M5

Question 1

Current liability term

Answer 1

1 year

Question 2

Expenses incurred that have not been paid in cash at the financial statement date

Answer 2

Accrued liabilities
Wages, utilities, rent

Question 3

Liabilities

Answer 3

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)

Question 4

Contingent liability

Answer 4

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

Question 5

Current liabilities
Accounts payable and wages payable
Income taxes payable and utilities payable and accrued payables

Answer 5

Noncurrent liabilities
Bonds payable
Notes payable
Lease and Pension payables

Question 6

Current liabilities

Answer 6

Due in 1 year or the current operating cycle of the business (period of time from acquiring inventory to collecting receivables) whichever is longer

Question 7

Current liability is expected to be extinguished with

Answer 7

Current assets
This reduced liquidity

Question 8

Trade credit

Answer 8

Allows the buyer time to sell some goods before paying for them
Gross and net method of recording the trade discount

Question 9

Payroll taxes liabilities

Answer 9

Be cautious whether the question is only asking for the employee liability of FICA or both employer and employee

Question 10

Contingency categories (3) LOSS

Answer 10

Probable (more likely than not)
Reasonably possible (50/50)
Remote (no disclosure)

Question 11

GAIN contingencies that are probable

Answer 11

Not accrued, but disclosed

Question 12

Loss contingencies that can be reasonably estimated

Answer 12

Must be accrued
If a range then best estimate is used and the excess is in footnote disclosure

If no best estimate, use minimum

Question 13

Remote contingencies

Answer 13

Generally ignored - unless it’s a guaranty then it’s disclosed

Question 14

Premiums and warranties are loss contingencies

Answer 14

Generally accrued

Question 15

Unasserted claims
Example lawsuit not filed

Answer 15

Probable - Treated like any other loss
Accrued liability booked, best estimate or the minimum if a range is given

Reasonably possible - then disclose

Question 16

Co-sign for another party (guaranty)

Answer 16

Must disclose no matter how remote

Question 17

JV for contingent loss

Answer 17

D estimated loss (IS)
C contingent liability (BS)
This is an accrued liability- income stmt this year, cash next year

Question 18

Potential gains from a lawsuit

Answer 18

Not recorded - conservative principal

Question 19

If a range is given for the loss, but no amount is more probable than the other…

Answer 19

Book the minimum of the range

In the final JV, upon settlement, any over or under of the contingency becomes gain/loss

Question 20

Purchase commitment - fixed priced contract

Answer 20

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

Question 21

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

Answer 21

D unrealized loss on purchase contract (IS)
C estimated liability on purchase contract (BS)

Question 22

Liabilities that appear as short term but are long term

Answer 22

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

Question 23

Current liabilities definition

Answer 23

Are satisfied with other current assets or other current liabilities (replacement of one liability with another)

Question 24

If debt covenants are broken or if the debt is “callable on demand” then the liability becomes a

Answer 24

Current liability

Question 25

Current liability examples

Answer 25

Accounts payable
Unearned revenue
Payroll taxes payable

Question 26

FOB’s for liabilities
Shipping point buyer assumes liability when?
Destination ?

Answer 26

Shipping point buyer assumes liability immediately
Destination buyer assumes liability when receives
The word after FOB is the sellers last point of responsibility

Question 27

Short term note to be refinanced into a long term - can it be counted as long term?

Answer 27

Yes, if the entity intends to refinance and has ability to do it before the financial statements are ISSUED

Question 28

Deferred compensation arrangement

Answer 28

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

Question 29

Vacation pay and sick pay
Vest and accumulates

Answer 29

Vacation pay accrues if it vests or accumulates
Sick lay accrues only if it vests

Question 30

ARO - asset retirement obligation

Answer 30

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