M1 - Payable and Accrued Liabilities

Question 1

Costs to relocate employees are costs associated with exit and disposal activities (true or false)

Answer 1

True

Also, benefits related to INvoluntary employee termination
Costs to terminate a contract that is NOT a capital lease.
Capital lease termination costs are accounted for separately from exit and disposal activities
The cost of retiring a fixed asses is not considered an exit or disposal cost.

Question 2

Any entity’s commitment to an exit plan by itself is enough to result in liability recognition. (true or false)

Answer 2

FALSE

Question 3

A liability is only recognized when ALL of the following criteria are met:

Answer 3

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

Question 4

True or False: “Periodic Payment of Interest” and “Secured By Collateral” are generally associated with payables classified as accounts payable.

Answer 4

False,

A liability that requires the periodic payment of interest should be classified as an accrued liability or debt.

A liability that is secured by collateral should be classified as a loan payable.

Question 5

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. (true or false)

Answer 5

true

Question 6

All deferred tax liabilities are classified as (current or noncurrent)?

Answer 6

Non-current

Question 7

Accounts Payable are classified as (current or non-current) liabilities?

Answer 7

Current

Question 8

An asset retirement obligation (ARO) must be recognized at the time the asset is purchased to reflect the buyers legal obligation to dismantle the asset and remove everything. (true or false)

Answer 8

true

The ARO would be recorded at the PV of the expected obligation by debiting the asset and crediting ARO Liability. Over the life of the asset, accretion expense would be recorded so that at the end of the life, the ARO liability is equal to the undiscounted total expected cost of the asset. When the actual demolition and removal costs are incurred in the last year, the following JE would be recorded:

DR: ARO Liability
DR: Demolition Expense (if larger than expected)
CR: Cash/AP

Question 9

The credit adjusted risk free interest rate is used to calculate the ARO. (true or false)

Answer 9

true

Beginning ARO x Risk-adjusted rate = 100,000 x 10% = $10,000

Question 10

A decommissioning liability under IFRS is the same as an asset retirement obligation (ARO) under US GAAP. (true or false)

Answer 10

True:

Any change in the value of the liability after the property has been fully depreciated will be recognized in profit or loss.

Question 11

When an asset retirement obligation (ARO) exists, the entity should record an asset retirement cost (ARC) which increases the carrying value of the long lived asset as well as an ARO which is the liability recorded on the balance sheet related to the retirement. (TRUE OR FALSE)

Answer 11

True

The amount recorded to both the asset and liability will be equal to the FV of the ARO (which is determined by discounting the Future Cash Flows required). The ARC will be depreciated over the useful life of the related asset while the ARO will be “accreted” based on the relevant accretion rate.

Question 12

Upon declaration, dividends become a debt of the corporation (credit to dividends payable) and are debited to retained earnings. (true or false)

Answer 12

True

Question 13

Rule: Employees’ compensation for future absences (mostly vacation) should be accrued if:

Answer 13

1. Services have already been rendered, and
2. The obligation relates to vested or accumulated rights, and
3. The amount can be reasonably estimated, and
4. Payment is probable