Contingencies &. Long term debt Flashcards
The Contingent liability for a discounted note receivable
= maturity value.
Should be disclosed
Note endorsed with recourse
Means the endorser is liable if the maker of the note does not pay
Accrual of estimates for contingent liabilities
Contingent liabilities are recorded when they are probable and estimable. Although GAAP requires accrual of the best estimate, in the event that only a range of liabilities is known, the minimum amount of the range is recorded.
Premium offers estimated
Total number of coupons issued
X estimated redemption rate
= total estimated coupon redemptions
All premiums will not be redeemed in the same period. Therefore the number of outstanding premium offers must be estimated accurately to reflect the current liability at the end of each period. Cost is charged to sales in the period that benefited from the premium offer.
Deferred revenues (contracts)
When service contracts are sold, the entire proceeds are reported as deferred revenue. Revenue is recognized, and deferral reduced as the service performed.
Loss is remote
Remote = slight chance of occurring.
No disclose.
However, “guarantee-type” remote loss contingencies should be disclosed.
Loss is reasonably possible
Reasonably possible = more than remote but less than likely.
Disclosed in notes only. Not accrued as a livability.
Loss is probably and can be reasonably estimated
Probable = likely to occur
Should be disclosed and accrued as a liability.
Best estimate of loss is accrued- if there is a range, take smaller amount
Gain contingencies
Not reported as revenue until recognized. Disclosure only
Trade notes and accounts receivable with customary trade terms not exceeding one year
May be recorded at face value.
It exceeds year -
Face amount of note x interest rate = annual interest x term = interest +principal = amount due at maturity x present value factor = present value of note
Yield (market interest rate)
Coupon / price
No coupon if non interest bearing note
“Paid back in full”
No principal payments until maturity.
Interest payments recorded separately
Present value of $1
The amount that must be invested now at a specific interest rate so that a dollar can be paid or received in the future
Futures value of $1
(Compound interest). the amount that would accumulate at a future point in time if $1 were invested now.
interest factor causes the future value of a dollar to be greater than one dollar
Present value of an ordinary annuity
The current worth of a series of identical periodic payments to be made in the future
