Estimated And Accrued Liabilities

Front 1

What is meant by "Estimated liability"?

Back 1

It represents recognition of a PROBABLE future charge that results from a prior act, such as estimated liability for warranties, trading stamps, or coupons.

Front 2

Note

Back 2

Premiums & Coupons are examples of probable future charges that results from a prior act which requires recognizing estimated liability.

Front 3

What is meant by a "Premium"?

Back 3

It is a promotion that offers some sort of prize to customers who purchase a required number of items.

Front 4

What are the procedures of accounting for premiums?

Back 4

When a company offers a premium, the company must estimate the future amount of premiums that will be redeemed. It will then set up an estimated liability account for this amount and recognize a premium expense in the current period.

Front 5

Note

Back 5

Companies often have premium liability for outstanding coupons when it is PROBABLE that some of the coupons will be redeemed and the amount can be estimated.

Front 6

Note

Back 6

Matching Principle requires that Premium expense should be accrued in the period of SALE based on the estimated redemption rate.

Front 7

What is meant by "Coupons"?

Back 7

They are a reduction of the sales price that the consumer must pay.

Front 8

What is meant by "Redeemed Coupon"?

Back 8

When a coupon is used by a customer, the coupon is said to have been redeemed.

Front 9

What would be the JE to record the redemption of the coupon in the period that benefited from the premium offer through the sale of coupons?

Back 9

Front 10

What would be the JE to record the non-redeemed coupons (in the form of premium claims) in the period that benefited from the premium offer through the sale of coupons?

Back 10

Front 11

What is meant by "Warranties"?

Back 11

They are a seller's promise to "correct" any product defects.

Front 12

Note

Back 12

Sellers offering warranties must create a liability account if the cost of the warranty can be reasonably estimated.

Front 13

Note

Back 13

The entire liability for the warranty should be accrued in the year of sale to "match" the cost with the corresponding revenue, even if part of the warranty expenditure will be incurred in a later year.

Front 14

Note

Back 14

Service contracts usually include cash received prior to the period in which the related expense occurs. As such, they are treated as unearned revenue and are estimated and accrued in the financial statements. Then, when services are performed, unearned revenue is debited and revenue is credited.

Front 15

What is meant by "Accrued Liability"?

Back 15

An accrued liability (accrued expense) represents an expense recognized or incurred (through passage of time or other criteria) but not yet paid (e.g. , accrued interest, accrued wages, accrued unemployment taxes, and accrued employer's portion of FICA taxes).