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Three essential characteristics of a liability:
- 1. Present obligation settles by future transfer or use of cash, goods, or services
- 2. Unavoidable obligation
- 3. Transaction or event creating obligation already occurred
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Current Maturities of Long-term debt is excluded if one of these three items exist:
- 1. Retired by assets accumulated for this purpose and not shown as current asset
- 2. Refinanced, or retired from the proceeds of a new debt
- 3. Converted into capital stock
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Short term debt is shown as long term if:
- both the ability and intent to refinance or sell equity securities exist.
- ability is shown by actually financing or entering into a financing agreement
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Customer Advances and Deposits
returnable cash deposits received from customers or employees creating a future obligation
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Sales Tax
Calculation if given total cash received
Cash receive divided by 1.(percentage rate)
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Compensated Absences
- accrue if services have been rendered by employee, amount can reasonable be estimated, and payment is probable and arising from vesting or accumulation.
- *Matching principle
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Vesting
- Rights continues even after termination.
- Expensed in the year earned
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Accumulated
- Right caries over from year to year but not after termination.
- Exp. only when used even if earned prior
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Sick pay
Accrue?
only if sick pay is vested
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Contingent Losses
- Probable- J/E
- Reasonably Possible- Footnote
- Remote- Footnote?
- *if not estimated only make a footnote
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Estimated loss is within a range?
GAAP requires the lowest amount in the range to be accrued
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Contingent Gain
- Probable- Footnote
- Reasonably Possible- Footnote?
- Remote- no note or J/E
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Payroll Liabilities
Journal entries-employee
- Dr. Wages Exp
- Cr. Taxes Payable-individually
- Cr. Misc. Withholding's of employee
- Cr. Wages Payable-paid out on pay day
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Payroll Liabilities
Journal entries-employer
- Dr. Payroll Taxes/ Benefit Exp
- Cr. Taxes Payable-individually
- Cr. Misc. required3rd party payments
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Payment to employees J/E
- Dr. Wages Payable
- Cr. Cash
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Total cost of payroll
gross wage exp. + additional cost the employer incurs
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Wages Expense
Gross earnings by the employees
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Wages Payable
- Employees net pay for the period
- gross pay - deductions
- deductions are held by employer until remitted to the proper entity
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Warranties
product guarantees that represent an additional expense for the seller
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Warranties
Cash Basis
- Revenue recorded in year 1
- Expense recorded later when when actual cost are incurred
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Expense Warranty Approach
- Seller estimates and accrues warranty liability costs in the period of Sales Revenue.
- In future periods the liability is reduced and related accounts for actual expense occurs
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Expense Warranty Approach
journal entry
- Expense estimate and record in year 1
- Dr. Expense
- Cr. Liability
- In future periods of actual expense
- Dr. Liability
- Cr. Cash/Inventory/Wages Pay.
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Sales Warranty Approach
Sale is split-the portion attributed to the warranty is deferred by recording unearned rev, then the rest is sales. In future periods revenue is recognized as earned either on straight line or proportional basis. Actual Cost expensed when incurred.
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Sales Warranty Approach
journal entry
- Year 1 split-sale and warranty revenue
- Dr. Account Rec.
- Cr. Sales
- Cr. Unearned Warranty Revenue
- In future periods
- Cr. Un. Warranty Rev.
- Dr. Warranty Rev
- Actual Cost expensed when incurred
- Dr. Warrenty Exp
- Cr. Cash/Inv./Wages Pay.
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Sales Warranty Approach
Warranty to recognize
Straight line
total un. war. rev. / time
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Sales Warranty Approach
Warranty to recognize
proportional method
total un. war. rev. *(cost for period / total expected cost)
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Premiums,Coupons, or Rebates
used to stimulate product sales. Expenses related should be estimated and recorded in the same period as the sales revenue.
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Premiums,Coupons, or Rebates
Journal Entries
inventory(if prize) and sale of product
- Inventory of prizes
- Dr. Inventory
- Cr. Cash
- Record sale of product
- Dr. Acct. Rec.
- Cr. Sales
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Premiums,Coupons, or Rebates
Journal Entries
coupons in and end of year estimate
- Coupons come in
- Dr. Cash(possible)
- Dr. Premium Expense
- Cr. Cash or Inventory
- End of year estimation
- Dr. Premium Expense
- Cr. Estimated Liability
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Premiums,Coupons, or Rebates
Journal Entries
future periods
- Coupons received future period
- Dr. Cash
- Dr. Estimated Liability
- Cr. Cash or Inventory
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Premiums,Coupons, or Rebates
notes
- Don not accrue for expired coupons
- Accrue for coupons expiring 12/31
- Do not let 12/31 prize inventory affect accrual
- Premium expense recorded in the year of the sale not afterward
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Asset Retirement Obligation
- legal obligation related to the retirement of a long lived asset.
- Recorded regardless of whether the work is performed by the entity or a third party
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Asset Retirement Obligation
recording
- ARO initially recorded at fair value, which is the present value of the estimated obligation.
- Cost is included in the carrying value of long lived assets and liability is recorded.
- DO NOT use a separate asset account.
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Asset Retirement Obligation
journal entry
purchase,depreciate, interest, retire
- purchase of asset
- Dr. Asset __ Cr. Cash or Payable
- Record ARO at Present Value
- Dr. Asset __ Cr. ARO
- Depreciate Cost
- Dr. Dep. Exp __ Cr. Accm. Depr.
- Record Interest (based on CV or ARO)
- Dr. Interest Exp __ Cr. ARO
- Record Retirement
- Dr. ARO __ Cr. Cash
- Dr. __ Cr. Loss or Gin
- *difference between actual cost and ARO is gain or loss
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