MGT 105: Chapter 13

What is the general entry for a service type warranty at period end?

Unearned Revenue - Service XX Warranty Revenue XX

What is the valuation of a liability represented by?

Valuation = the PV of all future cash outflows

What is the important thing to remember with a zero-interest bearing Note in terms of accounts used to record interest?

The Interest Payable type account is never created! Instead "Notes Payable - Discount" is used to record interest and is the account that is credited when recording interest expense

What is a discount as it relates to zero-interest-bearing notes payable?

The discount represents the cost of borrowing.

In order to record a loss liability, what two criteria must be met?

The loss contingency must be probable and easily estimated

What rate is used when creating the compensation liability?

The rate at the time it is earned

True or False: Companies should recognize the expense and related liability for compensated absences in the year earned by employees.

True

Define 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."

Venible Newspapers sold 6,000 of annual subscriptions at $150 each on June 1. How much unearned revenue will exist as of December 31?

$375,000

Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Muggs $4 each. Muggs estimates that 45 percent of the coupons will be redeemed. Data for 2020 and 2021 are as follows: 2020 2021 Bags of dog food sold 500,000 600,000 Leashes purchased by Muggs 18,000 22,000 Coupons redeemed 120,000 150,000 The premium liability at December 31, 2021 is .........

$112,500

What are the general steps for a considerations payable problem?

1) Record sale 2) Record estimated liability from redemptions which results in a credit to consideration payable 3) Record any payment of actual consideration to customers by debiting consideration payable an crediting cash

What are some current liability example accounts?

A/P, Dividends Pay., Unearned Revenues, Income Tax Payable , Notes Payable

Which of the following should not be included in the current liabilities section of the balance sheet?: Trade notes payable The discount on short-term notes payable Short-term zero-interest-bearing notes payable All of these answers are included.

All of these answers are included.

Which of the following is a condition for accruing a liability for the cost of compensation for future absences?: -Payment of the compensation is probable. -The obligation relates to the rights that vest or accumulate. -The obligation is attributable to employee services already performed. -All of these are conditions for the accrual.

All of these are conditions for the accrual.

Composite provides extended service warranty contracts on electronic equipment sold through major retailers. The standard contract is for four years. During the current year, Composite provided 42,000 such warranty contracts at an average price of $162 each. Related to these contracts, the company spent $800,000 servicing the contracts during the current year. What is the net profit that the company will recognize in the current year related to these contracts?

Answer: $901,000 Because Unearned Service Revenue that year was $6,804,000 and only $1,701,000 was recognized as revenue that year. so $1,701,000 - 800k = 901,000

Describe an assurance type warranty

Assurance type warranty is a warranty included in the initial sale of product.

At what point in time is the interest expense account created?

At the end of each period in which it was incurred

A N/P-Discount only occurs for which type of Note Payable?

Only for a Zero-interest bearing Note Payable

Define Notes Payable: Borrowed funds with a written promise to pay the ______________ at the ________________

Borrowed funds with a written promise to pay the Face Value of Note at the maturity date

Company signs a $100k, 6%, four month Note. What is the entry on issuance date?

Cash 100,000 N/P 100,000

What is the entry to record issuance of 4-month, zero-interest- bearing note to a bank? (Here $100k note, 2k implied interest)

Cash 100,000 N/P-Discount 2,000 N/P 102,000

Company signs a $102,000, four-month, zero-interest bearing note. The PV of the note is $100k. What is the entry to record the issuance?

Cash 100,000 N/P-Discount 2,000 N/P 102,000

What is the general entry that should be recorded at time of sale for a service type warranty?

Cash XX Unearned Revenue-Service XX

What is the general entry to record Compensated Payable at period end when it is accrued?

Comp Expense XX Comp Payable XX

What is the general entry for compensation liability payment when it is being used where the pay rate is higher on the date used then the date earned?

Comp. Payable XX Comp Expense XX Cash XXXX where comp expense represents the difference in cash paid out in compensation at new rate and previous accrued liability recorded

At the end of the period, what is the generic entry to record accumulated compensated absences accrued?

