ESTIONS IN PAGE 14
Define liabilities.
Liabilities are legal obligations or debt owed to another person or company. In other
words, liabilities are future sacrifices of economic benefits that an entity is required to
make to other entities due to past events or past transactions.
What are the essential characteristic of an accounting liability?
Present obligation of a particular entity
The entity liable must be identified. It is not necessary that the payee to whom
the obligation is owed be identified.
The liability arise from past events.
This means that the liability is not recognized until it is incurred.
The settlement of the liability requires an outflow of resources embodying economic
benefits this is the very heart of the definition of an accounting liability.
Explain a present obligation.
An essential characteristic of a liability is that the entity has a present obligation, which
may be a legal obligation or a constructive obligation. An obligation is a duty or
responsibility to act or perform in as certain way. Obligations may be legally enforceable as
a consequence or binding contract or statutory requirement.
Explain transfer of an economic resource to settle an obligation.
The transfer of an economic resource embodies economic benefits that will be required to
settle the obligation, resulting in an outflow (in general of cash) from the reporting entity to
a third party.
The settlement of a present obligation usually involves the entity transferring
resources embodying economic benefits in order to satisfy the claim of the other party.
Settlement of a present obligation may occur in a number of ways by payment of cash,
transfer of other assets, provision of services, replacement of that obligation with another
obligation, and conversion of the obligation to equity.
Explain the past event leads to a present obligation.
Past event that leads to a legal or constructive obligations. This creates a present
Obligation because the entity has no realistic alternative but to settle the obligation
created by the event
Example: the acquisition of goods gives rise to accounts payable. The obligating event is the
acquisition of goods.
Explain the measurement of current and noncurrent liabilities.
Non – Current liabilities such as bonds payable and non-interest bearing note payable, are
initially measured at present value and subsequently measured at amortized cost. If the
long-term note payable is interest bearing, it is initially and subsequently measured at face
amount. In this case, the face amount is equal to the present value of the note payable.
While current liabilities are conceptually, all liabilities are initially measured at present
value and subsequently measured at amortized cost. In practice, current liabilities or short-
term obligations are not discounted anymore but measured, recorded and reported at their
face amount. The reason is that, the discount or the difference between the face amount
and the present value is usually not material and therefore ignored.
Define current and noncurrent liabilities.
Current liabilities is classify when the entity expects to settle the liability within the entity’s
operating cycle, the entity holds the liability primarily for the purpose of trading, the
liability is due to be settled within twelve months after the reporting period, the entity does
not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period.
The term “noncurrent liabilities” is a residual definition. All liabilities not classified as
current are classified non-current liabilities, it includes non-current portion of a long-term
debt, finance Lease Liability, deferred Tax Liability, long-term obligation to entity officers,
and long-term deferred revenue.
Explain the refinancing of a long-term debt falling due within one year.
A liability which is due to be settled within twelve months after the reporting period is
classified as current even if the original term was for a period longer than two months, an
agreement to refinance or to reschedule payment on a long-term basis is
Completed after the reporting period and before the financial statements are
authorized for issue. However, if the refinancing on a long-term basis is complete on
or before the end of the reporting period, the refinancing is an adjusting event and
therefore the obligation is classified as non-current.
What are covenants attached to borrowing agreements?
Covenants are often attached to borrowing agreements which represent undertakings by
the borrower. These covenants are actually restrictions on the borrowers as to undertaking
further borrowings, paying dividends maintaining specified level of working capital and so
forth.
How are current liabilities presented in the statement of financial position?
A current liability is one the company expects to pay in the short term using assets noted on
the present balance sheet. Typical current liabilities include accounts payable, salaries,
taxes and deferred revenues (services or products yet to be delivered but for which money
has already been received).
What are estimated liabilities?
An estimated liability is an obligation for which there is no definitive amount. Instead,
the accountant must make an estimate based on the available data.
