Liabilities Flashcards
What makes a liability to be definitely determinable?
Whether amounts and due dates can be established with considerable certainty
Certainty can be derived from statutory law, contract, or trade custom
What are examples of accrued payroll expenses?
Salaries incurred for last week of accounting period but not payable until next period
Social security taxes and federal unemployment taxes borne by employer (FICA taxes)
Employees’ SS and federal income taxes are NOT accrued payroll expenses, although corporations still have income taxes payable
What are the equations to determine bonus liabilities based on profits?
Bonus calculated on income after tax but before bonus:
B = Br ( I - T )
T = Tr ( I - B )
Bonus calculated on income after tax and bonus:
B = Br ( I - T - B )
T = Tr ( I - B )
Other possibilities too, such as a bonus deducted from pretax income but after bonus:
B = Br ( I - B )
How are contingent liabilities classified?
By (1) the likelihood of incurring the liability and (2) whether the amount can be reasonably estimated
How should probable contingent liabilities be reported?
Probable liabilities with reasonably estimated amounts should be charged and disclosed
If only a range can be estimated, each value being equally likely, the minimum should be accrued
If an amount cannot be estimated, the contingent liability should merely be disclosed
How should improbable contingent liabilities be reported?
If a liability is reasonably possible, no charge should be made, but it should be disclosed in the footnotes
If a liability is merely remote, it does not need to be disclosed
Which remote contingent liabilities should still be disclosed?
- guarantees of indebtedness of others
- banks’ standby letters of credit
- guarantees to repurchase receivables
If a loss is deemed probable and can be reasonably estimated, but is identified between the financial statement date and the issuance date, how should it be reported?
It should still be both incurred and disclosed
When should asset impairments be accrued or disclosed?
They follow the same rules as contingent liabilities
Should subsequent events be accrued or disclosed?
Not accrued and ordinarily not disclosed – they are different from contingent liabilities because (presumably) they are not predicted
What are some subsequent events that should be disclosed?
- purchase of a business
- loss of inventories or plant assets due to casualty
- issuance of bonds or stocks
How should gain contingencies be recorded?
Not accrued, but should be disclosed if not remote
Gain contingencies include gains that have already occurred but are being appealed (e.g. lawsuits)
What journal entries are used if warranty expense is determined at the point of sale?
Warranty Expense X
Est. Warranty Liab. X
(to record estimated warranty expense at point of sale)
Est. Warranty Liab. X
Cash or Other Assets X
(to record actual warranty expenditures as incurred)
What journal entries are used if warranty expense is determined at the end of the accounting period?
Warranty Expense X
Cash or Other Assets X
(to record actual warranty expenditures as incurred)
Warranty Expense X
Est. Warranty Liab. X
(to record estimated warranty expense at end of accounting period)
Do explanations for estimated warranty expenses need to be disclosed?
No
For coupon arrangements where customers must pay cash and coupons in order to get a product, how does this affect the company’s estimated liability for coupons?
It reduces the liability by the amount of cash paid
What conditions must be met for a liability for employees’ compensation for future absences and post-employment benefits to be accrued?
- Payment is probable
- Amount can be reasonably estimated
- Obligation for employee services is already rendered
- The obligation relates to employee rights that vest or accumulate
Also needs to be disclosed
What are vested rights and accumulated rights?
Vested rights hold irrespective of an employee’s termination of employment
Accumulated rights may be carried forward to one or more future periods
How do you value notes payable with unstated or unreasonable interest rates?
Record at FV of goods or services exchanged or at the FV of the note, whichever is more clearly determinable.
If the above cannot be determined, record the note at its PV by discounting all future payments at an imputed interest rate.
In both cases, the difference between the recorded amount and face amount is discount or premium.
How is an imputed interest rate determined?
- debtor’s credit standing
- prevailing rates for similar debt
- rates at which the debtor can obtain funds
How is the discount or premium for a note payable amortized?
Amortized as interest expense
Should result in a constant rate of interest when applied to the note’s carrying amount at the beginning of any given period
Methods other than effective interest method are allowed if difference is immaterial
How is a note with an unstated interest rate accounted for?
Note discounted to PV at imputed rate, difference between PV and face value is discount
Discount amortization for each period is (unamortized discount x imputed rate) and recorded as interest expense
