FAR 2G - Payables

Question 1

What is the definition of a current liability?

Answer 1

An obligation that is expected to be settled within one year or the operating cycle, whichever is longer. This includes payables related to the operating cycle (e.g., accounts payable) and other obligations like accruals and salaries.

Question 2

What are the conditions for reclassifying a short-term liability as long-term?

Answer 2

A short-term liability can be reclassified as long-term if the entity 1) intends to refinance it on a long-term basis, and 2) demonstrates the ability to refinance by the balance sheet date.

Question 3

How are sinking funds classified and used?

Answer 3

A sinking fund is money set aside for a specific purpose, typically to redeem bonds or preferred stock. It is not available for general purposes and is often required by bond covenants.

Question 4

What is the treatment of bond issuance costs?

Answer 4

Bond issuance costs are included in the cost of the bond and are amortized over the life of the bond. They are presented as a deduction from the carrying amount of the debt on the balance sheet.

Question 5

How are long-term liabilities measured?

Answer 5

Long-term liabilities are measured at the present value of future payments, discounted at an appropriate interest rate. Any premium or discount is amortized using the interest method.

Question 6

What is a balloon note?

Answer 6

A balloon note is a loan with smaller periodic payments and a large final payment at the end of the loan term.

Question 7

What is the definition of an Asset Retirement Obligation (ARO)?

Answer 7

An ARO is an obligation associated with the retirement of a tangible, long-lived asset, such as a nuclear power plant. The ARO is measured at the present value of the expected cost and recognized as both a liability and an asset.

Question 9

What is accretion expense, and how is it calculated for AROs?

Answer 9

Accretion expense is the increase in the ARO liability over time due to the passage of time. It is calculated as:
Accretion Expense = ARO Liability × Credit-Adjusted Risk-Free Interest Rate.

Question 10

How is an ARO settled?

Answer 10

When an ARO is settled, a gain or loss is recognized based on the difference between the carrying amount of the ARO and the actual cost of settlement.

Question 11

What is off-balance sheet risk?

Answer 11

Off-balance sheet risk refers to situations where potential accounting losses exceed the amounts reported on the balance sheet. This often arises from contingent liabilities or complex financial instruments.

Question 12

What is the purpose of a sinking fund?

Answer 12

A sinking fund is money set aside for a specific purpose, such as redeeming bonds, preferred stock, or replacing capital assets. It is often stipulated by bond covenants and not available for general use.

Question 13

How is the cash surrender value of a life insurance policy treated?

Answer 13

The cash surrender value of a life insurance policy is recorded as an asset. The expense is the premiums paid less any increase in cash surrender value during the period.

Question 14

What are the key components of salaries and wages expense?

Answer 14

• Gross salaries and wages
• Employee portion of FICA
• Federal income taxes withheld
• Voluntary deductions
  It excludes employer-paid benefits like the employer portion of FICA, unemployment taxes, and other benefits.

Question 15

What is the difference between employee and employer payroll tax expenses?

Answer 15

The employee’s portion of payroll taxes (e.g., FICA) is included in salaries and wages expense, while the employer’s portion is recorded under payroll tax expense.

Question 16

How are long-term liabilities presented on the balance sheet?

Answer 16

Long-term liabilities are presented at the present value of future payments, discounted at an appropriate interest rate. Any unamortized premium or discount is added to or deducted from the face value of the liability.

Question 17

How are bond issuance costs treated in financial statements?

Answer 17

Bond issuance costs are amortized over the life of the bond and presented as a deduction from the carrying amount of the debt liability on the balance sheet.

Question 18

What is the accounting treatment for asset retirement obligations (ARO)?

Answer 18

The ARO liability is recognized at its present value when incurred. An asset equal to the liability is recorded and depreciated over the asset’s useful life. The ARO liability is increased each year by accretion expense.

Question 19

What happens when an ARO is settled?

Answer 19

Upon settlement, the company recognizes a gain or loss based on the difference between the settlement cost and the carrying amount of the ARO at that date.

