M5 Flashcards
Current liability term
1 year
Expenses incurred that have not been paid in cash at the financial statement date
Accrued liabilities
Wages, utilities, rent
Liabilities
1 present obligation
2 unavoidable
3 result of past transaction
You may not know the creditor or the exact amount or the due date (example: lawsuits)
Contingent liability
Does not definitely exist at the balance sheet date
Example warranty
If it is estimated and probable then you include it on the balance sheet
Current liabilities
Accounts payable and wages payable
Income taxes payable and utilities payable and accrued payables
Noncurrent liabilities
Bonds payable
Notes payable
Lease and Pension payables
Current liabilities
Due in 1 year or the current operating cycle of the business (period of time from acquiring inventory to collecting receivables) whichever is longer
Current liability is expected to be extinguished with
Current assets
This reduced liquidity
Trade credit
Allows the buyer time to sell some goods before paying for them
Gross and net method of recording the trade discount
Payroll taxes liabilities
Be cautious whether the question is only asking for the employee liability of FICA or both employer and employee
Contingency categories (3) LOSS
Probable (more likely than not)
Reasonably possible (50/50)
Remote (no disclosure)
GAIN contingencies that are probable
Not accrued, but disclosed
Loss contingencies that can be reasonably estimated
Must be accrued
If a range then best estimate is used and the excess is in footnote disclosure
If no best estimate, use minimum
Remote contingencies
Generally ignored - unless it’s a guaranty then it’s disclosed
Premiums and warranties are loss contingencies
Generally accrued
Unasserted claims
Example lawsuit not filed
Probable - Treated like any other loss
Accrued liability booked, best estimate or the minimum if a range is given
Reasonably possible - then disclose
Co-sign for another party (guaranty)
Must disclose no matter how remote
JV for contingent loss
D estimated loss (IS)
C contingent liability (BS)
This is an accrued liability- income stmt this year, cash next year
Potential gains from a lawsuit
Not recorded - conservative principal
If a range is given for the loss, but no amount is more probable than the other…
Book the minimum of the range
In the final JV, upon settlement, any over or under of the contingency becomes gain/loss
Purchase commitment - fixed priced contract
No JV entry on the day of the agreement, but the contract is noted in a footnote
BUT, if the price drops then a loss have to be recorded
JV to account for a Probable loss on an agreement before the contract execution date and the buyer is OBLIGATED to a fixed quantity of purchase
D unrealized loss on purchase contract (IS)
C estimated liability on purchase contract (BS)
Liabilities that appear as short term but are long term
Note due in 3 months but payable in company stock (won’t be paid w a current asset)
Bond liability due next yr but it has a sinking fund (noncurrent asset) so it would reduce noncurrent assets
Current liabilities definition
Are satisfied with other current assets or other current liabilities (replacement of one liability with another)
If debt covenants are broken or if the debt is “callable on demand” then the liability becomes a
Current liability
Current liability examples
Accounts payable
Unearned revenue
Payroll taxes payable
FOB’s for liabilities
Shipping point buyer assumes liability when?
Destination ?
Shipping point buyer assumes liability immediately
Destination buyer assumes liability when receives
The word after FOB is the sellers last point of responsibility
Short term note to be refinanced into a long term - can it be counted as long term?
Yes, if the entity intends to refinance and has ability to do it before the financial statements are ISSUED
Deferred compensation arrangement
If there is a service period before the compensation is paid then divide the compensation total cost over the service period
Ex: 300,000 to be paid after 5 years of service so the cost is 60,000 each year
Vacation pay and sick pay
Vest and accumulates
Vacation pay accrues if it vests or accumulates
Sick lay accrues only if it vests
ARO - asset retirement obligation
Asset is constructed and there is a legal requirement to removal costs at the end of the life
Creates a liability - the present value of the future obligation
