F4 - Liabilities Flashcards
1
Q
F4M1
A
Payables and Accrued Liabilities
2
Q
liabilities are
A
probable future sacrifices of economic benefits
current liabilities are due within the next year or lifecycle whateveer is longer
3
Q
Trade accounts payable are amounts owed for
A
Inventory and raw material
can be recorded as purchase or inenotry, non interest bearing so that makes it an operating liability
4
Q
Purchase of trade accounts payable gross method is recorded as
A
wait to record discount until it’s actually taken
5
Q
Accounts Payable Adjustments
A
A debit balance in accounts payable (resulting from a prepayment) should be removed and reclassified as a prepaid asset.
Goods shipped FOB destination are included in accounts payable only when the buyer receives the goods
6
Q
Purchase of trade accounts payable net method is recorded as
A
records net of the discount
if the payment is made after the discount period, a purchase discount lost account is debited
7
Q
Trade Notes Payable are
A
notes, debts, bonds, and debentures are all interest bearing and its a financing liability
they are formal written promises to pay on a certain date
8
Q
JE For Issuance of Note
A
DR Cash ($ of note)
CR NP ($ of note)
9
Q
JE for Interest Expense
A
DR Interest Exp ($note * % * month/12)
CR Cash
10
Q
JE of Interest Exp EOY
A
DR Interest Exp ($note * % * month/12)
CR Interest Payable
11
Q
JE to record reclassification o f refinancing longterm deebt
A
DR short term liability
CR Long term liability
12
Q
Interest Expense =
A
principal * rate * time/year
13
Q
Accrued Salaries and Wages Payable is
A
the unpaid portion of salaries and wages
14
Q
What is the JE to book the accrued liability EOY for employees earnings?
A
DR Salaries and wages expense
CR Salaries and wages payable (earnings times amount earned this year)
15
Q
What is the JE to book the accrued liability Next year for employees earnings adn
A
16
Q
What are asset retirement obligations? How is it recorded?
A
A legal obligation to incur costs related to the retirement of an asset
An ARO is recorded as a liability at its fair value, which is the present value of the future obligation. The same amount is added to the cost of the related asset
17
Q
What is Accretion Expense
A
the increase in ARO liability due to the passage of time.
18
Q
Accretion Expense Equation
A
Beginning ARO liability * credit adjusted risk-freee interest rate
19
Q
Subsequent Changes with ARO
A
After the related asset is fully depreciated, any changes in the ARO liability are recognized in profit or loss
20
Q
Exit and Disposal Activities Definition
A
Costs associated with a company exiting or disposing of assets or operations
These include costs to relocate employees and benefits related to involuntary employee termination
Costs associated with the retirement of a fixed asset or termination of a capital lease are not considered exit or disposal costs
21
Q
A liability for exit or disposal activities is recognized only when all of the following conditions are met:
A
- A formal plan exists (e.g., restructuring, closing a plant).
- The plan is communicated to affected employees or parties.
- Actions are unlikely to change significantly.
22
Q
Vacation Accrual =
A
(Vacation Days/Year) × (Pay Per Day) × (Prorated for Period)
23
Q
Unemployment Claim
A
If a company elects to reimburse the state for actual unemployment claims, accrue a liability based on an estimate of those claims.
The estimate is typically a percentage of eligible gross wages, which may be capped at a certain amount per employee
24
Q
Unemployment Claims Accrual =
A
(Estimated Percentage) × (Eligible Gross Wages)
25
Sales Tax Payable:
Sales tax collected from customers is a liability until it is remitted to the government.
The sales tax is not revenue or an expense of the collecting company.
