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Actions Shares. No notes for slide. Ch13 kieso intermediate accounting solution manual 1. Concept of liabilities; definition and classification of current liabilities. Accounts and notes payable; dividends payable. Short-term obligations expected to be refinanced. Deposits and advance payments. Compensated absences and bonuses. Collections for third parties. Contingent liabilities General. Guaranties and warranties.
Premiums and awards offered to customers. Self-insurance, litigation, claims, and assessments, asset retirement obligations. Presentation and analysis. Describe the nature, type, and valuation of current liabilities. Explain the classification issues of short- term debt expected to be refinanced. Identify types of employee- related liabilities. Identify the criteria used to account for and disclose gain and loss contingencies.
Explain the accounting for different types of loss contingencies. Indicate how to present and analyze liabilities and contingencies. Simple 10—15 E Accounts and notes payable. Moderate 15—20 E Refinancing of short-term debt. Simple 10—12 E Refinancing of short-term debt. Simple 20—25 E Compensated absences. Moderate 25—30 E Compensated absences. 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.
Rent Revenue Utilities Expenses Depreciation Expense Ending balance of supplies Add: Adjusting entry Deduct: Purchases Beginning balance of supplies Total prepaid insurance Present balance The entry in January to record salary expense was Salaries and Wages Expense January End Bal. Ending balance of salaries and wages payable Plus: Reduction of salaries and wages payable Beginning balance of salaries and wages payable. Cash received Unearned service revenue reduced Ending unearned service revenue January 31, Plus: Unearned service revenue reduced Beginning unearned service revenue December 31, To record payment of October 15 payroll.
To record revenue for services performed for which payment has not yet been received Cash To record receipt of cash for services not yet performed. To record the use of supplies during October. To record revenue for services performed for which payment has not yet been received Salaries and Wages Expense To record liability for accrued payroll.
To reduce the Unearned Service Revenue account for service that has been performed. Accumulated Depreciation— Equipment Accumulated Depreciation—Buildings Mortgage Payable Maintenance and Repairs Expenses Expenses Salaries and wages expense Rent expense Depreciation expense Interest expense Net Income Add: Net income Less: Dividends Retained earnings, December Property, plant, and equipment Equipment Supplies expense Insurance expense Total expenses Net income Assets Cash Accounts receivable Prepaid insurance Sales Revenue Less: Sales returns and allowances Sales Returns and Allowances Sales Discounts Selling Expenses Investment of cash in business.
Paid for advertising. Paid for one-year insurance policy. Purchased equipment on account. Received cash for services performed.
Paid salaries and wages expense. Paid creditor on account. Adjusting Entries: 1. Advertising Expense Accounts payable Interest payable Total current liabilities The following accounts and amounts would be shown in the February income statement: Supplies expense The problem deals with routine transactions of a professional service firm and provides a good integration of the accounting process.
Problem Time 35—40 minutes Purpose—to provide an opportunity for the student to prepare adjusting entries, and prepare financial statements income statement, balance sheet, and statement of retained earnings.
The student also is asked to analyze two transactions to find missing amounts. Problem Time 25—30 minutes Purpose—to provide an opportunity for the student to prepare adjusting entries.
The adjusting entries are fairly complex in nature. Problem Time 40—50 minutes Purpose—to provide an opportunity for the student to prepare adjusting entries and an adjusted trial balance and then prepare an income statement, a retained earnings statement, and a balance sheet. In addition, closing entries must be made and a post-closing trial balance prepared. Problem Time 15—20 minutes Purpose—to provide the student with an opportunity to determine what adjusting entries need to be made to specific accounts listed in a partial trial balance.
The student is also required to determine the amounts of certain revenue and expense items to be reported in the income statement. Problem Time 25—35 minutes Purpose—to provide the student with an opportunity to prepare year-end adjusting entries from a trial balance and related information presented.
The problem covers the basics of the end-of-period adjusting process. Problem Time 25—35 minutes Purpose—to provide an opportunity for the student to figure out the year-end adjusting entries that were made from a trial balance and an adjusted trial balance. The student is also required to prepare an income statement, a statement of retained earnings, and a balance sheet.
In addition, the student needs to answer a number of questions related to specific accounts. Problem Time 30—40 minutes Purpose—to provide an opportunity for the student to prepare adjusting, and closing entries. This problem presents basic adjustments including a number of accruals and deferrals.
It provides the student with an integrated flow of the year-end accounting process. Problem Time 30—35 minutes Purpose—to provide an opportunity for the student to prepare adjusting and closing entries from a trial balance and related information.
In addition, adjusting and closing entries must be made and a post-closing trial balance prepared. Trial Balance September 30 Debit Cash Expenses: Salaries and wages expense Office expense Add: Net income for September Less: Withdrawal by owner Notes Payable Less: Net loss Retained earnings, November 30, Total current assets Accumulated depreciation— equipment Total assets Long-term liabilities Notes payable Total liabilities Retained earnings Utilities Expense Repair Expense Freight Out Bad debt expense Utilities expense Less: Withdrawals Withdrawals during the year Unearned service revenue Salaries and wages payable Prepaid Rent Expense Rent revenue Total revenue Retained earnings, September 30, Prepaid rent expense Less: Accumulated depreciation Unearned rent revenue Retained earnings, Janaury Unearned Dues Revenue Dues Revenue Green Fees Revenue Rent Receivable Maintenance Expense Prepaid Insurance Bal.
Advertising Expense 6, Adj. Salaries and Wages Expense Admin. Salaries and Wages Expense Sales Other operating expenses Net income loss Property, plant, and equipment Land Less: Accum. Depreciation— Equipment Property Taxes Payable Property Tax Expense Unearned Admissions Revenue Both of these accounts would require an adjusting entry to recognize the proper amount of expense incurred during the period. In addition, depreciation expense is an adjusting entry related to a deferral.
PepsiCo is engaged in three different types of businesses: soft drinks, snack-food, and juices. As a result, it has more tangible fixed assets. While Coca-cola has substantially more intangible assets, it is not sufficient enough to offset the property, plant, and equipment.
Amortizable intangible assets for Coke and Pepsi increase the amount of amortization expense recorded in income. The amount of property, plant, and equipment and amortizable intangible assets reported for these two companies is as follows:. Kellogg experienced a slight slowing in sales slight decline in the current year which followed strong growth in the previous year.
The gross-profit percentage increased slightly after a drop in the prior year. Its growth in operating profit and cash flows, compared to prior years, suggest it faces a challenging period and might be starting recover. This may bode well for the strength and flexibility of its business model. Accumulated depreciation—Equipment Ticket Revenue Prepaid Advertising Principles The tradeoffs are between the timeliness of the reports, which contributes to relevance, and verifiability, the lack of which detracts from faithful representation.
That is, by preparing reports more frequently, the company provides more timely information, which can make a difference to a statement reader who needs to make a decision. However, preparing statements more frequently requires more subjective estimates, which reduces faithful representation. Search String: asset and characteristics. CON6, Par Search String: liability and characteristic. A liability has three essential characteristics: a it embodies a present duty or responsibility to one or more other entities that entails settlement by probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand, b the duty or responsibility obligates a particular entity, leaving it little or no discretion to avoid the future sacrifice, and c the transaction or other event obligating the entity has already happened.
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