Payables and Accrued Liabilities Flashcards
What are liabilities?
they are probable future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
What are trade accounts payable?
they are amounts owed for goods, raw materials, and supplies that are not evidenced by a promissory note; purchases of goods and services on credit are usually determinable as to amounts due and the due date; cash discounts associated with accounts payable can be anticipated and journalized; the purchase may be recorded gross or net
gross method: records the purchase without regard to the discount; if invoices are paid within the discount period, a purchase discount is credited
net method: records the purchase net of the discount; if payment is made within the discount period, no adjustment is necessary; if payment is made after the discount period, a purchase discount lost account is debited
trade notes payables are formal, written promises to pay on a certain date that arise from the purchase of goods, supplies, or services; they may include a stated interest rate
What is interest payable?
short and long term debt instruments with a stated interest rate whose payment date does not coincide with the fiscal year-end will result in an interest payable balance at year-end; the amount accrued should represent the interest expense incurred that has not been paid in cash as of the balance sheet date
What are current portions of long-term debt?
debt instruments may be set up such that periodic principal payments are made during the life of the borrowing; in this case, the principal due within the next year (or operating cycle) will be classified as a current liability
under U.S. GAAP, a short-term obligation may be excluded from current liabilities and included in non-current debt if the company intends to refinance it on a long-term basis and the intent is supported by the ability to do so as evidenced either by: the actual refinancing prior to the issuance of the financial statements or the existence of a noncancelable financing agreement from a lender having the financial resources to accomplish the refinancing
the amount excluded from current liabilities and a full description of the financing agreement shall be fully disclosed in the financial statements or notes thereto
What are accrued liabilities/expenses?
accrued salaries and wages payable is the unpaid portion of salaries and wages as of the balance sheet date; unpaid salaries and wages generally result from pay periods that overlap the balance sheet date; accruals are calculated as the ratio of days occurring prior to the balance sheet date divided by the total days in the pay period times the amount of the affected payroll
other accrued liabilities relate to expenses incurred that have not been paid in cash t the financial statement date (such as utilities, rent, etc.)
What are taxes payable?
different types of taxes payable may exist on an entity’s balance sheet
property taxes are often invoiced in arrears; there are two methods of accrual and either method is acceptable, provided the method used is consistently applied
property taxes payable may be accrued prior to the receipt of the tax invoice and matched in the year for which the invoice pertains
property taxes may also be recorded as a payable upon the receipt of the tax invoice and expensed in the year of receipt (which is often different from the year to which the invoice pertains)
sales taxes payable are sales taxes collected from customers on behalf of the taxing authority and held in trust until remission to the taxing authority; they should be credited to a payable account after collection and until remitted; sales taxes are not an expense of the company collecting the sales taxes from customers
What are employee-related liabilities?
unemployment taxes and the employer’s share of payroll taxes (Social Security and Medicare) should be accrued by the employer as an expense; the liability will not be liquidated until the amounts are remitted to the appropriate taxing authority
payroll deductions for Social Security, Medicare, and income taxes are withheld from employees out of the gross pay of their paychecks; these deductions are the responsibility of the employee and are therefore not recorded as an expense but are credited to a payable account until remitted
companies may pay employees bonuses in addition to their regular salaries or wages; these amounts should be recorded to salaries and wages expense; the amount of the bonus is normally based on company profits; computation problems result because although the bonuses are based on net income, they are a business expense that also reduces net income
What is accrued vacation?
vacation accruals are recorded in the year earned if ALL of the following conditions are met:
the employer’s obligation to compensate employees for accrued vacations is attributable to services already rendered by employees
the obligation relates to rights that vest (are not contingent on an employee’s future service) or accumulate (may be carried forward to one or more accounting periods subsequent to that in which earned)
payment of the compensation is probable
the amount can be reasonably estimated
if only the first three conditions are met, disclosure in a note to the financial statements is adequate
What is self-insurance liabilities?
it occurs when an entity is liable for risk they choose to bear themselves rather than obtaining third-party insurance; by saving the costs of premiums, the entity can set aside savings to cover future claims
the entity should accrue estimated losses for unpaid claims that have already been filed and for those which may occur in the future; discounting the liability is possible when future payments can be reasonably estimated, and liabilities may be both current and non-current depending on expected timing
What are exit/disposal costs?
they are costs associated with exit and disposal activities and include: involuntary employee termination benefits, costs to terminate a contract that is not a lease, and other costs associated with exit or disposal activity including costs to consolidate facilities or relocate employees; a liability must be recognized for the costs associated with an exit/disposal activity
an entity’s commitment to an exit or disposal plan, by itself, is not enough to result in liability recognition; a liability associated with an exit or disposal activity should be recognized only when all of the following criteria are met: an obligating event has occurred, the event results in a present obligation to transfer assets or to provide services in the future, and the entity has little or no discretion to avoid the future transfer of assets or providing of services
future operating losses expected to be incurred as part of an exit or disposal activity are recognized in the period(s) incurred
the liability should be measured at fair value; the liability may be adjusted in future periods as a result of revisions to the timing of, or estimated cash flows from, the exit or disposal activity; revisions are accounted for prospectively (change in estimate)
costs associated with an exit or disposal activity related to a discontinued operation will be reported in discontinued operations; costs associated with an exit or disposal activity not related to a discontinued operation will be reported in income from continuing operations
What are asset retirement obligations (AROs)?
it is a legal obligation associated with the retirement of a tangible long-lived asset that results from the acquisition, construction or development, and/or normal operation of a long-lived asset, except for certain lease obligations (minimum lease payment and contingent rentals); a balance sheet approach is required to recognize AROs
an ARO qualifies for recognition when it meets the definition of a liability: duty or responsibility, little or no discretion to avoid, and obligating event
uncertainty about whether performance will be required does not defer the recognition of a retirement obligation; rather, that uncertainty is factored into the measurement of the fair value of the liability through assignment of probabilities to cash flows
when an asset retirement obligation exists and qualifies for recognition, an entity records an asset and a liability on the balance sheet equal to the fair value of the asset retirement obligation, if a reasonable estimate of fair value can be made; fair value is generally equal to the present value of the future obligation; if a reasonable estimate of fair value cannot be made, the liability and related asset are recognized when a reasonable estimate of fair value can be made
What is the difference between an asset retirement obligation (ARO) and an asset retirement cost (ARC)?
ARO - the obligation/liability associated with the retirement of a tangible long-lived asset
ARC - the amount capitalized (asset) that increases the carrying amount of the long-lived asset when a liability for an ARO is recognized
What is the difference between accretion and depreciation?
in periods after the initial measurement, the ARO liability is adjusted for accretion expense due to the passage of time, and the ARC asset is depreciated
accretion - the increase in the ARO liability due to the passage of time calculated using the appropriate accretion rate; the accretion expense is added to the ARO liability each period; at the end of the accretion period, the ARO liability reported on the balance sheet should be (approximately) equal to the asset retirement obligation to be paid
depreciation - it decreases the ARC asset reported on the balance sheet; at the end of the accretion period, the asset retirement cost (asset) should be fully depreciated
