Liabilities

Question 1

for warranty expense how do you account for it?

Answer 1

the warranty cost % multiplied by the amount of sales.

Question 2

what is the J/E for recording warranty expense?

Answer 2

debit-warranty expense
credit-estimated warranty liability

for the amount spent on actual repairs

debit-estimated warranty liability
credit-cash

Question 3

what is the journal entry for service contracts (service contracts are like extended protection when you buy a computer)

Answer 3

debit-cash
credit-deferred service revenue

when revenue is actually earned

debit-deferred service revenue
credit-service revenue.

Question 4

what are the steps to determine the estimated liability for un-redeemed coupons @ the B/S date?

Answer 4

• determine the total face value of the coupons issued
• add the handling fee % promised to merchants
• multiply the % of coupons expected to be redeemed
• subtract payments already made to merchants for redeemed coupons.

Question 5

what two accounting issues are associated with compensated absences?

Answer 5

matching-cost s/b recognized @ the time employees render the services that entitle them to compensated absences.

faithful representation (neutrality)-costs should only be recognized if they have been paid or are likely to be paid in the future.

Question 6

when will a company report a liability for compensated absences?

Answer 6

• the obligation for compensation for future absences results from services already provided by the employees
• the right to compensation for future absences either vests or accumulates
• payment is probable
• the amount of the payment can be reasonably estimated.

Question 7

What is the algebraic equation for calculating the bonus if the % is based on what income will be after the bonus is paid rather than before?

Answer 7

B=bonus
I= Income
% (ex. 10%of income)
B=%(I-B-amount in excess after the bonus is deducted)

Question 8

what are dividends payable?

Answer 8

considered a current liability when they are declared whether related to common stock or preferred stock.

Question 9

what are the rules for loss contingencies?

Answer 9

remote-slight chance of occuring
***dont disclose & don’t accrue

reasonably possible-more than remote, less than probable

• **do disclose the nature and range of loss
• **don’t accrue (fair presentation)

probable-“likely” to occur

• **is estimable - do disclose and accrue the most conservative amount
• **is not estimable - do disclose the nature and range of loss but don’t accrue.

Question 10

what are the criteria for gain contingencies?

Answer 10

• disclose if reasonably possible or probable, the nature and amount
• never accrue until realized
• ***conservatism

Question 11

what does it mean to impute an interest rate?

Answer 11

use a reasonable rate for a note of this type.

Question 12

when is a short term debt reclassified to a long term debt

Answer 12

when the company INTENDS to refinance the obligation on a L/T basis, it is classified as L/T.

Question 13

What are the criteria for Intent & ability

Answer 13

• actually issuing L/T debt or Equity securities after the balance sheet date, but prior to the issuance of the financial statements
• signing a firm agreement to refinance the obligation w/a lender or investor that has the financial ability to provide the financing.

Question 14

what is an unconditional purchase obligation (purchase commitments)

Answer 14

-if obligated to purchase goods for a period of time at a fixed price, the liability is disclosed for each of the 5 years following the B/S date.

**accrue loss if the market value of the item falls below the purchase price. the loss will be for the minimum quantity required to be purchased.

Question 15

what are the 3 trouble debt restructuring types?

Answer 15

• transfer of property
• ***Debtor its either an extra-ordinary if both infrequent & unusual or an ordinary if it does not fall in those categories. it is the diff btwn the Carrying Value & FMV of the asset given up
• ***Creditor-records new asset at FMV & recognizes an ordinary loss
• equity interest in the debtor is issued.
• ***equity is recorded as if issued for FMV; gain for difference btwn the CV of the debt and the FMV of the equity (extraordinary if unusual and infrequent)
• modification of terms; reduction of the interest rate, extension of the maturity date, reduction of the face amount of the debt and accrued interest.

if future payments are greater than the obligation no gain or loss & it is considered an adjustment to the interest rate.

Question 16

in bankruptcy what is stop it drunk driver???

Answer 16

the order of how assets are distributed:

• Secured Creditors
  
  • **fully secured (the value of the collateral covers the debt owed
  • **partially secured (the value of the collateral is less than the debt owed; the remaining balance becomes an unsecured claim.
• Priority Claims STOP-IT Drunk Driver (paid 1 level @ a time)
• ***Support & Alimony payments
• **Trustee, Attorney & accountant fees
• **Owed to involuntary gap creditors
• **Payroll w/in 180 days up to $12,475.00
• **Individual consumer deposits up to $2,775
• **Tax claims w/in 3 years of the filing
• **Drunk Driver injury claims
• **general (unsecured) creditors.

Question 17

under IFRS when can a current liability be reclassified to a noncurrent liability?

Answer 17

only if the entity expects and has the discretion to finance or roll over the obligation for at least 12 months after the reporting period under a loan facility that is in place as of the balance sheet date.

Question 18

under IFRS what is a provision

Answer 18

provisions are considered liabilities that are uncertain in timing or amount & they are reported separately & are recognized as a liability when three conditions are met

1) the entity has a present obligation as a result of a past event
2) it is probable that an outflow of resources will be required
3) the amount of the obligation can be reliably estimated

Question 19

under IFRS what are contingent liabilities

Answer 19

a possible obligation arising from past events that will be confirmed only upon the occurrence or nonoccurrence of some future event that is not only entirely w/in the control of the entity or a present obligation arising from past event that is not recognized because either: it is not probable that a future outflow of resources will be required or the amount of the outflow cannot be reliably estimated.

They are not recognized on the balance sheet however, contingent gains are required to be disclosed if probable.

Question 20

under IFRS when does an entity required to disclose and then recognize income?

Answer 20

disclosed when an inflow of economic benefits is probable and realization of income is virtually certain, the inflow is not considered a contingency and is recognized.

Question 21

how are contingent liabilities that are both probable and estimable accounted for?

Answer 21

accrued and disclosed in the notes

Question 22

how are contingent liabilities that are reasonably possible accounted for?

Answer 22

disclosed only and NOT accrued

Question 23

how is a deferred tax liability arising from depreciation expense accounted for

Answer 23

it is classified as a noncurrent liability b/c it relates to a long-term asset.

Question 24

how are vested compensated absences accounted for?

Answer 24

accrued at the next years rate for instance if the employees will get a raise in the next year your accrued liability should be at the rate of the raise.

Question 25

when are dividends and dividends in arrears accrued?

Answer 25

ONLY when they have been declared as of the balance sheet date. If they are not declared as of the balance sheet date then you cannot accrue them.

Question 26

how is interest expense on self constructed long term assets accounted for?

Answer 26

They MAYBE capitalized to the extent that interest is actually paid subject to certain rules.