Moderate 25—30 E Adjusting entry for sales tax. Simple 5—7 E Payroll tax entries. Simple 10—15 E Payroll tax entries. Simple 15—20 E Warranties.
Simple 10—15 E Warranties. Moderate 15—20 E Premium entries. Simple 15—20 E Contingencies. Moderate 20—30 E Asset retirement obligation. Moderate 25—30 E Premiums. Moderate 25—35 E Financial statement impact of liability transactions. Moderate 30—35 E Ratio computations and discussion. Simple 15—20 E Ratio computations and analysis. Simple 20—25 E Ratio computations and effect of transactions. Moderate 15—25 P Current liability entries and adjustments.
Simple 25—30 P Liability entries and adjustments. Simple 25—35 P Payroll tax entries. Moderate 20—30 P Payroll tax entries. Simple 20—25 P Warranties, accrual, and cash basis. Simple 15—20 P Extended warranties. Simple 10—20 P Warranties, accrual, and cash basis. Moderate 25—35 P Premium entries. Moderate 15—25 P Premium entries and financial statement presentation. Moderate 30—45 P Loss contingencies: entries and essay. Simple 25—30 P Loss contingencies: entries and essays.
Moderate 35—45 P Warranties and premiums. Moderate 20—30 P Liability errors. Moderate 25—35 P Warranty and coupon computation. Moderate 20—25 CA Nature of liabilities. Moderate 20—25 CA Current versus noncurrent classification. Moderate 15—20 CA Refinancing of short-term debt. Moderate 30—40 CA Loss contingencies. Simple 15—20 CA Loss contingency.
Simple 15—20 CA Warranties and loss contingencies. Simple 15—20 CA Warranties. Moderate 20—25 4. See paragraphs through The obligation may be incurred in connection with the sale of goods or services; if so, it may require further performance by the seller after the sale has taken place.
CE According to FASB ASC Asset Retirement and Environmental Obligations : An entity shall disclose all of the following information about its asset retirement obligations: a A general description of the assetretirement obligations and the associatedlong-lived assets b The fair value of assets that are legally restricted for purposes of settling asset retirement obligations c A reconciliation of the beginning and ending aggregate carrying amount of asset retirement obligations showing separately the changes attributable to the following components, whenever there is a significant change in any of these components during the reporting period: 1.
Liabilities incurred in the current period 2. Liabilities settled in the current period 3. Accretion expense 4. Revisions in estimated cash flows. Thus, depreciation of assets is not a contingency, nor are such matters as recurring repairs, maintenance, and overhauls, which interrelate with depreciation.
This Topic is not intended to alter depreciation practices as described in Section Estimates Used in Accruals Amounts owed for services received, suchas advertising and utilities, are not contingencies even though the accrued amounts may have been estimated; there is nothing uncertain about the fact that those obligations have been incurred.
Changes in Tax Law The possibility of a change in the tax law in some future year is not an uncertainty. Accumulate means that earned but unused rights to compensatedabsences may be carried forward to one or more periods subsequent to that in which they are earned, even though there may be a limit to the amount that can be carried forward.
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 liabilities.
Long-term debt consists of all liabilities not properly classified as current liabilities. Thus the word is used broadly to comprise not only items which constitute liabilities in the proper sense of debts or obligations including provision for those that are unascertained , but also credit balances to be accounted for which do not involve the debtor and creditor relation.
But, accountants quantify or measure only those liabilities or future disbursements which are reasonably determinable at the present time. And, accountants have accepted the completed transaction as providing the objectivity or basis necessary for financial recognition. Therefore, a liability may be viewed as an obligation to convey assets or perform services at some time in the future and is based upon a past or present transaction or event.
A formal definition of liabilities presented in Concepts Statement No. Close examination of the liability section and the related footnotes discloses amounts, maturity dates, collateral, subordinations, and restrictions of existing contractual obligations, all of which are important to potential creditors.
The assets and earning power are likewise important to a banker considering a loan. Current liabilities are obligations whose liquidation is reasonably expected to require the use of existing resources properly classified as current assets, or the creation of other current liabilities. Because current liabilities are by definition tied to current assets and current assets by definition are tied to the operating cycle, liabilities are related to the operating cycle.
