FAR 22 - Payables and Accrued Liabilities Flashcards Preview

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Flashcards in FAR 22 - Payables and Accrued Liabilities Deck (18):

In its 2005 financial statements, Cris Co. reported an interest expense of $85,000 in its income statement and a cash amount of $68,000 paid for interest in its cash flow statement. There was no prepaid interest or interest capitalization at either the beginning or end of 2005. The accrued interest at December 31, 2004 was $15,000.

What amount should Cris Co. report as accrued interest payable in its December 31, 2005 balance sheet?

An analysis of the accrued interest payable account leads to the correct ending balance:

Beginning balance + Interest expense - Interest payments = Ending balance

$15,000 + $85,000 - $68,000 = $32,000


Hemple Co. maintains escrow accounts for various mortgage companies. Hemple collects the receipts and pays the bills on behalf of the customers. Hemple holds the escrow monies in interest-bearing accounts. They charge a 10% maintenance fee to the customers based on interest earned. Hemple reported the following account data:

Escrow liability beginning of year $ 500,000
Escrow receipts during the year 1,200,000
Real estate taxes paid during the year 1,450,000
Interest earned during the year 40,000

What amount represents the escrow liability balance on Hemple's books?

This question requires you to think about how liabilities are accrued. If Hemple is holding funds for a mortgage company, it is a liability for Hemple. The liability would be increased when escrow monies are deposited and decreased when there is payment made on behalf of customers. The funds are also earning interest and 10% of that interest is charged as a maintenance fee to the customer. A T-Account will help demonstrate this:
Escrow Liability
cr. 500,000 Beginning Balance
dr.Taxes paid from escrow 1,450,000
cr. 1,200,000 Escrow receipts
dr. Maintenance fees 4,000
cr. 40,000 Interest earned
cr. 286,000 Ending Balance


Which of the following is generally associated with payables classified as accounts payable?
Periodic payment of interest
Secured by collateral

Accounts payable is also labeled: accounts payable, trade. The accounts payable account is used only for routine trade payables, typically for purchases of inventory and supplies.

Interest accrued is recorded in accrued interest payable, and secured debt is recorded in other specifically-labeled liability accounts.


Black Corp.'s accounts payable at December 31, 2004, totaled $900,000 before any necessary year-end adjustments relating to the following transactions:

On December 27, 2004, Black wrote and recorded checks to creditors totaling $400,000, causing an overdraft of $100,000 in Black's bank account at December 31, 2004. The checks were mailed out on January 10, 2005.
On December 28, 2004, Black purchased and received goods for $153,061, terms 2/10, n/30. Black records purchases and accounts payable at net amounts. The invoice was recorded and paid on January 3, 2005.
Goods shipped F.O.B. destination on December 20, 2004 from a vendor to Black were received January 2, 2005. The invoice cost was $65,000.

At December 31, 2004, what amount should Black report as total accounts payable?

Preadjusted balance in accounts payable
Plus checks not sent to creditors until Jan. 10 (this amount was debited to accounts payable and must be reversed because the checks have not been sent - accounts payable has not been reduced as of December 31)
Plus goods received Dec. 28, at net: .98($153,061)(the firm records purchases at net of 2% discount)
Equals ending accounts payable


There is no liability at December 31, 2004 for the goods shipped FOB destination because title does not pass until the goods reach the destination, which did not occur until January.
The firm must include the Dec. 28 receipt of goods in accounts payable because the firm has received the goods.


T/F: All liabilities due beyond one year from the balance sheet date must be classified as long-term.

Current liabilities are those due within one year or the operating cycle of the business, whichever is longer.

Portions of LT liabilities are classified as current as a portion may be classified as Current Liab.


T/F: A liability due on demand in the coming year is classified as current even though the creditor is not currently contemplating calling the debt.



T/F: The exact amount payable for a liability must be known before it can be recorded.

Contingent liabilities have some uncertainty at the BS date. It may be accrued and disclosed as a contingency. Ex. lawsuits, warranties and guarantees.


T/F: All liabilities must be the result of a past transaction or event.



T/F: The identity of the payee of a liability must be known before it can be recorded.

Can be accrued before knowing where the payment will go.


T/F: A portion of a serial bond issue that has been outstanding several years is due within 10 months of the balance sheet date. That portion is classified as current.



T/F: A liability due on demand because of a violation by the debtor is classified as long-term.

It would be classified as short term because it has the potential of being called at any point in time.


What amounts are included in the accrual of payroll taxes:
I. FICA for employer
II. FICA for employee
III. Unemployment

I and III. The amount of II, FICA for EE, is not the ER's responsibility and is not part of the liability. These amounts are withheld from the EE pay and submitted at regular intervals.


As of December 15, 2002, Aviator had dividends in arrears of $200,000 on its cumulative preferred stock. Dividends for 2002 of $100,000 have not yet been declared. The Board of Directors plans to declare cash dividends on its preferred and common stock on January 16, 2003. Aviator paid an annual bonus to its CEO based on the company's annual profits. The bonus for 2002 was $50,000, which will be paid on February 10, 2003. What amount should Aviator report as current liabilities on its balance sheet at December 31, 2002?

Only the bonus is a liability of the firm as of 12/31/02. That amount was earned and granted in 2002 and thus is recognized in the 2002 balance sheet because it is not due for payment until 2003. Dividends are not liabilities until declared. There is no unpaid declared dividend at 12/31/02.


After three profitable years, Dodd Co. decided to offer a bonus to its branch manager, Cone, of 25% of income over $100,000 earned by his branch. For the year 2002, income for Cone's branch was $160,000 before income taxes and Cone's bonus. Cone's bonus is computed on income in excess of $100,000 after deducting the bonus, but before deducting taxes. What is Cone's bonus for the year 2002?

The following equation expresses the relationship. Let B = bonus.
B = .25($160,000 - $100,000 - B)
B = .25($60,000 - B)
B = $15,000 - .25B
1.25B = $15,000
B = $15,000/1.25 = $12,000


T/F: The employer records only its share of FICA as a payroll tax expense.

The EE portion is only accrued until remitted.


T/F: State income tax withholding is not an employer payroll tax.



T/F: A bonus that is based on income after tax need not be considered when computing the amount of tax.

Because it's based on income after tax, the bonus amount would be still be taxed separately.


T/F: A bonus is 10% of income before taxes and bonus. Tax is 40%. The income before bonus and tax is $100,000. $36,000 is the amount of tax to be paid.


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