ACCCOB2 Quiz 4 Liabilities

Liability

Present obligation of an entity to transfer an economic resource as a result of past events, involves future disbursements of assets and services

unavoidable, entails a settlement, transaction creating the obligation is done

three essential characteristics of a liability

maturity or face amount

current liabilities are valued at their

Current Liabilities

obligations whose liquidation is reasonably expected to require the use of existing resources that are classified as current assets

operating cycle or one year, whichever is longer

definition of current liabilities are dependent upon he time period used in defining the current assets

present value techniques

tese techniques are not usually used in measuring current liabilities because of the short time periods involved

beginning of liability and equit section of the SFP

where current liabilities are listed on the sfp

determinable liabilities

liabilities with a determinable amount eg. account and notes payable, accrued liabilities, dividend payables, vat payables, income tax payables, unearned revenues, current maturities of long-term debt, employee-related liabilities

Accounts Payable

obligations owned to others for goods, supplies, and services purchased on open account

trade accounts payable

other term for accounts payable, should be recorded to coincide with the receipt of the goods or at the time the legal title is passed to the buyer, not when the order is placed

inventory, purchases

A/P matches with the recognition of ___ under perpetual inventory system, and _____ under periodic inventory

FOB Shipping Point

Buyer

FOB Destination Point

Seller

collateral, net of cash discounts

Usually, the A/P is not secured by ___. and is recorded ____

gross price method

recorded on invoice price, cash discount is recognized when taken

net price method

recorded at net amount, discount is recognized whether taken or not

notes payable

written promises to pay a certain sum of money on a specified future date, which may arise from sales, financing, or other transactions.

short term notes payable

resulting from the borrowing of funds from a lending instiution may be interest-bearing or noninterest-bearing

interest-bearing notes payable

liability at the face amount of the note + interest payable

noninterest-bearing notes payable

does not explicitly state an interest rate on the face of the note; thus, there is a need to compute for its present value

present value - face amount at maturity

formula for the interest of noninterest bearing notes payavble or discount on notes payable

12 months

when a portion of long-term debts is classified, it is assumed that the amount will be paid within the next ___ out of the funds classified as current assets

accrued liabilities

expenses already incurred but have not been paid yet

payment not been made, no supplier invoice

examples of accrued expenses

increase

if an entry is made to accrue expenses at year end, the expense for the period and the liability at year end will __

expenses

if accrual entry is reversed at the beginning of the next period, all expenses paid in the next period can be charged to ____

debited, credited

if no reversing entry is made, the liability is recorded in the previous period and the expense portion for the current period are ___, and cash is ___ for the total amount

overstated, understated, understated

if an entity fails to accrue expenses at year end, the ff outcomes might happen

a. net income is ____ at current period, and ___ at next

b. liabilities are ____ in current period

dividends

corporations declare ___, which are proportionate distributions of their earnings to shareholders

cash and share dividends

usual dibidends declared

cash dividend payable

recorded when cash dividend is declrared

cash dividend

once declared, a ___ is a binding obligation of a corporate entity to pay its shareholders

share dividend distributable

when a share dividend is recorded, the ___ is recorded and reported on the equite section. NOT A LIABILITY

unearned revenues

company receives cash prior to its performance of services or issue of merchandies. increase in the ___ account which is classified as a current liability eg. rentals, magazines, subscriptions, insurance premiums, airline of ttheatre tickets booked in advance, gift certificates, and repair services contracts signed in advance

debited, credited

once unearned revenues are redeemed, liability is ___, and a revenue account is ____

provisions

an estimated liability. liabilities of uncertain timing or amount. existence is certain, however, amount and to who is must be paid to is not. eg. product warranties, legal or constructive obligations to clean up contaminated land, premiums and coupons

recognition of provision, contingent liability

probable that an outflow of casdh will be required to settle provision. if not probable, then treated as a ____

product warranties

promises made by a seller to a buyer to make good for a deficiency of quality, quantity, or perfomance in a prodct. creates a liability, but amount willl not be known until end

warranty expense

recognized in the period the sale is made

estimate of all costs

recognition of warranty expense in the period of sale and the corresponding liability to require an ___ that will be incurrred after the sale in order to correct any defficiencies and defects

liability, cash

actual expenditures made to honor a warranty would result in a debit to ___, and cerdit to ___

adjustment

requried if experience differs materially from the estimated

premiums and coupons

offerend in exchange for labels, box tops, wrappers, redeemable certificates, and other evidence of purchase

costs of the premiums

charged to expense in the period of the sale that benefits from the period plan

cash, premium expense

is debited, and _ is reduced accordingly

contingent liabilities

possible obligations whose existence will be vconfirmed by uncertain future events that are not wholly in the control of the entity. dependent upon the occurence or non-occurence of one or more future events to resolve their status eg. pending litigations, pending claims or assessments, guarantee of indebtedness to others

