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78 Cards in this Set

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liabilites are defined by FASB as
probable future sacrifices of economic benefits arising from present obligatons of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
a liability has three essential characteristics
it is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services

it is an unavoidable obligation

the transaction or other event creating the obligation has already occurred
Liabilities are divided into the basic categories of
current liabilites

and

long term debt
current assets are
cash or other assets that companies can reasonably expect to cash, sell or consume in operations within a single operating cycle or within a year
current liabilities are
obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of other current liablities
the operating cycle is the
period of time elapsing between the aquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections
typical current liabilities
accounts payable
notes payable
current maturities of long term debt
short term obligations expected to be refinanced
dividends payable
customer advances and deposits
unearned revenues
sales taxes payable
income taxes payable
employee related liabilities
balances owed to others for goods, supplies or services purchased on open account
trade accounts payable
most companies record liabilities for purchases of goods upon
receipt of the goods
if title has passed to the purchaser before receipt of the goods the company should record the transaction when
at time of title passage
written promises to pay a certain sum of money on a specified future date are
notes payable
Discount on notes payable is a _____ account to _________ and therefore is subrracted from _______ on the balance sheet
contra; notes payable, notes payable
discount on notes payable balance represents
interest expence chargable to futre period
portion of bonds, mortgage notes and other long-term indebtedness that matures within the next physical year
current maturities of long term debt
conpanies exclude long term debts maturing currently as current liabilities if they are to be
retired by assets accumullated for this purpose that properly have not been shown as current assets

refinanced, or retired from the proceeds of a new debte issue or

converted into capital stock
When only a part of long term debt is to be paid, a company reports this how?
the maturing portion is reported as a current liability and the remaining is reported as a long term debt
any bill that is due on demand should be classified as
current liability
A company is required to exclude a short-term obligation from current liabilites if BOTH of the following conditions are met:
must INTEND TO REFINANCE the obligation on a long term basis

must DEMONSTRATE THE ABILITY to consummate the refinancing
A Company may demonstrate the ABILITY to consummate the refinancing by:
Actually refinancing the short term obligation by issuing a long term obligation or equity securities after the date of the balance sheet but before it is issued or

entering into a financing agreement that clearly permits the company to refinance the debt on a long term basis on terms that are readily determinable
an amount owed by a corporation to its stockholders as a result of board of directors authorization
cash dividend payable
because companies always pay cash deividneds within one year of declaration (gernerally within three months) they are generally classified as
current liabilities
Why don't companies recognize accumulated but undeclared dividentds on cumulative preferred stock as a liabiliby
preferred dividends in arreards are not an obligation until the board of directors authorizes the payment
Companies generally recognize dividends payable in the form of additional shares of stock in the _____ section of the balance sheet because they
stockholders equity; represent retained earnings in the process of transfer to paid-in capital
received from customers to guarantee performance of a contract or service or as gurarantees to cover payment of futre obligations
returnable cash deposits
how do you account for unearned revenu
debit cash, credit current liability accout of the unearned revenue

debit unearned revenue and credit earned revenue
When the sales tax collections credited to the liability account are not equal to the liability as computed by the governmental formula GAP
recognizees a gain or loss on sales tax collections
income tax liabilities _______appear on the financial statements of proprietorships and partnerships because;
do not; individual propritors and the members of partnerships are liable for income tax on their share of the business's taxsable income
If in a later year the taxing aurthority assesses an additional tax on th eincome of an earlier year, the company should
credit income taxes payable and charge the related debit to current operations
employee related current liabilities can include
salaries and wages owed
payroll deductions
compensated absences
bonuses
payroll deductions are
social security taxes
unemployment taxes
income tax witholding
THe government taxes employer and the employee at ____% of the employee's gross pay up to _________annual limit
6.2%;$90,000
Employees who meet this criteria are subject to the Federal Unemployment Tax Act
1) Those who paid wages of $1,500 or more during the calendar year
or
2) those who employeed at least one individual on at least one day in each of 20 weeks during the current or preceeding calendar year
The unemployment tax is ___% on the first ____ of compensation paid to each employee during the calendar year
6.2%;$7,000
The employer may receive a tax credit not to exceed ___% for unemployment taxes paid to the stae
5.4%
all stated provide for some kind of _______ which reduces the the state contribution rate for employer's when they display by their benefit and contribution experience that they provide steady employment
merit rating
Companies pay federal unemployment tax ____ and file a unemployment tax form ____
quarterly; annually
Companies should record the amount of accrued but unpaid employer contributions as
an operating expense and as a current liablity at year end
The employer should record all unremitted employer FICA taxes as
payroll tax expense and payroll tax payable
Companies should accrue a liability for the cost of compensation for future absences if ALL of these conditions exist
a) the employer's obligation relating to employees' rights to recieve compensation for future absences is attributable to employees' services ALREADY RENDERED

b) the obligations relates to the rights that VEST OR ACCUMULATE

c) Payment of the compensation is PROBABLE

d) The amount can be REASONABLY ESTIMATED
___ exist when an employer has an obligation to make payment to an employee even after terminating his or her employment
vested rights
rights that employees carry forward to future periods if not used in the period in which earned.
Accumulated rights
If sick pay benefits vest, a company must ____ them
accrue
If sick pay benefits accumulate but do not vest, a company must
can choose whether or not to accrue them
Companies should recognize the expense and related liablity for compensated absences when?
In the year earned by employees
REcording an employee bonus earned in a prior year make the following entries
in prior year:
Dr Employees Bonus Expense
Cr Profit sharing bonus payable

