Chapter 13: Current Liabilities

Question 1

Liabilities

Answer 1

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

Question 2

Current Liabilities

Answer 2

Obligations whose liquidation is reasonably expected to require the use of existing resources classified as current assets, or the creation of other current liabilities

Question 3

Compensated Absences

Answer 3

Employee Absences ( vacation, sick leave) for which it is expected that employees will be paid

Question 4

Conditions for a Liability to be Accrued (for cost of compensated absences)

Answer 4

1.) Employees’ rights to receive compensation for future absences are attributable to services already rendered 2.) Obligation relates to rights that vest or accumulate 3.) Payment of compensation is probable 4.) Amount can be reasonably estimated (if not - disclose reason why)

Question 5

Contingencies

Answer 5

Existing condition or situation; uncertain loss or gain (rare footnote only) that is dependent upon the occurrence (or non-occurrence) of a future event

Question 6

1st Type of Uncertainty: Occurrence of the Event

Answer 6

Probable - likely to occur; Reasonably possible - less than likely, but greater than remote; Remote - unlikely to occur

Question 7

2nd Type of Uncertainty: Dollar Amount of the Loss

Answer 7

Can the dollar amount be estimated with a reasonable degree of precision?

Question 8

Accrue the Loss If:

Answer 8

Loss is PROBABLE and the dollar amount can be estimated

Question 9

Footnote Disclosure If:

Answer 9

Loss is PROBABLE and the dollar amount cannot be estimated or loss is REASONABLY POSSIBLE

Question 10

Ignore If:

Answer 10

Loss is REMOTE or immaterial

Question 11

Reasonable Estimate for a Contingent Liability

Answer 11

Single amount is most likely, a reasonable range can be estimated (accrue minimum of range)

Question 12

Asset Retirement Obligations (ARO)

Answer 12

Obligations associated with the disposition of an operational asset (ex: legally required restoration costs associated with a mine or oil well)

Question 13

Scope of AROs

Answer 13

AROs arise only from LEGAL obligations for restoration costs at retirement of long-lived assets

Question 14

Measurement of AROs

Answer 14

AROs are recorded at fair value (typically PV of the estimated future cash flows) at the date of inception

Question 15

Recognition of AROs

Answer 15

AROs typically arise at the date of acquisition of the asset, but can arise at other times (are added to the cost of a related asset)

Question 16

Allocation of AROs

Answer 16

Cost of AROs are allocated as part of the depreciation expense for the related asset

Question 17

Interest Expense of AROs

Answer 17

Interest is recognized periodically over the life of the obligation

Question 18

Warranty

Answer 18

Customer guarantee against future faults in the product purchased; involves an expense to be incurred, contingent upon the occurrence or non-occurrence of a future event (faulty product)

Question 19

Warranty Matching Principle

Answer 19

Accrue all future warranty costs and match them with the revenue in the period the product is sold

Question 20

Express Warranty Method (GAAP)

Answer 20

Estimate total warranty costs and match with revenue in the period the product is sold

Question 21

Cash Basis Method

Answer 21

Recognize warranty expense when an actual warranty expenditure is made