F4 M1 Payables and Accrued Liabilities

liabilities

are probable future sacrifices of economic benefits arising from a present obligation to transfer assets or provide services to another entity in the future as a result of past transactions or events; an amount an entity currently owes that will require payment or performance in the future; identified as either current or noncurrent

current liabilities

are obligations expected to be settled using current assets or by creating another current liability within the next year or the normal operating cycle, whichever is longer; are valued on the balance sheet at their settlement value and are an important indication of financial strength and solvency

trade accounts payable

are amount owed to suppliers for inventory, raw materials, or supplies purchased on credit, without signing a formal promissory note; cash discount associated with this can be anticipated and journalized

gross method

records the purchase without regard to the discount, with a debit to inventory and a credit to accounts payable; of paid within discount period, then a debit to accounts payable (original amount), a credit to cash (regarding the discount taken), and a credit to inventory or purchase discounts (discount amount)

net method

purchases and accounts payable are recorded net of the discount, with a debit to inventory (for amount minus discount amount) and a credit to accounts payable; if not paid within discount period, then a debit to accounts payable (for amount minus discount amount), a debit to purchase discount lost (discount amount), and a credit to cash (for full amount)

trade notes payable

are formal, written promises to pay a supplier for goods, raw materials, supplies, or services on specified future date; are evidence by a promissory note and may include a stated interest rate; when issued, a debit to supplies/inventory/etc. and a credit to trade notes payable

interest on a notes payable

is the cost of borrowing money, usually the stated interest rate; records as it is incurred, even if it has not yet been paid; a debit to interest expense and a credit to cash

interest payable

represents the interest expense incurred that has not been paid in cash as of the balance sheet date; a debit to interest expense and a credit to interest payable

*principal x annual interest rate x (months elapsed/12)

current portion of long-term debt

principal due within the next year (or operating cycle) will be classified as a current liability; remaining principal due after that period remains as a long-term liability

refinancing

replacing a current with a new long-term debt or equity financing so the obligation will not be paid using current assets; amount excluded from current liabilities and a full description of the financing agreement shall be full disclosed in financial statements or notes, a debit to shot-term liability and a credit to long-term liability

current obligations expected to be refinanced

management intends to refinance it on a long-term basis; company demonstrates the ability to refinance by either actually refinancing before the financial statements are issued or having a noncancelable financing agreement with a lender

accrued salaries and wages payable

is the unpaid portion of salaries and wages as of the balance sheet date, these generally result from pay periods that overlap the balance sheet date

employees have worked but not yet paid

a debit to salaries and wages expense and a credit to salaries and wages payable

*PY days worked x pay rate per day

employee is paid

a debit to salaries and wages payable (for the unpaid amount at year-end), a credit to salaries and wages expense (amount made in CY, first week in Jan.), and a credit to cash

property taxes payable

may be accrued prior to the receipt of the tax invoice and matures in the year for which the invoice pertains or may be recorded as a payable upon the receipt of the tax invoice and expensed in the year of receipt (usually different from the year to which invoice pertains)

sales taxes payable

are sales taxes collected from customers on behalf of the taxing authority and held in trust until remission to the taxing authority; are not an expense of the company collecting sales taxes from customers; a debit to cash (total sale amount), a credit to sales revenues, and a credit to sales taxes payable

unemployment taxes and employer’s share of FICA taxes

are payroll taxes (additional expenses) of the employer and are accrued as liabilities until paid to taxing authority; unemployment are paid entirely by employer and the employer pays its own share of Social Security and Medicare; these amounts are not withheld from employees’ paychecks; a debit to payroll tax expense, a credit to FICA taxes payable, and a credit to unemployment taxes payable

bonuses

are additonal compensation to emplyees, usually based on company profits or individual performance; should be recorded to salaires and wages payavle (reduces net income)

