Current Liabilities & Contingencies

Purchase Discounts Example 12-1 - 0 INTEREST BEARING (a) #1 On July 1, Waterway purchased $75,000 of inventory, terms 2/10, n/30, FOB shipping point. #2 Waterway paid freight costs $1237 (b) #2 July 3 return damaged goods and received a credit of $7500 (c) #3 July 10 paid for goods

#1 DR Purchases $75,0000 CR AP $75,000 #2 DR Freight in $1237 CR Cash $1237 DR AP $7500 CR Purchase Return $7500 #3 DR AP $67,500 CR Cash $66,150 CR Purchase Discounts $1350 {AP=75,000-7500=67,500} {Discount=67,500*2%=1350} {plug for cash=67,500-1350=66,150}

26) Within the current liabilities section, how do you believe the accounts should be listed? Defend your position.

(1) in order of maturity, (2) according to amount, (3) in order of liquidation preference. statements examined listed "notes payable" first, regardless of relative amount, followed most often by "accounts payable," and ending the current liability section with "current portion of long-term debt.

28) When should liabilities for each of the following items be recorded on the books of an ordinary business corporation? (a) Acquisition of goods by purchase on credit. (b) Officers' salaries. (c) Special bonus to employees. (d) Dividends. (e) Purchase commitments.

(a) A liability for goods purchased on credit should be recorded when title passes to the purchaser.If the terms of purchase are f.o.b. destination, title passes when the goods purchased arrive; if f.o.b. shipping point, title passes when shipment is made by the vendor. (b)Officers' salaries should be recorded when they become due at the end of a pay period. Accrual of unpaid amounts should be recorded in preparing financial statements dated other than at the end of a pay period. (c)A special bonus to employees should be recorded when approved by the board of directors or person having authority to approve, if the bonus is for a period of time and that period has ended at the date of approval. 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. (d)Dividends should be recorded when they have been declared by the board of directors. (e)Usually it is neither necessary nor proper for the buyer to make any entries to reflect commitments for purchases of goods that have not been shipped by the seller. 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 - purchase commitments

31) What evidence is necessary to demonstrate the ability to consummate the refinancing of short-term debt?

(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.

Gift card example - 12-10 Nash sells 300 gift cards at $45 per gift card and 150 of the gift cards are redeemed year end. Nash estimates that it will have 10% breakage. Prepare JE for redemption and breakage.

**10% estimated breakage for gift cards sold {10%*300=30; 300-30=270; 270 expected to be redeemed not 300 due to the breakage** **@ y/e 150 of the 270 are actually redeemed {150/270=56.66% DR Unearned Gift Card Revenue $7501 {.5556*300*45} CR Sales Revenue $6750 {45*150} CR Sales Revenue (breakage) $751 {plug}

27) How does the acid-test ratio differ from the current ratio? How are they similar?

-both measures a company's ability to pay off short-term debt -both numerators include cash, short-term investments, and net receivables, and both denominators include current liabilities -The acid-test ratio excludes inventories and prepaid expenses on the basis that these assets are difficult to liquidate in an emergency

13) What is gift breakage? Describe accounting in this regard.

-is when revenue is recognized from good/services delivered but not used -unredeemed, lost, or expired gift cards

12) What is a gift card? How does the accounting for a gift card reflect the application of the revenue recognition principle?

-type of prepayment for goods/services rev rec prin=revenues are recognized when goods/services delivered-not when cash received The seller records a deferred revenue liability and then records revenue once the gift card is used and if the gift card never gets used then the seller recognizes revenue when it expires. Relates to the revenue recognition principle because revenue is not recorded when cash is received it is recorded when the good/services delivered.

6) What is the nature of a discount on NP

0 INTEREST BEARING discount=deduction from the usual cost of something usually given for prompt or advance payment NP=long-term liabilities that indicate the money a company owes its financiers—banks and other financial institutions proceeds from NP is less than the face value of the note; treated as an offset to the face value of the note and amortized to interest expense over the life of the note - discount rep interest expense chargeable to future periods

LT liabilities

<1 we record LT liabilities at PV ex. long term debt such as bank loans, notes payable, bonds payable, mortgages ^ ex. bank loans or notes for equipment, buildings, land, etc.

current liabilities

>1 we record current liabilities at face value (what we expect to pay) ex. if we pay it in 6 mo. -require the use of existing resources (CA or the creation of CL) Commonly reported current liabilities are those related to payables (e.g., accounts, notes, and income taxes) and unearned revenues (e.g., gift cards and customer advances).

