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Theory of Financial Accounting I > Chapter 13: Current Liabilities and Contingencies > Flashcards

Chapter 13: Current Liabilities and Contingencies Flashcards

1
Q

Self-Insurance

A

Not actually insurance. Risk assumption

Not GAAP to record in the financial statements, rather just record in notes

May incur liability risk of loss resulting from PAST injury but not for expected future

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2
Q

Accounting recognition of asset requirement obligations

A

Must recognize Asset Requirement Obligations (ARO) if they exist and can be reasonably estimated (report at fair value - may use discounted rate)

ARO = costs associated with retirement of the asset

Includes cost of ARO in carrying amount of asset and record a liability for that amount

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3
Q

Consideration payable

A

Payments to customers as part of revenue agreements

  • discounts
  • volume rebates
  • free products or services
  • coupons, cash rebates

when a material right is promised to a customer an obligation must be recorded

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4
Q

Recording Considerations Payable

A

Must estimate any premium liability outstanding at the end of the period

Adjusting entry:
Debit Premium Expense (for matching)
Credit Premium Liability

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5
Q

Recording a Service Type Warranty

A

(extended warranty - purchased

Recorded as a separate obligation:
Debit Cash or AP
Credit Unearned Warranty Revenue
Credit Sales Revenue

Adjust warranty on straight line basis over the length of the contract

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6
Q

Warranty

A

Should be recognized as is a performance obligation of the company

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7
Q

Service-type warranty

A

Not included in sales price

provides for additional service

recorded as separate performance obligation

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8
Q

Assurance-type warranty

A

Included in product sales price

warranty that the product meets agreed upon specifications in the contract at the time the product is sold

No separate performance obligation is recorded - expensed in period goods are provided and service performed

Adjusting entry to record warranty/ liability

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9
Q

Liabilities related to litigation, claims and assessments

A
  • time period when underlying cause of action accrued must be on or before the date on financial statements (even if company is not aware yet)
  • probability of unfavorable outcome
  • ability to make reasonable estimate of amount of loss
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10
Q

When to accrue estimated loss from contingency

A

Only accrued if both of the following are true:

  • information available prior to the issuance of the financial statements indicates that it is PROBABLE that a liability has been incurred at the date of financial statements
  • the amount of the loss can be reasonably estimated

NOT liabilities that are simply the risks of being in business

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11
Q

Contingency Liability

A

Liability incurred as a result of a loss contingency

  • depends on one or more future events to confirm amount, payable, payee, date payables, existance of liability

Split into:

  • probable
  • reasonably possible
  • remote
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12
Q

IFRS “Provisions”

A

Provisions = estimated liability

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13
Q

Short-term debt expected to be refinanced

A

Classified as non-current only if one or both of the following are true:

  • liability is contractually due to be settled more more than one year (or ops cycle, if longer) after the balance sheet date
  • entity has a contractual right to defer settlement of the liability for at least one year (or operating cycle) after balance sheet date
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14
Q

Treatment of refinancing on balancing

A

Depends on contractual agreement at balance sheet date (report date)

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15
Q

Gain contingencies

A

Claims or rights to receive assets (or have a liability reduced) whose existence is uncertain but may become valid eventually
- follow conservative policy: only disclose when high probability of realizing gains

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16
Q

Liabilities

A

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

  • resulting from events that have already occurred
  • Unavoidable obligations
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17
Q

Current liabilities

A

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

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18
Q

Operating Cycle

A

Period of time elapsing between the acquisition of goods and services involved in the manufacturing process and final cash realization resulting from sales/ subsequent collections

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19
Q

Typical Current Liabilities

A 
Accounts Payable
Notes Payable
Dividends payable
customer advances & deposits
unearned revenues
sales tax payable
income taxes payable
employee-related liabilities
Current maturities of long term debt
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20
Q

Types of employee related liabilities

A

Salaries/wages owed
payroll deductions
compensated absences
bonuses

21
Q

Vested Rights

A

When an employer has an obligation to make payment to an employee even after termination of employment

22
Q

Accumulated Rights

A

Rights carried forward into future periods if not used in the period earned

23
Q

Recording accounts payable

A

Debit inventory / accounts receivable
Credit accounts payable

Purchase discounts are recorded the same way as accounts receivable

24
Q

Recording a zero-interest bearing note

A

Debit Cash
Debit Discount on notes payable
Credit notes payable

Discount decreases value of the notes payable on balance sheet

25
Q

Interest Bearing Notes Payable

A

Debit Cash
Credit notes payable

to accrue interest
Debit Interest Expense
Credit Interest Payable

26
Q

Recording cash dividends payable

A

Becomes a liability on the date of declaration

because usually paid within one year they are classified as a current liability

accumulated dividends on preferred stock NOT a liability until a dividend is declared

Stock dividends are not a liability

27
Q

Recording customer advances and deposits

A

Current or long term liability depending on time between date of deposit and termination of the relationship that required the deposit

