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Accounting for Liabilities

Defining Liabilities

Liabilities are future obligations to others that have three essential characteristics. Firstly, a liability can be settled in the future by transferring or using cash or other assets, by providing services, or giving up other economic benefits. A future obligation that doesn't require giving up some economic benefit is not considered a liability. Secondly, the date that the obligation must be settled must be previously determined, or must be based on some specific event occuring, or can be on demand. However, the entity itself should have little discretion in avoiding the obligation. Thirdly, the transaction or other even that creates the liability must have already occured for the liability to be recognized. 

Distinguishing Between Financial and Non-Financial Liabilities

In addition to our definition for liabilities, we also recognize a distinction between financial liabilities and those that are not financial in nature. According to the FASB master glossary, a financial liability is a contract that imposes on one entity an obligation to do either of the following: (a) deliver cash or another financial instrument to another entity or (b) exchange other financial instruments on potential unfavourable terms with another entity. It is important to recognize that this definition requires the liability to be based on a contract. Therefore, obligations that arise as a result of legislation, such as income taxes payable, are not considered financial liabilities. The distinction is important because financial liabilities may be required to be measured at fair value as opposed to historical cost.

Most current liabilities are financial in nature expect for those where the obligation will be met by the delivery of goods or services. For example, deferred revenue, commitments, gaurantees and warranties are often non-financial in nature. Long-term liabilities that are non-financial in nature may include asset retirement obligations, environmental obligations, exit or disposal cost obligations and loss contingencies. 

Distinguishing Between Liabilities and Equity

One of the more complicated aspects of accounting for liabilities is the ability to determine whether an obligation is a liability or an ownership claim. For example, while perferred shares are reported as part of shareholders' equity we know that preferred shares, in fact, have many characteristics of debt. GAAP looks at distinguishing freestanding financial instruments which have characteristics of both debt and equity in.1 


1. FASB ASC 480-10

Categories within Accounting for Liabilities

Current Liabilities

Postings: 23

Current liabilities mean liabilities that will become payable within a year or within the normal operating cycle (if this is longer than a year). As a result, we normal expect current liabilities to be settled using existing current assets.


Postings: 11

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 entity that will ultimately be resolved when one or more future events occur or fail to occur.

Current vs. Long-Term Liabilities

Raffie's Kids, a nonprofit organization that provides aid to victims of domestic violence, low-income families, and special-needs children, has a 30-year, 5% mortgage on the existing building. The mortgage requires monthly payments of $3,000. Raffie's bookkeeper is preparing financial statements for the board and, in doing so, l

Bankruptcy legislation: Wage Earner Plan

Jon Morgan is in a financial position where owes more than he earns each month. Due to his lack of financial planning and heavy debt load, Jon started missing payments and saw his credit rating plunge. Unless corrective action is taken, personal bankruptcy will follow. Jon recently contacted his lawyer so as to set up a wage

Journal Entries of Cirque de Liverpool Ltd

Cirque de Liverpool Ltd (CDLL) reported the following amounts at the end of 2008. Accounts receivable Debit £265,000 Allowance for doubtful accounts Credit £15,000 Bad debt expense Debit £45,000 During 2009, the following transactions occurred: Sales on account of £395,000 Accounts written off for £20,000

Effects of Burger King's Current Liabilities on It's Statement of Cash Flows

PROBLEM 9-2: Instructions: Complete exercise following the requirements provided in your book. The following items are classified as current liabilities on Burger King Holdings, Inc.'s balance sheets as of June 30, 2010, and June 30, 2009: 6/30/2010 6/30/2009 (in Millions) Current liabilities: Accounts and drafts pay

Alter-Ego Liability

I am having difficulty finding a case that involves alter-ego liability on I am also having troubling listing the elements the court considered when determining whether to pierce the corporate shield. Incorporate the material from the text and support your statements. Is it ethical for a company to move its cor

Foreign Regionalism

Define Liability of Foreignness and Regionalism. Discuss how it relates to and how it impacts international strategies.

Current Liabilities and Contingencies

Assume you are Chief Financial Officer of Camp Industries. Camp is the defendant in a $44 million class action suit. The companys legal counsel informally advises you that chances are remote that the company will emerge victorious in the lawsuit. Counsel feels the company will probably lose $30 million. You recall the provis

SCR: should companies be capped on their liabilities?

