Question

E5.10 (LO1, 2) (Current Liabilities) Mary Pierce 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. Bonuses to key employees based on net income for 2019 are estimated to be $150,000 b. On December 1, 2019, the company borrowed $900,000 at 8% per year. Interest is paid quarterly. c. Credit sales for the year amounted to $10,000,000. Arnold's expense provision for doubtful accounts is estimated to be 2% of credit sales d. On December 15, 2019, the company declared a $2 per share dividend on the 40,000 ordinary shares outstanding, to be paid on January 5, 2020. e. During the year, customer advances of $160,000 were received: $50,000 of this amount was earned by December 31, 2019 Instructions For each item above, indicate the dollar amount to be reported as a current liability. If a liability is not reported, explain why

Answer 1

Liabilities are probable future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to others entities in the future as a result of past transactions or events.

A liability requires three things:

1. Presents obligation
2. The Obligation is a result of past events
3. Settling the obligation will require an outflow of economic resource

Liabilities must be classified as current or Non-current for financial reporting purpose.

Current liabilities are obligations whose liquidation is reasonably expected to require the use of current assets, the creation of other current liabilities, or the provision of services within the next year or operating cycle, whichever is longer.

	Account Head	Current liability
a.	Bonuses Payable	$ 50,000
b.	Interest accrued but not due	$ 6,000
c.	Provision for doubtful accounts	$ -
d.	Dividend Payable	$ 80,000
e.	Advances from Customer / Unearned income	$ 110,000

Notes

a. Bonus is generally paid annually, it is assumed it will be paid within one year.

b Interest will be paid quarterly, Interest accrued for one month [$ 900,000 * 8 % /12]

c.  Provision for doubtful accounts is a special case. It is a provision only because in this case an amount has been set aside from the profits to be treated as an expense. there is not going to be any outflow of resources, hence not a liability. It is reduced from accounts receivable and shown separately, Accounts receivables as reported net of provision.

d. Dividend is payable on January 5, 2020

e.Advances from Customer / Unearned income [$ 160,000 - 50,000]