Flashcards in Liabilities Deck (56):
What are financial liabilities?
Contracts that impose on the entity an obligation to either:
1) Deliver cash or another financial instrument to another entity -OR-
2) Exchange other financial instruments on potentially unfavorable terms with the other entity
What is a current liability?
A liability expected to be settled within one year (12 months) or the operating cycle, whichever is longer
What value are current liabilities carried at?
Net realizable value (NRV)
Differentiate between the gross method and the net method for purchase discounts.
The gross method records a discount that reduces COGS, while the net method “nets” the discount against the Purchase Expense. If the discount period has subsequently passed, additional COGS will be recognized for the gross method, while additional Interest Expense will be recognized for the net method.
With regard to FOB shipping point, when is a payable recognized?
When goods are transferred into the hands of the common carrier (same as when seller recognizes the sale)
With regard to FOB destination, when is a payable recognized?
When goods are ultimately received into the hands of the purchaser (same as when seller recognizes the sale)
Differentiate between accrued liabilities and accrued expenses.
Trick question! They are one in the same, just different ways of saying the same thing: an expense that has been incurred, but yet to be paid (current liability)
What is deferred revenue?
Same thing as Unearned Revenue (current liability). Cash has been received from the customer, but the earnings process is incomplete (undelivered, unfulfilled).
What are warranties? How are they classified?
Promises of repairs or replacement for a limited time period accompanying the sale of a product. They are classified as a current liability and are recorded at the time the product is sold.
How are warranties recognized?
Dr. Warranty expense
Cr. Estimated warranty liability
How are a product's associated expected warranty expenses over multiple years treated? Are they recorded in each of those years?
No, this is bad matching (and not GAAP)! If 1% likelihood in the first year and 3% in the second year, then combine them to arrive at the appropriate warranty expense at the time of sale (4%).
How are warranty repairs recognized?
Dr. Estimated warranty liability
Cr. Cash spent on warranty repair/replacement
How are service contracts classified and recognized?
Service contracts are a form of deferred (unearned) revenue:
Cr. Deferred service revenue
With regard to compensated absences (vacation/sick), what does accumulation refer to?
Days not taken in the current period may be used in a future period.
With regard to compensated absences (vacation/sick), what does vesting refer to?
Days not used will be paid in cash at the time of the employee's termination of service with the company.
With regard to compensated absences, are the costs associated with sick days recognized?
Only if the sick pay amount VESTS. It is also PERMITTED if the pay only accumulates, but doesn't vest.
With regard to compensated absences (vacation/sick), how are they recognized?
Dr. Vacation/Sick pay expense
Cr. Liability for unused vacation/sick days
How are refundable deposits recognized?
Cr. Refundable deposit liability
Can revenue from refundable deposits be recognized?
Yes. Usually is recognized after returning a significant portion back.
Dr. Refundable deposit liability
How are subscriptions treated?
Upon receipt of cash:
Cr. Unearned subscription revenue
As subscription is fulfilled (earned):
Dr. Unearned subscription revenue
Cr. Subscription revenue
With regard to payroll taxes, do employees pay unemployment taxes?
No, only the employer
With regard to payroll taxes, who pays FICA taxes?
Both the employer and the employee
Are the employer payroll taxes taken out of the payroll? How is the employer's payroll recognized?
No! They are expensed in addition to the gross payroll.
Dr. Payroll tax (FICA & FUTA) – ER
Cr. Payroll tax liability (FICA & FUTA)- ER
Cr. Tax withholdings due (IRS, State, & FICA) – EE
What is a contingency?
A gain or loss that may occur in the future as a result of an existing condition.
What are gains or losses that may occur in the future as a result of an existing condition?
What are contingent liabilities?
A potential obligation that may be incurred depending on the outcome of a future event. A contingent liability is one where the outcome of an existing situation is uncertain, and this uncertainty will be resolved by a future event.
What are some examples of contingent liabilities?
Obligations related to product warranties
Pending or threatened litigation
Guarantees of indebtedness of others (suretyship)
Obligations related to product defects
Threat of expropriation of assets
Collectibility of receivables
When are loss contingencies recorded?
If Probable & Estimable - they are accrued and disclosed
If Probable, but not Estimable – they are ONLY disclosed (as lack of estimate hinders accruing)
If Reasonably Possible - they are disclosed
If Remote - don't accrue or disclose
How are loss contingencies recognized?
*if probable and estimable
Dr. Estimated Loss
Cr. Estimated Contingency Liability
How are range of losses handled?
