Chapter 9, Problem 1DQ

Summary Introduction

Introduction : A liability is a future payment of assets and services that has to pay in the future due to past transactions or events. This definition includes three elements namely, the first one is due to a past transaction or event, the second one is the company has a present obligation and the third one is for future payment of assets or services. No liability is entertained when one or more elements are missing.

To determine: The difference between a current and long-term liability.

Answer to Problem 1DQ

Current Liabilities: These are obligations that are due within one year or we can say these have to pay within a year. These are also called short-term liabilities. Some examples are accounts payable, wages payable, short-term notes payable, taxes payable and warranty liabilities. Most are paid using current assets or by creating current liabilities.

Long-term Liabilities: These are obligations which are due after one year or we can say these have to pay after a year. These are also called long-term liabilities. Some examples are bonds payable, lease liabilities, long-term notes payable and warranty liabilities.

Explanation of Solution

Current liabilities vary from company to company's point of view because they depend on the type of company operations. For example, Tech Mahindra reported current liabilities such as casino outstanding liability and casino front money deposits. Harley Davidson reports a much different set of current liabilities such as warranty and dealer incentive liabilities. Some liabilities are payable on the creditor’s demand but they do not have a fixed due to date.

If we talk about the example of long-term liabilities, Pizza hut reports long-term liabilities of $2,150 million. A single liability can be divided between the current and long-term liabilities if a company expects to make a payment towards both the short-term and long-term liabilities. Pizza hut reports long-term debt $2,139 million and the current portion of long-term debt i.e. $11 million. The current portion is reported in current liabilities in the balance sheet of the company.