A warranty reserve is based on an estimate of the number of warranty claims that will
be received. Similarly, a defined benefit pension liability is based on multiple estimates
of how long employees will live, how long employees will continue to work for the
company, and the return on investment of funds set aside for pension payments.
What is deferred revenue?
Deferred revenue is money received in advance for products or services that are going to
be performed in the future. Rent payments received in advance or annual subscription
payments received at the beginning of the year are common examples of deferred revenue
Explain gift certificates payable.
When a gift certificate is presented to the retailer, revenue will be recorded by the retailer
for the amount of merchandise or services that were provided. This is done with a debit to
the liability account Gift Certificates Outstanding and a credit to a revenue account.
What are refundable deposits?
term refundable deposits refers to cash collected from credit customers that a company
expects to return after a specified period of time, or when certain conditions are satisfied.
When companies collect this money, the intention is to return it after a relatively brief
period of time. Following the receipt of the cash, the company would classify the refundable
deposit as a current liability on the balance sheet.
What are the four variations in the computation of bonus?
1. Bonus is expresses as a certain percent of income before
bonus and income tax
2. Bonus is expresses as a certain percent of income after bonus
but before tax
3. Bonus is expresses as a certain percent of income after bonus
and after tax
4. Bonus is expressed as a certain percent of income after tax but
before bonus
QUESTIONS IN PAGE 54
1.) What is premium?
Premiums are articles of value such as toys, dishes, silverware and other goods
given to customers as a result of past sales or sales promotion activities
2.) Explain briefly the accounting for the acquisition of premiums and recognition of
estimated premium liability.
When the premium are purchased
Premiums xxx
Cash xxx
When the premiums are distributed to customers
Premium expense xxx
Premiums xxx
At the end of the year, if premium are still outstanding
Premium expense xxx
Estimated premium liability xxx
3.) Explain a cash rebate program.
Money refunded to customers who buy merchandise from retailers within a
specified time; the rebate allows dealers to clear inventories without cutting list
price.
A consumer rebate program is any kind of opportunity your company provides
customers for them to get a portion of their money back if they perform a
specific task. Because of this exchange, such programs are sometimes called
“refund programs.”
4.) Explain a cash discount offer program.
Businesses that use a cash discount program offer a discount to customers who
pay by cash or check instead of using a credit or debit card. Merchants can
incentivize cash payments by offering a discount on the posted credit or debit
card prices for customers that pay by cash or check.
5.) What is a customer loyalty program?
A customer loyalty program is a system where a business offers rewards to its
customers who make frequent purchases. From a business perspective, it's a
tactic used to encourage customers to repeatedly buy from your business.
QUESTIONS IN PAGE 81
1.) Explain warranty.
is the cost that a business expects to or has already incurred for the repair or
replacement of goods that it has sold. The total amount of warranty expense is
limited by the warranty period that a business typically allows. After the
warranty period for a product has expired, a business no longer incurs a
warranty liability
2.) What are the conditions for the recognitions of a warranty provision?
A provision should be recognised when an enterprise has a present obligation as
a result of a past event, it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation; and a reliable estimate
can be made of the amount of the obligation.
3.) Explain the accrual approach of accounting for warranty cost.
Warranty Accrual means, at any time, the aggregate amount of the accounting
reserve or “contra” entries established with respect to the Receivables on any
Originator’s books and records in respect of such Originator’s liability in
connection with its Warranty Plans.
4.) Explain the expense as incurred approach of accounting for warranty cost.
Warranty expense is recognized in the same period as revenue for the sold
products if there is a probability that an expense will be incurred and if the
company can estimate the amount of the expense. The practice is referred to as
the matching principle when all expenses relevant to a product sale are
recognized together in the same period.
5.) Explain the sale of an extended warranty.
An extended warranty is sold for an additional price around the time you sell
goods, such as computers, mobile phones and washing machines, or services,
such as trade services. An extended warranty is different to a manufacturer's
warranty, which comes free with goods. It is also different from the guarantees
implied by the CGA, which apply regardless and can be avoided only in limited
circumstances.