26
Interest Payable and Equation
Accrue interest expense for the period from the last payment date to the balance sheet date
Interest Payable = (Outstanding Principal) × (Interest Rate) × (Time Period)
27
Deferred Compensation
Recognition Period and Calculation
If a deferred compensation arrangement attributes benefits to a service period greater than one year, the cost of benefits should be recognized over that required period of service
Annual Compensation Expense = (Total Benefit) / (Service Period)
28
Debt Refinancing Classification and Exception
Classification: Short-term debt that is expected to be refinanced on a long-term basis can be classified as long-term if the refinancing occurs before the issuance of financial statements
Exception: Amounts prepaid on a note prior to refinancing should be included as a current liability
29
Royalty Expense
Royalty expense is the greater of the guaranteed minimum royalty or the actual royalties based on sales
30
Escrow Liabilities Definition:
Money held by one party on behalf of another, often for payment of real estate taxes or insurance
31
Escrow Liabilities
The escrow liability balance is affected by escrow receipts, payments made on behalf of customers (e.g., real estate taxes), interest earned, and maintenance fees charged to customers.
Equation: Ending Escrow Liability = Beginning Escrow Liability + Escrow Receipts + Interest Earned - Real Estate Taxes Paid - Maintenance Fees
32
F4M2
Contingencies and Commitments
33
Contingency is a
situation involving uncertainty
34
the resolution of contingency may result in
acquisition of an asset
reduction of liabilty
or
loss/impairment of an asset
incurrence of a liabilty
35
Loss Contingencies Examples
- collebtability of receivables
- product warranties
-unredeemed coupons
- risk of loss of property, explosion, fire
- pending or threated ligtiation
36
When do we disclose a loss contingency in the footnotes?
If it is probable, we accrue and record journal entry
if reasonably possible, disclose to footnotes
if remote, do not record je and do not disclose
37
Gain Contingencies can be
can be disclosed in the notes of financial stmts
do not accrue
-no journal entry
38
When do we disclose a gain contingency in the footnotes?
If the probability is remote (not likely) we do not disclose it
if the probabiltiy is not remote, no gain is reognized and disclose it in the footnotes
39
Loss contingency should be accrued if both conditions exist:
asset has been impaired, or a liability inccurred prior to the issuance of the fs
and amt of loss can be reasonably estimated
if amt cannot be reasonably estimated, then disclose it in the notes. ensure you have a good reason why you cant estimate
40
Range of probably losses
gaap requires that hte loss be accrued iwtht he highest proababiliyu of occuring, best estimate
if every outcome has equal probability, the minimum amt in range should be accrued
disclose possibliity
41
Premiums and Warranties
are loss contingencies that are generally accrued by an entity
can be accrued only if expected amts are probable and can be reasonably estimated
42
Premiums are
offers to customers for the purpose of stimulating sales.
43
Total estimated coupon redemptions =
total # of coupons issued * estimated redemption rate
44
Warranties are
seller's promise to correct any product defects. sellers offering warranteies must create a liability account if the cost of the warranty can be reasonably estimated.
45
JE for Warranty Expense
JE to reduce to actual costs
DR Estimated Warranty Expense
CR Warranty Liability
DR Warranty Liability
CR Inventory
46
F4M3
Long Term Liabilities
47
discounting rate is
the present value
48
compounding rate is
future value
49
Future Value Equation
PV(given) * (1+r)^n
n= number of periods
r= periodic interest rate
50
Present Value Equation
FV(given) / (1+r)^n
or
FV(given) * (1/ (1+r)^n )
51
annuities are
identical periodic payments at regular intervals
52
what's the difference btw ordinary annuity and annuity due?
ordinary at the end of each period
annuity due starts today at beginning of period
53
Present value factors and future value factors are
inverses of eachother
if PV factor is given, take 1 and divided by that number to get the FV
if FV factor is given, take 1 and divided by that number to get the FV
54
for annuity due problems if they give you factors for periods less than you need and ordinary annuity..
just add 1 to it
ex.
pv of ordinary annuity of 1 at 6% for 2 periods = 1.8334
pv of annuity of 1 at 6% for 3 periods = 1.8334 + 1 = 2.8334
55
What is the difference btw Liability and Equity?
