claims and a

company can reasonably estimate the costs involved, the
company must record an expense.

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 Warranty Provisions

Companies often provide one of two types of warranties to

customers:

Assurance-Type Warranty
A quality guarantee that the good or service is free from
defects at the point of sale.

 Obligations should be expensed in the period the

goods are provided or services performed (in other
words, at the point of sale).

 Company should record a warranty liability.

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 Assurance-Type Warranty

Facts: Denson Machinery Company begins production of a new

machine in July 2019 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 2019 and $16,000 in 2020.

Question: What are the journal entries for the sale and the related
warranty costs for 2019 and 2020?

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 Assurance-Type Warranty

Solution: For the sale of the machines and related warranty costs
in 2019 the entry is as follows.

1. To recognize sales of machines and accrual of warranty

liability:

July–December 2019

Cash 500,000
Sales Revenue 500,000

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 Assurance-Type Warranty

Solution: For the sale of the machines and related warranty costs
in 2019 the entry is as follows.

2. To record payment for warranties incurred:

July–December 2019

Warranty Expense 4,000

Cash, Inventory, Accrued Payroll 4,000

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 Assurance-Type Warranty

Solution: For the sale of the machines and related warranty costs
in 2019 the entry is as follows.

3. Record the adjusting entry to record estimated warranty

expense and warranty liability for expected warranty claims in
2020:

December 31, 2019

Warranty Expense 16,000

Warranty Liability 16,000

At December 31, 2019, the statement of financial position reports a warranty

liability (current) of $16,000 ($20,000 − $4,000). The income statement for
2019 reports sales revenue of $500,000 and warranty expense of $20,000.
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 Assurance-Type Warranty

Solution: For the sale of the machines and related warranty costs
in 2019 the entry is as follows.

4. To record payment for warranty costs incurred in 2020 related

to 2019 machinery sales:

January 1–December 31, 2020

Warranty Liability 16,000

Cash, Inventory, Accrued Payroll 16,000

At the end of 2020, no warranty liability is reported for the machinery

sold in 2019.

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 Warranty Provisions

Companies often provide one of two types of warranties to

customers:

Service-Type Warranty
An extended warranty on the product at an additional cost.

 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

Facts: You purchase an automobile from Hamlin Auto for €30,000

on January 2, 2019. 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 2019 and €200 in 2020.
Hamlin records revenue on the service-type warranty on a straight-
line basis.

Question: What entries should Hamlin make in 2019 and 2022?

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 Service-Type Warranty

Solution:

1. To record the sale of the automobile and related warranties:

January 2, 2019

Cash (€30,000 + €900) 30,900

Unearned Warranty Revenue 900
Sales Revenue 30,000

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 Service-Type Warranty

Solution:

2. To record warranty costs incurred in 2019:

January 2–December 31, 2019

Warranty Expense 500

Cash, Inventory, Accrued Payroll 500

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 Service-Type Warranty

Solution:

3. The adjusting entry to record estimated warranty expense and

warranty liability for expected assurance warranty claims in
2020:

January 1–December 31, 2019

Warranty Expense 200

Warranty Liability 200

At December 31, 2019, the statement of financial position reports a warranty

liability of €200 (€700 – €500). The income statement for 2019 reports sales
revenue of €30,000 and warranty expense of €700.
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 Service-Type Warranty

Solution:

4. To record revenue recognized in 2022 on the service-type

warranty:

December 31, 2022

Unearned Warranty Revenue (€900 ÷ 3) 300

Warranty Revenue 300

Warranty costs under the service-type warranty will be expensed as incurred in

2022–2024.

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 Common Types of Provisions

Consideration Payable
Companies often make payments (provide consideration) to
their customers as part of a revenue arrangement.

Companies offer premiums, coupon offers, and rebates to

stimulate sales.
 Companies should charge the costs of premiums and
coupons to expense in the period of the sale that benefits
from the plan.

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 Consideration Payable

Facts: Fluffy Cake Mix Ltd. sells boxes of cake mix for £3 per box.
In addition, Fluffy Cake Mix offers its customers a large durable
mixing bowl in exchange for £1 and 10 box tops. The mixing bowl
costs Fluffy Cake Mix £2, and the company estimates that
customers will redeem 60 percent of the box tops. The premium
offer began in June 2019. During 2019, Fluffy Cake Mix purchased
20,000 mixing bowls at £2, sold 300,000 boxes of cake mix for £3
per box, and redeemed 60,000 box tops.

