Liabilities

Question 1

How does the “Gross Method” work for Accounts Payable (A/P)?

Answer 1

Purchases are shown at “Gross,” if the discount is taken

NOTE: This is considered a reduction of Cost of Sales (i.e. Cost of Goods Sold)

Question 2

WHEN would an entity report a Liability for future compensated absences?

Answer 2

If all four of the following criteria are met:
(1) Payment is “reasonably estimatable”

(2) Payment is “Probable”
(3) Right to compensation for future absences “vests” (i.e. they earned it) or “accumulates”
(4) Future absences result from services already provided by the employees

Question 3

Under the Liquidation Basis of Accounting, what amount should the company value their assets at if; IT is considered imminent that a company is no longer a going concern?

Answer 3

THE Amount expected to be generated upon liquidation

Question 4

WHAT if a company can demonstrate both intent and ability to refinance short-term obligations on a long-term basis, Under GAAP?

Answer 4

THE obligations may be categorized as long-term on the Financial Statement (F/S)

Question 5

WHAT value is used when an entity transfers an asset in a debt restructuring?

Answer 5

THE “Fair Value”

Question 6

Would you record a gain on a modification of a loan term if the total payments to be made under the modified terms exceed the revised carrying value?

Answer 6

NO.

YOU would report a Gain; if the carrying value of the modified loan exceeded the total payments to be made under the modified terms

Question 7

WHAT type of transactions would INCREASE an Escrow Liability account?

Answer 7

(1) Escrow receipts

(2) Interest earned

Question 8

True or False.

Sick pay may be accrued if it accumulates or if it vests

Answer 8

FALSE.

Sick pay may be accrued if it accumulates but is required to be accrued ONLY if it vests

WHY? - Because it is assumed that sick pay will only be given when an employee is sick, which may or may not occur

Question 9

WHAT are some examples of Current Liabilities?

Answer 9

(1) Accounts payable-trade
(2) Short-term borrowings
(3) Current (Short-term) portion of bank loan

Question 10

WHAT items are compared WHEN there is a troubled debt restructuring involving ONLY a modification of loan terms?

Answer 10

THE sum of total future cash payments TO the Carrying Amount of the debt

Question 11

WHEN is a Loss Contingency recognized?

Answer 11

WHEN it is both probable and estimable

NOTE: If it is only reasonably possible, it is disclosed but not accrued

Question 12

True or False.

Contingency gains, including those that are probable and estimable, are accrued

Answer 12

FALSE.

Contingency gains, including those that are probable and estimable, are NOT accrued

NOTE: They may be disclosed as long as the disclosure does not imply a greater degree of likelihood of realization than actually exists

Question 13

WHAT “basis” amount is used to calculate the limited amount an entity can refinance on a long-term basis?

Answer 13

THE “value of the collateral” NOT the original amount of the note

i.e. you would take whatever the limit percentage is and multiply it by the “Value of the Collateral”

Question 14

Fill in the blank.

WHEN a ___A___ amount exists within a range, the reporting company must ___B___ the most likely amount and ___C___ that range.

Answer 14

A. Most likely

B. accrue

C. disclose

Question 15

True or False.

Deferred tax liabilities arising from depreciation would be classified as a current liability.

Answer 15

FALSE.

Deferred tax liabilities arising from depreciation would be classified as a “noncurrent” liability

WHY? - Because they are related to long-term assets

Question 16

True or False.

Interest is payable on the noninterest bearing note.

Answer 16

FALSE.

THERE is NO Interest Payable on a Noninterest Bearing Note; so no interest payable is recorded for it

Question 17

True or False.

Dividends; whether dividends in arrears or dividends that are intended to be declared from current year income are reported as liabilities before they are declared.

Answer 17

False.

Dividends, whether dividends in arrears or dividends that are intended to be declared from current year income are NOT reported as liabilities until they are declared

Question 18

Under IFRS, WHAT is the difference between a “Provision” and a “Contingency?”

Answer 18

Provision - A liability that is uncertain as to timing or amount

Contingency - A “Potential” obligation that is not recognized as a liability either because the outflow of resources is NOT probable or the amount is NOT “reasonably estimable”

Question 19

Do Warranty costs increase or decrease an Accrued Warranty Liability account?

Answer 19

Decrease the account

Original Journal Entry would be:

Dr. Warranty expense
Cr. Estimated liability under warranties

After a Warrant Cost is Incurred the Journal Entry would be:
Dr. Estimated liability under warranties
Cr. Cash

Question 20

HOW do you account for a Condition (i.e. damages) existing after the balance sheet (B/S) date, but prior to the issuance of the financial statements?

Answer 20

You would disclose but NOT accrue the condition on the company’s financial statements

i.e. This is considered a “TYPE II” Condition