What is an Estimated Liability? Definition Meaning Example

This type of liability often arises from uncertain future events and is recorded to ensure that financial statements accurately reflect the potential costs a company may incur. Provincial Sales Tax (PST) is the provincial sales tax paid by the final consumers of products. Quebec’s equivalent to PST is called the Quebec Sales Tax (QST). If investors purchase bonds on dates falling in between the interest payment dates, then the investor pays an additional interest amount. For example, if an investor purchases a bond four months after the last interest payment, then the issuer will add these additional four months of interest to the purchase price. When the next interest payment date occurs, the issuer pays the full six months interest to the purchaser.

Recording the Issuance of Bonds at a Discount

This results in an accrued expense that appears within the what is an estimated liability current liabilities section of the balance sheet. Contingent assets are assets that are likely to materialize if certain events arise. These assets are only recorded in financial statements’ footnotes because their value can’t be reasonably estimated. On May 1, 2023, Impala Ltd. issued a 10-year, 8%, $500,000 face value bond at a spot rate of 102 (2% above par). The company uses the effective interest rate method to calculate interest expense and amortize the bond premium. The employer is also required by law to pay CPP (or QPP in Quebec) of an amount that equals the employee amount.

LO2 – Record and disclose known current liabilities.

However, the vendors’ invoices have not yet been received and the exact amount is not yet known. The company is required to estimate the amount since the estimated amount is far better than implying that no liability is owed and that no expense was incurred. Many of the accrual adjusting entries require estimated amounts. Throughout the next year, as warranty claims come in and are addressed, they would decrease this liability and record the corresponding expense.

Examples of Contingent Liabilities

1. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
2. Notice that the dollar amounts in the entries for BDCC are identical to those for Bendix.
3. The company’s income before income taxes for the year ended December 31, 2018 was $15,000.

The stated rate of 8% is less than the market rate of 9%, resulting in a present value less than the face amount of $500,000. Since the market rate is greater, the investor would not be willing to purchase bonds paying less interest at the face value. The bond issuer must, therefore, sell these at a discount in order to entice investors to purchase them.

Related Questions

Financial liabilities can be either long-term or short-term depending on whether you’ll be paying them off within a year. AT&T clearly defines its bank debt that’s maturing in less than one year under current liabilities. This is often used as operating capital for day-to-day operations by a company of this size rather than funding larger items which would be better suited using long-term debt. Let’s look at a historical example using AT&T’s (T) 2020 balance sheet. The current/short-term liabilities are separated from long-term/non-current liabilities. An expense is the cost of operations that a company incurs to generate revenue.

Companies operating in the United States rely on the guidelines established in the generally accepted accounting principles (GAAP). A contingent liability is defined under GAAP as any potential future loss that depends on a “triggering event” to become an actual expense. Two classic examples of contingent liabilities include a company warranty and a lawsuit against the company. Both represent possible losses and both depend on some uncertain future event. Paul’s Roofing Corporation paid monthly corporate income tax instalments of $500 commencing February 15, 2018.

The payroll register details an employee’s regular pay plus any overtime pay before deductions, known as gross pay. An employee is paid their net pay (gross pay less total deductions). Payroll deductions are amounts subtracted by the employer from an employee’s gross pay. Some deductions are optional and deducted by the employer based on directions made by the employee. Examples of optional deductions include an employee’s charitable donations or Canada Savings Bonds contributions. Because these loan payments are made at BDCC’s year end, no interest payable is accrued or reported on the balance sheet.

The interest amount paid and received by the bond-holder will net to two months. This makes intuitive sense given that the bonds have only been held for two months making interest for two months the correct amount. A contract called a bond indenture is prepared between the corporation and the future bondholders. It specifies the terms with which the corporation will comply, such as how much interest will be paid and when. Another of these terms may be a restriction on further borrowing by the corporation in the future.

For example, in a $30 million serial bond issue, $10 million worth of the bonds may mature each year for three years. Most bond issues are sold in their entirety when market conditions are favourable. However, more bonds can be authorized in a particular bond issue than will be immediately sold.