What does 2/10, n/30 mean?

A buyer will receive a 2% discount on the net amount if they pay the invoice in full within the first ten days of the invoice date. Otherwise, the full invoice amount is due in 30 days without a discount.

what is callable debt?

A callable bond is a debt security that can be redeemed early by the issuer before its maturity at the issuer's discretion. A callable bond allows companies to pay off their debt early and benefit from favorable interest rate drops.

Gift card example 12-9 Splish sells 200 gift cards at $50 per gift card and 100 of the gift cards are redeemed by year end. Prep JE.

ADJ - sells only 200 DR Cash $10,000 CR Unearned gift card revenue $10,000 {200*50} EOY - we know 100 are redeemed y/e DR Unearned gift card revenue $5000 CR Sales revenue $5000 {100*50}

What are type of current liabilities

AP, NP, current maturities of LT debt, dividends payable, returnable deposits, sales and use taxes, payroll taxes, and accrued expenses

What are examples of current liabilities

AP- invoice in hand NP- current portion is current customer advances and deposits- up front pymt to "hold their spot" unearned revenues- prepaid to us taxes payable- amount we have to pay employee related liabilities- bonuses, vacation, salary accrual

19) Grant Company has had a record-breaking year in terms of growth in sales and profitability. However, market research indicates that it will experience operating losses in two of its major businesses next year. The controller has proposed that the company record a provision for these future losses this year, since it can afford to take the charge and still show good results. Advise the controller on the appropriateness of this charge.

Advise the controller to not record the future operating loss based on GAAP rules. This provision does not meet the definition of a liability (must result from a past transaction, and can be reasonably estimated) *we cannot accrue based on what we think will happen-cant accrue for a worry* reasonably possible=don't accrue

service-type warranty (extended warranty)

An additional service, not included in the sales price of the product. A service-type warranty is recorded as a separate performance obligation. unearned revenue revenue is recognized on a straight line basis over the life of the warranty entries: 1. sale 2. costs incurred by the co. 3.record revenue recognized on service type warranty if the customer has the option to purchase it separately or if it provides a service to the customer beyond fixing defects existing at the time of sale

Annual Sub example 12-8 Pharoh sold 10,560 annual subscriptions on August 1, 2025 for $14 each. Prepare the August 1 entry and the December 31 adjusting entry.

Aug 1 DR Cash $147,840 CR Unearned Sub Revenue $147,840 Dec 31 DR Unearned Sub Revenue $61,600 CR Sub Revenue $61,600 {5/12*147,840}

How do you know it is a loss contingency premium problem and what is the JE if you want to record the liability of unredeemed coupons at the end of the year?

Basically in order to boost sales a co will have a plan in place where if a customer buys their product then they could win a prize "new sales promotion plan" "coupon" "certain % estimation redeemed" How many should be reported as unredeemed Premium Expense Premium liability

Weston Industries has a potential contingent liability that is considered reasonably possible. The company must now prepare a footnote to its financial statements describing the contingent liability. Which of the following does not need to be included in this footnote? A Guarantees to repurchase receivables that have been sold or assigned. B Guarantees of indebtedness of others C The terms of the new obligation incurred or to be incurred D Obligations of commercial banks under "stand-by letters of credit"

C) The terms of the new obligation incurred or to be incurred

4) How are current liabilities related by definition to current assets? How are current liabilities related to a company's operating cycle?

CA: assets expected to be used up, converted to cash or sold within one fiscal year or operating cycle CL: debts a company must pay within one fiscal year or operating cycle ^both have to be within 12 months Current liabilities are a company's short-term financial obligations that are due within one year or within a normal operating cycle. CL require the use of CA (resources) By definition CL are tied to CA and CA by definition are tied to the operating cycle, making CL also tied to the operating cycle. oc: buy (CA), sell, receive cash, pay off debt (CL)

1) Distinguish between a current and long term liability

CL - requires use of existing resources aka current assets, or the creation of CL; due within 12 months LT debt- all liabilities not classified as CL; owes a third party creditor (used to finance assets-land, buildings, equipment) that are payable beyond 12 months ^different based on their nature and time. For instance

The numerator of the acid-test ratio consists of: Cash, inventory and short-term investments. Cash, short-term investments, and net receivables. Cash inventory and net receivables. Total current assets.

