Question

Presented below is the current liabilities section of Micro Corporation.

(\(000)

2018 2017

Current liabilities

Notes payable \) 68,713 \( 7,700

Accounts payable 179,496 101,379

Compensation to employees 60,312 31,649

Accrued liabilities 158,198 77,621

Income taxes payable 10,486 26,491

Current maturities of long-term debt 16,592 6,649

Total current liabilities \)493,797 $251,489

Instructions

Answer the following questions.

(a) What are the essential characteristics that make an item a liability?

(b) How does one distinguish between a current liability and a long-term liability?

(c) What are accrued liabilities? Give three examples of accrued liabilities that Micro might have.

(d) What is the theoretically correct way to value liabilities? How are current liabilities usually valued?

(e) Why are notes payable reported first in the current liabilities section?

(f) What might be the items that comprise Micro’s liability for “Compensation to employees”

Short answer

(a) It is a current obligation wherein future transfer of cash, goods or services is probable, it is unavoidable and transaction or even which creates the obligations, are three characteristics of liabilities.

(b) Current liabilities are the obligations that are required to settle by the use of current assets or by creating other current liabilities. Long-term liabilities are the liabilities that are not paid within a year or within an operating cycle.

(c) Accrued liabilities are the expenses that have been incurred and will be settled in the future. Examples include salaries and wages payable, interest payable, and income taxes payable.

(d) Liabilities are recorded at the present value of future outlay for the liabilities. In the case of current liabilities, it is valued at the maturity value of the liability.

(e) Notes payable are required to be paid first, in the event of liquidation.

(f) Wages, salaries, or bonuses payable, compensated absences, and post-retirement benefits payable.

Step-by-step solution

(a) Explanation of liabilities

Liabilities indicate the future obligations arising due to any services or goods availed in past. It is the probable sacrifice of economic resources to the service providers as a result of transactions that occurred in past.

(b) Difference between current liability and long-term liability

Current liabilities include obligations such as accounts payable, interest payable, salaries and wages payable, etc., which are required to be paid within a year or within an operating cycle, whereas in the case of long-term liabilities, these are paid in long term say three years.

(c) Explanation of accrued liabilities

The expense which has been incurred but not paid in cash by the entity is the current liabilities.

(d) Valuation of liabilities and current liabilities

The present value of future cash flows for the liabilities is used to report the value of liabilities. Current liabilities are valued at maturity or face value.

(e) Reporting of notes payable

In the balance sheet, liabilities are reported on the basis of the sequence of settlements at the time of liquidation. When business is in process of closing or liquidation, notes payable are probably settled first, hence reported first in sequence under the current liabilities section.

(f) Explanation of compensation to employees

The liabilities related to employees are salaries and wages earned by them, accrued bonuses or incentives, benefits related to the post-retirement, and the expenses related to compensated absences.