Lecture 7 - Liabilities Part 2

Estimated Liabilities

Income Taxes

Financial statements are prepared soon after the beginning of the year, but taxes aren't paid until March 15. So you may not know how much tax you'll pay when you're preparing the financial statement.

Entry for this estimation:
Debit Income Tax Expense (aka provision for income taxes)
------Credit Income Tax Liability

(ACE Question answer is false)

Product Warranties

Product warranties require two types of entries: The end of year adjustment and the provision of warranty services. See class slides for details (which assumes that the warranty provides for replacement of a damaged/defective item and so requires Cr from merchandise inventory)

Contingent Liabilities

Should it be recorded? The criteria are: is it likely to be paid out and can it be estimated?

If so,
Debit Expense related to loss on litigation
---- Credit Contingent Liability relating to litigation

(ACE Question answer is A) Which is not a contingent liability? A dividend declared, but not yet paid. It's a real liability.