What 3 criteria must be met before an obligation is met as a liability?
- a. There is a present duty requiring future transfer of assets or performance of services.
- b. The obligation leaves little or no discretion to avoid the future sacrifice.
- c. The obligation is a result of a past transaction.
An obligation whose liquidation is expected to require the use of existing current assets or the creation of other current liabilities.
What are the two methods of handling cash discounts?
Gross and Net Methods
How do you do the gross method of handling cash discounts?
Purchases and AP are recorded at gross amounts. If the discount is taken, purchase discounts is credited and is a contra purchases account.
How do you do the net method of accounting for cash discounts?
Purchases and AP are recorded net of any cash discounts available. If the discount is not taken, purchase discounts lost is debited and is an expense account.
What are the two basic types of short-term notes payable?
Interest and Non-interest bearing notes
What are the 3 important dates for cash dividends? What do they mean?
- Date of declaration: Date the dividends are declared by the BOD. They become a legal liability on this date.
- Date of record: Date the corporation determines who owns the stock and will therefore receive dividends. There is no journal entry on this date.
- Date of payment: Date the dividend liability is paid.
What is debited and credited on the date of declaration?
When is this usually done?
- Retained Earnings is debited
- Dividends Payable is credited
- This is usually done at the end of the year or the end of the companies fiscal year.
What is debited and credited on the date of record?
- Dividends payable is debited and
- Cash is credited.
When must long term liabilities be reported?
at the present value of future cash flows.
When is a portion of long-term debt reclassified as a current liability?
when a portion of long-term debt is coming due and will be paid out of existing current assets
What evidence must be present to reclassify short-term debt to long term?
- 1. Management's intent to refinance the short-term debt on a long term basis and
- 2. The enterprise's ability to accomplish the long term refinancing.
How can you know if the enterprise is able to accomplish the long term refinancing?
- a. If during the subsequent period, the short-term debt is actually refinanced on a long term basis by issuing long term debt or equity securities or
- b. If prior to the issuance of the bs the firm enters into a noncancelable, long term agreement that clearly allows the firm to refinance the short term debt on a long term basis.
What are the two common methods of accounting for sales tax and what do the journal entries look like?
- a. Sales and sales tax payable are recorded separately. Cash is debited and sales and sales tax payable are credited.
- b. The entire amount received is recorded as sales. An adjusting entry is needed periodically. Cash is debited and sales is credited. Adj Entry is Sales is debited and Sales tax payable is credited.
What are the two different types of property taxes that we studied?
- a. Property taxes which are levied on the property's assessed value, which approximates its fair market value and
- b. Property taxes which are levied on a lien date, which is typically the beginning of the taxing authority's upcoming fiscal year.
What is the theoretically preferable method of accounting for property taxes and how does it work?
In the accruing liability method the property tax expense and the related property tax payable are recorded as the tax accrues or is incurred by the firm.
You accrue an expense and liability for compensated absences to be taken off in the future when what factors are present? What factors must be considered in doing this?
- 1. The future compensation is probable
- 2. The amount of the compensation is reasonably estimable.
- 3. The employer's obligation relates to services already rendered.
- 4. The employees' rights are vested or they carry over from period to period.
- 1. Sick pay must be accrued if the rights are vested or if the employees do not have to be ill to take the time off.
- 2. Sick pay may be accrued (but is not required) if the employees are required to be ill to take the time off.
What would the journal entry look like for accruing sick pay?
Debit salary expense and credit salaries payable.
What is the process for finding Bonuses and Taxes?
- A. Know the 3 equations for bonus, taxes, and net income
- B. Write them down
- C. Converge all equations into 1 in terms of bonus
- D. Solve for bonus
- E. Plug bonus into tax equation and solve for tax.
What are the 3 equations necessary to find bonus and taxes?
- !. Net income=Gross Income-Bonus-taxes
- 2. Bonus=rate(gross income-bonus-taxes)
- 3. Taxes=rate(gross income-bonus)
What is a contingency?
- An existing condition
- involving uncertainty
- that has a possible gain or loss.
When are gain contingencies recognized?
when they are realized.
When will a loss contingency be accrued?
- When both of the following conditions are met:
- 1. It is probable that an asset has been impaired or liability incurred by the bs date
- 2. The amount of the loss is reasonably estimable
What are the 3 ranges of possibility that a loss contingency will be realized and what do they mean?
- 1. Probable- the probability of the future event confirming the loss is likely.
- 2. Reasonably possible- the probability of the future event confirming the loss is more than remote but less than likely.
- 3. Remote- the probability of the future event confirming the loss is slight.
In what two situations would a loss contingency be disclosed but not accrued?
- 1. The negative outcome is probable, but the amount is not reasonably estimable.
- 2. The negative outcome is reasonably possible, and the amount is or is not reasonably estimable.
What would a loss contingency posting look like for a lawsuit?
- debit estimated loss on law suit
- credit estimated liability on lawsuit
If it is probable that you will have a loss but you don't have a best estimate then what number will you post?
If you have a range from lowest to highest possibilities then you would post the lower and put the range in the notes. If you don't have a range then you can't post anything.
When should warranty expenses be recognized?
in the period in which the item is sold
What are the two general methods of accounting for warranties and which one is not permitted by GAAP?
- Cash basis method is not permitted by GAAP
- Accrual method is permitted by GAAP
How would you account for warranty expenses?
- 1. In the year it is sold:
- a. Debit Est warranty expense
- b. Credit Estimated warranty liability
- 2. In the year or repair
- a. Debit Est. warranty liability
- b. Credit cash or ap or np
How would you account for premiums?
- 1. In the year an item is sold
- a. Debit premium expense
- b. Credit premium liability
- 2. In the year of issuance
- a. Debit premium liability
- b. Credit premium inventory
In IGAAP "contingent liability" is what?
In IGAAP when no best estimate within the range exists when recording a probable loss contingency what do you do?
accrue the midpoint in the range