Current legislation limits the amount of economic-related liabilities to be paid by a company on account of an oil spill to $75 million. A move to amend that legislation and raise the liability cap to $10 billion was blocked in the Senate because Big Petroleum, who is responsible for a recent spill, has given its word that it wo

Analyzing and estimating environmental liabilities

Merck & Co. included the following footnote in its 2011 annual report: Environmental Matters The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material adverse effect on the Company. The Company is also remediating environmental contamina

Long Term Liabilities Worksheet

1). Indicate whether each of the items below should be classified on December 31, 2013, as a current liability, a long term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of th

FASB: Changes in Liabilities, Equity Measurement and Reporting

The accounting for liabilities, both current and long-term, and equity has changed significantly since the inception of the FASB. Discuss some of the primary changes in the accounting (measurement and reporting) for liabilities and equity that the FASB has implemented.

Long-Term Liabilities

(Classification of Liabilities) Presented below are various account balances. (a) Bank loans payable of a winery due Mar 10, 2016 (the product requires aging for 5 years before sale) (b) Unamortized premium on bonds payable, of which 3,000 will be amortized during the next year (c) Serial bonds payable, 1,000,000 of whi

Total Long Term Debt and Liabilities

At year-end 2010, Bertin Inc.'s total assets were $1.2 million and its accounts payable were $375,000. Sales, which in 2010 were $2.5 million, are expected to increase by 25% in 2011. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Bertin typically uses no current liabili

Current liabilities, notes payable, journal entries, taxes

1. Current liabilities are Due, but not receivable for more than one year Due, but not payable for more than one year Due and receivable within one year Due and payable within one year 2. On June 8, Alton Co. issued an $80,000, 6%, 120-day note payable to Seller Co. What is the due date of the note? October 8

Intermediate Accounting Current Liabilities

Mary Smith is the controller of Arnold Corporation and is responsible for the preparation of the year-end financial statements. The following transactions occurred during the year. (a) On December 20, 2012, an employee filed a legal action against Arnold for $100,000 for wrongful dismissal. Management believes the action to b

business multiple choice: current liabilities

43) Which of the following items is a current liability? A. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months. B. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months. C. Bonds to be refunded when due in eight mo

A transaction that is likely to cause an increase in a current liability is

A transaction that is likely to cause an increase in a current liability is: a. payment of accrued wages. b. accrual of interest expense. c. depreciation of equipment. d. accrual of bad debts expense. Which of the following is a true statement regarding interest calculation methods? a. Interest is calculated on eith

liabilities and bonds

1) What are the criteria for classifying an item as a current liability? What are some examples of current liabilities? Why is it important to classify a portion of long-term debt on a yearly basis as a current liability? What is the implication of misclassifying a liability as current or long-term? 2) What is a contingency?

Analyzing the ability to pay liabilities

Large Land Photo Shop has asked you to determine whether the company's ability to pay current liabilities and total liabilities improved or deteriorated during 2012. To answer this question, you gather the following data: (See Attatchment) Compute the following ratios for 2012 and 2011: a. Current ratio b. Acid-test ra

Addressing Estimated Current Liabilities

Would you be able to describe the two types of current liabilities that must be estimated and why this is so? How are the financial statements affected if they are not estimated?

Discussion on estimated current liabilities

There are two types of current liabilities that must be estimated. Describe them and explain why they must be estimated. How are the financial statements affected if they are not estimated? Respond to the following post. Estimated Warranty Payable and Contingent Liabilities are two types of current liabilities that must b

assets and liabilities; accrual accounting

1. What is the key distinction between current and non-current assets? Current assets will be used up or converted to cash within one year or one operating cycle. Non-current assets are which do not lose their value over time. Current assets always have lower balances than non-current assets. Non

Product liability and deciding whether to go to court or settle.

Describe where you see personal responsibility and accountability fitting into this chapter's materials on product liability. An owner of a manufacturing firm is being sued for potential product liability of a particular product. Identify at least two things the owner should consider in the decision to fight in court or settle.