F4 Flashcards
Recording royalty expenses
The larger of minimum royalties or the percentage of sales agreed.
Accrued vacation pay
Employees’ compensation should be accrued if:
1 Services are rendered
2. Obligation relates to vested or accumulated rights
3. Amount can be reasonably estimated
4. Payment is probable
Accounting for short-term liability payments after year -end but before financials are issued
If the financials have not been issued and the actual amount of transaction is known, the company should adjust the current liability balance on the financials and include necessary disclosures.
Debit Short term liability
Credit Long-term liability
Footnote 2 of SFAS No 6, Classification of Short-Term Obligations Expected to Be Refinanced, states “if equity securities have been issued [after the balance sheet date but before the balance sheet is issued], the short-term obligation, although excluded from current liabilities, shall not be included in owners’ equity.”
Exit or disposal activities
A liability is only recognized when all of the following criteria is met:
- An obligation event has occurred
- Results in a present obligation to transfer the assets or provide services in the future
- Little to no discretion to avoid the future transfer of assets or providing services.
Costs associated with exit and disposal activities
Include costs related to involuntary (**Not voluntary) employee termination.
–Costs to relocate employees
–Include costs to terminate a contract that is NOT a capital lease. Capital lease termination costs are accounted for separately.
-the cost of retiring a fixed asset is not considered an exit or disposal cost.
Recording accrued interest
Add each yearly interest payable to the principal amount to calculate interest payable for the following year.
Asset Retirement obligation (ARO)
Accretion Expense:
Beg. Asset retirement obligation X Risk-adjusted rate
When an ARO exists, the company debit an asset retirement cost (ARC) which increases the carrying value of the asset and credit an asset obligation (ARO) which is the liability recorded for the retirement.
The amount recorded for the ARC/ARO is equal to the fair value (determined by discounting the future cash flows).
ARC will be depreciated over the useful life of the related asset while the ARO will be “accreted” based on the relevant accretion rate (risk-adjusted rate).
The expense related to the ARO will be captured through depreciation expense over the estimated useful life of the asset, rather than recorded in total on the date the asset is placed into service.
Current/Long-term liabilities
Short term debt refinancing with long-term debt is long-term liability.
Deferred tax liability and tax assets are reported as non-current liability/asset.
Payroll taxes
-FICA
-Federal income taxes are not payroll tax
Escrow liability at year end
Escrow liability is increased by escrow payments and interest paid on escrow funds (net of fees). It is reduced by real estate taxes paid
Recognizing liability for termination benefit
Calculate the liability based on how many employees a company expects/estimates will receive the termination benefit, not based on the population of terminated employees.
Treatment for reasonably possible contingency
Disclosed but not accrued.
Only footnote disclosure is required for a “reasonably possible” (not “probable”) loss.
The disclosure should include the range of $250,000 − $500,000 and indicate that the best estimate is $400,000.
Treatment for probable contingency
Accrued and disclosed.
When a loss is “probable,” an amount must be accrued on the balance sheet. The amount to accrue is the best estimate of the loss, but if there is no best estimate, the lower bound of the estimated range is the appropriate amount to accrue.
When a loss is probable but not reasonably estimated, the liability should be disclosed in the notes to the financials but no liability entry is made; only disclosure.
Probable: An increase in both expenses and liabilities because it is probable and amount can be reasonably estimated.
Contingent liabilities are recorded when they are probable and estimable.
If the amount of the loss cannot be reasonably estimated, a probable loss cannot be accrued. In this situation, disclosure is still appropriate.
Contingency
Favorable judgement means a liability may not have to be paid so it is not probable, should not be accrued on balance sheet.
Appeal judgement is a contingent gain (or reduction of expense) and should not be recognized until realized.
Gain contingencies that are probable and reasonably possible and can be reasonably estimated are disclosed.
Conservatism Concept
Pertains to recording gain contingencies
“Anticipate all losses but no gains”
Remote contingency
No disclosure or accrual is necessary when a loss contingency is considered to be remote.
Gain Contingency
Gain contingencies are not recorded in the accounts once a gain is recognized but not before an appeal process is complete and award is collected.
gain contingencies are not recorded because to do so may cause recognition of revenue prior to its realization.
Reported as interest expense
-Imputed interest on non-interest bearing note.
Not reported as interest expense:
- Pension cost interest is a component of pension plan expense
- Interest incurred to finance construction of machinery for own use is capitalize as part of the cost of the machinery
- Post retirement healthcare benefits interest is part of post retirement benefit expense.
Recording cost of asset
100,000 note payable + 10,000 cash paid - 24,866 discount = 85,132
Noninterest bearing notes payable
reported at the present value of future cash flows.
Note payable’s present value on the balance sheet
Discount is a reduction from the face amount; premium is addition to the face amount.
Reporting financial instruments
Financial instruments in the form of shares that are mandatorily redeemable and represent an unconditional obligation is a liability and not equity according to GAAP.
Future amount of annuity in advance of 1 at 10% for # periods
Use this formula if problem is looking to figure out how much each deposit should be for a certain period. Divide that from the total they are looking to achieve.
Ex:
If you plan to have 1,000,000 by year 5 and plan to make four equal payments in a fund that will earn 10% annually, then they should:
1,000,000/5.11 (future amount of annuity in advance of 1 at 10% for # periods)
=195,695
Note receivable balance for installment notes in 24 equal monthly payments which include 12% interest.
The present value of the remaining monthly payments discounted at 12%.
