FAR 13 - LIABILITIES

Question 1

Current Liabilities

How is it valued & what are different types?

Answer 1

Current Liabilities - valued at their NRV or settlement value

Includes: A/P, Accrued Expenses, Dividends payable, Income Taxes payable, current portion of Long Term Debt

Question 2

Accounts Payables

How are Discounts recorded?

Answer 2

Gross Method - purchases are shown at gross, if discount is taken, it is a reduction of Cost of Sales

DR: Purchases (at gross)

CR: Accounts Payable

DR: A/P

CR: Cash

CR: Discount (reduction of COGS)

Net Method - purchases are shown at net of discount, if discount is not taken, considered as interest expense.

DR: Purchases (net of discount)

CR: A/P

DR: A/P

DR: Interest Expense (if discount not taken)

CR: Cash

Question 3

Warranty Costs

How to book?

Answer 3

Total estimated warranty costs are accrued at the date of sale

DR: Warranty Exp (Amount * Full %)

CR: Estimated Warranty Liability

DR: Estimated Warranty Liability (actual repairs)

CR: Cash

Question 4

Service Contracts

Answer 4

Service contract revenues are deferred until earned.

DR: Cash

CR: Deferred Service Revenue

When earned JE:

DR: Deferred Service Revenue

CR: Service Revenue

Question 5

Coupons or Premiums

How to determine the estimated liability for unredeemed coupons at the BS date? 4 Steps

Answer 5

1. Total Face Value of Coupon/Premium
2. Add handling fee to total face value of Coupon/Prem
3. Multiply percentage of coupons/premiums to be redeemed.
4. Subtract payments already made

Amount after finishing step 4 is the answer.

Question 6

Compensated Absenses

Vacation vs. Sick

Answer 6

• Vacation Days - recognize if days accumulate or vests
  
  • ​Use new wage rate available since its vested
• Sick Days - recognize if days vests only

Question 7

Accrued & Deferred Amounts

Bonus

Answer 7

Bonus = % (Income - Bonus - Excess Number/Income)

Question 8

Payroll Taxes

Answer 8

Payroll Taxes needs to be accrued. Only employer taxes are accrued expenses. Employee withholdings are not considered accrued expenses.

DR: Payrol Expense (Gross Wage)

DR: Payrol Tax Expense (Employer Tax)

CR: Cash

CR: Accrued Payroll Taxes Liabilities (Employer Tax)

CR: Witholdings (Employee’s Federal Witholding & FICA)

NOTE: FICA & Unemployment MAY be subjected to specific amounts.

Question 9

Dividends Payable

Answer 9

Dividends payable are current liabilities when declared by the boards.

Dividend in arrears on Cumulative Preferred Stock are NOT booked & is not a liability, but must be disclosed.

Question 10

Loss Contingency

Answer 10

1.) Disclose 2.) Accrue

Remote/Slight - 1. NO, 2. NO

Reasonably Possible - 1. YES, 2. NO

Probable & Estimable - 1. YES, 2. YES

Probable & NOT Estimable - 1. YES, 2. NO

NOTE: When there is a RANGE

When any amount within a range is as likely as the rest, the reporting company must accrue the minimum amount in the range and disclose that range.

Question 11

Gain Contingency

Answer 11

1.) Disclose 2.) Accrue

Remote/Slight - 1. NO, 2. NO

Reasonably Possible - 1. YES, 2. NO

Probable & Estimable - 1. YES, 2. NO

Probable & NOT Estimable - 1. YES, 2. NO

NOTE: Gain Contingency IS NEVER ACCRUED. Only recognize when certain.

Question 12

Subsequent Events

Type 1 vs. Type 2

Answer 12

Susbsequent Events - Events occuring after the B/S date, but before issuing F/S for the period.

Type 1

• If condition existed at B/S date,
  
  • Accrue & Disclose (recognized)

Type 2

• If condition DID NOT exis at B/S date,
  
  • Disclose ONLY

Question 13

Refinancing of Short-Term Obligations on a Long-Term basis

How will a short term liability that will be financed booked?

Answer 13

For a short-term liability that’s to be refinanced, it can be recognized as a L/T if it has Intent & Liability

Question 14

Bankcruptcy

STOP-IT Drunk Driver

Answer 14

Bankruptcy - Concerned with the distribution of assets in liquidations

Asset Liquidation in Order of:

1. Secured Creditors (including Partially secured)
2. Priority Claims
3. General (unsecured) Creditors

Priority Claims - STOP-IT Drunk Drivers

Support & Alimony payments

Trustee, Attorney & Accountant Fees

Owed to involuntary gap creditors

Payroll within 180 days

Individual consumer deposits

Tax Claims w/in 3 years of filing

Drunk Driver injury Claims

Question 15

IFRS vs. GAAP

Liabilities

1. Short Term Obligations to be Refinanced
2. Contingencies vs. Provisions

Answer 15

Under IFRS

Short term Obligation may only be recognized its already been refinanced.

Contingencies - Reasonably Possible

Provisions - Probable & Estimable