Current liability possible, payments, following, understand, liability

hardwork24

I can't understand this question even reading answer. Please, help me!

Which of the following would most likely result in a current liability?
A. Possible warranty claims
B. Future operating lease payments
C. Estimated income taxes for the current year
The answer is C and there is the explain:
Estimated income taxes for the current year are likely reported as a current liability. To recognize the warranty expense, it must be probable, not just possible. Future operating lease payments are not reported on the balance sheet.

_Why estimated income taxes for the current year are likely reported as as current liability? do they mean tax payable?
_"it must be probable, not just possible" what does it mean?



Edited 1 time(s). Last edit at Saturday, December 19, 2009 at 11:27AM by silentnight103.

btcapital

Yeah, I see the points thanks to your interpretation

JPSem

It must be a Schweser question, but let me explain why A and B can't be the answer.

A: Possible expenses are never accrued unless they are probable. The likelihood of a current year expense is still to vague and uncertain. It's like saying, somebody out there might submit a claim -- it's possible, a contingency -- but we have no real confidence as to when or how much. On the other hand, if we have empirical evidence suggesting that X% of sales will probably result in expense, we can estimate the current liability.

B: This is a future event, so B cannot be right either.

C: Estimated income taxes is a poor word choice -- it really should be taxes payable, because the term "estimated" can mean quarterly estimated tax payments, or an estimated tax accrual. Using the latter definition, C would be correct.

- Robert

Flok

Here's another way to look at it.

Possible (not accrued): A worker is seriously injured at the plant. The company has covered the worker's medical expense but the company is concerned that it may get sued for $1MM. No legal action has been threatened thus far. The possible legal action may rise to a contingency that should be disclosed in the footnotes but not accrued on the balance sheet,

Probable (accrued): Assume same facts as above, except the worker has initiated legal action and the company's legal counsel advises that the company is probably liable. Counsel further estimates that the likely settlement is $250k. This amount is accrued on the balance sheet because payment is probable.

See the distinction?

- Robert