Unearned revenue is a liability that arises from current sales but for which someservices or products are owed to customers in the future.
At the time of a sale, customers pay not only for the delivered product, but they also pay for future products or services e. Market analysts indicate that an increase in the unearned revenue liability, rather than raising a red flag, often provides a positive signal about sales and profitability.
When the sales are growing, its unearned revenue account should grow. Thus, an increase in a liability may be good news about company performance. In contrast, when unearned revenues decline, the company owes less future amounts but this also means that sales of new products may have slowed. Payables and receivables generally involve an interest element. Recognition of the interest element the cost of money as a factor of time and risk results in valuing future payments at their current value.
The present value of a liability represents the debt exclusive of the interest factor. A discount on notes payable represents the difference between the present value and the face value of the note, the face value being greater in amount than the discounted amount. It should be treated as an offset contra to the face value of the note and amortized to interest expense over the life of the note. The discount represents interest expense chargeable to future periods. Liabilities that are due on demand callable by the creditor should be classified as a current liability.
Classification of the debt as current is required because it is a reasonable expectation that existing working capital will be used to satisfy the debt.
Liabilities often become callable by the creditor when there is a violation of the debt agreement. Only if it can be shown that it is probable that the violation will be cured satisfied within the grace period usually given in these agreements can the debt be classified as noncurrent.
An enterprise should exclude a short-term obligation from current liabilities only if 1 it intends to refinance the obligation on a long-term basis, and 2 it demonstrates an ability to consummate the refinancing. The ability to consummate the refinancing may be demonstrated i 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 ii by 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.
A cash dividend formally authorized by the board of directors would be recorded by a debit to Retained Earnings and a credit to Dividends Payable. The Dividends Payable account should be classified as a current liability.
An accumulated but undeclared dividend on cumulative preferred stock is not recorded in the accounts as a liability until declared by the board, but such arrearages should be disclosed either by a footnote to the balance sheet or parenthetically in the capital stock section. A stock dividend distributable, formally authorized and declared by the board, does not appear as a liability because a stock dividend does not require future outlays of assets or services and is revocable by the board prior to issuance.
Unearned revenue arises when a company receives cash or other assets as payment from a customer before conveying or even producing the goods or performing the services which it has committed to the customer. Unearned revenue is assumed to represent the obligation to the customer to refund the assets received in the case of nonperformance or to perform according to the agreement and thus earn the unrestricted right to the assets received.
While there may be an element of unrealized profit included among the liabilities when unearned revenues are classified as such, it is ignored on the grounds that the amount of unrealized profit is uncertain and usually not material relative to the total obligation. Unearned revenues arise from the following activities: 1 The sale by a transportation company of tickets or tokens that may be exchanged or used to pay for future fares.
Compensated absences are employee absences such as vacation, illness, and holidays for which it is expected that employees will be paid. If an employer meets conditions a , b , and c , but does not accrue a liability because of failure to meet condition d , that fact should be disclosed. An employer is permitted but not required to accrue to liability for sick pay that employees are allowed to claim only as a result of actual illness.
In addition, the amount set aside both the employee and the employer share will be reported as current liabilities until they are remitted to the appropriate third party. A contingent liability should be recorded and a charge accrued to expense only if: a information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements, and b the amount of the loss can be reasonably estimated.
A determinable current liability is susceptible to precise measurement because the date of payment, the payee, and the amount of cash needed to discharge the obligation are reasonably certain.
There is nothing uncertain about 1 the fact that the obligation has been incurred and 2 the amount of the obligation. A contingent liability is an obligation that is dependent upon the occurrence or nonoccurrence of one or more future events to confirm the amount payable, the payee, the date payable, or its existence. Contingent liabilities—obligations related to product warranties and product defects, premiums offered to customers, certain pending or threatened litigation, certain actual and possible claims and assessments, and certain guarantees of indebtedness of others.
The terms probable, reasonably possible, and remote are used in GAAP to denote the chances of a future event occurring, the result of which is a gain or loss to the enterprise. If it is probable that a loss has been incurred at the date of the financial statements, then the liability if reasonably estimable should be recorded.
If it is reasonably possible that a loss has been incurred at the date of the financial statements, then the liability should be disclosed via a footnote. The footnote should disclose 1 the nature of the contingency and 2 an estimate of the possible loss or range of loss or a statement that an estimate cannot be made.
