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. If it is probable that a loss has been incurred at the date of the financial statements, then the liability if reasonably estimable should be recorded. If it is reasonably possible that a loss has been incurred at the date of the financial statements, then the liability should be disclosed via a footnote.
The footnote should disclose 1 the nature of the contingency and 2 an estimate of the possible loss or range of loss or a statement that an estimate cannot be made. If the incurrence of a loss is remote, then no liability need be recorded or disclosed except for guarantees of indebtedness of others, which are disclosed even when the loss is remote. Under the cash-basis method, warranty costs are charged to expense in the period in which the seller or manufacturer performs in compliance with the warranty, no liability is recorded for future costs arising from warranties, and the period of sale is not necessarily charged with the costs of making good on outstanding warranties.
Under the accrual method, a provision for warranty costs is made at the time of sale or as the productive activity takes place; the accrual method may be applied two different ways: expense warranty versus sales warranty method.
But under either method, the attempt is to match warranty expense to the related revenues. Under U. GAAP, companies may not record provisions for future operating losses. Suchprovisions do not meet the definition of a liability, since the amount is not the result of a past transaction the losses have not yet occurred.
Therefore the liability has not been incurred. Furthermore, operating losses reflect general business risks for which a reasonable estimate of the loss could not be determined. Note that use of provisions in this way is one of the examples of earnings management discussed in Chapter 4.
By reducing income in good years through the use of loss contingencies, companies can smooth out their income from year-to-year. The expense warranty approach and the sales warranty approach are both variations of the accrual method of accounting for warranty costs.
The expense warranty approach charges the estimated future warranty costs to operating expense in the year of sale or manufacture. The sales warranty approach defers a certain percentage of the original sales price until some future time when actual costs are incurred or the warranty expires. Southeast Airlines Inc. Therefore, the full-fare ticket should be recorded as unearned transportation revenue liability when sold and recognized as revenue when the transportation is provided.
The half-fare ticket should be treated accordingly; that is, record the discounted price as unearned transportation revenue liability when it is sold and recognize it as revenue when the transportation is provided. Although the accounting for this transaction has been studied, no authoritative guideline has been developed to record this transaction.
In the case of a free ticket award, AcSEC proposed that a portion of the ticket fares contributing to the accumulation of the 50, miles the free ticket award level be deferred as unearned transportation revenue and recognized as revenue when free transportation is provided.
The total amount deferred for the free ticket should be based on the revenue value to the airline and the deferral should occur and accumulate as mileage is accumulated. An asset retirement obligation must be recognized when a company has an existing legal obligation associated with the retirement of a long-lived asset and when the amount can be reasonably estimated. The absence of insurance does not mean that a liability has been incurred at the date of the financial statements.
Until the time that an event loss contingency occurs there can be no diminution in the value of property or incurrence of a liability. Expected future injury, damage, or loss resulting from lack of insurance need not be recorded or disclosed ifno contingency exists.
And, a contingency exists only if an uninsurableevent which causes probable loss has occurred. Lack of insurance is not in itself a basis for recording a liability or loss.
In determining whether or not to record a liability for pending litigation, the following factors must be considered: a The time period in which the underlying cause for action occurred. 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.
If both are probable, the loss reasonably estimable, and the cause for action dated on or before the date of the financial statements, the liability must be accrued. There are several defensible recommendations for listing current liabilities: 1 in order of maturity, 2 according to amount, 3 in order of liquidation preference. The acid-test ratio and the current ratio are both measures of the short-term debt-paying ability of the company.
The acid-test ratio excludes inventories and prepaid expenses on the basis that these assets are difficult to liquidate in an emergency. The current ratio and the acid-test ratio are similar in that both numerators include cash, short-term investments, and net receivables, and both denominators include current liabilities. If the terms of purchase are f. Accrual of unpaid amounts should be recorded in preparing financial statements dated other than at the end of a pay period.
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. Ordinary orders, for which the prices are determined at the time of shipment and subject to cancellation by the buyer or seller, do not represent either an asset or a liability to the buyer and need not be reflected in the books or in the financial statements.