Disclose the range and accrue the most likely amount to occur (think estimated cash flows)
How are gain contingencies recognized?
They are NEVER accrued until REALIZED due to Conservatism
What is a subsequent event?
An event occurring after the balance sheet date, but before the date that the financial statements are issued or are available to be issued.
Distinguish between a Type I and Type II subsequent event
Type I – a condition that existed at the balance sheet date that will require an ADJUSTMENT to be RECOGNIZED due to a subsequent event
Type II – a condition that DID NOT exist at the balance sheet date, and as such will only be DISCLOSED (as it still represents important financial information to users)
If a note payable occurs in the ordinary course of business, what value is it recorded at?
Face value (don't present value the note)
If a company is planning on refinancing its short-term obligations to long-term liabilities after the balance sheet date, can it reclassify them as long-term liabilites at the balance sheet date?
Yes, as long as the company has the INTENT and ABILITY:
Intent – company is going to issue L/T debt or equity securities after B/S date
Ability – company signed a firm agreement to refinance the obligation with a lender or invester that has the ability to provide the financing
What is suretyship? Does it require disclosure?
Guaranteeing the debt of another. Yes, it requires disclosure (but no accrual).
What is the debt considered to be when a debtor cannot pay a debt as it comes due?
What is Troubled Debt?
Debt that a debtor cannot pay when it comes due
When is a loan considered impaired?
Probable that all amounts due (principal and interest) will not be received
How is an impaired loan reported by the creditor?
Present value of the loan's expected future cash flows are discounted at the loan's effective interest rate:
Dr. Bad debt expense
Cr. Allowance for credit losses
When undergoing troubled debt restructuring, can a creditor have an extraordinary gain or loss?
No, the creditor will always recognize ORDINARY losses, since the restructuring is at the creditor's insistence!
When is a gain recognized in a debt restructuring?
If terms are modified, and the debtor's future payments are now less than the carrying amount of the debt, then a Gain is recognized (by the debtor). Conversely, the creditor recognizes a loss
What is the gain recognized under a settlement of debt?
Difference between cash paid and carrying amount of debt
Difference between non-cash asset given and re-valued at FMV and debt carrying amount
Under Troubled Debt Restructuring, if the future payments are less than the obligation, what do the debtor and creditor recognize, respectively?
The debtor recognizes a gain (presumably extraordinary if unusual and infrequent) and the creditor recognizes an ordinary loss
Under Troubled Debt Restructuring, if the future payments are greater than the obligation, what do the debtor and creditor recognize, respectively?
There is no gain or loss recorded as it is considered an adjustment of the interest rate
Under Troubled Debt Restructuring, if the debtor elects the fair value option, does this affect the accounting by the creditor?
No, the debtor's election of the fair value option has no effect on the accounting by the creditor.
Under Bankruptcy, what is the general priority list of asset claims against the bankrupt entity?
1) Secured Creditors (those with partially secured claims have those unsecured portions relegated to general/unsecured creditor priority)
2) Priority claims (STOP-IT Drunk Driver)
3) General (unsecured) creditors
Under Bankruptcy, what is the priority list within the Priority Claims category?
1) Support and Alimony payments
2) Trustee, Attorney, and Accountant fees
3) Owed to involuntary gap creditors
4) Payroll within 180 days up to $12,475
5) Individual consumer deposits up to $2,775
6) Tax claims within 3 years of the filing
7) Drunk Driver injury claims
“STOP IT, Drunk Driver”
The difference between book value and fair value is always what type of gain (or loss)?
Ordinary, as it occurs in the normal course of business (as opposed to extraordinary)
For a creditor, how is a loan impairment recorded?
If future cash flows discounted at loan's Effective Interest Rate are less than Carrying Value:
Effective Rate calculated using original rate; not modified rate
Under IFRS, what are the two main types of current liability classifications?
Contingencies and Provisions?
Under IFRS, what are contingencies?
A possible obligation arising from past events whose outflows of resources are either not PROBABLE or ESTIMABLE.
Under IFRS, what are provisions?
Liabilities that are uncertain in timing or amount and have three conditions met:
1) Present obligation as a result of a past event
2) Probable that an outflow of resources will be required
3) Amount of the obligation can be reliably estimated
Under IFRS, can provisions also be considered contingencies?
Yes, provisions are also contingencies in that they are uncertain as to timing or amount, but since provisions are actually reported on the balance sheet, they are treated separately from contingencies.
Under IFRS, can contingencies also be considered provisions?
No, as provisions are reported on the balance sheet, while contingencies are only disclosed in the notes. Once contingencies are recognized, they become provisions.