Question

A current liability is a short-term obligation that is normally expected to be settled within one year. For each of the following events and transactions that occurred in November 2017, indicate the title of the current liability account that is affected and the amount that would be reported on a statement of financial position prepared on December 31, 2017. If an event does not result in a current liability, explain why.

a) A customer purchased a ticket from WestJet Airlines For $ 470 cash to travel in January 2018. Answer from WestJet's standpoint.

b) Hall Construction Company signs a contract with a customer for the construction of a new $ 500,000 warehouse. At the signing, Hall receives a cheque for $ 50,000 as a deposit on the future construction. Answer from Hall's standpoint.

c) On November 1, 2017, a bank lends $ 10,000 to a company. The loan carries a 5 percent annual interest rate, and the principal and interest are due in a lump sum on October 31, 2018. Answer from the company's standpoint.

d) A popular ski magazine company receives a total of $ 17,800 from subscribers on December 31, the last day of its fiscal year. The subscriptions begin in the next fiscal year. Answer from the magazine company's standpoint.

e) On November 20, the campus bookstore receives 900 accounting textbooks at a cost of $ 70 each. The terms indicate that payment is due within 30 days of delivery. Answer from the bookstore's standpoint.

f) Ziegler Company, a farm equipment company, receives its phone bill at the end of January 2018 for $ 2,300 for January calls. The bill has not been paid to date.

Answer 1

• Regarding Current Liabilities, following points must be considered:

----These are ‘liabilities’ that are to be repaid.

----These are to be paid in SHORT TERM, say within one year.

----These also include any Revenue that has not been EARNED, or revenue amount received as ADVANCE from Customer.

• Questions and there answers:
• a. A customer purchased a ticket from WestJet Airlines For $ 470 cash to travel in January 2018. Answer from WestJet's standpoint.

Customer has paid $ 470 cash as an Advance.

This is accounted as “Unearned Revenues” for WestJet and will be recorded under “Current Liabilities”.
Amount of Current Liability = $ 470.

b. Hall Construction Company signs a contract with a customer for the construction of a new $ 500,000 warehouse. At the signing, Hall receives a cheque for $ 50,000 as a deposit on the future construction. Answer from Hall's standpoint.

Customer has paid $ 50,000 cash as an Advance.

This is accounted as “Unearned Revenues” for Hall and will be recorded under “Current Liabilities”.
Amount of Current Liability = $ 50,000.

c. On November 1, 2017, a bank lends $ 10,000 to a company. The loan carries a 5 percent annual interest rate, and the principal and interest are due in a lump sum on October 31, 2018. Answer from the company's standpoint.

Since both Principal and Interest are repayable within 1 year, both are in the nature of Current Liabilities.

However, since current year is ending on 31 Dec, 2017, Interest Expense of only 2 months [Nov and Dec] will be recognised in books, and as a result 2 Month Interest Payable [current liability] will be recognised.

Current Liabilities on 31 Dec, 2017:

Bank Loan = $ 10,000
Interest Payable = 10,000 x 5% x 2 months / 12 months = $ 83.33
Total current Liabilities = 10000 + 83.33 = $ 10,083.33

d. A popular ski magazine company receives a total of $ 17,800 from subscribers on December 31, the last day of its fiscal year. The subscriptions begin in the next fiscal year. Answer from the magazine company's standpoint.

Subscribers have paid $ 17,800 Subscription for next year.
This is accounted as “Unearned Revenues (Subscription)” for Magazine company and will be recorded under “Current Liabilities”.
Amount of Current Liability = $ 17,800.

e. On November 20, the campus bookstore receives 900 accounting textbooks at a cost of $ 70 each. The terms indicate that payment is due within 30 days of delivery. Answer from the bookstore's standpoint.

Books purchased of value 900 x $70 = $ 63,000 will be a current liability as it is payable within 30 days.

Amount of Current Liability = $ 63,000 [Accounts Payable head]

f. Ziegler Company, a farm equipment company, receives its phone bill at the end of January 2018 for $ 2,300 for January calls. The bill has not been paid to date.

$ 2,300 are to paid next month and hence Current Liabilities are of $ 2,300.

These can be recorded under “Expense payable”, “Telephone expense payable” , “Utilities Payable” or even under “Accounts payable” if there are no dedicated account.