Liability
- has a maturity date/due date
- obligation to repay the capital
Equity
- no due date
- no obligation to repay anything
56
notes payable must be
recorded at present value at the date of issuance
57
if a note is noninterest bearing or the interest rate is unreasonable, the value of note
must be deteermined by imputing the market rate of the note and by using the effective interest method
58
gross note payable =
of payments * payment
59
Discount what is it and how to calc
deferred interest expense
gross note payable - present value
60
what are the two types of notes?
no principal is paid (no payment until maturity)
or periodic payments are made (reduces principal/interest)
still, interest must be accrued whether or not coupon payments are made
61
If a note is a short-term term then
Imputing interest is not required
62
Amortization of the Discount
Step 1
Beg CV * effective market rate = interest exp
Step 2
periodic payment - interest exp = principal reduction of note
63
Effective Interest Method Setup
(a) Cash Payment - (b) Interest Expense = (C) principal paid, (d) CV
(b) interest expense = (d) * interest rate
all of b is total int expense
all of c is principal paid
64
JE of Note Payble with Int Payment
DR Interest Expense periodic int payment
DR Notes Payable periodic principal
CR Cash total
65
Imputed Interest JE to record purchase
DR Machine (
DR Discount on NP
CR NP
66
Imputed Interest JE to amortize the discount on NP
DR Int Exp
Discount on NP
67
What is a debt covenant?
when creditors prohibit or encourage certain actions of the debtors to maintain credit ratings and FMV of investments
68
Affirmative Covenants
Debtor will
- pay taxes
- safeguard assets
69
Negative Covenants
Debtor will not
- borrow excessive amts
- pay excessive dividends
- do anything that negative effect ratios
70
F4M4
Bonds Payable Part 1
71
Bonds payable is classified as what
a long term liability and a financing liabilty
NO OWNERSHIP INTEREST IS SOLD
72
What is a bond indenture?
the doc that describes the contract btw the issue (borrower) and the bondholders (lender(=)
73
Face (Par) Value is usually
$1000 per bond
74
The Stated Interest Rate is
the nominal interest rate or coupon rate
is the interest to be paid to the investors in cash
75
Interest exp of bond is =
CV beginning * market rate (at issuance)jhy
76
cash payment for bond =
par value * coupon rate
77
What is a discount?
If the market rate is higher than the stated rate, the bonds will be issued at a discount
bonds sell for less than face amt to make up for the lower return being provided.
78
What is a premium?
if the market rate is lower than the stated rate, the bonds will be issued at a premium
investor will pay more than the face value die to the higher return offered
79
if coupon rate = market rate then
the selling price is equal to par value
80
Types of Bonds
1. debentures
2. mortgage bonds,
3.collateral trust bonds
4. convertible bonds
5. participating bonds
6. term bonds
7. serial bonds
8. income bonds
9. zero coupon bonds
10. commodity backed bonds
81
what is a debenture?
they are unsecured bonds by collateral. Since debentures have no collateral backing, debentures must rely on the creditworthiness and reputation of the issuer for support. Both corporations and governments frequently issue debentures to raise capital or funds.
82
what is a mortgage bond?
are bonds that are secured by real property
83
What are collateral trust bonds?
they are secured bonds
84
What are convertible bonds?
they are convertible into common stock of the debtor at the option of the bondholder
1. nondetachable warrants: the convertible bond itself must be converted into capital stock
2. detachable warrants: the bond is not surrendered upon conversion, only the warrants plus cash representing the exercise price of teh warrants. The warrants can be bought and sold separately from the bonds
85
what are participating bonds?
have a stated rate of int and particpiate in income if certain earning levels are obtained.
A bond which allows the holder to receive a guaranteed minimum rate plus extra coupon payments up to a specific level if the issuer would manage to achieve a preset level of income or profits. This bond, thus, entitles the holder additional benefits beyond its fixed rate of interest.