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. See Chapter 9 on purchase commitments. The entire amount would be reported as a long-term liability.
This assumes Burr had not entered into a long-term agreement prior to issuance. Short-term debt refinanced. X 8 hrs. Also,if employeesearnvacationpayatdifferentpayrates,a consistentpattern of recognition e.
The FASB requires that, when some amount within the range of expectedloss appears atthe time to be a better estimate than any other amount within the range, that amount is accrued.
When no amount within the range is a better estimate than any other amount, the dollar amountat the low end of the range is accrued and the dollar amountat the high end of the range is disclosed.
In this case, therefore, Salt-n- Pepa Inc. The potential insurance recovery is a gain contingency—it is not recorded until received. This is a gain contingency because the amount to be received will be in excess of the book value of the plant. Gain contingencies are not recordedand are disclosed only when the probabilities are high that a gain contingency will become reality.
However, it eliminates assets that mightbe slow moving,suchas inventoriesand prepaid expenses. Although industry and general business conditions are unknown in this case, the company appears to have a relatively strong current position. The main concern from a short-term perspective is the apparently low inventory turnover. The rate of return on assets and profit margin on sales are extremely good and indicate thatthe company is employingits assets advantageously.
The situations presented are basic ones including purchases and payments on account, and borrowing funds by giving a zero-interest-bearing note. The student is also required to prepare year-end adjusting entries. Problem Time 25—35 minutes Purpose—to present the student with the opportunity to prepare journal entries for several different situations related to liabilities. Filling in the blanks, the answers are 1, 3, 4, 5, 2.
Analyze business transactions. Journalize the transactions. Post to ledger accounts. Prepare a trial balance. Journalize and post adjusting entries. Prepare an adjusted trial balance. Prepare financial statements. Journalize and post closing entries. Prepare a post-closing trial balance. Filling in the blanks, the answers are 4, 2, 8, 7, 5, 3, 9, 6, 1. Service Revenue CHF21, Less: Accumulated depreciation Debit Credit July 31 Commission Revenue Steps 1—3 may occur daily in the accounting cycle.
Steps 4—7 are performed on a periodic basis. Closing entries are prepared after financial statements are prepared. Accounts Payable Salaries Expense Titles Dr. Debit Credit Dec. Debit Credit Balance Jan. Debit Credit Balance Dec. Debit Credit Mar. Debit Credit Balance Mar. Expense—Building b 3, 3, 3, Accum. Expense—Equipment c 4, 4, 4, Accum. Debit Credit July 1 Cash Debit Credit July 31 Accounts Receivable Ch24 kieso intermediate accounting solution manual.
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Related Books Free with a 30 day trial from Scribd. Dry: A Memoir Augusten Burroughs. Related Audiobooks Free with a 30 day trial from Scribd. Empath Up! I don't have enough time write it by myself. Sharna Banik. Devyani Kirana. Baraa Zhour. Muhammad Riza Aulia. Muhammad Arif. Ishrat Mukta. Show More. Views Total views. Actions Shares. No notes for slide. Ch04 kieso intermediate accounting solution manual 1. Income measurement concepts.
Computation of net income from balance sheets and selected accounts. Single-step income statements; earnings per share. Multiple-step income statements.
Extraordinary items; accounting changes; discontinued operations; prior period adjustments; errors. Retained earnings statement. Intraperiod tax allocation. Comprehensive income. Disposal of a component discon- tinued operations. Understand the uses and limitations of an income statement.
Describe the content and format of the income statement. Prepare an income statement. Explain how to report various income items. Identify where to report earnings per share information. Understand the reporting of accounting changes, and errors. Prepare a retained earnings statement. Explain how to report other comprehensive income. Simple 18—20 E Compute income measures. Simple 10—15 E Income statement items.
Simple 25—35 E Single-step income statement. Moderate 20—25 E Multiple-step and single-step. Simple 30—35 E Multiple-step and extraordinary items. Moderate 30—35 E Multiple-step and single-step. Simple 15—20 E Multiple-step statement with retained earnings.
