Chapter 13: Current Liabilities and Contingencies Flashcards Preview

ACG 5806 > Chapter 13: Current Liabilities and Contingencies > Flashcards

Flashcards in Chapter 13: Current Liabilities and Contingencies Deck (21):

What is a liability?

Probable future sacrifices of economic benefits arising from present obligations to transfer assets or provide services in the future as a result of past events.


What is a current liability?

Obligations whose liquidation is reasonably expected to require use of current assets, or the creation of other current liabilities.


What conditions must exist to accrue a liability for compensated absences?

(When do you have a liability?)


  1. Employees' services already rendered
  2. Right is vested or accumulated
  3. Compensation is probable
  4. Amount reasonably estimated


What are vested rights?

Employer is obligated to pay an employee even after termination.


What are accumulated rights?

Rights (obligations) employees can carry forward to future periods if not used in the period earned.


What does to be refinanced mean?

Retiring a debt by:

  1. Retired by non-current assets
  2. Retired from the proceeds of new debt
  3. Converted into capital stock


What conditions must be met to exclude a short-term obligation from current liabilities?


  1. Intend to refinance on a long-term basis
  2. Demonstrate an ability to refinance prior to issuance of financial statements
    • Actual refinancing - issuing long-term obligation or equity securities after the date of the balance sheet but before issuance
    • Entering into a financing agreement


What does intention mean in regard to refinancing?

Company intends to refinance so it will not require the use of working capital.


What is a contingency?

Uncertainty about possible gain or loss that will be resolved when one or more events occur or fail to occur.


What are gain contingencies?

How are they recorded (if any)?

Uncertainty about claims to receive assets (or reduce liabilities).

Do not record.

Discloses if high probabilty exists of realizing.


What are loss contingencies?

Possible losses as a result of one or more future events that occur or fail to occur.


What is a contingent liability?

Liabilities that depend on the occurence of one or more future events to confirm:

  • amount payable
  • payee
  • date payable
  • existence


What are the terms the FASB uses to identify likelihood of loss?

What is the accounting treatment for each?


  • Probable - likely to occur
  • Reasonably possible - more than remote but less than likely to occur
  • Remote - occurance slight

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What conditions need to be met to accrue an estimated loss from a loss contingency?

How is it recorded?


  1. Information available prior to the issuance of financials indicates it is probable that a liability has been incurred at the date of the financials.
  2. Amount of loss can be reasonably estimated

Debit expense and credit liability.


What factors must a company consider when determining whether to record a liability for pending, threatening, or actual litigaiton, claims, and assessments?


  1. Time period cause of action occurred
  2. Probability of unfavorable outcome
  3. Ability to reasonably estimate amount of loss


What must be determined before recording a liability for unfiled suits and unasserted claims and assessments?


  1. Probability suit will be filed or claim or assessment declared
  2. Probability of unfavorable outcome


What is a warranty (product guarantee)?

Promise made by seller to buyer to make good on a deficiency of quantity, quality, or performance in a product.


What is an assurance-type warranty?

What is the accounting treatment?

Guarantee product meets agreed-upon specifications in the contract at the time the product is sold.

  • Expense in period goods sold
  • Record warranty liability


What is an service-type warranty?

What is the accounting treatment?

Guarantee that provides additional service beyond the assurance-type warranty.

  • Record as separate performance obligation
  • Record Unearned Warranty Revenue
  • Recognize revenue on a straight-line basis over the period the warranty is in effect


What is the accounting treatment for premiums and coupons?


  • Expense costs in the period of the sale
  • Estimate the number of outstanding offers that will be redeemed
  • Estimate cost of the offer
  • Debit Premium expense, credit Premium Liability


What is an asset retirement obligation (ARO)?

What is the accounting treatment?

An existing legal obligation associated with retirement of a long-lived asset and the amount of the liability can be reasonably estimated.

Recored at fair value.

Debit an asset, credit ARO.

Depreciate asset over the life of the asset.

Amortize the cost of the ARO to increase to maturity value.