Cash, short-term investments, and net receivables.

20) explain the accounting of an assurance type warranty

Companies do not record a separate performance obligation for assurance-type warranties. This type of warranty is nothing more than a quality guarantee that the good or service is free from defects at the point of sale. These types of obligations should be expensed in the period the goods are provided or services performed (in other words, at the point of sale). In addition, the company should record a warranty liability. The estimated amount of the liability includes all the costs that the company will incur after sale due to the correction of defects or deficiencies required under the warranty provisions. free of charge to the customer if product failure occurs within a specified period of time.

17) what is the difference between a current liability and contingent liabilities?

Current liabilities are the obligations that a company owes and are payable within one year on the balance sheet date; you know you will pay this and you know the exact amount of payment Contingent liabilities are the obligations whose payments depend on specific future events; you may or may not pay this and you don't know the exact amount, a reasonable estimate

How do we account for current liabilities?

Current liabilities are usually recorded and reported in financial statements at their full maturity value. Because of the short time periods involved, frequently less than one year, the difference between the present value of a current liability and the maturity value is usually not large. Companies record unearned revenues as current liabilities until the performance obligation is satisfied. Liabilities for contingencies are recorded when future payments are both reasonably estimable and probable. PV=current payment MV=what will be due at the end of the accounting cycle/period

Service warranties on appliance sales

Current liability or long-term liability depending on term of warranty

12-15 service type warranty example The company offers smart home systems to its customers on a 4-year warranty contract. During 2025, the company sold 20,000 warranty contracts at $66 each. The corporation spent $178,000 servicing warranties through 2025. a. prepare JE for the sale b. cost of servicing c. recognition of warranty revenue

DR Cash $1,320,000 CR Unearned Warranty Revenue $1,320,000 {66*20,000} DR Warranty Expense $178,000 CR inventory $178,000 (given) DR Unearned Warranty Revenue $330,000 CR Warranty Revenue $330,000 {1.320M/4 yr warranty}

security deposit example 12-11 Novak housing requires all tenants pay $560 security deposit, which will be returned at the end of the lease, less any repair costs to the apartment. Novak rented 290 apartments in the current month. Prepare the JE for the security deposits collected.

DR Cash $162,400 CR Refundable Deposit Liability $162,400

lawsuit liability example 12-13 Cheyenne Company was recently sued by a competitor for patent infringement. Attorneys have determined that it is probable that Cheyenne will lose the case and that a reasonable estimate of damages to be paid is $275,700. Due to this case, they are deciding to establish $97,900 self insurance allowance.

DR Lawsuit Loss $275,700 CR Lawsuit Liability $275,700

lawsuit liability example 12-12 Blue Inc. is involved in a lawsuit at December 31, 2025. (a) prepare dec 31 JE assuming it is probable that Blue will be liable for $857,200 as a result of this suit.

DR Lawsuit Loss $857,200 CR Lawsuit Liability $857,200

DEAD

Debits increase Expenses, Assets, and Dividends

12-6 vacation example Martinez Inc. provides vacation time to its employees. At December 31, 2025, 15 employees have earned 2 weeks of vacation. The average salary is $720 per week. Prepare the Dec 31 adjusting entry.

Dec 31 ADJ DR Salary & Wage Expense $21,600 CR Salary & Wage Payable $21,600 {15*2*$720}

9) Under what conditions is an employer required to accrue a liability for sick pay? Under what conditions is an employer permitted but not required to accrue a liability for sick pay?

Employers are required to accrue a liability for "sick pay" that employees are allowed to accumulate and use as compensated time off even if their absence is not related to an illness. An employer is permitted, but not required, to accrue a liability for sick pay that employees are allowed to claim only as a result of actual illness.

Which of the following loss contingencies would be incorrectly accrued? Obligations related to product warranties Premiums offered to customers Collectibility of receivables General or unspecified business risks

General or unspecified business risks

What are specific situations in which a assurance-type warranty may be used

If the warranty is required by law, it is more likely to be an assurance-type warranty because such laws exist to protect customers from purchasing defective products. If the nature of the promised tasks entails specific tasks to provide assurance that a product complies with certain standards, then it is more likely that the warranty is an assurance-type warranty.

whats the JE for an ARO

Initiation: capitalize PV of retirement (given) Plant Asset Cash Plant Asset ARO ARO liability Over time: dep using straight line, apply interest rate depreciation expense accumulated depreciation Interest expense ARO liability Maturity: release the liability and incur the costs ARO liability Loss on ARO/ARO expense Cash

Why is information about current liabilities important?