If the incurrence of a loss is remote, then no liability need be recorded or disclosed except for guarantees of indebtedness of others, which are disclosed even when the loss is remote. Under the cash-basis method, warranty costs are charged to expense in the period in which the seller or manufacturer performs in compliance with the warranty, no liability is recorded for future costs arising from warranties, and the period of sale is not necessarily charged with the costs of making good on outstanding warranties.
Under the accrual method, a provision for warranty costs is made at the time of sale or as the productive activity takes place; the accrual method may be applied two different ways: expense warranty versus sales warranty method.
But under either method, the attempt is to match warranty expense to the related revenues. Under U. GAAP, companies may not record provisions for future operating losses. Suchprovisions do not meet the definition of a liability, since the amount is not the result of a past transaction the losses have not yet occurred. Therefore the liability has not been incurred. Furthermore, operating losses reflect general business risks for which a reasonable estimate of the loss could not be determined.
Note that use of provisions in this way is one of the examples of earnings management discussed in Chapter 4. By reducing income in good years through the use of loss contingencies, companies can smooth out their income from year-to-year. The expense warranty approach and the sales warranty approach are both variations of the accrual method of accounting for warranty costs.
The expense warranty approach charges the estimated future warranty costs to operating expense in the year of sale or manufacture. The sales warranty approach defers a certain percentage of the original sales price until some future time when actual costs are incurred or the warranty expires.
Southeast Airlines Inc. Therefore, the full-fare ticket should be recorded as unearned transportation revenue liability when sold and recognized as revenue when the transportation is provided.
The half-fare ticket should be treated accordingly; that is, record the discounted price as unearned transportation revenue liability when it is sold and recognize it as revenue when the transportation is provided.
Although the accounting for this transaction has been studied, no authoritative guideline has been developed to record this transaction. In the case of a free ticket award, AcSEC proposed that a portion of the ticket fares contributing to the accumulation of the 50, miles the free ticket award level be deferred as unearned transportation revenue and recognized as revenue when free transportation is provided. The total amount deferred for the free ticket should be based on the revenue value to the airline and the deferral should occur and accumulate as mileage is accumulated.
An asset retirement obligation must be recognized when a company has an existing legal obligation associated with the retirement of a long-lived asset and when the amount can be reasonably estimated. The absence of insurance does not mean that a liability has been incurred at the date of the financial statements. Until the time that an event loss contingency occurs there can be no diminution in the value of property or incurrence of a liability.
Expected future injury, damage, or loss resulting from lack of insurance need not be recorded or disclosed ifno contingency exists. And, a contingency exists only if an uninsurableevent which causes probable loss has occurred. Lack of insurance is not in itself a basis for recording a liability or loss.
In determining whether or not to record a liability for pending litigation, the following factors must be considered: a The time period in which the underlying cause for action occurred. Before recording a liability for threatened litigation, the company must determine: a The degree of probability that a suit may be filed, and b The probability of an unfavorable outcome. If both are probable, the loss reasonably estimable, and the cause for action dated on or before the date of the financial statements, the liability must be accrued.
There are several defensible recommendations for listing current liabilities: 1 in order of maturity, 2 according to amount, 3 in order of liquidation preference. The acid-test ratio and the current ratio are both measures of the short-term debt-paying ability of the company.
The acid-test ratio excludes inventories and prepaid expenses on the basis that these assets are difficult to liquidate in an emergency. The current ratio and the acid-test ratio are similar in that both numerators include cash, short-term investments, and net receivables, and both denominators include current liabilities.
If the terms of purchase are f. Accrual of unpaid amounts should be recorded in preparing financial statements dated other than at the end of a pay period. If the period for which the bonus is applicable has not ended but only a part of it has expired, it would be appropriate to accrue a pro rata portion of the bonus at the time of approval and make additional accruals of pro rata amounts at the end of each pay period. Ordinary orders, for which the prices are determined at the time of shipment and subject to cancellation by the buyer or seller, do not represent either an asset or a liability to the buyer and need not be reflected in the books or in the financial statements.
However, an accrued loss on purchase commitments which results from formal purchase contracts for which a firm price is in excess of the market price at the date of the balance sheet would be shown in the liability section of the balance sheet.