86
what are term bonds?
have a single fixed maturity dat. the entire principal is paid at the end.
A term bond refers to bonds from the same issue that share the same maturity dates. In effect, term bonds mature on a specific date in the future and the bond face value must be repaid to the bondholder on that date.
87
what are serial bonds?
are prenumbered bonds that the issuer may call and redeem a portion by serial number. A serial bond is a bond issue that is structured so that a portion of the outstanding bonds mature at regular intervals until all of the bonds have matured.
88
what are income bonds?
bonds that only pay interest if certain income obj are met. An income bond is a type of debt security in which only the face value of the bond is promised to be paid to the investor, with any coupon payments paid only if the issuing company has enough earnings to pay for the coupon payment.
89
zero coupon bonds
zero coupon are bonds sold with no stated interest but rather at a discount and redeemed at the face value without periodic interest payments
A zero coupon bond is a bond that is issued at a deep discount to its face value but pays no interest.
90
commodity-backed bonds are
commodity backed bonds are bonds that are redeemable either in cash or a stated volume of a commoodity, whichever is greater
91
for coupon/price
if a bond sells more than par value (selling price is greater than par)
- the market rate is less than coupon
- the proceeds in excess of the fv are called an unamortized premium
- the CV is the face value plus the gain
- the gain is going to be recorded and amortized over the life of the bond by making interest expense periodically less than the coupon paid
92
for coupon/price
if a bond sells at discount price
- the market rate is greater than the coupon
- selling price is less than face value (par)=loss
- called an unamortized disocunt
- face value - selling price = discount (loss)
- face value - discount = intitial carry value
- loss recorded over the life of the bond (matching principle) - amortizing a discount
93
bonds are typically
notes are typically
interest is paid before maturity, princpial is paid at maturity
for notes its customized
94
price is always quoted in 100s
so at 97 means 97% of 100
95
coupon payment =
face vale * coupon
96
interest expense =
initial carrying value beginning of each period * market rate
97
coupon rate =
the stated interest rate on the bond
98
bond interest (check amt) =
coupon rate * face
bonds generally pay interst semiannualy and annually in other countries
99
bond selling price =
present value of the future principle payment + preseent value of the future periodic interest payments
100
Step 1 number of periods =
life of bond * 2 = number of coupon payments if semi annually
101
the coupon rate is used for
the market rate is use for
to the the periodic coupon payment
the determine the present value factors
102
JE of Bonds Issued at Par for Borrower and investor
DRCash
CR Bonds Payable
DRInvestment in Bonds
CR Cash
103
Step 2 Periodic market rate =
market rate / 2 assuming semi annual
104
PV of principal = the solution
the solution * principal
105
How to calculate bonds issued at par?
Step 1 find total number of period
step 2 find periodic market rate
step 3 multiply market rate * by principal
step 4 step 3 * solution for annuity
step 5 multiply principal by $
add annuty $ + princpial amt
106
How to calculate bonds issued at a discount?
Step 1 find total number of period
step 2 find periodic market rate
step 3 find the solution annuity and * by principal
step 4 take principal * by coupon rate/2 = x
step 5 multiply by annuity rate
add annuty $ + princpial amt
107
JE of Bonds Issued at Discount for Borrower and investor
DRCash (PV calc)
DR Discount on BP (diff)
CR Bonds Payable. (principle
DRInvestment in Bonds (PV calc)
CR Cash. (PV calc)
108
How to calculate bonds issued at a premium?
Step 1 find total number of period
step 2 find periodic market rate
step 3 find the solution annuity and * by principal
step 4 take principal * by coupon rate/2 = X
step 5 multiply X by annuity rate
add annuty $ + princpial amt
109
JE of Bonds Issued at Premiumfor Borrower and investor
DRCash (PV calc)
CR Discount on BP (diff)
CR Bonds Payable. (principle
DRInvestment in Bonds (PV calc)
CR Cash. (PV calc)
110
What type of bonds mature in installments?