Question: What entries should Fluffy Cake Mix record in 2019?

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 Consideration Payable

Solution:

1. To record purchase of 20,000 mixing bowls at £2 per bowl in

2019:

Premium Inventory (20,000 bowls x £2) 40,000

Cash 40,000

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 Consideration Payable

Solution:

2. The entry to record the sale of the cake mix boxes in 2019 is as
follows.

Cash (300,000 boxes x £3) 900,000

Sales Revenue 900,000

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 Consideration Payable

Solution:

3. To record the actual redemption of 60,000 box tops, the

receipt of £1 per 10 box tops, and the delivery of the mixing
bowls:

Cash [(60,000 ÷ 10) x £1] 6,000

Premium Expense 6,000
Inventory of Premiums [(60,000 ÷ 10) x £2] 12,000

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 Consideration Payable

Solution:

The computation of the Premium Liability at 12/31/19 is as follows.

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 Consideration Payable

Solution:

4. The adjusting entry to record additional premium expense

and the estimated premium liability at December 31, 2019, is
as follows:

Premium Expense 12,000

Premium Liability 12,000

The December 31, 2019, statement of financial position reports Premium

inventory of £28,000 (£40,000 − £12,000) as a current asset and Premium
Liability of £12,000 (£18,000 − £6,000) as a current liability. The 2019 income
statement reports £18,000 (£6,000 + £12,000) premium expense as a selling
expense.

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 Common Types of Provisions

Environmental Provisions
A company must recognize an environmental liability when it has
an existing legal obligation associated with the retirement of a
long-lived asset and when it can reasonably estimate the amount
of the liability.

13-78 LO 2
 Environmental Provisions

Obligating Events. Examples of existing legal obligations,

which require recognition of a liability include, but are not
limited to:
► Decommissioning nuclear facilities.
► Dismantling, restoring, and reclamation of oil and gas
properties.
► Certain closure, reclamation, and removal costs of mining
facilities.
► Closure and post-closure costs of landfills.

13-79 LO 2
 Environmental Provisions

Measurement. A company initially measures an

environmental liability at the best estimate of its future costs.

Recognition and Allocation. To record an environmental

liability a company includes

► the cost associated with the environmental liability in the

carrying amount of the related long-lived asset, and

► records a liability for the same amount.

13-80 LO 2
 Environmental Provisions

Illustration: On January 1, 2019, Wildcat Oil Company erected an oil

platform in the Gulf of Mexico. Wildcat is legally required to dismantle
and remove the platform at the end of its useful life, estimated to be
five years. Wildcat estimates that dismantling and removal will cost
$1,000,000. Based on a 10 percent discount rate, the fair value of
the environmental liability is estimated to be $620,920 ($1,000,000 x
.62092). Wildcat records this liability on Jan. 1, 2019 as follows.

Drilling Platform 620,920

Environmental Liability 620,920

13-81 LO 2
 Environmental Provisions

Illustration: During the life of the asset, Wildcat allocates the asset
retirement cost to expense. Using the straight-line method, Wildcat
makes the following entries to record this expense.

December 31, 2019, 2020, 2021, 2022, 2023

Depreciation Expense ($620,920 ÷ 5) 124,184

Accumulated Depreciation—Plant Assets 124,184

13-82 LO 2
 Environmental Provisions

Illustration: In addition, Wildcat must accrue interest expense each

period. Wildcat records interest expense and the related increase in
the environmental liability on December 31, 2019, as follows.

December 31, 2019

Interest Expense ($620,920 x 10%) 62,092

Environmental Liability 62,092

13-83 LO 2
 Environmental Provisions

Illustration: On January 10, 2024, Wildcat contracts with Rig

Reclaimers, Inc. to dismantle the platform at a contract price of
$995,000. Wildcat makes the following journal entry to
record settlement of the liability.

January 10, 2024

Environmental Liability 1,000,000

Gain on Settlement of Environmental Liability 5,000
Cash 995,000

13-84 LO 2
 Common Types of Provisions

Onerous Contract Provisions

“The unavoidable costs of meeting the obligations exceed
the economic benefits expected to be received.”

The expected costs should reflect the least net cost of

exiting from the contract, which is the lower of

1. the cost of fulfilling the contract, or

2. the compensation or penalties arising from failure to fulfill

the contract.

