Chapter 1 Flashcards
(23 cards)
These are present obligations of an entity to transfer an economic resource as a result of past events.
Liabilities
What are the 3 essential characteristics of an accounting liability?
- The entity has present obligation.
- The obligation is to transfer an economic resource.
- The liability arises from a past event.
This is a duty or responsibility that an entity has no practical ability to avoid.
Obligation
This is the asset that represents a right with a potential to produce economic benefit.
Economic resource
True or false: A liability is not recognized until it is incurred.
True
How can an obligation be legally enforceable?
It is legally enforceable as a consequence of a binding contract or a statutory requirement.
True or False: Accounts payable for goods and services received are not legally enforceable.
False. These kinds of liabilities are normally legally enforceable.
True or false: Without payment of money, without transfer of non cash asset, without performance of service, there is no accounting liability.
True
Is the declaration of cash dividends an accounting liability? Why?
Yes, because an obligation to pay cash would arise, hence, it is an accounting liability.
Is the declaration of share dividends (share dividend payable) an accounting liability?
No, because the obligation is to issue the entity’s own shares. The issuance of the entity’s own shares is not a transfer of non cash asset because the share capital is an equity item. Thus, share dividend payable is part of equity rather than an accounting liability.
This is the past event that leads to a legal or constructive obligation.
Obligating event
Conceptually, how are liabilities initially measured?
At present value
In practice, how are current liabilities or short-term obligations measured?
At face amount
How are non current liabilities measured?
At present value
If the non current liability is an interest-bearing note payable, it is initially measured at?
At face amount
Trade payables and accruals for employees settled for more than twelve months are current or non current liabilities?
Current. They are used in the entity’s normal operating cycle.
These are often attached to borrowing agreements which represent undertakings by the borrower. These are actually restrictions on the borrower.
Covenants
A breach of covenant is classified as what kind of liability?
Current
If in the breach of covenant, the lender provides a grace period on or before the reporting period, is the liability still current?
No. It becomes non current.
This is a period within which the entity can rectify the breach of a covenant.
Grace period
These are obligations which exist at the end of reporting period although their amount is not definite. Are these valid?
Estimated liabilities. Yes, they are valid.
This is income already received but not yet earned.
Deferred or unearned revenue
