Payables And Accrued Liabilities Flashcards
Liabilities
Classified as either current or non-current. Current liabilities are expected to be paid within one year or one operating cycle. Current liabilities are primarily accounts payable and accrued liabilities/expenses. Current liabilities are not interest bearing.
Accounts Payable
Short-term liabilities due to purchasing goods or services on credit.
Office supplies
Inventory
Accounts Payable
Accrued Expenses
Expenses that are recognized in the books before they are paid for, with the main example being payroll, interest, and taxes.
Payroll liabilities
Wages that are accrued as employee’s work and then are paid out as wage or salary expenses on payday. Also include the employee portion of taxes and fringe benefits such as FICA and Medicare.
Wage Expense
Wages Payable
Wages Payable
Cash
Exit or Disposal Activities
Usually refers to a situation when a company is going to lay off employees and determining the liabilities for termination benefits. The liability is recognized on the communication date, which means the liability meets the requirements to be recognized and the termination has been communicated to employees. The liability is recognized at fair value, and if it’s in the distant future then it would be discounted to present value
Asset Retirement Obligations
With certain assets that have environmental impact or are affected by other regulations, there will be significant costs to dispose of the asset. These future costs need to be accounted for as an asset retirement obligation (ARO).
Closing a mine, decommissioning nuclear processes, or site reclamation. The future asset retirement costs are capitalized as an asset, and as a liability. The amount capitalized is the weighted present value of the future costs to retire the asset. The asset’s base is depreciated over its useful life.
Accretion Expense
The ARO is increased each year as time goes on, this is accretion expense, which is increasing the present value of the ARO up to its full amount the closer it gets to being retired. The accretion expense is the ARO balance x the discount rate at initial measurement. Annual accretion expense is an operating expense and is NOT considered interest expense
ABC purchases mine for $100,000 and is required by the government to seal the mine at the end of the 5 year operation. These estimated costs to seal the mine will be $10,000
Journal Entries:
Initial entry
Mine 107,500
Cash 100,000
Liability for ARO 7,500
Entry to recognize accretion expense each year
Accretion expense $500
Liability for ARO $500
Final entry
Asset retirement obligation $10,000
Cash $10,000
Modification of terms vs Extinguishment of Debt
Extinguishment needs to be a 10% or greater difference in the present value of the new loan’s cash flows and the present value of the old loan’s remaining cash flows. Also if any embedded conversion options were changed, it would be considered “substantially different” and would be considered an extinguishment.
If neither of these apply, then the new loan is not substantially different, and it would just be considered modification.
Troubled debt restructuring
When the creditor grants the debtor a concession that they wouldn’t normally consider. This is based on two conditions: the debtor must be experiencing financial difficulties, the creditor must grant a concession as a result of the debtor’s financial difficulties. Another way to look at it is if the creditor modifies the dent in a way that results in less overall money being paid back then before the restructure, indicating the creditor has made a concession. Would rather get paid back a portion of what is owed of what is owed then nothing if the debtor is forced to default. When this happens, the creditor will record a loss (they essentially have a note receivable that just went down in value), and the debtor records a gain, because they were released from a portion of debt they otherwise would have paid back
Convertible debt
Debt that can at a later date be exchanged for common stock will be classified as debt until the conversion takes place. If the conversion can be settled with cash, then it remains classified as debt.
Bonds with detachable warrants
The proceeds from the issuance are allocated to 1) the fair value of the warrants without the debt (paid in capital account-equity) and 2) the fair value of the debt instrument (classify as debt)
Issuing shares worth a fixed dollar amount
If a firm agrees to a transaction where they will issue shares worth a fixed dollar amount in the future, this would be considered debt. They are essentially just agreeing to pay a certain price in the future for the transaction, which fits the description of debt.
Issuing a fixed number of shares
If a firm agrees to a transaction where they will issue a certain number of shares, but not at a fixed price, this would be classified as equity.
