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138 Cards in this Set

  • Front
  • Back
What is a liability?
A liability represents OUTSIDER CLAIMS TO a firm's assets or are ENFORCEABLE CLAIMS FOR services to be rendered by the firm.
What are current liabilities measure at?
The nominal amount necessary to extinguish the claim
What are noncurrent liabilities measure at?
PV
The valuation of noncurrent liabilities represents a significant departure from the valuation basis used for most other accounts in the balance sheet. T or F
True
Taken from FASB's conceptual framework, the definition of a liability includes what three key elements?
a. Liabilities represent probable Future sacrifices of economic benefits.
b. Liabilities are Obligations to transfer assets or provide services in the future.
c. Liabilities are the Result of past transactions or events.
Is it necessary for the identity of the creditor,or the exact amt that will be paid, or the due date of the liability for it to be recognized in the accounts?
No
How are liabilities presented on the balance sheet?
In increasing order of maturity. Current liabilities presented first.
What is a Current Liability?
DUE IN THE COMING YEAR or the operating cycle of the business, whichever is longer AND IS AN OBLIGATION TO BE MET BY the transfer of a current asset or the creation of another current liability.
What are Long-term Liabilities?
Defined by exclusion. Those liabiliteis that do not meet the criteria of a current liability.
How is a serial bond liability classified?
The amount due the following year is classified as a current liability in the balance sheet for the current year and is labeled: current maturities of long-term debt. The remaining portion is a noncurrent liability.
What is a Callable on Demand liability?
This means that the debtor (borrower) must pay the debt if the creditor demands it to be paid.
How is a callable on demand liability classified?
Current liability classification is required:

If the liability is due on demand within one year of the balance sheet date, even though liquidation may not be expected.

If the liability is due on demand because of a violation by the debtor of the terms of the debt agreement
Why is a liability callable on demand classified as current even if the due date is beyond one year from the balance sheet date?
Because the debtor cannot control the payment date
How are long-term monetary liabilities initially recognized?
At the PV of future cash flows.
What is the discount rate used to calculate PV of long-term monetary liabilities?
The market rate on the date the liability was created
After the initial incurrence of a liability, how is the liability valued on the balance sheet?
At the PV of remaining future cash flows
What is the discount rate used to determine the PV of remaining cash flows of a liability after the initial incurrence?
The discount rate used for this determination is the market rate of interest on the date the liability was created.
What is the difference between the valuation at initial incurrence of the debt, and the valuation on later balance sheets, is the number of remaining cash flows and periods for computing the present value.
The number of remaining cash flows and periods for computing the present value.
How is periodic Interest expense measured for liabilities?
The product of:

Beg Bal for the pd and the market rate of int on the date the liab was created
Interest expense may be different than cash interest payable. T or F
True
What is a nonmonetary liability?
One payable in services or non-monetary assets.
What are nonmonetary liabilities valued at on the balance sheet?
At the market value of RESOURCES RECEIVED for both current and noncurrent liabilities.
What are current liabilities valued at?
At the face amount or the amount due at maturity
What is the reason for current liabilities being measured at face amt or amt due rather than PV?
Materiality. That is, the difference between the amount due at maturity and present value of future cash flows is immaterial.
Name the four definitely determinable liabilities.
1. Accounts Payable
2. Notes Payable
Interest Bearing/Non- interest Bearing
3. Dividends Payable
Name the five liabilities typically related to adjusting entries.
1. Payroll Taxes
2. Property Taxes
3. Compensated Liabilities
4. Deferred Revenues
5. Sales Taxes
What are definitely determinable liabilities?
Not dependent on some future event. The amt is determined by a current event or past transaction or event.
What is an accounts payable?
Also called trade payables.

Amouns owed to suppliers that provide goods or services to the company.
What is the time period for a typical accounts payable?
30 days

Sometimes can be 45 or 60 days
When are accounts payable recognized on the balance sheet?
At the time of purchase or the time services are rendered.

For purchased merchandise, recognize at the time it's included in the buyer's inventory.
When should merchandise purchased be included in the company's inventory and recognized on the balance sheet?
Depends on how products were shipped.

If shipped FOB shipping pt - then recognize on the date it reached the shipping pt.