See Chapter 9 on purchase commitments. The entire amount would be reported as a long-term liability. This assumes Burr had not entered into a long-term agreement prior to issuance. Short-term debt refinanced. X 8 hrs. Also,if employeesearnvacationpayatdifferentpayrates,a consistentpattern of recognition e. The FASB requires that, when some amount within the range of expectedloss appears atthe time to be a better estimate than any other amount within the range, that amount is accrued.
When no amount within the range is a better estimate than any other amount, the dollar amountat the low end of the range is accrued and the dollar amountat the high end of the range is disclosed.
In this case, therefore, Salt-n- Pepa Inc. The potential insurance recovery is a gain contingency—it is not recorded until received. This is a gain contingency because the amount to be received will be in excess of the book value of the plant. Gain contingencies are not recordedand are disclosed only when the probabilities are high that a gain contingency will become reality.
However, it eliminates assets that mightbe slow moving,suchas inventoriesand prepaid expenses. Although industry and general business conditions are unknown in this case, the company appears to have a relatively strong current position. The main concern from a short-term perspective is the apparently low inventory turnover.
The rate of return on assets and profit margin on sales are extremely good and indicate thatthe company is employingits assets advantageously. The situations presented are basic ones including purchases and payments on account, and borrowing funds by giving a zero-interest-bearing note. The student is also required to prepare year-end adjusting entries. Problem Time 25—35 minutes Purpose—to present the student with the opportunity to prepare journal entries for several different situations related to liabilities.
The situations presented include accruals and payments related to sales, use, and asset retirement obligations. Year-end adjusting entries are also required. Problem Time 20—30 minutes Purpose—to present the student with an opportunity to prepare journal entries for four weekly payrolls.
The student must compute income tax to be withheld, FICA tax, and state and federal unemployment compensation taxes. Problem Time 20—25 minutes Purpose—to provide the student with the opportunity to prepare journal entries for a monthly payroll. Learn Accounting Concepts Efficiently. Powered and refined by the Knewton Adaptive Engine, with more than 15 million users, this new assignment type gives instructors the flexibility and control to create targeted adaptive experiences that match their teaching preferences.
With actionable analytics to support student and class intervention, Adaptive Assignments makes teaching and learning more efficient than ever. With personalized instructional material, assessment, and targeted feedback, students can more successfully recall and retain foundational material in order to succeed and apply knowledge to the intermediate accounting course. Hundreds of algorithmic questions , available across all levels of Blooms taxonomy, help student learn accounting and develop problem solving skills.
Analytics in Action screenshot. Solution Walkthrough Videos with Excel walk students through how to use basic and advanced Excel functions to solve select accounting problems from the text.
Gradable Excel Assignments develop the Excel knowledge and skills students need by giving them the opportunity to practice using formulas and functions to complete specific exercises in a real Microsoft Excel worksheet. Analytics in Action Features and Videos use Power BI-based data visualizations and dashboards to tell the stories of various business scenarios. Over 20 author-created videos drill deeper into the visualizations and dashboards, helping further explain how data visualizations can be used to tell the story behind the numbers.
Additional Data Analytics Problems in the end-of-chapter material provide students with opportunities to analyze information and prepare simple visualizations using Excel. These problems range in difficulty and offer varied data sets, providing instructors with the flexibility to assign problems that are at the appropriate level for their students.
Based on learning science, pre-built courses reflect insights from authors and subject matter experts to provide inspiration for engaging, effective course design and are fully customizable, giving you the flexibility to create your version of the perfect course. Donald E. Kieso , Ph. From to , he served as a charter member of the national Accounting Education Change Commission.
Jerry J. He holds a PhD in accounting from the University of Illinois. These articles have examined such financial reporting issues as accounting for price-level adjustments, pensions, convertible securities, stock option contracts, and interim reports. He has served on numerous committees of the American Accounting Association and as a member of the editorial board of the Accounting Review; he also has served as president and secretary-treasurer of the American Accounting Association.
He has served on the FASB task force that examined the reporting issues related to accounting for income taxes and served as a trustee of the Financial Accounting Foundation. Terry D. He received a B. Securities and Exchange Commission in Washington, D.
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