5.2 Current Liability
1. Definition of Current Liability
Current liability is short-term obligations that usually must be paid from current assets within a year or within the operating cycle.
2. Types of Current Liabilities ★
1) Trade Payable
Trade payable usually is called accounts payable. Trade payable are amounts owed to others for goods supplies, and services purchased on credit.
Lecture Example 1
Company A purchased goods on credit on 6th June, 20x8. Received sales invoice from the supplier on 10th June 20x8, the sales value of goods was $400.
A made payment $400 to supplier on 15th July 20x8 from bank.
(1) on 10th June, 20x8, should recorded the transaction as follow:
Dr: Purchases 400
Cr: Trade payable 400
(2) on 15th July 20x8, should recorded the transaction as follow:
Dr: Trade payable 400
Cr: Bank 400
2) Current Notes Payable
Current notes payable are written promissory notes. The maker of the note promises to pay the face amount of the note at the due date (maturity date).
In theory, notes payable should be recorded at the present value of the cash outflows (payments of principal and interest) associated with the note.
Lecture Example 2
B Company cannot pay its past due $10 000 account with A Company. As an accommodation, on April 1st, A Company agrees to accept B Company’s 3 month, 12%, $10 000 note in granting an extension on the due date of the debt.
B Company records the issuance of the note as follows：
①On April 1st:
Dr: Accounts Payable－－A Company 10 000
Cr: Notes Payable 10 000
②At the each end of April, May and June, recorded the following double entry：
Dr: Interest Expense 100
Cr: Interest Payable 100
③ On July 1st, B paid A Company the interest expense and principal:
Dr: Notes Payable 10 000
Interest Payable 300
Cr: Bank 10 300
3) Advances from Customers
In many industries, customers pay in advance for goods and services to be provided at future dates．
This liability is then converted to revenue as the related services are performed or the relevant goods are delivered．
Lecture Example 3
On Jan 1st Public Transportation Corporation sells public transportation cards for $10 million as advance payments from customers. On Jan 31st 20X2, the computers show that $8million of this amount is earned by Jan 31st，20X2．
①The double entry on Jan 1st, 20X2
Dr: Cash 10 000 000
Cr: Advance from customers 10 000 000
②The double entry on Jan 31st, 20X2：
Dr: Advance from customers 8 000 000
Cr: Service revenue 8 000 000
4) Current Maturities of Long-Term Obligations
An obligation previously classified as long-term but now due within one year. For example mortgages payable, bonds payable, and financing lease obligations.
Current maturities of long-term obligations should be reclassified as a current liability in the Statement of Financial Position of titled portion of long-term liabilities due within one year．
5) Dividend Payable
A liability is created when the board of directors of a corporation declares a dividend to be paid to the shareholders.
Lecture Example 4
The board of directors of A company declares a semiannual dividend of $6 per share on 4000 shares of common stock outstanding on May 28th and dividends will be paid on June 14th．
①The declaration should be recorded as follow：
Dr: Cash dividends 24 000
Cr: Dividends payable 24 000
②The payment should be recorded as follow:
Dr: Dividend payable 24 000
Cr: Bank 24 000