If shipped FOB destination, then recognize on date it reached buyer's destination.
What distinguishes a notes payable from an accounts payable?
For a notes payable,

1. The time period is extended
2. Notes have an interest element
What method should be used to amortize premiums and discounts for notes payable?
Effective Int method
What is an interest-bearing note payable?
One in which the interest element is explicitly state.
What are long-term interest bearing notes are recorded at?
The PV of cash flows, using the market rate of interest as the discount rate.
If the stated interest rate and the market interest rate are the same, what is true about the present value of future cash flows?
It is equal to the face amount of the note.
If the stated interest rate and the market rate of interest are not equal, the present value of the future cash flows is not equal to the face amount of the note and a discount will be recorded. T or F
True
How is the PV of future cash flows calculated?
Face Amt x PVIF $1, no. pds, int

+ Cash Int Pmt x PVIF ord ann or add due
How are cash int pmts calculated?
Stated rate x Total Interest
What is the journal entry to record the initial incurrence of an interest bearing note?
Debit: Asset or Exp
Debit: Disc on NP
Credit: Note Payble

Note: The asset or exp is recorded at the PV of all future pmts.
Under the gross method, notes payable is recorded at what amount?
The face value
Under the gross method, discount on NP is recorded at what amount?
Diff between Face Value and PV
What does an ordinary annuity mean?
Interest pmts are made at the end of the year
What is an annuity due?
Interest pmts start being made at the beginning of the year.
When there is an ordinary annuity, what is the journal entry for interest pmts?
Debit: Int Exp
Credit: Disc on NP
Credit: Cash
What is the journal entry for interest pmt of an annuity due?
Debit: Int Exp
Debit: Prem
Credit: Cash
Compare the journal entries for interest pmts with a disc and prem.
Cash for both entries are the same. The difference is in the amt charged to int exp. A disc has more amt charged to int exp because it was sold lower than the face amt and the thus cost of selling it at a lower amt is reflected in a higher interest exp. Whereas a premium charges less to int exp because the note sold at a price higher than face value.
For the SL method, how are interest pmts calculated?
Tot int amt x #mos in pd/tot # mos
What is a non-interest bearing note?
The interest element is not explicitly stated but rather is included in the face amount of the note.
Are there cash interest pmts for throughout the note for non-interest bearing notes?
No
What amt does the issuer (borrower) of the note receive in a non-int bearing note?
The PV of the note, not the face value.
What is the initial journal entry for recording a non-interest bearing note?
Debit: Cash
Debit: Disc NP
Credit: NP

Note: The borrower receives less than the face amt but has to pay back the entire face amt, which includes interest.
If the market interest rate is unknown, how is it calculated?
PV/Face Amt. Then take that amt and look it up in the PV tables.
When is different about using the net method rather than the gross method?
At the initial recording of the note, the asset and payble are recorded at the PV of the note.

At interest pmt dates:

Debit: Int Exp
Credit: NP

For a disc, NP is directly increased for the total int pmt amt rather than crediting Disc on NP.
How does amortization of a disc affect interest exp?
Increases int exp
How does amortization of a prem affect interest exp?
Decreases int exp
How do dividends affect retained earnings?
All dividends reduce retained earnings and can be a distribution of earnings.
Do all dividends involve a distribution of assets?
No
What dividends require recognition of a liability?
Thoses dividends involving a distribution of assets
When does a liability occur for a dividend?
When a dividend, that is a distribution of an asset, is declared.
What are the three relevant dates pertaining to dividends payable?
Declaration Date
Date of Record
Payment Date
What is the declaration date in relation to dividends payable?
The date the board of directors declares the dividend
What is the date of record in relation to dividends payable?
A cut-off date. The shareholders of record on this date will receive the dividends.
What is the payment date in relation to dividends payable?
The date the dividends are paid to shareholders.
What types of dividends are there?
Cash
Property
Stock
Is there a journal entry needed on the Date of Record?
No
What are the journal entries for recognizing and paying a cash dividend?
At Declaration Date:

Debt: RE
Credit: Div Pay

At Payment Date:

Debt: Div Pay
Credit: Cash
What are the journal entries for recognizing and paying a property dividend?
At Declaration Date:

Debt: RE
Credit: Div Pay

Debit: Asset
Loss/Gain
Asset

* On the declaration date, the asset (property dividend) is written up or down to MV from BV.

At Payment Date:

Debt: Div Pay
Credit: Asset
For a property dividend, what will be the net reduction in RE?
Adjusted BV. The MV of the asset at the date of declaration.
What is the most common type property dividend distributed?
Investment in securities of other companies
What is the value the property dividend is initially recorded at?
The market value at declaration date.
Explain the net effect of property dividends on RE.
RE is reduced by the MV of the asset distributed, but the gain or loss decreases or increases RE to a net amt equaling BV.
What is a stock dividend?
A distribution of the issuing company's shares to its shareholders in proportion to each investor's existing holdings.
Why is there no liability recorded for stock dividends?
Because stock dividends do not involve a future transfer of assets or a future provision of services.
In essesnce, what happens with each investor's holdings as a result of a stock dividend?
Each investor simply holds more shares, but each share is worth proportionately less than before the dividend. Each investor maintains the previous ownership percentage.
What does it mean when you receive a 2 for 1 stock distribution?
For every 1 share you have, you'll receive 1 more.

