Liabilities

Question 1

Calculate bonus as a percentage of income

Answer 1

Bonus of X% on net income after deduction of bonus:
E.g. 10% bonus on 500,000 income before bonus
X = 10% * (500,000 - X)
X = 50,000 - 0.1X
1.1X = 50,000
X = 45,455

Question 2

Employee compensated absences

Answer 2

Accrue liability when:

1) liability to pay compensation pertains to services already rendered by the employee
2) right of employee to receive compensation either vests (paid when ee terminates) or accumulates (carried forward to future periods)

Question 3

Contingencies

Answer 3

Remote: 0-20% (slight chance)
Reasonably possible: 20-50% (less than probable)
Probable: +50% (likely to occur)

Question 4

Loss contingency - disclose & accrue

Answer 4

any time loss is more than remote, disclose

accrue loss only when loss is probably and can be estimated

Question 5

Gain contingency - disclose & accrue

Answer 5

any time gain is more than remote, disclose

never accrue

Question 6

Long-term contracts

Answer 6

Two types:
performance obligation satisfied OVER TIME
- e.g. tutoring sessions, get benefit each session
performance obligation satisfied at a POINT IN TIME
- e.g. home building, no benefit until keys handed
over

Question 7

Performance obligation - satisfied over time

Answer 7

1) customer receives and consumes the benefits
2) entity’s performance creates or enhances an asset that the customer controls WHILE it is being created or enhanced (e.g. bathroom renovation in home)
3) entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

Question 8

Performance obligation - satisfied point in time

Answer 8

entity has right to payment
customer has legal title
customer has physical possession
customer has risks/rewards
customer has accepted asset

Question 9

revenue recognition methods - satisfied over time

Performance obligation

Answer 9

input method: recog rev on cost incurred, labor hours expended, time elapsed, or machine hours

output method: recog rev on units produced or delivered, contract milestones, or surveys of work performed

Question 10

revenue recognition - satisfied over time

Answer 10

gross profit recognized in each period of the contract on accrual basis

[cost to date / total estimated costs] x estimated total profit

Question 11

performance obligations - revenue recognition

Answer 11

for both the point in time and over time methods, any anticipated losses are recognized immediately

loss = total estimated loss + all previously recog’d profits

Question 12

Contingencies - exceptions

Answer 12

for remote losses (generally no disclosure, no accrual), guarantees of indebtedness for others DOES require disclosure.