Compensation Expense XXX Compensation Pay. XXX

A company gives each of its 75 employees (assume they were all employed continuously through 2020 and 2021) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2020, they made $21 per hour and in 2021 they made $24 per hour. During 2021, they took an average of 9 days of vacation each. What amount of vacation liability would be reflected on the 2020 and 2021 balance sheets, respectively?

Compensation liability in 2020 = $151,200 where entry to record is: Comp. Exp. 151,200 Comp. Pay. 151,200 Compensation liability in 2021 = $210,600 where first entry to record payment of used days is: Comp. Pay. 113,400 Comp. Exp. 16,200 Cash 129,600 and entry to record the additional accrual of days is: Comp Ex. 172,800 Comp. Pay. 172,800

Among the short-term obligations of Larsen Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Dennison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Larsen Company as

Current Liabilities

What does the "Notes Payable-Discount" account represent?

Differed Interest Expense or the amount(cost) of interest that will be paid to note holder

Craig borrowed $700,000 on October 1, 2020 and is required to pay $720,000 on March 1, 2021. What amount is the entry recorded at on October 1, 2020 and how much interest is recognized from October 1 to December 31, 2020?

Entry to record Note: so here since it is clearly stated what value is owed on due date it is a note with a stated interest rate. This results in a N/P account only at borrowing date. Cash 700,000 N/P 700,000 Then at the end of the accounting period an entry is made to record accrued interest expense. Interest Expense 12,000 Interest Payable 12,000

When note is interest bearing, we know that the cash actually received in issuance date is equal to the _______________ of the note.

Face Value

For a zero-interest bearing Notes Payable, the cash due at maturity is equal to the __________________________.

Face Value of Note

For an interest bearing Notes Payable, the cash due at maturity is equal to the __________________________.

Face Value of the Note plus interest

True or False: Companies should accrue an estimated loss from a loss contingency occurring during the fiscal year if information available prior to the issuance of financial statements indicates that it is reasonably possible that a liability has been incurred.

False, it has to be probable

True or False: A company recognizes gain contingencies only when a high probability exists for realizing them.

False. Gain contingencies are not realized until they happen

True or False: Under an assurance-type warranty, companies charge warranty costs only to the period in which they comply with the warranty.

False. The costs are incurred as an adjusting entry at the end of the period when estimated warranty liability is credited

How do you record an Interest Bearing Note Payable on the Issuance Date?

For an Interest-Bearing Note, on the Issuance Date you debit Cash for the amount of money borrowed and you credit N/P for the principal amount ONLY! Ex: Cash XX N/P XX

In the case of a Zero-interest Note Payable, what amount will the lender receive on the maturity date?

He will receive the face value of the note or the total amount in the N/P account

Company signs a $102,000, four-month, zero-interest bearing note. The PV of the note is $100k. What is the entry to record interest expense on April 30th?

Interest Expense 1,000 N/P - Disc. 1,000

Company signs a $100k, 6%, four month Note on March 1. What is the entry to record interest on June 30?

Interest Expense 2,000 Interest Payable 2,000

Greeson Corp. signed a three-month, zero-interest-bearing note on November 1, 2020 for the purchase of $500,000 of inventory. The face value of the note was $507,800. Greeson used a "Discount of Note Payable" account to initially record the note. Assuming that the discount will be amortized equally over the 3-month period and that there was no adjusting entry made for November, the adjusting entry made at December 31, 2020 would look like.....

Interest Expense 5,200 N/P-Disc 5,200

When thinking about problems related to compensation payments, it is useful to think of the accrued days as a type of _________________ the follows the _______________ method ?

Inventory, FIFO Method

In which account does the "interest cost" of a Zero-Interest Note Payable get recorded on issuance date?

It gets recorded in the "Discount on Notes Payable" Account

What kind of account in "N/P-Discount" and what is its normal balance? Also what does it represent?

It is a contra-liability account to N/P with a normal debit balance. It represents the cost of borrowing or implied interest.

What type of account in is "Notes Payable - Discount" and what is its normal balance?

It is a contra-liability account to Notes Payable and has a normal debit balance thus reducing Notes Payable

In the case of a Zero-interest Note, how is the amount of cash received on issuance date calculated?

It is just the PV of the face value of the note on maturity date

How do you calculate borrowing cost (interest cost) on a zero-interest bearing note?