Serial bonds are pre-numbered bonds that the issuer may call and redeem a portion by serial number.
111
How to calc bonds payable at discount?
multiply principle with coupon rate = A
multiply discount rate with market rate = B
B-A = C amortization of year 1
discount amount - (C/2) = BP
112
the stated interest rate is
also known as the nominal or coupon rate
dictates the periodic coupon payment
113
the effective interest rate is
also known as the market rate
dictates the selling price and proceeds on sale which determines the present value factors
determines the interest exp on inc statement
beginning cv * market rate
114
F4M6
Troubled Debt Restructuring
115
Troubled Debt Restructuring
is when the creditor allos the debtor ceretain concessions to improve the likelihood of collection that owuld not be considered under normal circumstances
116
Types of Troubled Debt Restructuring
Modification of Terms
- Reduction in interest rate
- Extension of maturity date
- Reduction in principal amount
- Reduction or forgiveness of accrued interest
Settlement of Debt
- Issuance of equity in exchange for debt
- Transfer of assets to satisfy debt
117
Accounting for TDR (Debtor's Perspective)
- if only terms are modified and the total future cash flows are less than the carrying amt of the debt , the debtor recognizes a gain for the difference
if the debt is settled with assets or equity, the debtor recognizes a gain or loss baseed on the diffeerence between the carrying amt of the debt and the fair value of assets/equity
118
Transfer of Assets
The debtor will recognize a gain in the amt of
- the excess of the CV of the payable over the FV of the assets given up
the gain or loss on disposition of the asset is reported in income of the period
119
Gain on transfer of asset comes from
the difference btw the FMV of asset transferred and amt of loan and then also the diff net book value of asset and the fmv of asset
120
JE of Gain on transfer of asset
DR Payable
CR Acc Depr
CR PPE
Gain PPE
GAin. Debt
121
Transfer of Equity Interest
the diff btw the CV of the payble and the FV of the equity interst is recognized as a gain
122
JE Transfer of Equity Interest
DR Payable
CR Common Stock
CR Additional PIC
CR Gain
123
Modification of Terms
debtor usually accounts for the effect of the restructuring prospectively
deebt has not been estinguished but terms have been adjusted so the debtor has greater ability to fulfill its obligation
124
JE for If a creditor reduces the principal from $100,000 to $70,000, the debtor records:
Dr. Notes Payable $100,000
Cr. Gain on Restructuring $30,000
Cr. Notes Payable (New) $70,000
125
JE for impairment on books
Bad debts exp
allowance for credit losses
126
Total Future Cash Payments
are the principal and any accrued interest at the time of the restructuring that continues to be payable by the new teerms
127
modification of terms interest expense
computed by a method that causes a constant effective rate
- the new effective rate of interest is the discount rate at which the carrying amt of the debt is equal to the present value of the future cash payments
128
modification of terms future payments
when the total future cash payments are less than the carrying amt , the debtor should
- reduce the carrying amt accordingly; and
-recog the diff as a gain restructuring of debt
129
Extinguishment of Debt
debt is considered extinguished when it is settled or legally discharged
130
Key Rules for Extinguishment
If the debtor pays off the debt early, any difference between the carrying amount and the amount paid is recognized as a gain or loss.
If debt is converted into equity or assets, the difference between the carrying value and fair value of consideration is recognized.
131
Formula for Gain/Loss on Debt Extinguishment
Gain/Loss=Carrying Amount of Debt−Reacquisition Price
Carrying amount = Face value ± unamortized premium/discount ± unamortized issuance costs
Reacquisition price = Cash paid or fair value of new securities issued
132
Special Cases for extinguishment of Debt
Debt Issuance Costs: These are expensed immediately if debt is extinguished early.
Callable Bonds: If a bond is called at a premium, the additional premium paid increases the reacquisition price.