Investors and creditors are interested in a company's liquidity, which is the ability of a company to pay its current liabilities on time. Short-term liquidity ratios, such as the current ratio (current assets ÷ current liabilities), are used to analyze the liquidity of a company. In general, the greater a company's liquidity, the lower its risk of failure. comparable to 1, anything less is not very good

JT Engineering plans to retire a short-term bond payable using a bond sinking fund. This fund is classified as a long-term asset. Based on this information, JT should report the bond payable in the Choose your answer here short-term long-term liabilities section of its financial statements.

LT

29) How should a callable debt (lender) be reported in the debtors financial statements?

Liabilities that are due on demand (callable by creditor) should be classified as CL b/c 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.

Do the following fit the definition of PAR? Why? Astra Inc. reports as a liability "anticipated losses from pending transactions." Hen-low Co. may be sued by a customer who was injured on Hen-low's property. If sued, Hen-low's attorney believes it is possible that the company may lose the suit.

NO a probable future sacrifice of economic benefits that (cash, goods, services) arise from a present obligation to transfer goods or services {unavoidable, we owe somebody} resulting from past transactions or events (already occurred can't accrue for a worry; anticipated losses, a loss that may or may not happen and the potential lawsuit do not represent a present obligation because none of the following events have actually occurred yet, for ex. the injured party has not yet sued *no cash, goods, or services have been sacrificed/transferred, we don't technically owe anyone for anything yet bc the transactions have not even occurred they just have the potential to occur in the future so they are not liabilities to the co. yet "pending transactions" the condition that might cause the loss has not taken place

24) Should a liability be recorded for risk of loss due to lack of insurance coverage?

No -does not support PAR definition -Expected future injury, damage, or loss resulting from lack of insurance need not be recorded or disclosed if no contingency exists. And, a contingency exists only if an uninsurable event which causes probable loss has occurred. Lack of insurance is not in itself a basis for recording a liability or loss.

Borrowing a note 12-3 - zero interest bearing Marin corporation borrowed $70,000 on November 1, 2025 by signing a $71,575 3 month zero interest bearing note. prepare nov 1, dec 31 adjusting entry, and feb 3 and feb 1 entries

Nov 1 DR Cash $70,000 DR Discount on NP $1575 {plug} CR NP $71,575 Dec 31 DR Interest Expense $1050 CR Interest Payable $1050 {1575*2/3} Feb 1 DR Interest Expense $525 CR Interest Payable $525 {1575*1/3} DR NP $71,575 CR Cash $71,575

18) how are the terms probable reasonably possible and remote related to contingent liabilities

Probable contingencies are likely to occur and can be reasonably estimated and are recorded. Reasonably possible contingencies do not have a more-likely-than-not chance of being realized but are not necessarily considered unlikely either- disclosed in footnotes. Remote contingencies aren't likely to occur and aren't reasonably possible and do not need to be recorded or disclosed.

RL Enterprises financial statements include a $100,000, 8%, nine-month note in its long-term liabilities section. RL plans to retire the liability at maturity using proceeds from the liquidation of an investment property. Which of the following can you assume based on this information? RL is using an asset classified as long-term to pay off a current liability. RL is using an asset classified as long-term to pay off a long-term liability. RL is using an asset classified as short-term to pay off a current liability.

RL is using an asset classified as long-term to pay off a current liability.

23) Pacific Airlines Co. awards members of its Frequent Fliers Club one free round-trip ticket, anywhere on its flight system, for every 50,000 miles flown on its planes. How would you account for the free ticket award? Please be specific.

Revenue would be deferred (unearned transportation revenue) and recognized when transportation is provided.

25) what factors must be considered in determining whether or not to record a liability for pending litigation? Threatened litigation?

The following should be considered: (a) The time period in which the underlying cause for action occurred. (b) The probability of an unfavorable outcome. (c) The ability to make a reasonable estimate of the amount of loss. probable + reasonable - very similar to contingencies 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.