SFP, notes to financial statements

contingent liability is not recognized on the ___, however, unless the possibility of an outflow economic resource is remote, a contingent liability is disclosed on the ____

existing condition, uncertainty, resolution of uncertainty

primary characteristics of contingency

noncurrent liabilities

obligations maturing beyond one year or all other obligations not qualifying as current. consist of probable future sacrifices or economic benefits arising from present obligations that are not payable within 12 months or the operating cycle of the business, whicheber is longer

formal agreement

non current liabilities normally require a ___ between parties involved often including certain covenants and restrictions for both lenders and borrowers

bond indenture or note agreement

covenants and restrictions are found in the ___ and include information related ot the amounts authorized to be issued, interest rates, due dates, call provisions, security for the debt, sinking fund requirements, etc.

retirement

a long-term debt that matures within one year should be reported as a current liability unless ___ is to be accomplished with other than the current assets

bonds payable

obligation of the issuing corporation to pay a sum of money at a designated maturity date + periodic interest at a specified rate on the face value

bonds

debt instruments issued by an entity to borrow funds from the general public or institutional investors

underwriter

bodns may be sold through __ who either guarantees a certain sum to the corporation and assumes the risk of sale or agrees to sell the bond issue on the basis of a commission

secured bond

bond issued with specific assets of the issuer pledged as collateral for the bonds

unsecured bond

bond issued against the general credit of the borrower

term bond

bond that matures at a single specified date

serial bond

bond issued in which the principal is retired in regular installemnts over the maturity period of the issue

registered bond

issued in the name of the owner. cancellation of bonds and issuance of new bonds

bearer or coupon bond

bond that is not regsitered. must send in coupons to receive interest payments

convertible bond

can be converted into ordinary shares at the bondholder’s option

callable bond

subject to retirement at a stated amount prior to maturity at the option of the issuer

bond indenture

were the terms of the bond issue are set out. summarizes the rights of the bondholders and the obligations of the issuing entity

bond certificate

provides information such as the name of the issuer. bond’s face value, contractual interest rate, and maaturity date

percentage

bonds are issued with a stated rate of interest expressed as a __ of the face value of the bonds.

premium, discount, different

when bonds are sold for more than their face value (____), or less than their face value (___), the interest rate actually earned by the bondholder is ____ from the stated rate

discount

effective rate > stated rate

premium

effective rate < stated rate

time the bonds are sold

discounts and premiums resulting from a bond issue are recorded at the ______

anortized, bond interest

the discount and premiums amounts are _____ each time the ____ is paid

True

t OR F: time period of amortization of discounts and premiums = period of time the bonds are outstanding or at the date of sale to the maturity date

decreases

the amortization of bond premiums ____ the recorded amount of bond interest expense

increases

the amortization of bond discounts ___ the bond interest expense

credited

whenever bonds are issued, the bonds payable account is always ____ for the face amount of the bonds issued

unamortized premiums and discounts

_______ are reported in the bonds pauable account in the liability section of the SFP

effective interest rate x carrying value at the start

formula for interest cost for each period

mortgage

long-term financing insrtument used to purcase property

property

the collateral itself til the mortgage gets paid off

interest

the early payments of mortgage consist of more ___ than principak

increases, decreases

over the life of the mortgage, the portion of each payment that represents the principal ____, and the interest portion _____

working capital

excess of te current assets over the current liabilities which is a measure of liquidity

liquidity

ability to pay maturing obligations and meet unexpected needs of cas

current assets - current liabilities

working capital formula

current ratio

also a measure of liquidity and can be used to compare liquidity of companies of different sizes

current assets/current liabilities

current ratio formula

1.2-2

ideal current ratio

below 1

means that a company does not have enough assets to cover its short term liabilities

equal to 1

current ratio that indicates current assets are equal to current liabilities

debt to total assets ratio

higher the percentage, the greater the irsk that a company may be unable to pay its maturing debt, solvency

total liabilities / total assets

debt to total assets ratio

solvency

ability to pay interest and principle on long term debts as they become due

times interest earned

higher ratio means that a company presents less of a risk to investors and creditors in terms of solvency

income before income taxes + interest expense / interest expense

formula for times interest earned

2.5

companies that have a times interest earned ratio of less than ___ are considered a much igher risk ofr bankruptcy