Acct. 221 1st Edition Lecture 17Outline of Last Lecture 1. Depreciation Methodsa. Double-Decliningb. Units of Production Method2. Natural Resources 3. Expensing Intangible Assets4. Current versus Noncurrent Outline of Current Lecture 1. Contingent Liabilities a. Probable and estimableb. Reasonably possiblec. Remote 2. Warranty Obligations 3. Current Ratio4. 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