Assurance type- warranty example 12-14 Concord Factory provides a 2-year warranty with one of its products which was first sold in 2025. Concord sold $940,900 of products subject to warranty. Concord expects $122,010 of warranty costs over 2 years. In that year, concord spent $74,460 servicing warranty claims. prepare the JE to record the sales and dec 31 adjusting entries

Warranty costs incurred DR warranty expense $74,460 CR inventory $74,460 sale DR cash $940,900 CR sales revenue $940,900 eoy expense DR warranty expense $47,550 CR warranty liability $47,550 {122,010-74,460}

assurance-type warranty (base warranty)

Warranty, included in the sales price of a company's product (not a separate performance obligation), that the product meets agreed-upon specifications in the contract at the time the product is sold. -nothing more than a quality guarantee that the good or service is free from defects at the point of sale entries: 1. sale 2. costs incurred by the co. 3.payment for warranty costs incurred (if you actually had to pay to replace or fix a product for a customer) at EOY IS (seller perspective): expense it 100% in period sold assurance=a promise warranty=a contract promising to repair or replace within a specific time A warranty that cannot be purchased separately and only provides assurance that a product will function as expected and in accordance with certain specifications is not a separate performance obligation

30) Under what conditions should a short-term obligation be excluded from current liabilities?

a co. should exclude a ST obligation from CL if the following is met: 1) It must intend to refinance the obligation on a LT basis 2) It must demonstrate an ability to consummate the refinancing. Meeting these criteria supports the assertion that current assets will not be used to pay the debt

12-17 Dec 31, 2025, Bramble owes $529,700 on a NP due Feb 15, 2026. a. If Bramble had restructured the note on Dec 15, 2025 so that they have a contractural right to defer payment $264,850 of the note until Feb 15, 2027 how much of the $529,700 should be reported as a current liability at Dec 31, 2025? b. If they pay off the note on Feb 15, 2026 and then borrow $1,059,400 on a long term basis on March 1 how much of the $529,700 should be reported as a current liability in Dec 31, 2025? BS issues March 1, 2026

a. $264,850 ^ subtract amount you are deferring to a future period; deferred it before deadline in the clear! b. $529,700 none of this has anything to do with the payment due on dec 31 all of it happens after

7) what are comp absences

absences such as vacation, illness, and holidays for which it is expected that employees will be paid

What is the difference between the accounting cycle and operating cycle

acct. consists of the steps from recording business transactions to generating financial statements for an accounting period - think reporting for the public (gov, investors) operating cycle is a measure of time between purchasing inventory, selling the inventory as a product, and collecting cash from the sales transaction - think cycle of $ for businesses

Accounts Payable

balances owed to others for goods, supplies, or services purchased on open account; arise because of the time lag between the receipt of service/goods and the payment for them he terms of the sale (e.g., 2/10, n/30 or 1/10, E.O.M.) usually state this period of extended credit, which is commonly 30 to 60 days. company buys something on account record liabilities for purchases of goods upon receipt of the goods The invoice received from the vendor or creditor specifies due date and amount due to settle the account

5) Why do we PV long term liabilities

because LT debt has interest 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. later it will be more due to the interest that grows over time but we want to know what the value is today separate from interest

Acid Test Ratio

cash + current investments + accounts receivable / current liabilities relates total current liabilities to cash, short-term investments, and receivables -measures short term ability of a company to meet its obligations but with more liquid items -excludes inventory

Current Ratio

current assets/current liabilities (liquidity) CA=Cash, short-term investments, accounts receivable, inventory, and perhaps prepaid expenses -measures company's ability to meet its short term obligations -bigger numerator the better

Premium offers outstanding

current liability

accrued vacation pay

current liability

amounts received for gift cards

current liability

current maturities of long term debts to be paid from current assets

current liability

customer advance on an order

current liability

employee payroll deductions unremitted

current liability

estimated taxes payable

current liability

gift certificates sold to customers but not yet redeemed

current liability

sales taxes payable

current liability

unpaid bonuses to officers

current liability

Discounts on NP

current or long term liability depending on face value of note

Deposit received from customer to guarantee performance of a contract

current or long term liability depending on time

Why are dividends payable in the form of additional shares of stock not recognized as a liability? a. Because they will be disbursed during a subsequent operating cycle b. Because they are not considered an obligation until disbursement is authorized c. Because they can be reinvested in the company rather than being disbursed d. Because they do not require the future outlay of assets or services

d. Because they do not require the future outlay of assets or services

When considering current liabilities, why do accounts payable arise? a. They arise because the operating cycles of the company selling an asset and the company purchasing an asset are different. b. They arise because sometimes the title to an asset is received in one period and the physical asset is received in another period. c. They arise because large purchases often require some sort of financing or other special terms. d. They arise because there is a lag time between receipt of services or title and the payment for them.

d. They arise because there is a lag time between receipt of services or title and the payment for them.

