Chapter 10 Flashcards
Is there a contra-accounts payable account just like a contra account receivable account (AFDA)?
No, because if there was a contra-AP account, it would be called allowance for “I dont like some suppliets so I am not going to pay money to them” account
What are the three characteristics of liability?
(1) Will require probable future economic sacrifice
(2) The company has little or no chance to avoid the obligation (present obligation)
(3) The event giving rise to the obligation has already ocurred (from the past transaction)
What are the tree types of liabilities?
(1) Determinable (known) liabilities
(2) Estimated liabilities
(3) Contingent liabilities
What is determinable (known) liabilities?
All factors of who when and how much are certain. Examples include A/P, N/P, wages payable, bond payable
What is estimated liabilities?
A known obligation thatis of an uncertain amount but that can be reasonably estimated. Examples include warranty liabilities / warranty provisions
What is contingent liabilities?
A potential obligation that depends on a future event arising from a post transaction. Examples include a pending lawsuit
When do we call a liability a provision?
When the liability has uncertainty about timing and amount (it is still a liability)
What must you note when probability of losing the case is greater than 50%?
Accrued Loss and disclosure is amount is reasonably estimated but no journal entry if amount is not reasonable estimated
What is the journal entry for accrual loss?
(Dr) Contingent loss (Cr) Related liabilities
Suppose that a buyer purchases a car ($10,000) for operation and paid sales tax (1,000). What is the accounting treatment from a buyer’s vs. a seller’s point of view?
Buyer’s book:
(Dr) PPE 11,000 (Cr) Cash 11,000
Seller’s book
(Dr) Cash 11,000 (Cr) Sales revenue 10,000 Sales Tax Payable 1,000
Are sales taxes part of revenue from the seller’s point of view?
No buy they are part of PPE from the buyer’s point of view
What are notes payable?
A formal obligation in the form of written promissory notes with the occurence of interest expense
Assume that the principal amount of loan payable on Jan 1st is 1000. Annual interest rate is 5%. Principal reduction occurred on July 1 from 1000 to 500. What is the total interest expenses in this year?
On Jan: (Dr) Cash (Cr) Note payable 1000 Loan payable 1000
On Jul 1 we paid off half (so 500) so the total interest expense:
1000 * 5% * 6/12 + 500 *5% * 6/12
Assume that the principal amount of loan payable on Jan 1st 2021 is 1000. Annual interest rate is 5%. Principal reduction occurred on July 1 2021 from 1000 to 500. Further assume that cash payment for interest occurs on December 1st 2021, 2022, and 2023,and the entire remaining principal is due on December 1, 2023. What is the total interest payable in this year of 2021?
As soon as cash is paid for interest, interest payable is 0. so December 1st 2021 when you make cash payment for interest, interest payable will be 0 at that point. So interestr payable is only for the month of December:
5005%1/12
Assume that the principal amount of loan payable on Jan 1st 2021 is 1000. Annual interest rate is 5%. Principal reduction occurred on July 1 2021 from 1000 to 500. Further assume that cash payment for interest occurs on December 1st 2021, 2022, and 2023,and the entire remaining principal is due on December 1, 2023. What is the journal entry?
Jan 1 2021:
(Dr) Cash 1000 (Cr) NP 1000
Jul 1 2021:
(Dr) N/P 500 (Cr) Cash 500
Dec 1 2021:
(Dr) Interest Expense (Cr) Cash
calculated by 10005%6/15005%5/12
Dec 31 2021:
(Dr) Adjusting entry interest expense (5005%1/12) (Cr) Interest Payable (5005%1/12)
