Acct 221 1st Edition Lecture 17 Outline of Last Lecture 1 Depreciation Methods a Double Declining b Units of Production Method 2 Natural Resources 3 Expensing Intangible Assets 4 Current versus Noncurrent Outline of Current Lecture 1 Contingent Liabilities a Probable and estimable b Reasonably possible c Remote 2 Warranty Obligations 3 Current Ratio 4 Investments and Securities Current Lecture Contingent Liabilities Potential obligation arising from a past event The amount or existence of the obligation depends on some future event Ex lawsuits Accounting standards require companies to classify contingent liabilities into one of three categories Probable and estimable Recognize in the financial statements Reasonably possible probable but not estimable These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Disclose in the footnotes to financial statements Remote No need to recognize or disclose Warranty Obligations Generally within the warranty period the seller promises to replace or repair defective products without charge to the customer Ex Matric Inc sells 100 000 of merchandise for cash The merch Has a cost to Matrix of 60 000 Debits cash 100 000 Credit revenue 100 000 Then Credit inventory Debits Cost of Goods Sold Expense Ex 2 Matrix Inc estimates that warranty expense associated with the current sale will be 5 000 Credit Warranty Payable Debit Warranty Expense Ex 3 Matrix Inc pays 1 000 cash to repair defective merchandise returned by several customers Credit cash for 1 000 Debit warranty payable for 1 000 Do not debit warranty expense we already estimated our expense and put it into our warranty payables account now as we actually pay we decrease our warranty payables hence the debit to warranty payable Current Ratio Current asset current liabilities Ex 288 600 193 800 1 49 Anything greater than 1 is good Investments in Securities A company may use some of its extra cash to invest in the debt or equity securities of another company These investments must be classified as one of three types Securities held to maturity Debt securities Intent and ability to hold maturity Not current Trading securities Debt and equity securities Readily determinable fair values Bought and held to sell in the near term Actively and frequently traded trying to make a profit buy low sell high Measured at fair market value and classified as a current asset Unrealized gains and losses included in determination of net income Current Securities available for Sale Debt and equity securities Readily determinable fair values Not classified as either securities held to maturity or trading securities Measured at fair value on balance sheet May be current or noncurrent May have holding gains or losses to be reported net as a separate component of owners equity usually as a part of other comprehensive income