28
Q

Recording Unearned revenues

A

Debit Cash
Credit unearned revenue

then need to do an adjusting entry when revenue is earned:

Debit Unearned revenue
Credit Sales revenue

29
Q

Recording Sales Tax payable

A

Recorded with every sale where applicable

Debit Cash
Credit Sales Revenue
Credit Sales tax payable

Sometimes may need to do an adjustment - if math is off, or if it is not recorded at time of sale

30
Q

Recording income taxes payable

A

Corporate tax rate is currently a flat percent

Different for partnerships or proprietorships, which are not taxable entities (partners/ proprietor is liable for the taxes on their portion of the business on their income tax)

Corporations make periodic estimated payments
estimates changing causes the payments to change

31
Q

Recording employee related liabilities - payroll deductions

A

Any amounts not yet remitted should be recognized as a current liability

  • social security tax (OASDI)/ FICA+ medicare: employee and employer make equal contributions
  • unemployment taxes (FUTA + SUTA): employers responsibility
    - possible to reduce contribution with “ment” rating
  • paid quarterly, considered operating expenses
32
Q

salaries and wages journal entry

A

Debit Salaries and wages expense (tota)
Credit witholding tax payable
Credit FICA tax payable (employee contribution)
Credit other deductions (insurance contributions, union dues)
Credit cash

33
Q

Recording employer payroll taxes

A

Debit Payroll tax expense
Credit FICA taxes payable (employer contribution)
Credit FUTA taxes payable
Credit SUTA taxes payable

34
Q

Recording Employee related liabilities - income tax witholding

A

Income tax withheld shown as liability until it is remitted to government

35
Q

Recording salaries and wage expense - manufacturing

A

May have multiple accounts

  • direct labor
  • indirect labor
  • sales salaries
  • executive salaries
  • administrative salaries, etc…
36
Q

Recording employee-related liabilities: compensated absences

A

Vacation, illness, holidays

Should accrue a liability for compensation of future absences if all the following are true:

  • obligation is attributable to services already rendered by the employee
  • obligation relates to rights that vest or accumulate
  • payment of the compensation is probable
  • the amount of the payment can reasonably be estimated

if all four are true then the liability is a legit expense for the period

if all four conditions are not met then obligation should be disclosed in notes

37
Q

Recording sick pay

A

If sick pay benefits vest then a company MUST accrue them. if they do not vest the company can choose whether or not to accrue them.

Depends on if sick pay can be used as PTO of if it is limited to illness

if it can be used as PTO then must accrue

recognize the expense/ liability in the period it is earned by the employee, not the period used

38
Q

Recording if a compensated absence is accrued at a lower rate then held when taken

A

Original journal entry:
Debit Salaries and Wages Expenses
Credit Salaries and Wages Payable

When taken:
Debit Salaries and Wages Payable
Debit Salaries and Wages Expense (for difference)
Credit cash

39
Q

Recording employee compensation liabilities - bonuses

A

Considered wages = deducted from net income

also conditional expenses - agreements with the employees to pay expenses
will be accrued based on the standing agreement

40
Q

Recording current maturities on long term debt

A
  • long term liabilities due in next fiscal year, except if:
    • being retired by assets accumulated for the purpose, not shown in current assets
    • being refinanced
    • being converted to capital stock
      (aka no current asset used or new current liability created
      (include note to financial statements)
41
Q

Recording liabilities due on demand

A

aka callable liabilities

Classify as current

liabilities that become callable in certain circumstances are recorded as current if circumstances occur (unless can show probable circumstance will pass within specified period)

42
Q

Acid test ratio

A

A liquidity ratio

removes show moving inventory from current ratio

= (cash + short term investments + net accounts receivable) / current liabiltiies

43
Q

Current ratio

A

Liquidity ratio (aka working capital ratio)

= current assets / current liabilities

44
Q

Contingencies on financial reports

A

Loss contingency:

  • record if liability is probable AND can be reliably estimated
  • if only one or the other then include in notes: reasonable probability, nature of contingency, estimate

Some disclosures are required even when probability remote

  • guarantees of indebtedness to others
  • obligations of commercial banks under “stand by letters of credit”
  • guarantees to repurchase receivables
45
Q

Refinancing on financial statements

A
  • if short term obligation excluded from current liabilities because of refinancing should note: financing agreement description, terms, equity security

If refinancing by issuing equity DO NOT include liability in equity section

46
Q

Currently maturing obligations paid with long-term assets on financial statements

A

Reported in long term liabilities if paying with long term assets

47
Q

Current liabilities on balance sheet

A

Recorded and reported at maturity vale
- because short term present value not very different/ immaterial

always the 1st classification of liabilities presented

  • identify any secured/ pledged liabilities
  • do not offset against assets
  • current maturities of long term liabilities are listed as current
48
Q

to get sales tax from total sales revenue

A

Total revenue / 1 + tax % = sales revenue

Total revenue - sales revenue = tax amount

Tax % x sales revenue should = total revenue - sales revenue

Theory of Financial Accounting I (13 decks)

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