Generally speaking on the balance sheet debits are () and credits are ()

debits are good credits are bad income statement is opposite debits are bad credits are good

12-7 bonuses example Swifty Corporation provides bonuses based on net income. 2025 bonuses total $361,700 and are paid on Feb 15, 2026. Prepare the Dec 31 adj entry and the feb 15 2026 entry.

dec 31 ADJ DR Salary & Wage Expense $361,700 CR Salary & Wage Payable $361,700 feb 15 DR Salary & Wage Payable $361,700 CR cash $361,700

PAR

defines what a liability is: a probable future sacrifice of economic benefits that arise from a present obligation to transfer goods or services {unavoidable, we owe somebody} resulting from past transactions or events ^ we cant accrue a worry, we can only accrue if that event has actually occurred

If an employee earned a benefit attributable to their service for the company and the employer provides them that benefit, accrues for it, and then pays for it later then this would be an example of...

employee-related liabilities aka bonuses, vacation time, and accrued salaries

personal injury claim pending that is not probably and not reasonably estimated

footnote disclosure

22) Southeast Airlines Inc. awards members of its Flightline program a second ticket at half price, valid for 2 years anywhere on its flight system, when a full-price ticket is purchased. How would you account for the full-fare and half-fare tickets?

full fare tickets would be recorded as unearned transportation revenue (liability) when sold and recognized as revenue when transportation provided. half fare would be recorded as unearned transportation revenue (liability) at the discount price when sold and then revenue when transportation is provided.

The following appeared in the notes of JT Engineering's December 31, 2019, financial statements. In Q1, a U.S. District Court in Chicago, IL, awarded JT a $1 million judgment against RL Enterprises related to RL's failure to uphold its warehousing agreement with JT. JT has recorded no income relating to this judgment because RL has filed an appeal. This is an example of a disclosure of a(n): accrual for loss contingency. litigation. gain contingency. guarantees of indebtedness.

gain contingency

What are specific situations in which a service-type warranty may be used

insurance policy that covers the repair of the product purchased for a period beyond the assurance-type warranty time limit. -iphone insurances beyond the assurance portion of warranty

What is the JE to record the probable liability that a business will be sued for $900,000

legal expense 900,000 legal liability 900,000 not probable=remote=no entry=no payment

A company's current ratio provides information about that company's profitability. efficient use of assets. liquidity. extent of slow-moving inventories.

liquidity

What are types of 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

When is a loss contingency accrued?

only if a loss is probable and the amount can be reasonably estimated ^accrue and disclose if you can't reasonably estimate it then you disclose if there is a range accrue the low end of the range, we never accrue for a gain

When a company receives an advance payment, which financial statements are affected on the date of the payment?

only the balance sheet

credit/cash sale w % sales tax included 12-4 Nash corporation made credit sales of $33,000 which are subject to 6% sales tax. The corporation also made cash sales $15,476 including the 6% sale.

pt. 1) DR AR $34,980 {1.06*33,000} CR Sales Revenue $33,000 {given} CR Sales Taxes Payable $1980 {plug} pt. 2) DR Cash $15,476 {given} CR Sales Revenue $14,600 {15476/1.06} CR Sales Taxes Payable $876 {plug}

21) explain the accounting of an service type warranty

recorded as a separate performance obligation For example, the seller recognizes the sale of the TV w the assurance-type warranty separately from the service-type warranty. The sale of a service-type warranty is usually recorded in an Unearned Warranty Revenue account. Companies then recognize revenue on a straight-line basis over the period the service-type warranty is in effect. Companies only defer and amortize costs that vary with and are directly related to the sale of the contracts (mainly commissions). Companies expense employees' salaries and wages, advertising, and general and administrative expenses because these costs occur even if the company did not sell the service-type warranty. provides a service to the customer beyond the period covered by the assurance-type

