Ch 13

Question 0

3 essential characteristics of a liability

Answer 0

1 present obligation that entails settlement by probable
Future transfer, or use of cash, goods or services

2 unavoidable obligation

3 transaction or event creating obligation has already occurred

Question 1

Liabilities

Answer 1

Probable future sacrifices of economic benefits arising
From present obligations of particular entity

To transfer assets or services to other entities in future
As a result of past transactions

Question 2

Current liabilities

Answer 2

Obligations whose liquidation is reasonably expected to
Require use of current assets or the creation of other
Current liabilities

Question 3

Operating cycle is the period of time elapsing…

Answer 3

btw acquisitions of goods and services involved in

manufacturing and final cash realization from sale

Question 4

5 Typical current liabilities that don’t end in payable?

Answer 4

1 current maturities on Longterm debt
2 short term obligations expected to be refinanced
3 customer advances and deposits
4 unearned revenues
5 employee related liabilities

Question 5

Accounts payable AKA Trade accounts payable

Answer 5

Balances owed to others for goods, services or supplies
Purchased on open account

Arise b/c time lag between receipt of product or service
And transfer of payment

Question 6

Notes Payable AKA Trade notes payable

Answer 6

Written promises to pay certain sum of money on specified
Future date

May arise from purchases, financing or other transactions

Question 7

Zero interest bearing note 4 things (note 3 and 4 are same thing)

Answer 7

1 Does not state an interest rate on face of note
2 interest is still charged
3 at maturity, borrower must pay back amount greater
Than received on issuance day
4 borrower receives in cash present value of note

Question 8

Discount on notes payable

Answer 8

Contra account to notes payable

Subtracted from notes payable on balance sheet

Represents interest expense charged in future periods

Question 9

Current maturities on long term debt

Answer 9

Current liabilities on portion of bonds, mortgage notes,

Other Longterm indebtedness that matures within year

Question 10

Companies exclude Longterm debts maturing currently

As current liabilities if… 3 things

Answer 10

1 retired by assets accumulated for this purpose that
Properly haven’t been shown as current assets

2 refinanced, or retired from proceeds of new debt issue

3 converted into capital stock

Question 11

When only a part of Longterm debt is to be paid within the next 12 months the company reports…

Answer 11

The maturing portion of Longterm debt as current liability

Question 12

Due on demand, callable

Answer 12

Any liability should be classified as current if callable by
Creditor or due on demand in operating cycle

Callable Brought on by violation of agreement

Question 13

Short term obligations that are expected to be refinanced on long term basis

Answer 13

Will not require use of working capital over next year

Question 14

2 refinancing criteria for exclusion of short term obligation from current liabilities

Answer 14

1 intend to refinance obligation on long term basis

2 demonstrate ability to consummate refinancing

Question 15

Intention to refinance on Longterm basis means?

Answer 15

Company intends to refinance short term obligations

So it won’t require use of working capital in fiscal year

Question 16

2 ways company demonstrates ability to consummate refinancing?

Answer 16

1 actual refinancing

2 entering financing agreement

Question 17

Ability to consummate the refinancing: Actual refinancing

Answer 17

by issuing long term obligation or Equity securities after date
of balance sheet but before It is issued

Question 18

Ability to consummate the refinancing: Entering a financing agreement

Answer 18

That clearly permits company to refinance debt on long term

Basis on terms readily determinable

Question 19

IFRS requires that the current portion of long term debt be classified as…

Answer 19

Current unless agreement to refinance on Longterm basis

Is completed before date of financial statements

Question 20

Cash dividends payable

Answer 20

Amount owed by corporation to stockholders as result

Of board of directors’ authorization

Question 21

Preferred dividends in arears

Answer 21

Companies don’t recognize accumulated but undeclared
Dividends on cumulative preferred stock as liability

B/c not obligation til board of directors authorizes payment

Question 22

Stock dividends

Answer 22

Dividends payable in form of additional shares of stock

Not recognized as liability

Question 23

Returnable cash deposits

Answer 23

Received from customers and employees

Guarantees performance of contract or service
Or guarantees to cover payment of expected future obligations

Question 24

Unearned revenues, how are they accounted for (2 steps)

Answer 24

1 when company receives advanced payment, it debits cash Credits unearned revenues 2 when company recognizes revenue it debits unearned revenue and credits revenue account

Question 25

3 types of employee related liabilities

Answer 25

1 payroll deductions 2 compensated absences 3 bonuses

Question 26

Payroll deductions, 4 most common types?

