13 Payables and Accrued Liabilities

Question 1

What payroll taxes are paid in equal amounts by the employer and the employee?

Answer 1

Federal Insurance Contributions Act (FICA) tax
Medicare

Question 2

What payroll taxes are paid only by the employer?

Answer 2

State and federal unemployment taxes are paid only by employer.

Question 3

What are current liabilities?

Answer 3

Liabilities that are due in the upcoming year or the operating cycle of the business, whichever is longer, and which will be met through the transfer of a current asset or the creation of another current liability

Question 4

How are current liabilities valued and recorded?

Answer 4

Normally recorded at face value

Question 5

When is the expense associated with compensated absences accrued, even if the benefits do not vest or accumulate or if the obligation is not attributable to services rendered as of the balance sheet date?

Answer 5

When it is probable that benefits will be paid, and the amount is estimable

Question 6

What is the exception to the requirement that compensated absence expense be accrued?

Answer 6

Sick pay benefits

Question 7

How is the total employer expense for payroll computed?

Answer 7

Gross pay + Employer payroll taxes + Employer portion of employee fringe benefits

Question 8

When is an amount less than the total benefit earned by employees accrued?

Answer 8

When not all earned benefits are expected to be paid

Question 9

What is the meaning of “accumulate” in the context of compensated absences?

Answer 9

Benefits carry over to future periods although there may be limits.

Question 10

Which liability requires more future cash payments: a current liability reported at $2 million or a noncurrent liability reported at $2 million?

Answer 10

The noncurrent liability requires more future cash payments.

Question 11

What basis of accounting is used for recognizing expense for compensated absences?

Answer 11

The basis is accrual.

Question 12

List the two key elements of liabilities.

Answer 12

It is a present obligation.
The obligation requires an entity to transfer or otherwise provide economic benefit to others.

Question 13

What do liabilities represent?

Answer 13

The represent outsider claims to a firm’s assets or enforceable claims for services to be rendered by the firm.

Question 14

Define “accounts payable”

Answer 14

Amounts owed to vendors for the purchase of goods or services on account in the ordinary course of business.

Question 15

Define “deferred revenue”

Answer 15

Revenues collected but not yet earned.

Question 16

Describe the gross and net methods for accounting for discounts on accounts payable.

Answer 16

Under the gross method, purchases are recorded at their full purchase price; then, if the discount is taken, it is considered a reduction of cost of sales. Under the net method, purchases are recorded as if the discount will be taken; then, if the discount is not taken, the discount lost may be considered an expense.

Question 17

When is an accrued liability recorded?

Answer 17

When an expense is incurred but not yet paid

Question 18

When is salary expense recorded?

Answer 18

When an employee performs services, regardless of when they are paid

Question 19

What is an asset retirement obligation (ARO)?

Answer 19

A legal obligation associated with the retirement of a tangible, long-lived asset. AROs are expected to be paid at the end of the period of usage.

Question 20

How is an asset retirement obligation (ARO) initially recorded on a company’s books?

Answer 20

With a debit to the long-lived asset and a credit to ARO liability. The ARO should be recorded at its fair value. If the fair value cannot be determined, an estimate should be made based on the present value of expected future costs using a credit-adjusted risk-free rate of return.

Question 21

How does an asset retirement obligation (ARO) liability change over the life of the asset?

Answer 21

Each year, the ARO liability is increased based on the discount rate. This increase is reported as accretion expense. When the liability is satisfied, it is reported at its total non-discounted value.