Brite Corp. had the following liabilities at December 31,
year 2:

Accounts payable $55,000

Unsecured notes, 8%, due 7/1/Y3 400,000

Accrued expenses 35,000

Contingent liability 450,000

Deferred income tax liability 25,000

Senior bonds, 7%, due 3/31/Y3 1,000,000

The contingent liability is an accrual for possible losses on a
$1,000,000 lawsuit filed against Brite. Brite’s legal counsel expects
the suit to be settled in year 4, and has estimated that Brite
will be liable for damages in the range of $450,000 to $750,000.
The deferred income tax liability is not related to an asset
for financial reporting and is expected to reverse in year 4.
What amount should Brite report in its December 31, year 2
balance sheet for current liabilities?

(c) Current liabilities are obligations whose liquidation
is reasonably expected to require the use of current assets or the
creation of other current liabilities. This means that generally,
current liabilities are the liabilities that are due within one year of
the balance sheet date. Clearly, accounts payable ($55,000) and
accrued expenses ($35,000) are current liabilities. Notes payable
($400,000) and bonds payable ($1,000,000) are usually considered
to be long-term, but the maturity dates given (7/1/Y3 and
3/1/Y3 respectively) indicate they are current liabilities at
12/31/Y2. The contingent liability ($450,000) and deferred tax
liability ($25,000) will not be settled until year 4 and therefore
should be classified as long-term at 12/31/Y2. Thus, the
12/31/Y2 current liabilities total is $1,490,000 as follows:
Accounts payable $ 55,000
Accrued expenses 35,000
Unsecured notes 8%—due 7/1/Y3 400,000
Senior bonds 7%—due 3/31/Y3 1,000,000
Total current liabilities $1,490,000