FAR CPA Lessons 124-139 Flashcards
What are the three key elements of a liability?
- A present obligation to transfer assets or provide services
- It is unavoidable
- Is the result of a part transaction or event
Define Current Liabilities
Must meet both criteria:
- Due within 1 year of the balance sheet.
- An obligation to be met by the transfer of a current asset or the creation of another current liability
- accounts payable
- wages payable
- income taxes payable
- utilities payable
- accrued payables
- some notes payable
- many others.
Define Noncurrent Liabilities
All Liabilities that do not meet the criteria necessary for classification as a current liability
- bonds payable
- some notes payable
- lease liabilities
- pension liabilities.
What is a definite liability?
Definite liabilities actually exist at the balance sheet date and do not depend on any future event
What is a contingent liability?
Contingent liabilities have some uncertainty at the balance sheet date. Their existence is contingent on an event that may or may not occur after the balance sheet.
- lawsuits
- warranties
- guarantees
How are the values for current liabilities reported?
At the amount due or the nominal amount
How are the values for noncurrent liabilities reported?
At the present value of all future payments (principal and interest), discounted at the prevailing rate of interest for similar debt on the date of issuance.
Is deferred income tax a current or noncurrent liability?
Noncurrent
Accounts Payable
- Represent the amount a business owes to suppliers or other entities that provided goods or services to the company
- Typically for a short duration, usually 30 days
- Recognized at the time of purchase or at the time services are received
What is the entry to accrue a liability?
Debit expense and credit accrued liability
Property Taxes
Property taxes are levied by state and local governments based on the assessed valuation of property as of a given date. The tax becomes a lien against the property on the date specified by law and thus legally the liability comes into existence on that date
Accounting for property taxes
- Entities accrues the expense over time
- When the invoice arrives the difference between the estimated annual amount and the actual annual amount is treated as an increase or decrease to the monthly property tax expense
Sales Tax
Firms collect sales taxes from their customers and periodically submit them to the state or local government. Between collection and submission of the tax, the firm has a liability to the government.
Journal Entries for sales tax
AP/Cash - Debit total amount
Sale/Revenue - Credit Net of sales tax
Sales tax payable - credit tax amount
What are the two sources of definite payroll liabilities?
- Employer Costs (Gross salary, benefits, employer portion of taxes etc)
- Employee Costs withheld from paycheck (Tax withholdings, employee portion of benefits) personal expenses etc
Appropriate FICA rates
6.5% on the first $110,000 of salary per year
What are the payroll taxes that only the employer pays?
- FUTA (Federal Unemployment Tax Act)
2. SUTA (State Unemployment Taxes)
Appropriate Medicate rates
1.5% with no limit
Appropriate FUTA rates
6% on the first $7,000 reduced by up to 5.5% for contributions to SUTA
Appropriate SUTA rates
5.5% on first $7,000
Formula for bonus - after tax and bonus
B = BR(OI - T - B)
B = Bonus BR = Bonus Rate OI = Operating income T = Tax
Formula for bonus - after tax before bonus
B = BR(OI - T) B = Bonus BR = Bonus Rate OI = Operating income T = Tax
Identify how asset retirement obligations are measured.
The Asset Retirement Obligation (ASO) is recognized as the time the cost becomes estimable
Debit - Asset Account
Credit - ARO Account
Fair value - The amount the firm would expect to pay today to cover future costs
Present value - the probability-weighted estimates of future cash flows are discounted using credit-adjusted risk-free rate.
Explain how asset retirement obligations are accreted over time.
The annual accretion expense and corresponding increase in ARO is found by multiplying the interest rate used in capitalizing the initial amount by the beginning balance in the ARO. The annual expense is considered an operating expense, not interest expense. Thus, the ARO gradually increases over time (to the final amount expected to be paid) while the net book value of the asset declines through the depreciation or depletion process. Only the initial fair value (present value) is capitalized to the asset and is subject to depreciation or depletion.