CH13: Current Liab. and Contingencies Flashcards
What is a liability? and what are its characteristics?
it obligates the debtor to pay cash at a specified times and result from legally enforceable agreements. 1. are probable, future sacrifices of economic benefits, 2. Arise from present obligations to transfer assets or provide services to other entity, 3. Result from past transactions or events.
What is Account Payable, and how does it differ from Notes Payable?
obligations to suppliers of goods or services purchased on open account. Notes Payable are formally recognized and bear interest.
What is credit line?
It is an agreement to provide short-term financing, with amounts withdrawn by the borrower only when needed (no procedure or paperwork). Two types:
- Noncommitted: informal. limited. require a compensating balance on deposit with the bank.
- Committed: formal. requires commitment fee, also may require compensating balance.
Write out the entries needed for non-interest-bearing notes!
PURCHASE: Dr. Cash Dr. Discount on notes payable (@ disc. rate) Cr. Notes payable RETIREMENT: Dr. Interest Exp Cr. Discount on notes payable (@ disc. rate) Dr. Notes payable Cr. Cash
Why would managers prefer non-current obligations over current obligations?
- current ones are more riskier– require current access to cash. 2. Long-term liab. enables the company to record higher working capital (curr. assets - curr. liab.), and higher current ratio.
What is loss contingency?
It is an existing, uncertain situation (occurred before the financial statement date) involving potential loss depending on whether some future event occurs.
list the categories of the likelihood that a future event will confirm the incurrence of the liability are: and list the classification of the amount of potential loss:
Probable: likely to occur,
Reasonably Possible,
Remote: chance is slight.
known, reasonably estimable, not reasonably estimable.
What is the appropriate accounting treatment of a contingency for each combination of the likelihood of an obligation and determinability of its dollar amount?
What are some examples of loss contingencies?
- Product warranties and guarantees,
- Litigation claims,
- Subsequent event.
Entries:
Dr. Loss (or expense)
Cr. Liability increased/ Asset decreased
- T/F: We accrue a loss contingency the cause of which occurred after the accounting period ended.
- If the cause of loss contingency (such as a lawsuit) occured after the accounting period ended (yet before the financial statments), what do we do?
- False
- We don’t accrue the liability, but we should disclose it in a a disclosure note.
T/F:
- Employers are not required to withold taxes from employee’s paychecks and remit to the IRA!
- accounts withheld from paychecks represent liabilities until remitted to third party
- False
- True
Matching
- F.V. * Interest rate * Time =
- what is payable w/ current assets?
- What happens to short-term liability whe financed w/ common stocks?
- present value of interest plus present value of principle is
- non-interest bearing lisb:
- noncommitted line of credit:
- we pledge accounts receivables for
- a way of reclassification of debt:
- purchased by other corporation only
- expense not yet paid:
- liab. until refunded:
- applied against purchase price
- interest on debt
- current liab.
3.
E 13-23:
- list current liabilities:
- list long-term liabilities:
- note disclosed liab:
1 current liabilities:
- coommercial paper
- customer advances
- a/p
- callable liab.– even if it is not probable to be called
- accrued interest w/i a year
- unasserted assessment, that would probably be asserted, and a loss is expected within 1 year
- determinable loss from a past event contingent on a future event (within 1 yr)