You double the shares, but each share is worth 1/2
What are dividends in arrears?
Upaid dividends for a particular year on cumulative preferred stock
What is cumulative preferred stock?
Dividends are not required to be paid but are said to accumulate if unpaid.

The cumulative feature of preferred stock means in the event of a dividend declaration, preferred shareholders are entitled to be paid the dividends in arrears before any distribution related to the current period occurs.
When can a liability be recognized for dividends in arrears?
Only when a dividend is declared
Where are dividends in arrears recorded?
In the footnotes
Accrued liabilities are typically related to adjusting entries. To or F
True
What are accrued liabilities?
They are recorded because of the passage of time or because resource changes have occurred without cash being paid.
Give two examples of accrued liabilities.
Wages Payable between the last payday of a fiscal period and the end of the period, and

Interest Payable between the last interest payment date of a fiscal period and the end of the period.
The employer serves as a collection point for payroll taxes for the employer and employee and submit them at regular intervals. T or F
True
As far as payroll taxes, what taxes are to be paid by the employee?
Federal Income Tax
State Income Tax
FICA (social security, assessed up to a maximum wage limit.
What are the taxes that are to be paid by the employer?
FUTA Federal Unemployment
SUTA State Unemployment
FICA, equivalent to employee amt

Wage limits apply to each of the taxes.
What is the journal entry for the employee's payroll tax liabilities?
Debit: Sal/Wage Exp
Credit: FITP Fed IncTx Pay
Credit: SITP Sta IncTxPay
Credit: Fica TP
Credit: Cash
What is the journal entry for the employor's payroll tax liabilities?
Debit: Payroll Tax Exp
Credit: FUTP Fed UnTx Pay
Credit: SUTP Sta UnTxPay
Credit: Fica TP
What is property tax?
Tax levied by the local government to support schools and other activities.
When is property recorded in the accounts?
When the govt levis the tax and makes it payable.
If property tax is payable at the beginning of the fiscal period, describe the accounting treatment.
Prepaid Tax is recorded and paid.

Then, an expense is recorded each month to recognize the monthly tax being earned.
If property tax is payable at the end of the fiscal period, describe the accounting treatment.
Monthly entries would recognize the expense and payable, because throughout the year, it's not yet due. The expense is recorded as it is earned.

At the end of the period, the property tax payable would be closed and the payable would be paid.
What are the journal entries to record property tax when it's due at the beginning of the year?
At the beg of the period:

Debit: Prepaid Property Tax
Credit: Cash

Monthly:

Debit: Prop Tax Exp
Credit: Prepaid Prop Tax
What are the journal entries to record property tax when it's due at the end of the year?
Monthly:

Debit: Prop Tax Exp
Credit: Prop Tax Pay

At the end of the period:

Debit: Prop Tax Pay
Credit: Cash
What are Compensated Absence Liabilities?
The accrual of earned vacation and holiday pay.
. SFAS #43 requires that vacation and holiday pay be accrued during the period employees earn these benefits, BUT ONLY ACCRUE if what four criteria are met?
1. OBLIGATION is attributable to services rendered as of the balance sheet date

2. The RIGHTS vest (benefits are no longer contingent on continued employment) or accumulate (carry over to future periods)

3. PAYMENT of the obligation is probable

4. AMOUNT of the obligation is estimable
What does it mean if vacation/holdiay rights vest?
Benefits are no longer contingent on continued employment.

Employees can leave the firm and be paid the benefits that vested.
What does it mean if vacation/holdiay rights accumulate?
Benefits carry over to future periods
What do limits on accumulation of vacation/holiday rights do?
Places a cap on the amount of liability accrued.

In other words, you may only be able to accumulate so much.
What wage rates are the accrual of vacation/holiday pay based on?
Based on current wage rates
Is an attempt made to estimate wage increases that might be in effect when vacation or holiday is taken?
No. Accrual is recorded at the current wage rate.
What is the adjusting entry at the end of the period for the accrual of earned and unpaid holiday/vacation pay?
Debit: Salary Expense
Credit: Liab for Com Ab's
What should be done if there's a pay rate increase?
Only accrue it to Salary Expense if the pay is being paid right then.

