Chapter 13: Current Liabilities & Contingencies

Question 1

What are the 3 characteristics of liabilities?

Answer 1

PROBABLE, FUTURE sacrifices of economic benefits
that arise from PRESENT obligations
resulting from PAST transactions

Question 2

These are payable within 1 year and reported at maturity value.

Answer 2

current liabilities

Question 3

What are the types of current liabilities?

Answer 3

Accounts payable
Notes payable
Accrued expenses
Dividends payable
Refundable deposits
Sales taxes
Income taxes payable
Unearned revenue
Gift cards
Employee-related liabilities

Question 4

A written promise to pay a sum of money on a specific date

May be non-interest bearing (no stated rate)

Answer 4

notes payable

Question 5

Interest component for Notes payable is calculated…

Answer 5

face * annual rate * time to maturity

Question 6

an expense that is incurred but paid later (there is no such thing as no money)
examples: interest or salaries

Answer 6

accrued expenses

Question 7

Amounts owed to shareholders

Dividends in arrears (cummulative preferred stock) are not recorded as a current liability

Answer 7

dividends payable

Question 8

These are recodred at declaration date

Answer 8

dividends payable

Question 9

Money that does not belong to a leasing company

Answer 9

refundable deposits

Question 10

Tax that does not belong to a retail store or other stores

Answer 10

sales taxes

Question 11

Tax that is owed to the government

Answer 11

income taxes payable

Question 12

Cash that is received in advance of providing a good or service

Answer 12

unearned revenue

Question 13

These are recorded as unearned revenue at the time of sale

Answer 13

gift cards

Question 14

Revenue for giftcards is recognized when…

Answer 14

• giftcard is used

- likelyhood of usage is considered remote (giftcard breakage)

Question 15

Types of employee related liabilities

Answer 15

• Payroll deductions
• Compensated absences
• Employee bonuses

Question 16

Type of employee related liability that includes withholding taxes and social security and annual plans such as… retirement plans contributions, insurance premiums, and union dues

Answer 16

payroll deductions

Question 17

Type of employee related liability that includes vacations time and other paid time off

Answer 17

compensated absences

Question 18

When are compensated absences recorded?

Answer 18

• Attributable to employees’ services already performed (have to work to earn vacation)
• The paid absence can be taken in a subsequent year (use the vacation hours or lose them)
• Payment is probable
• The amount can be reasonably estimated

Question 19

A type of expense that is awarded to you

Answer 19

employee bonuses

• tied to performance (financial and nonfinancial )
• compensation expense in the period earned

Question 20

What are the noncurrent vs current classifactions:

Answer 20

• current maturities of long-term debt (non current)
• long-term liabilities due on demand (long term that can be due tomorrow)
• short-term obligations expected to be refinanced

Question 21

Short-term obligations expected to be refinanced can be classified as non current if

Answer 21

• intent to refinance

- ability to refinance

Question 22

Uncertainty as to whether a loss really exists

Answer 22

loss contingencies

Question 23

Resolved when some future event occurs

Answer 23

loss contingencies

Question 24

Factors affecting accounting treatment in loss contingencies are:

Answer 24

• likelyhood of loss

- ability to estimate the loss

Question 25

What is the likelyhood of accurrence in loss contingencies?

Answer 25

• probable: likely
• reasonable possible: remote but less likely
• remote: slight (unlikely)

Question 26

What are the 3 presentations of contingencies?

Answer 26

• accure a liability if it is probable and estimable
• reasonably possible: disclosure note only
• remote: no action is required, except disclosures

Question 27

Fore remote, no action is required except disclosures for the following items:

Answer 27

• unsuded lines of credit
• guarantees of indebtedness to others
• guaranteees to repurchase accounts receivable

Question 28

What are the types of loss contingencies?

Answer 28

• warranties
• premiums
• litigation
• bad debts
• environmental liabilities
• self insurance
• asset retirement obligations

Question 29

A type of loss contingency that is estimated using historical data

Answer 29

warranties

Dr: Warranty expense
Cr: Warrany liability

Question 30

A type of loss contingencies that are incentives offered by the manufacturer to increase sales

Answer 30

premiums

Dr: Premium expense
Cr: Premium liability

Question 31

Journal entry for litigation (if we get sued)

Answer 31

Dr: loss of litigation
Cr: liability litigation

Question 32

Journal entry for bad debts

Answer 32

Dr: bad debt expense
Cr: allowane for bad debt

Question 33

A type of loss contingency that takes long to resolve and is disclosed in the footnotes

Answer 33

environmental liabilities

Question 34

A type of loss contingency where you just have to inclose that you are self insured

Answer 34

self insurance

Question 35

A type of loss contingencies that are legal obligations associated with retirement of long-lived assets

Answer 35

asset retirement obligations

Dr: Long-lived asset
Cr: asset retirement obligation

Question 36

What is the rolse of subsequent events?

Answer 36

• cause of the loss contingency must have occurred BEFORE year-end
• events occurring between year-end and the report date can affect account treatment

Question 37

If unassorted claims are probable…

Answer 37

you evaluate it like other contingencies

Question 38

If unassorted claims are not probable…

Answer 38

no action is required

Question 39

What is an example of an unassorted claim?

Answer 39

IRS deficiency assessment

Question 40

Discuss gain contingencies

Answer 40

• they are not recorded
• however we do disclose them in the footnotes
• which is a form of conservatism