Dr in current year:
profit sharing bonus payable
Cr Cash
agreements covering rents or royalty payments conditional on the amount of revenues earned or the quatnity of product produced or extracted
conditional expenses
a contingency is
an existing condition, situation, or set of circumstances involving uncertainty to possible gain or loss
Typical gain contingencies are
possible reciepts of monies from gifts, donations, bonuses, and so on

possible refunds from the government on tax disputes

pending court cases witha probable favorable outcome

Tax loss carryforwards
if somehting is likely to occur it is
probable
if the chance of something occuring is mor than remote but less than likely it is
reasonably possible
if the chance of somehting occurring is slight it is
remote
Companies should accrue and estimated loss from a loss contingency by a charge to expense and a liability recorded only if both of the following conditions are met
informaqtion available prior to the issueance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements

the amount of the loss can be reasonably estimated
Example loss contingencies accrued
loss related to:
collectibility of receivables
obligations related to product warranties and product defects
premiums offered to customers
examples of loss contingencies not accrued
loss related to:
risk of loss or damage of enterprise property by fire, or other hazards
general or unspecified business risks
resk of loss from catastrophies assumed by insurance companies
May be accrued
threat of expropriation of assets
pending or threatened litigation
actual or possible claims and assessments
guarantees of indebtedness of others
obligations of commercial banks undr "standby letters of credit"
agreements to repurchase receivables that have been sold
Some of the more common loss contingencies are
litigation, claims and assessments

guarantee and warranty costs

premiums and coupons

environmental liabilities
to report a loss and a liability in the financial statements the cause for litigation must have occurred
on or before the date of the financial statemens
To evaluate the probability of an unfaborable outcome a company considers the following
the nature of the litigation

the progress of the case

the opinion of legal counsil

its own and others' experince

managment responses to the lawsuit
with respect to unfiled suits and unasserted claims and assesments a company must determine
the degree of probability that a suit must be filed or a claim may be asserted

the probability of an unfavorable outcome
Companies use two basic methods of accounting fro warranty costs
the cash basis methods

accrual method
under the cash basis method of accounting for warranty costs, companies
expense warranty costs as incurred, and charges warranty costs to the period in which it complies with the warranty
Which accounting for warranty costs is recognized for income tax purposes
cash basis
A company must use the cash-basis method when it does not accrue a warranty liability in the year of sale either becuase
it is not probable that a liability has been incurred
or
it cannot reasonably estimate the amount of the liability
If it is probable that customers iwll make warranty claims and a company can reasonable estimate teh costs incurred, the company must use the___ and charge the warranty costs to operating expense when?
accrual method; in the year of sale
when the warranty is an integral an inseparable part of the sale and is viewed as a loss contigency it is referred to as the
expense warranty approach
REcognition of Warranty expense of items sold is accounted for as
DR Warranty Expense
Cr Cash, Inventory, Accrued payroll

Dr Warranty expense
Cr Estimated liability under warrnties

Costs in later period are
DR estimated liabitiy under warranties
CR Cash, inventory, or Accrued Payroll
when a seller recognized separately the sale of the item and the sale of the extended warranty this is called
the sales-warranty approach
Companies defer revenue on the sale of extended warranties and recognize it on a
straight line basis over the life of the contract
The companies that sell extended warranties should ___ costs that vary with and are directly related to the sale of the contracts (mainly commissions)
defer and amortize
The companies that sell extended warranties should ___that it would have incurred even if it did not sell a contract
expenses
Companies should____ the costs of premiums and coupons to expense in ______
charge;the period of the sale
Examples of accounting for asset retirement obligations
decommissioning nuclear facilities
dismantiling, restoring and reclamation of oil and gas properties
certain closure and reclamation fo mining facilities
closure of landfills
Companies should not record the capitalized asset retirement costs in a separte account because
there is no future economic benefit that can be associated with these costs alone
a major exception exists to presentation of current liabilities when
a company will pay a currently maturing obligation from assets classified as long term
companies should disclose certrain other contingent liabilities, even thought the possiblity of loss may be remote:
guarantees of indebtedness of others
Obligations of commercial banks under "standby letters of credit"
Guarantees to repurchase receivables that have been sold or assigned
The current ratio is
the ratio of total current assets to total current liablities
the current ratio is also called the
working capital ratio
the acid test ratio is
(cash+short term investments+net receiveables)/ current liabilities