Answer 26

Taxes, insurance premiums, employee savings, union dues

Question 27

To the extent that a company has not remitted the amounts deducted to the proper authority at the end of the accounting period...

Answer 27

It should be recognized as a current liability

Question 28

``` Old age, Survivor, and Disability Insurance (OASDI) tax AKA FICA (federal insurance contribution act) ```

Answer 28

Social security taxes levied from employees and employers gross pay Benefits for certain individuals and their families 6.2% tax

Question 29

Medicare AKA federal hospital insurance tax

Answer 29

2 part program alleviates high cost of medical care For those over 65 1.45% tax

Question 30

Social security tax

Answer 30

Combination of FICA and federal hospital insurance tax

Question 31

Companies should report the amount of unremitted employee and employer Social security tax on...

Answer 31

Gross wages paid as current liability

Question 32

All employers who meet the 2 criteria are subject to the Federal Unemployment Tax Act (FUTA)

Answer 32

1 those who paid wages of over $1500 during calendar Quarter in year of proceeding year 2 those who employed 1 individual on at least 1 day in each 20 weeks during current or preceding calendar year

Question 33

Merit rating

Answer 33

Reduces state contribution rate for unemployment tax | Paid by employers

Question 34

Companies should record the amount of accrued but unpaid employer contributions as...

Answer 34

Operating expenses and current liabilities when preparing | Financial statements at year end

Question 35

3 Examples of employee payroll deductions

Answer 35

1 withholding taxes payable 2 FICA Taxes Payable 3 Union dues payable

Question 36

3 examples of employer payroll taxes

Answer 36

1 FICA Taxes Payable 2 FUTA Taxes Payable 3 SUTA Taxes Payable

Question 37

Compensated absences, examples

Answer 37

Paid absences from employment Ex: vacations, illness, holidays

Question 38

Companies should accrue liability for the cost of compensation for future absences if all 4 of the following conditions exist

Answer 38

1 employers obligation to pay employee for future absences Is attributable to employees' rights to receive compensation services already rendered 2 obligation relates to rights that vest or accumulate 3 payment of compensation is probable 4 amount can be reasonable estimated

Question 39

Vested rights

Answer 39

Exist when employer has obligation to make payment To an employee even after terminating his employment Not contingent on employees' future service

Question 40

Accumulated rights

Answer 40

Those that employees can carry forward to future periods | If not used in period in which earned

Question 41

Sick pay benefits vest or not

Answer 41

If sick pay benefits vest, company must accrue them If sick pay benefits accumulate but do not vest, company May choose whether to accrue them

Question 42

Bonus

Answer 42

Paid to employees depends on company's profit

Question 43

Examples of contractual agreements for conditional expenses

Answer 43

Agreements covering rents or royalty payments conditional On amount of revenues recognized or quantity of product produced/extracted

Question 44

Contingency, examples

Answer 44

Existing condition, situation or set of circumstances Of possible gain or loss Ex. Lawsuits, warranties, default of a loan

Question 45

Gain contingencies, define, 4 examples

Answer 45

Claims or rights to receive assets who's existence is uncertain but may eventually become valid 1 possible receipt of monies from gifts, donations, asset sales 2 possible refunds from govt tax disputes 3 pending court cases with favorable outcome 4 tax loss carryovers

Question 46

Loss contingencies: contingent liabilities

Answer 46

Depend on occurrence of 1 or more future events to Confirm either amt payable, the payee, the date payable, It existence

Question 47

Provisions

Answer 47

IFRS term for estimated liabilities

Question 48

FASB'S term: probable

Answer 48

Future event is likely to occur

Question 49

FASB'S term: reasonably possible

Answer 49

Chance of future event is more than remote but less likely

Question 50

FASB'S term: remote

Answer 50

Chance of future events occurring is slight

Question 51

Companies should accrue an estimated loss from a loss contingency by charge to expense liability if both of the following 2 conditions are met...

Answer 51

1 info available prior to issuance of financial statements Indicates that it is probable that liability has been incurred At date of financial statements 2 amount of loss can be reasonably estimated

Question 52

3 loss contingencies that are usually accrued?

Answer 52