QUESTIONS IN PAGE 114
1.) Explain the meaning of a provision.
Provisions are funds set aside by a business to cover specific anticipated future
expenses or other financial impacts. An example of a provision is the estimated
loss in value of inventory due to obsolescence.
2.) What are the three conditions necessary for the recognition a provision as a
liability?
A provision shall be recognized when: an entity has a present obligation (legal or
constructive) as a result of a past event; it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation;
and. a reliable estimate can be made of the amount of the obligation.
3.) What is a legal obligation?
An obligation is a legal bond by which one or more parties (obligants) are bound
to act or refrain from acting. An obligation thus imposes on the obligor a duty to
perform, and simultaneously creates a corresponding right to demand
performance by the obligee to whom performance is to be tendered.
4.) What is a constructive obligation?
A constructive obligation arises from the entity's actions, through which it has
indicated to others that it will accept certain responsibilities, and as a result has
created an expectation that it will discharge those responsibilities.
5.) What is an obligating event?
An obligating event is an event that creates an obligation that results in an
enterprise having no realistic alternative to settling that obligation.
6.) Explain the terms probable, possible and remote in revelation to a provision.
Probable is most likely to happen, passible is likely to happen and remote is not
gonna happen.
7.) What is the measurement of a provision?
A provision is measured at the amount that the entity would rationally pay to
settle the obligation at the end of the reporting period or to transfer it to a third
party at that time. Risks and uncertainties are taken into account in measuring a
provision. A provision is discounted to its present value.
8.) Explain a restructuring provision.
When a company makes significant changes to its financial or operational
structure, typically while under financial duress. Companies may also
restructure when preparing for a sale, buyout, merger, change in overall goals,
or transfer of ownership.
a provision to take account of the probable cost of reorganizing a company,
reducing the number of employees etc.
9.) Define a contingent liability.
A possible obligation depending on whether some uncertain future event occurs,
or a present obligation but payment is not probable or the amount cannot be
measured reliably
10.) Distinguish a contingent liability from a provision.
Provision liability reduces an asset's value because of a present obligation arising
out of a past event. Contingent liability is a potential liability that can occur at a
future date due to events beyond a company's control. The event which can
result in a provisional liability may or may not occur.
11.) Explain the treatment of a contingent liability.
Contingent liabilities are never recorded in the financial statements of a
company. These obligations have not occurred yet but there is a possibility of
them occurring in the future. So a contingent liability has no accounting
treatment as such. Now such contingent liabilities have to be reviewed on a
yearly basis.
12.) Define a contingent asset.
A contingent asset is only valuable if certain events or conditions that are
independent of a company's own actions come to pass in the future
Upon meeting certain conditions, contingent assets are reported in
the accompanying notes of financial statements.
A contingent asset can be recorded on a firm's balance sheet only when the
realization of cash flows associated with it becomes relatively certain.
13.) Explain the treatment of a contingent asset.
Contingent assets are possible assets whose existence will be confirmed by the
occurrence or non-occurrence of uncertain future events that are not wholly
within the control of the entity. Contingent assets are not recognized, but they
are disclosed when it is more likely than not that an inflow of benefits will occur.
14.) What is a decommissioning liability?
Decommissioning Liabilities means any costs, charges, expenses, liabilities and
obligations incurred in abandoning and/or decommissioning any Asset Property
(including but not limited to wells and facilities) whether such loss, charges,
expenses, liabilities and obligations are incurred pursuant to any statutory.
15.) Explain the treatment of a decommissiong liability.
Decommissioning Liabilities means, with respect to a Person, its liabilities for
plugging and abandonment as reflected in the corresponding line item on its
balance sheet, or if such Person is the Borrower or any of its Subsidiaries, as
disclosed to the Administrative Agent.
