Financial 5 - Payables and Accrued Liabilities

Question 1

Recognizing a Liability Under Certain Circumstances

Answer 1

3 Criteria Must ALL Be Met to Recognize a Liability associated with exit or disposal activities:

1. An obligating event has occurred
2. The event results in a present obligation to transfer assets or to provide services in the future
3. The entity has little or no discretion to avoid the future transfer of assets or providing of services

• A commitment to an exit plan by itself is not enough to result in a liability

** RULE: Long Term Debt that matures within one year should be classified as a current liability. Unless retirement is to be accomplished with other than current assets

** Classification of Short-Term Obligations Expected to be Refinanced - “If equity securities have been issued [after the balance sheet date but before the balance sheet is issued] (treat as subsequent event), the short-term obligation, although excluded from current liabilities, shall not be included in owners’ equity”

Question 2

Adjustments To Liabilities on the Balance Sheet

Answer 2

• Advance payments should be recorded as prepaids (asset)
• Unmailed Checks (dated in Current Year, paid in the next) will drive Accounts Payable UP
• Salary Accrual for the work done in the last week of the year, NOT Paid until Yr. 2 will increase Salaries Expense and Liabilities
• Officers Bonuses NOT Paid until Yr. 2 will increase liabilities

Question 3

Sales Revenue Calculation

Answer 3

Credits to Sales Revenue / (1 + Tax rate) = Sales Revenue

Take the Revenue and * by the tax rate to find the Amount of Sales Tax Collected

LESS Any advance payments to arrive at your Sales Tax Payable

Question 4

Classification of Accounts Payable

Answer 4

NOT Classified as AP

1. Period Payment of Interest - This is an accrued liability/debt
2. Secured by Collateral - This is classified as a loan payable
3. Deferred Tax Liability - classified as Non-Current Liabilities

Short term debt that is expected to be refinanced is classified as a long term liability to the extent of post-balance sheet refinancing. Since a certain amount was prepaid subsequently, that amount of prepayment will be listed as a current liability

Question 5

Asset Retirement Obligation

Answer 5

• ARO must be created at the time of purchase to reflect legal obligation to dismantle the asset. The ARO is recorded at present value of the expected obligation by debiting the asset and crediting the ARO. Over the years, accretion expense will be recorded so that at the end of the useful life, the ARO Liability will equal the undiscounted total expected cost of the asset. This compares to actual demolition and removal costs and the additional expense is recorded accordingly
• • Accretion Expense - Beginning ARO * Risk-adjusted Rate = Accretion Exp
• This is the increase in the ARO liability due to the passage of time. The credit adjusted interest rate is used to calculate the ARO

Question 6

Decommissioning Liability

Answer 6

UNDER IFRS

• A decommissioning liability is treated the same as an ARO under GAAP
• Any change in the value of the liability after the property is fully depreciated will be recognized in the P&L