8) Under what conditions must an employer accrue a liability for the cost of compensated absences?

should be accrued if: a. The obligation is attributable to employee services already performed. b. The obligation relates to the rights that vest or accumulate. c. Payment of the compensation is probable. d. amount reasonably estimated If the amount is not reasonably estimated then that fact should be disclosed.

accrual revenue

someone is paying us later for a good/service AR-sales revenue; cash-service revenue ^someone purchasing something from us "on account" AR-someone owes us AP-we owe someone else CASH LATER on account

deferred revenue

someone pays us early for a good/service cash unearned rev unearned rev sales rev CASH FIRST

premium expense example 12-16 Flounder Co. offers a set of building blocks to customers who send in 3UPC codes from Flounder cereal along with 40 cents. The block sets cost $1 each to purchase and 70 cents to mail to customers. In 2025 the company sold $888,000 boxes of cereal. The company expects 30% of the codes to be sent. During 2025 88,000 of the codes were redeemed prepare their adjusting entry for Dec 31.

step 1: figure out what we pay-customer pays 1.70-.40=1.3 Step 2: apply the % estimate # boxes sold 2025=888,000 redemption estimate=30% Box est=888,000*.3=266,400 Step 3: deduct the # boxes processed from the estimate of boxes sold Boxes processed=88,800 266,400-88,800=177,600 step 4: cost of estimated claims outstanding 177,600/3*1.3=76,960 ^must factor in the 3 UPC codes^ DR Premium Expense $76,960 CR Premium Liability $76,960

Define operating cycle

time it takes a company to buy goods, sell them and receive cash from the sale of said goods how long it takes a co. to turn its inventory into cash not necessarily 12 mo. - dependent on industry there could be multiple cycles with 12 mo. buy, sell, receive cash

why do we accrue for loss contingencies?

to account for the amount of potential loss we put money in a jar so in case of an emergency, we have money to take out to cover the casualties *must be a past event

If a business received the money up front and then accrued for it throughout the year what type of current liability would that be?

unearned revenue- received money first but would not earn it until year end when they had completed the service or provided the good to the customer. adjusting entry* you would first record cash then credit unearned rev then debit unearned rev and credit rev acct ex. record subscriptions sold 12,000 for $18 cash 216K unearned 216K EOY adjusting entry after providing service/product - the first entry only recorded the entire sale so you need to first find the price per month then multiply that by the amount of time past (216/12=18k*5 mo=90,000) unearned rev 90,000 rev 90,000

accrual expense

we are paying someone later for a good/service Utility expense Utility payable ^we are buying something and promising we will pay later CASH LATER literally this whole chapter*

deferred expense

we pay someone early for a good/service pp rent cash rent expense pp rent CASH FIRST

11) How does unearned revenue arise? Why can it be classified properly as a current liability? Give several examples of business activities that result in unearned revenues.

when a customer pays a company ahead of time for goods/services -a CL bc there is a present obligation to the customer (1) The sale by a transportation company of tickets or tokens that may be exchanged or used to pay for future fares. (2) The sale by a restaurant of meal tickets that may be exchanged or used to pay for future meals. (3) The sale of gift certificates by a retail store. (4) The sale of season tickets to sports or entertainment events. (5) The sale of subscriptions to magazines.

When must a company recognize an asset retirement obligation?

when it has legal obligation associated with the retirement of a long-lived asset and when the amount of the liability can be reasonably estimated record at PV

Borrowing a Note 12-2 - interest bearing Indigo company borrowed $44,400 on November 1, 2025 by signing a $44,400 9% 3 month note. prepare nov 1, dec 31 adjusting entry, and feb 3 and feb 1 entries

when recording a note make sure you account for the interest Nov 1 DR Note Payable $44,400 CR Cash $44,400 Dec 31 *2months DR Interest Expense $666 CR Interest Payable $666 Feb 1 DR NP $44,400 DR Interest Expense $333 *1 month DR Interest Payable $666 * 2months Cr Cash $45,399 {interest expense=44,400*9%*1/12=$333} {interest payable=44,400*9%*2/12=$666} {Cash=int exp+int pay+NP=333+666+44400=$45,399}

simple definition of liability

you owe someone money