*bonus % [income without bonus or taxes - tax rate % (income without bonus or taxes - B)]

accrued vacation

is paid time off that employees have earned by working but have not year taken, recorded as a compensation expense and a payable (salaries and wages); have to meet these standards that include employees have performed the relate services, the vacation is vested or accumulated, payment is probable, and the amount can be reasonably estimated (a disclosure in notes if only first of three are met)

self-insurance liabilities

occurs when an entity is liable for risk they choose to bear themselves rather than obtaining third-party insurance, entity can set aside savings to cover future claims; record liability when a loss-producing event has occurred, loss is probable, and amount can be reasonably estimated; a debit to claims expense and a credit to unpaid claims (self-insurance) liability

exit or disposal activity

occurs when a company closes a location, downsizes, relocates operations, or exits a business activity; include involuntary employee termination benefits (severance pay), costs to terminate a nonlease contract, costs to consolidate facilities, and costs to relocate employees or more PP&E

liability with an exit or disposal activity

should be recognized only when a transaction or event occurs that creates a present obligation of an entity to transfer an economic benefit

future operation losses with an exit or disposal activity

if they are expected to be incurred and are recognized in the period incurred

exit cost liability for employee termination benefits

recorded when management commits to a plan of termination, plan identifies the employees to be terminated and the expected completion date, plan establishes the terms of the benefits that employees will receive upon termination, and it is unlikely that significant changes will be made to the plan or that the plan will be withdrawn

liability measurement for exit or disposal activity

recorded at fair value when a transaction or event creates a present obligation; may be adjusted in future periods as a result of revisions to the timing of, or estimated cash flows, from the activity; prospective change in estimates

exit or disposal activity in income statement

if related to a discontinued operation, then it is recorded in that section, if not related there, then activity is recorded in income from continuing operations; recognize losses only when they actually occur

disclosure of an exit or disposal activity

disclosed in notes in period it is initiated and all subsequent period until activity is completed; a description of activity including facts and circumstances leading to expected activity and expected completion date; the line items in the income statement in which costs are aggregated; if liability was not recognized because fair value could not be reasonably estimated, disclose that fact and explain why

each major cost disclosure

total amount expected to be incurred in connection with activity (amount incurred in period and cumulative to date), reconciliation of beginning and ending liability balances showing changes during period for costs incurred, costs paid or otherwise settled, and any other adjustments with an explanation of the reasons

each reportable segment disclosure

total amount of costs expected to be incurred, the amount incurred in the period and incurred to date, net any adjustments with an explanation of the reasons

asset retirement obligation (ARO)

is legal obligation to retire, dismantle, remove, or restore a tangible long-lived asset in the future; retirement results from the acquisition, construction or development, and/or normal operation of a long-lived asset, except for certain lease obligations (minimum lease payment and contingent rentals); examples are nuclear decommissioning, removals in oil and gas industries, etc.; recorded at a discounted amount

ARO recognition

when it meets the definition of a liability; company has duty or responsibility to retire long-lived asset, company has little or not discretion to avoid obligation, and obligating event has occurred such as acquiring the asset; uncertainty is factored into the measurement of the fair value of the liability through assignment of probabilities to cash flows

initial measurement for an ARO

entity records an asset and a liability on the balance sheet equal to the fair value of the asset retirement obligation, if reasonable estimate of fair value can be made (balance sheet approach); fair value is generally equal to the PV (discounted) of the future obligation

asset retirement cost (ARC)

is the amount capitalized (asset) that increases the carrying amount of the long-lived asset when a liability for an ARO is recognized; debit ARC (asset) at fair value and credit ARO (liability) at fair value

accretion expense

is the expense recognized as the ARO liability increases over time from its initial PV toward the expected future settlement amount; calculated using an accretion rate (similar to an interest rate); it is added to ARO liability each period; at the end of accretion period, the ARO liability reported on the balance sheet should be (approx.) equal to the ARO to be paid

accretion expense entry

a debit to accretion expense and a credit to ARO (liability); accretion expense shows the growth of the liability over time so that at the time the liability is satisfied, it is reported at its total non-discounted value

depreciation expense (ARC)

allocates the capitalized ARC over the useful life of the related asset; decreases the ARC asset reported on the balance sheet; at end of accretion period, the ARC (asset) should be fully depreciated; a debit to depreciation expense and a credit to accumulated depreciation (ARC)

total future payment (ARO)

*cumulative accretion expense + cumulative depreciation expense = total ARO

revisions to cash flow estimates

estimated cash flows are used to calculate the discounted ARO liability reported on the balance sheet; potential upward revisions to undiscounted cash flows as “new” liabilities (use current discount rate) or potential downward revisions require removal of “old” liabilities (use historical, or weighted-average, discount rate)

interest payable calculation

*(total borrowed amount - (principal payments x payments made so far) x interest rate x (time elapsed/12))