Question 20

What is accretion expense, and how does it apply to AROs?

Answer 20

Accretion expense represents the increase in the ARO liability over time as the liability approaches its settlement date. It is recognized as an operating expense and is calculated as:
Accretion Expense = ARO Liability × Credit-Adjusted Risk-Free Rate.

Question 21

How are termination benefits recognized?

Answer 21

Termination benefits are recognized when the termination plan is communicated to employees, there is no realistic possibility of withdrawal, and the obligation can be reliably estimated.

Question 22

When are conditional termination benefits recognized?

Answer 22

Conditional termination benefits, where employees must provide service to receive the benefit, are recognized ratably over the future service period. The liability is recognized proportionally as the employees render service until the termination date

Question 23

What are Selling Expenses in SG&A?

Answer 23

Selling expenses are the costs directly related to selling and distributing products. These include costs such as sales representatives’ salaries, advertising, marketing, and freight-out (shipping costs to customers)

Careful if the question says G&A or SG&A

Question 24

What is the ARO liability initially recorded at?

Answer 24

PV of expected future cash flows using a credit-adjusted risk-free rate. Over time, the liability is adjusted for market risk and inflation.

Question 25

How is a gain or loss on the settlement of an ARO calculated?

Answer 25

The gain or loss on ARO settlement is the difference between the accrued ARO liability on the settlement date (adjusted for market risk and inflation) and the actual settlement cost.

Question 26

What is typically included under the “Salaries” category in a company’s GL or FSLI?

Answer 26

The “Salaries” category includes gross wages, salaries, bonuses, commissions, and other direct compensation paid to employees for their work.

Question 27

What falls under the “Benefits” category in a company’s GL or FSLI?

Answer 27

The “Benefits” category includes employer-paid taxes (e.g., FICA, unemployment), health insurance premiums, retirement contributions, and other employer-provided benefits, as well as worker’s compensation and similar expenses.

Question 28

When does a bond liability with a sinking fund fall under current or noncurrent liabilities?

Answer 28

A bond liability with a sinking fund is classified as noncurrent, even if it matures within one year, as long as the sinking fund covers the repayment. The liability is considered noncurrent because the fund is a noncurrent asset

Question 29

How are vacation days and sick days treated for liability accrual?

Answer 29

a) Vacation days: If they are vesting (e.g., payable if not used), a liability must be accrued for any unused days.
b) Sick days: If they are nonvesting (e.g., not payable if unused), no liability accrual is required, even if the days can be carried over.

Question 30

What is the journal entry to record accretion expense for an Asset Retirement Obligation (ARO)?

Answer 30

Debit: Accretion Expense (increases expense)
Credit: Asset Retirement Obligation (ARO) (increases liability)

This entry reflects the increase in the ARO liability over time as the company approaches the settlement date.

Question 31

How are property taxes typically accrued in the financial statements?

Answer 31

Property taxes are accrued monthly or over the fiscal period in which they are incurred. Past-due amounts are recorded as property taxes payable, while payments covering future periods are recorded as prepaid property taxes.

Question 32

How are property taxes allocated when a payment is made?

Answer 32

Past period: Allocated to property taxes payable (liability).
Future period: Allocated to prepaid property taxes (asset).

Question 33

What is the accounting treatment for property taxes when a property is purchased during the fiscal year?

Answer 33

The buyer records property taxes from the date of purchase. Taxes accrued for past periods are recorded as property taxes payable, and taxes for future periods are recorded as prepaid property taxes.

Question 34

What part of a life insurance policy premium is charged as an expense when the policy has a cash surrender value?

Answer 34

The expense is the portion of the premium that does not increase the cash surrender value and represents the cost of insurance coverage for the period.

Question 35

How is the cash surrender value of a life insurance policy treated in financial statements?

Answer 35

The cash surrender value of a life insurance policy is recorded as an asset on the balance sheet, representing the amount the enterprise would receive if it canceled the policy.