F10: Other Liabilities and Debt Covenants

Question 1

Current liabilities are valued at ________, AKA ______.

Answer 1

Settlement value, AKA net realizable value

Question 2

A purchase of goods/services on account may be recorded one of two ways:

Answer 2

1- Gross method

2- Net method

Question 3

Gross method definition

Answer 3

• Record purchase without regard to discount

- If paid within the discount period, a purchase discount is credited

Question 4

Net method definition

Answer 4

• Record purchase net of discount
• If paid within discount period, no adjustment necessary
• If paid after discount period, purchase discount is debited

Question 5

How is the employer’s share of payroll taxes accounted for?

Answer 5

Expensed

Question 6

What is the statement presentation of a discount or premium?

Answer 6

Asset or liability is shown net of it on the balance sheet

Question 7

Debt covenants are used why?

Answer 7

To protect creditors’ interest by limiting/prohibiting actions of debtors that might negatively affect the positions of the creditors

Question 8

Common debt covenants

Answer 8

• Limitation on issuing additional debt
• Restrictions of payment of dividends
• Limitations on disposal of assets
• Minimum working capital requirements
• Collateral requirements
• Limitations on how the borrowed money can be used
• Maintenance of specific ratios

Question 9

Debt covenants should be:

Answer 9

Disclosed