??
Should accumulated sick pay benefits be accrued?
No. But they can be.
What is the rule if unused sick pay benefits are to be paid to employees, for example, if they leave the firm?
Accrual is required.
Deferred or Unearned Revenues are ususally related to what type of journal entries?
Adjusting entries
What accounting classification is unearned revenue?
A Liability
What is unearned revenue?
Revenue received but have not earned.

i.e. Cash received but product or service not provided.
What is the journal entry for receiving cash in advance of providing the product or service?
Debit: Cash
Credit: Unearned Revenue
What is the journal entry for providing the product or service when cash has already been received?
Debit: Unearned Revenue
Credit: Revenue
What are sales taxes?
When firms collect sales taxes from their customers and periodically submit them to the government
Between collection and submission of the tax, the firm has a liability to the government. T or F
True
When calculating sales taxes payable, the amount payable may be included in the Total amount collect from the customer. Regarding sales taxes, what is included in the Total amount collected from the customer?
Sales and Sales Taxes
What is the journal entry to record cash sales made to customers, including sales taxes?
Debit: Cash
Credit: Sales
Credit: Sales Taxes Pay
How would sales taxes payable be calculated from total sales?
Total sales / 1 + Sales Tax%
What is the title for FAS 146?
Accounting for Costs Associated with Exit or Disposal Activities
What does FAS 146, Accounting for Costs Associated with Exit or Disposal Activities, require?
Requires firms to recognize a liability (and expense) for exit or disposal activities at fair value in the period in which the liability is incurred.
What is an exit activity?
Includes a RESTRUCTURING that is planned and controlled by management and materially changes the scope or conduct of the business
What disposal activies does FAS 146, Accounting for Costs Associated with Exit or Disposal Activities not apply to?
An entity acquired in a business combination, and disposal activities not covered by FAS 144 on asset impairment. It also does not apply to costs associated with asset retirement obligations (FAS 143).
Give examples of costs covered by FAS 146, Accounting for Costs Associated with Exit or Disposal Activities.
1. One-time termination benefits provided to employees terminated under a benefit arrangement that is not part of an ongoing employee benefit agreement. FAS 146 does not alter the accounting for termination benefits under established pension and other employee benefit pronouncements: FAS 87, 88,106, 112.

2. Costs to terminate a contract other than a capital lease

3. Costs to consolidate facilities or relocate employees
Regarding initial recognition and measurement of exit and disposal activities, when is the liability for the cost recognized and at what value?
When the liability is incurred and at fair value
What is fair value?
The amount at which the liability could be settled in a current transaction between willing parties
When should the liability for exit and disposal costs be recoginized if fair value cannot be reasonably estimated at the time the liability is incurred?
When the fair value can be reasonably estimated
Regarding initial recognition and measurement of exit and disposal activities, when is a liability incurred?
When the Concepts Statement 6 definition of liability is met: When it is probable that the firm has an obligation to transfer assets or provide services to other entities in the future as a result of past transactions

The term probable used in its general meaning
Is creation of an exit or disposal plan sufficient for liability recognition?
No
What is the name of the expense frequently recorded along with the liability to record exit or disposal activities?
Restructuring Exp
When are the costs to terminate a contract recognized?
When the contract is terminated, not when a plan is agreed upon
In regards to exit and disposal activities, the fair value initially recorded for a noncurrent liability is also the PV. T or F
True
In regards to exit and disposal activities, how is the change to the liability balance due to the passage of time recorded?
Is recorded as an increase to the liability and to an expense such as "accretion expense."
In regards to exit and disposal activities, how is the increase to the liability calculated?
It's the product of the credit-adjusted risk-free rate for the firm, and the beginning balance in the liability
What causes an adjustment to the liability balance and the expense recorded initially for exit and disposal activities?
Revisions in the timing or amount of future cash flows used in computing the initial liability
What two factors do liabilities dependent on operating results sometimes need?
Taxes and Bonus
What is a bonus?
An additional amount of compensation in excess of a base salary
Frequently, liabilities related to bonus compensation are dependent on what?
The operating results for the accounting period
Bonuses may be based on what four factors?
Income before or after the bonus

Income before or after income taxes
Does entering into a contract (to do something in the future) create a liability for the accounts?
No. The event must meet all three definitions of a liability which includes "being the result of a past transaction or event. A contract to do something in the future is not a past event.
What are the three elements from the conceptual framework that must be met by a liability for it to be included in the accounts?
1. Probable future sacrifice of economic benefits

2. Obligation to transfer assets or provide services in the future

3. Be the result of a past transaction or event
What affects how a liability is measured?
Its classification into current or noncurrent