13 | Current Liailities and Contingencies

Question 1

13 | Part A: Current Liabilities (p. 739)

Name the 3 characteristics of a liability.

Answer 1

1. Probable, future sacrifices of economic benefits
2. Arise from present obligations to other entities.
3. Result from past transactions or events.

Question 2

13 | Part A: Current Liabilities (p. 739)

What dollar amount is current liabilities reported at?

Answer 2

Maturity Amounts.

Question 3

13 | Part A: Current Liabilities (p. 739)

Which ‘Current Liabilities’ are specifically exempted from ‘present value reporting’ by FASB ASC 835-30-15-3?

Answer 3

Those arising in connection with suppliers in the normal course of business and due within a year.

Question 4

13 | Part A: Current Liabilities (p. 740)

What does it mean when a ‘trade credit’ is offered on ‘open account’?

Answer 4

The only formal credit instrument is the invoice.

Question 5

13 | Part A: Current Liabilities (p. 743)

When ‘Accounts Receivables’ secures a loan it is referred to as?

Answer 5

Pledging.

Question 6

13 | Part A: Current Liabilities (p. 743)

When ‘Accounts Receivables’ are sold - it is called?

Answer 6

Factoring receivables.

Question 7

13 | Part A: Current Liabilities (p. 743)

What is ‘Commercial Paper’?

Answer 7

Unsercured notes issued by the firm and sold directly to the buyer (lender)

Question 8

13 | Part A: Current Liabilities (p. 743)

What are the terms of ‘Commercial Paper’?

Answer 8

• Minimum denominations of $25,000
• Maturities from 30 - 270 days
• Interest discounted at the issuance of the note
• Usually backed by a Line Of Credit

Question 9

13 | Part A: Current Liabilities (p. 743)

Why do ‘Commercial Papers’ only extend up to 270 days?

Answer 9

Beyond 270 days the firm would be required to file a registration statement with the SEC.

Question 10

13 | Part A: Current Liabilities (p. 744)

In a ‘Statement of Cash Flows’, the cash received from short-term notes and used to repay the notes are reported as?

Answer 10

Financing Activities.

Question 11

13 | Part A: Current Liabilities (p. 740)

What are ‘Accrued Liabilities’?

Answer 11

Expenses incurred but not yet paid.

Question 12

13 | Part A: Current Liabilities (p. 745)

What 4 conditions must be met for an employer to accrue an expense and related liability for employees’ compensation of future absences?

Answer 12

1. Obligation is attributable to employees’ services rendered
2. Paid absence can be taken in a later year (vested) or benefit can accumulate over time.
3. Payment is probable
4. Amount can be reasonably estimated

Question 13

13 | Part A: Current Liabilities (p. 745)

Paid absences are usually accrued at what wage rate?

Answer 13

Existing wage rate rather than estimated future rate.

Question 14

13 | Part A: Current Liabilities (p. 747)

Name 2 other commonly used terms for ‘Customer Advances’

Answer 14

1. Unearned Revenue

2. Deferred Revenue

Question 15

13 | Part A: Current Liabilities (p. 748)

When the redemption of ‘Gift Cards’ are deemed remote - it is called…?

Answer 15

Gift Card Breakage

Question 16

13 | Part A: Current Liabilities (p. 750)

GAAP vs. IFRS

Classification of Liabilities to be Refinanced

Liabilities can remain long-term if refinancing is completed…

Answer 16

GAAP: Before the date of issuance of the Financial Statements

IFRS: Before the Balance Sheet date.

Question 17

13 | Part B: Contingencies (p. 752)

What are the 2 main factors that determines whether a contingency should be reported as a liability?

Answer 17

1. The likelihood that the confirming event will occur

2. Whether a loss amount can be reasonably estimated.

Question 18

13 | Part B: Contingencies (p. 753)

Wat are the 3 basic categories to assess the likelihood that a liability exists?

Answer 18

Chance of event occurance is:

1. Probable - Likely to occur
2. Reasonably Possible - More likely than ‘Remote’ but less likely than ‘Probable’
3. Remote - Slight

Question 19

13 | Part B: Contingencies (p. 753)

If it is determined that a contingency is a liability, what amount should be accrued?

Answer 19

If one amount out of a range is more likely, accrue it.

If no amount within a range appears more likely than the others, record the minimum amount and disclose the additional potential loss.

Question 20

13 | Part B: Contingencies (p. 756)

Why do extended warranties constitute a seperate sale?

Answer 20

Because they are usually priced and sold seperately from the warranteed product.

Question 21

13 | Part B: Contingencies (p. 757)

How do you account for the revenue from extended warranties?

Answer 21

• Deferred as “unearned revenue” at time of sale
• Recognized over contract period usualy on a straight-line basis unless you have sufficient historical evidence, then use indicated pattern.

Question 22

13 | Part B: Contingencies (p. 757)

How and when is the estimated cost of promotional offers (Premiums) recorded?

Answer 22

The same accounting period the products are sold.

Question 23

13 | Part B: Contingencies (p. 759)

How do companies record Litigation Claims and the estimated lawyer fees and other legal costs?

Answer 23

Accrue estimated lawyer fees and other legal costs

Disclose estimated Litigation liabilities until settlement are substantially complete.

Question 24

13 | Part B: Contingencies (p. 760)

For a loss contingency to be accrued, the cause of the lawsuit must have occurred before…?

Answer 24

…the accounting period ended.

Question 25

13 | Part B: Contingencies (p. 761)

T/F

A clarifying event during the “subsequent events’ period can be used to determine how the contingency is reported.

Answer 25

True.

Question 26

13 | Part B: Contingencies (p. 762)

What is the two-steps in deciding how an ‘unasserted claim’ should be reported?

Answer 26

1. Is the claim/assessment probable?
2. a) What is the likelihood of an unfavorable
   outcome?
   b) Can the dollar amount be estimated?