133
F4M7
Lessee Accounting
134
There are two types of leases for lessee:
Operating
and Financing
135
If any of the BONES criteria are met they are a BLANK lease and if none of the crtieria are met they are an BLANK lease
What is BONES?
financing lease
Bones stands for
Bargain purchase option (lets you purchase at the end of lease for cheap, reasonably certain)
Ownership transfer occurs
Net PV of lease payment (plus guaranteed residual value by the lessee) is > 90% of FMV
E the lease term is >75% of the lease economic life
S The asset is considered specialized ( no alternative use to the lessor)
136
Combine Lease contracts if all criteria are met:
1. one or more is lease
2. contracts are basically same
3. parties to contract are same
4. one or more of:
- one contract affects the consideration paid of another
- the contracts have the same commercial obj and were negotiated as part of a package
- the right to use asset do not meeet accounign criteria for separate lease
137
separate lease contracts if
one right to use asset = one separate asset within the contract
more than one right to use an asset = lessee must deteeremine whether each right equatees to a separate lease conponent
138
What interest rate do we use for lease?
This tells us what factor to use for calculating the net present value of minimum lease payments
first choice is the implicit rate % uses the rate that the lease contract implies
the second choice is the incremental borrowing rate when we dont know what the implicit rate is
139
When you first look at lease problem determine what:
operating or financing with BONES?
which rate to use?
is it annuity due or ordinary annuity?
then determine present value
set up LL table
140
LL table looks like
PV LL
interest exp
pmt. = annual payment
diff = pmt - int exp
End LL = PV - diff
141
How to calc PV of lease payments?
annual payment * annuity due rate or ordinary annuity
142
Use the PV of lease payment to determine the interest
(annual payment * annuity due rate or ordinary annuity) * implicit or incremental borrowing rate
143
With financing leases we have what and with operating leases we have what
finance lease = interest exp
opeerating elase = lease exp, where its equal to annual payment
144
Initial JE of operating lease and financing lease for lesee
DR ROU asset
CR = lease liability (PV)
145
JE of opeerating lease exp for lessee
DR Lease exp (annual payment)
DR Lease Liabiliy (diff in table)
CR cash (annual payment
CR Acc Amort ( diff in table)
146
in order to keep lease payments fixed in operating lease
interest exp grows lower in table and principle reduction or diff grows higher
147
For financing leases we separate
the amortizization exp and acc depr from the int exp leas eliabilty and lease payable
148
YE JE of financing lease exp for lessee
Interest Exp
Lease Liability. (diff in table)
Cash/Lease Payable. (annual pmt)
Amortization Exp. (pv of asset/life of lease)
Acc Amortization -- ROU. same
149
for a finance lease, the interest portion of the lease payment
will serve to reduce cash flow from operations and the portion of the lease payment that represents principal is a cash flow from financing outflow
150
If BONES criteria of bargain purchase or ownership are met then
you use usefull life of asset for amortization
151
Amortization Exp of Lease =
(pv of right of use asset/life of lease)
If BONES criteria of bargain purchase or ownership are met then
(pv of asset/useful life of asset)
152
There are three types of leases for lessor:
finance lease:
sales type - BONES
- where gain is recognized, there is int income, and principal red
direct finance
- pure debt agreement, like lending money
or
operating
- like a rental
153
Initial JE of financing sales type lease for lessor
DR Lease receivable (PV of lease payment)
CR Asset. NBV of asset)
CR Gain (difference)
154
YE JE of financing sales type lease or direct finance lease for lessor
DR Cash (annual pmt)
CR Interest income (PV of lease payment * implicit rate)
CR lease receivable. (difference)
155
Direct Finance Lease does not meet
BONES but meet N with npv + guaranteed residual value of 3rd parties or lease pmtts + annual residual value are collectible do u pass 90%
if you fail this again then its operating lease
156
Initial JE of financing direct finance lease for lessor
DR Lease Receivable
CR Asset
157