It is the difference between the Face Value and yield of note

Define: Liability Valuation

Liability Valuation = PV of all expected future economic sacrifices (money outflows)

What is the relationship between current liabilities and a company's operating cycle?

Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).

What is a general journal entry to record a probable loss contingency from a lawsuit?

Loss from Lawsuit XXX Lawsuit Payable XXX

What are types of loss contingencies?

Loss from Lawsuit, Warranties

Company signs a $100k, 6%, four month Note on March 1. What is the entry to record maturity of note on June 30 if interest has already been accounted for?

N/P 100,000 Interest Payable 2,000 Cash 102,000

What is the general entry that should be recorded at time of sale for an assurance type warranty?

No entry needed since you just record the sale and the warranty is included as part of the sale

What is a general journal entry to record a unprobable loss contingency from a lawsuit?

No need to record

For a service type warranty, do you estimate the warranty expense?

No. If there are any expenses then Warranty Expense XX Parts Inv XX

What is the entry to record payment of an interest-bearing note and accrued interest at maturity? (Here $100k note, 2k interest)

Note Payable 100,000 Interest Payable 2,000 Cash 102,000

For a zero-interest bearing Notes Payable, the cash received by the Note Issuer is equal to the__________________________.

PV of the face value of the note

What are examples of employee related liabilities?

Payroll Deductions, Compensated absences, Bonuses

A company offers a cash rebate of $2 on each $6 package of batteries sold during 2021. Historically, 10% of customers mail in the rebate form. During 2021, 5,000,000 packages of batteries are sold, and 175,000 $2 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2021 financial statements dated December 31?

Rebate Expense in 2021 = $1,000,000 - this represents the whole estimated liability where 5,000,000 x .1 x $2 = 1,000,000 Rebate Payable in 2021 = $650,000 - this represents the whole estimated liability account minus what consideration was paid to customers 1,000,000 - (175,000 x $2) = 650,000

So for a zero-interest bearing note the person who writes the Note Payable will receive _________ cash than the face value of the note. This is how the____________ is accounted for. So for example if a firm receives a zero-interest bearing note from the borrower, then they will give the borrower the _______________________ and will receive the Face Value from the borrow on the maturity date.

So for a zero-interest bearing note the person who writes the Note Payable will receive less cash than the face value of the note. This is how the interest cost is accounted for. So for example if a firm receives a zero-interest bearing note from the borrower, then they will give the borrower the PV of the Face Value of the Note and will receive the Face Value from the borrow on the maturity date.

What is the general entry for an assurance type warranty when a company incurs an actual cost due to the warranty that period?

Warranty Expense XX Parts Inv. XX

What is the general entry for an assurance type warranty at period end when the company is recording the estimated liability?

Warranty Expense XX Warranty Liability XX

During 2019, Rao Co. introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method) Year Sales Actual Warrant Expenditures 2019 $1,600,000 $39,000 2020 2,500,000 65,000 2021 2,100,000 135,000 TOTALS $6,200,000 $239,000 What amount should Rao report as a liability at December 31, 2021?

Warranty Payable on Dec 31,2021 = $319,000 where 6,200,000 x .09 = $558,000 estimated liability 558,000 - 239,000 = 319,000 remaining in liability account

When is a contingent liability recorded?

When the future events are probable to occur and the amount can be reasonably estimated.

How and when do you record the interest expense of a Note Payable that is Interest-Bearing?

You accrue the interest in an adjusting entry at period end with a debit to interest expense and a credit to interest payable Ex: Interest Expense XX Interest Payable XX

When rate do you use to determine the value of compensation on the date it is USED?

You use the value of the rate of pay on the date used

For zero-interest bearing Notes Payable: At maturity, the borrower must pay back an amount _________than the cash received at the issuance date

greater

Define Deferrals

cash transactions that affect future period income statements

Zero-Interest bearing Notes have an _______________ interest rate

implied

Define Accruals

non-cash transactions that affect current period income statements.

Liabilities are ........

obligations arising from past transactions and payable in assets or services in the future

What rate is used when recording the payment/use of compensation liability?

the rate at the time it is used

Describe a service type warranty

warranty that provides additional services other than assurance warranty. This type of warranty uses a Unearned Revenue account.