1 collectibility of receivables 2 obligations related to product warranties and product defects 3 premiums offered to customers

Question 53

3 Loss contingencies not accrued

Answer 53

1 risk or loss or damage of enterprise property to fire, Explosion or other hazards 2 general or unspecified business risks 3 risk of loss from catastrophes assumed by property And casualty insurance companies including reinsurance Companies

Question 54

6 loss contingencies that may be accrued

Answer 54

1 threat of expropriation of assets 2 pending litigation 3 actual claims and assessments 4 guarantees of indebtedness of others 5 obligations of commercial banks under standby letters of Credit 6 agreements to repurchase receivables that have been sold

Question 55

4 of the most common loss contingencies

Answer 55

1 litigation, claims and assessments 2 guarantee and warranty costs 3 premiums and coupons 4 environmental liabilities

Question 56

Companies must consider the following 3 factors in determining whether to record a liability with respect to pending or threatened litigation and actual or possible claims and assessments?

Answer 56

1 time period where cause of action occurred 2 probability of unfavorable outcome 3 ability to make estimate of amount of loss

Question 57

Warranty AKA Product Guarantee

Answer 57

Promise made by seller to buyer to make good on | Deficiency of quantity, quality or performance of product

Question 58

Warranties: cash basis method

Answer 58

Seller or manufacturer charges warranty costs to period | In which it complies with warranty

Question 59

Warranty costs: accrual method AKA Expense warranty approach

Answer 59

Companies charge warranty costs to operating expense | In year of sale

Question 60

Sales warranty approach

Answer 60

Companies defer revenue on the sale of the extended warranty

Question 61

Printed coupons

Answer 61

Can be redeemed for cash discount on items purchased

Question 62

cash rebate

Answer 62

Buyer can obtain cash by returning the store receipt, rebate | Coupon and universal product code (bar code) to manufacturer

Question 63

Premiums

Answer 63

Additional bonus product when buying another product

Question 64

Accounting treatment of premiums and coupons?

Answer 64

Companies should charge costs of premiums and coupons | To expense in period of sale

Question 65

What do warranties and coupons what are they? What do they satisfy the condition for?

Answer 65

Warranties and coupons are loss contingencies that satisfy | Conditions necessary for a liability

Question 66

A company must recognize an Asset Retirement Obligation (ARO) when it has an... 2) Companies should record ARO at...

Answer 66

Existing legal obligation associated with retirement of a Long lived asset And when it can easily estimate the amount of liability 2) at fair value

Question 67

Examples of ARO's

Answer 67

Decommissioning nuclear facilities Dismantling, restoring, reclamation of oil and gas properties Closure of mining, landfills

Question 68

Self-insurance

Answer 68

Not insurance but considered risk assumption Company that assumes its own risks puts itself in position Of incurring expense and losses if they happen

Question 69

Presentation of current liabilities

Answer 69

Recorded and Reported in financial statements at their full maturity value

Question 70

If a company excludes short term obligation from current liabilities because of refinancing it should include the following note with 3 things in financial statements

Answer 70

1 general description of financing agreement 2 terms of any new obligation incurred or to be incurred 3 terms of any equity security issued or to be issued

Question 71

If a company has a loss contingency that is either probable or estimable but not both it must disclose the following 2 info items in the notes

Answer 71

1 the nature of the contingency 2 an estimate of possible loss or range of loss or statement that estimate can't be made

Question 72

GAAP VS IFRS: contingencies

Answer 72

GAAP provides more guidance on content of disclosures | About contingencies than does IFRS

Question 73

Companies should disclose 3 other contingent liabilities, even though the possibility of loss may be remote as follows...

Answer 73

1 guarantees indebtedness of others 2 obligations of commercial banks under "standby letters Of credit" 3 guarantees to repurchase receivables that have been sold Or assigned

Question 74

Current ratio AKA Working capital ratio

Answer 74

Current assets/current liabilities

Question 75

Acid test ratio AKA Quick ratio

Answer 75

Acid test ratio = | (cash + short term investments + net receivables)/current liabilities