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CL & Contingencies

Chapter 13

QuestionAnswer
what is a liability? probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
3 characteristics of liabilities present obligations that entails settlement by probable future transfer; an unavoidable obligations; transaction creating the obligation has already occurred
current liability obligations whose liquidation is reasonably espected to require use of existing resources properly classified as current assets
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
accounts payable balances owed to others for goods, supplies, or services purchased on open account
notes payable written promises to pay a certain sum of money on a specified future date
zero interest bearing note the borrower receives an amount equal to the face value of the note less the interest; the bank takes its fee "up front" rather than on the date the note matures
why would companies want to show more long term liabilities than CL? looks like we don't owe a lot of money yet (make company look better)
long term debt that matures within the next fiscal year is reported as CL, unless... it is to be refinanced by a new debt issue or by conversion into stock
must be excluded from CL only if the firm: 1) intends to refinance and 2) demonstrates an ability to refinance
ability can be evidenced by 1) actual refinancing, or 2) signing a refinancing agreement that clearly permits refinancing of the debt on a long-term basis with readily determinable terms
Refinancing must occur... before the current debt is due
dividends payable amount owed by a corporation to its stockholders as a result of board of directors' authorization
preferred dividends in arrears are not an obligation until the BOD authorizes the payment
employee related liabilities payroll deductions, compensated absences, bonuses
employee pays for... income tax withholding, FICA taxes, and union dues
employer pays for... FICA tazes, FUTA, State unemployment
Compenstaed absences are accrued as liabilitites if all the following conditions are met: obligations arises from services already rendered by the employee, rights the vest/accumulate, payment of compensation id probable, amount can be reasonably estimated
vested rights when an employer has an obligation to make payment to an employee even after terminating his employment
accumulated rights those that employees can carry forward to future periods if not used in the period in which earned
bonus agreements usually considered additional wages and should be deducted in determining net income
contingency an existing condition, situation, or set of circumstances invovling uncertainity as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur
gain contingencies are claims or rights to receive assets whose existence is uncertain but which may become valid eventually, are not recorded and are only disclosed when the probability is hgih that it will become a reality
2 conditions of loss contingencies probable that a liability has been incurred and amount of loss can be reasonably estimated
probable means... future event or events are likely to occur
reasonably possible... the chance of the future event or events occurring is more than remote but less than likely
remote means... the chance of the future event or events occurring is slight
3 factors with regards to litigation, claims, and assessments time period in which the underlying cause of action occurred, probability of an unfavorable outcome, ability to make a reasonable estimate of the amount of loss
warranty a promise made by a seller to a buyer to make good on a deficiency of quantity, quality, or performance in a product
expense warranty approach used whenever the warranty is an integral and inseparable part of the sale and requires warranty costs to be charged to operating expense in the year of sale
sales warranty approach used when warranty is sold separately from the product and requires that revenues from the sale of the warranty be deferred and subsequently recognized as income over the life of the warranty contract
asset retirement obligation when a company has an existing legal obligation associated with the retirement of a long-lived asset and when it can reasonably estimate the amount
self-insurance is not insurance, but risk assumption
Created by: SweetCheeks0707