Simple 30—35 E Earnings per share. Simple 20—25 E Condensed income statement—periodic inventory method. Moderate 20—25 E Retained earnings statement.
Simple 20—25 E Earnings per share. Moderate 15—20 E Change in accounting principle. Moderate 15—20 E Comprehensive income. Simple 15—20 E Comprehensive income. Moderate 15—20 E Various reporting formats. Moderate 30—35 P Multiple-step income, retained earnings. Moderate 30—35 P Single-step income, retained earnings, periodic inventory. Simple 25—30 P Irregular items. Moderate 30—40 P Multiple- and single-step income, retained earnings.
Moderate 45—55 P Irregular items. Moderate 20—25 P Retained earnings statement, prior period adjustment. Moderate 25—35 P Income statement, irregular items. Moderate 25—35 CA Identification of income statement deficiencies. Simple 20—25 CA Earnings management. Moderate 20—25 CA Earnings management.
Simple 15—20 CA Income reporting items. Moderate 30—35 CA Identification of income statement weaknesses. Moderate 30—40 CA Classification of income statement items. Moderate 20—25 CA Comprehensive income. Simple 10—15 4. Changes in accounting estimates result from new information. Examples of items for which estimates are necessary are uncollectible receivables, inventory obsolescence, service lives and salvage value of depreciable assets, and warranty obligations.
A change in accounting estimate is a necessaryconsequence of the assessment,in conjunction with the periodic presentation of financial statements, of the present status and expected future benefits and obligations associated with assets and liabilities. A change in the method of applying an accounting principle also is considered a change in accounting principle.
An example of a change in estimate effected by a change in principle is a change in the method of depreciation, amortization, or depletion for long-lived, nonfinancial assets.
It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Following this link yields the following paragraph: Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Thus, both of the following criteria shall be met to classify an event or transaction as an extraordinary item: a.
Unusual nature. The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates see paragraph Infrequency of occurrence.
The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates see paragraph In determining materiality, extraordinary items shall be related to the estimated income for the full fiscal year. Effects of disposals of a component of an entity and unusual and infrequently occurring transactions and events that are material with respect to the operating results of the interim period but that are not designated as extraordinary items in the interim statements shall be reported separately.
In addition, matters such as unusual seasonal results and business combinations shall be disclosed to provide information needed for a proper understanding of interim financial reports. Extraordinary items, gains or losses from disposal of a component of an entity, and unusual or infrequently occurring items shall not be pro-rated over the balance of the fiscal year. Facts: A registrant has various classes of preferred stock. Dividends on those preferred stocks and accretions of their carrying amounts causeincome applicable to commonstockto be less than reported net income.
Question: In ASR , the Commission stated that although it had determined not to mandate presentation of income or loss applicable to common stock in all cases, it believes that disclosure of that amount is of value in certain situations.
In what situations should the amount be reported, where should it be reported, and how should it be computed? The amount to be reported should be computed for each period as net income or loss less: a dividends on preferred stock, including undeclared or unpaid dividends if cumulative; and b periodic increases in the carrying amounts of instruments reported as redeemable preferred stock as discussed in Topic 3.
C or increasing rate preferred stock as discussed in Topic 5. FN1 If a registrant elects to follow the encouraged disclosure discussed in paragraph 23 of Statement , and displays the components of other comprehensive income and the total for comprehensive income using a one-statement approach, the registrant mustcontinue to follow the guidance set forth in the SAB Topic.
One approach may be to provide a separate reconciliation of net income to income available to common stock below comprehensive income reported on a statement of income and comprehensive income. FN2 The assessment of materiality is the responsibility of each registrant. However, absent concerns about trends or other qualitative considerations, the staff generally will not insist on the reporting of income or loss applicable to common stock if the amount differs from net income or loss by less than ten percent.
The income statement is important because it provides investors and creditors with information that helps them predict the amount, timing, and uncertainty of future cash flows. It helps investors and creditors predictfuture cash flows in a number of different ways. First, investors and creditors can use the information on the income statement to evaluate the past performance of the company.
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