13-85 LO 2
 Onerous Contract Provisions

Illustration: Sumart Sports operates profitably in a factory that it

has leased and on which it pays monthly rentals. Sumart
decides to relocate its operations to another facility. However,
the lease on the old facility continues for the next three years.
Unfortunately, Sumart cannot cancel the lease nor will it be able
to sublet the factory to another party. The expected costs to
satisfy this onerous contract are €200,000. In this case, Sumart
makes the following entry.

Loss on Lease Contract 200,000

Lease Contract Liability 200,000

13-86 LO 2
 Onerous Contract Provisions

Assume the same facts as above for the Sumart example and
the expected costs to fulfill the contract are €200,000. However,
Sumart can cancel the lease by paying a penalty of €175,000. In
this case, Sumart should record the liability as follows.

Loss on Lease Contract 175,000

Lease Contract Liability 175,000

13-87 LO 2
 Common Types of Provisions

Restructuring Provisions
Restructurings are defined as a “program that is planned and
controlled by management and materially changes either

1. the scope of a business undertaken by the company; or

2. the manner in which that business is conducted.”

Companies are required to have a detailed formal plan for the restructuring
and to have raised a valid expectation to those affected by implementation
or announcement of the plan.

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 Restructuring Provisions

IFRS provides specific guidance related to certain costs and

losses that should be excluded from the restructuring
provision.

ILLUSTRATION 13.13
Costs Included/Excluded from Restructuring Provision

13-89 LO 2
 Restructuring Provisions

ILLUSTRATION 13.14
Accounting for Restructuring

13-90 LO 2
 Common Types of Provisions

Self-Insurance
Self-insurance is not insurance, but risk assumption.
There is little theoretical justification for the establishment of a
liability based on a hypothetical charge to insurance expense.

Conditions for accrual stated in IFRS are not satisfied prior to

the occurrence of the event.

13-91 LO 2
 Disclosure Related to Provisions

A company must provide a reconciliation of its beginning to

ending balance for each major class of provisions, identifying
what caused the change during the period.

In addition,

► Provision must be described and the expected timing of

any outflows disclosed.

► Disclosure about uncertainties related to expected

outflows as well as expected reimbursements should be
provided.

13-92 LO 2
 LEARNING OBJECTIVE 3
Contingencies Explain the accounting for loss
and gain contingencies.

Contingent Liabilities
Contingent liabilities are not recognized in the financial
statements because they are

1. A possible obligation (not yet confirmed),

2. A present obligation for which it is not probable that

payment will be made, or

3. A present obligation for which a reliable estimate of the

obligation cannot be made.

13-93 LO 3
 Contingent Liabilities

ILLUSTRATION 13-16 presents the general guidelines for the

accounting and reporting of contingent liabilities.

ILLUSTRATION 13.16
Contingent Liability Guidelines

13-94 LO 3
 Contingencies

Contingent Assets
A contingent asset is a possible asset that arises from past
events and whose existence will be confirmed by the
occurrence or non-occurrence of uncertain future events not
wholly within the control of the company. Typical contingent
assets are:
1. Possible receipts of monies from gifts, donations, bonuses.

2. Possible refunds from the government in tax disputes.

3. Pending court cases with a probable favorable outcome.

Contingent assets are not recognized on the statement of financial position.

13-95 LO 3
 Contingent Assets

The general rules related to contingent assets are presented

in ILLUSTRATION 13-18.

ILLUSTRATION 13.18
Contingent Asset Guidelines

Contingent assets are disclosed when an inflow of economic benefits

is considered more likely than not to occur (greater than 50 percent).

13-96 LO 3
 LEARNING OBJECTIVE 4
Presentation and Analysis Indicate how to present and
analyze liability-related
information.

Presentation of Current Liabilities

 Usually reported at their full maturity value.
 Difference between present value and the maturity
value is considered immaterial.

13-97 LO 4
 Presentation of Current Liabilities ILLUSTRATION 13.19
Current Assets and
Current Liabilities

Illustration 13-15

13-98
 Analysis of Current Liabilities

Liquidity regarding a liability is the expected time to elapse

before its payment. Two ratios to help assess liquidity.

Illustration: Compute these two ratios using the information for

Wilmar International Limited (SGP) in ILLUSTRATION 13-19.

ILLUSTRATION 13.22
Computation of Current and Acid-Test Ratios for Wilmar

13-99 LO 4
 Copyright

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13-100
 Terima Kasih

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