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Flashcards in Liabilities Deck (56)
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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:

Dr. Cash
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?

Dr. Cash
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
Cr. Revenue


How are subscriptions treated?

Upon receipt of cash:
Dr. 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

Dr. Payroll
Cr. Tax withholdings due (IRS, State, & FICA) – EE
Cr. Cash


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)