Intermediate accounting answer chapter13.docx
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Intermediate accounting answer chapter13.docx
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Intermediateaccountinganswerchapter13
Chapter13CurrentLiabilitiesandContingencies
AACSBassuranceoflearningstandardsinaccountingandbusinesseducationrequiredocumentationofoutcomesassessment.Althoughschools,departments,andfacultymayapproachassessmentanditsdocumentationdifferently,oneapproachistoprovidespecificquestionsonexamsthatbecomethebasisforassessment.Toaidfacultyinthisendeavor,wehavelabeledeachquestion,exerciseandprobleminIntermediateAccounting,5ewiththefollowingAACSBlearningskills:
Questions
AACSBTags
Exercises(cont.)
AACSBTags
13-1
Reflectivethinking
13-6
Analytic
13-2
Reflectivethinking
13-7
Analytic
13-3
Reflectivethinking
13-8
Analytic
13-4
Reflectivethinking
13-9
Reflectivethinking
13-5
Reflectivethinking
13-10
Analytic
13-6
Reflectivethinking
13-11
Analytic,Reflectivethinking
13-7
Reflectivethinking
13-12
Analytic
13-8
Reflectivethinking,Communications
13-13
Analytic,Reflectivethinking
13-9
Reflectivethinking
13-14
Analytic,Communications
13-10
Reflectivethinking
13-15
Analytic
13-11
Reflectivethinking
13-16
Reflectivethinking
13-12
Reflectivethinking
13-17
Analytic
13-13
Reflectivethinking
13-18
Reflectivethinking
13-14
Reflectivethinking
13-19
Analytic
13-15
Reflectivethinking
13-20
Analytic
13-16
Reflectivethinking
13-21
Analytic
13-17
Reflectivethinking
13-22
Analytic
13-18
Reflectivethinking
CPA/CMA
13-19
Reflectivethinking
13-1
Analytic
13-20
Reflectivethinking
13-2
Analytic
13-21
Reflectivethinking
13-3
Analytic
13-22
Reflectivethinking
13-4
Analytic
BriefExercises
13-5
Analytic
13-1
Analytic
13-6
Analytic
13-2
Analytic
13-1
Reflectivethinking
13-3
Analytic
13-2
Reflectivethinking
13-4
Analytic
13-3
Analytic
13-5
Analytic
13-4
Analytic
13-6
Analytic
Problems
13-7
Analytic
13-1
Analytic
13-8
Analytic
13-2
Analytic
13-9
Analytic
13-3
Analytic
13-10
Analytic
13-4
Analytic
13-11
Analytic
13-5
Analytic
13-12
Analytic
13-6
Analytic
13-13
Analytic
13-7
Analytic
Exercises
13-8
Analytic
13-1
Analytic
13-9
Analytic
13-2
Analytic
13-10
Analytic
13-3
Analytic
13-11
Reflectivethinking
13-4
Analytic
13-12
Analytic,Communications
13-5
Analytic
13-13
Analytic
QuestionsforReviewofKeyTopics
Question13-1
Aliabilityentailsthepresent,thefuture,andthepast.Itisapresentresponsibility,tosacrificeassetsinthefuture,causedbyatransactionorothereventthatalreadyhashappened.Specifically,“ElementsofFinancialStatements,”StatementofFinancialAccountingConceptsNo.6,par.36,describesthreeessentialcharacteristics:
Liabilities–
1.areprobable,futuresacrificesofeconomicbenefits
2.thatarisefrompresentobligations(totransfergoodsorprovideservices)tootherentities
3.thatresultfrompasttransactionsorevents.
Question13-2
Liabilitiestraditionallyareclassifiedaseithercurrentliabilitiesorlong-termliabilitiesinaclassifiedbalancesheet.Currentliabilitiesarethoseexpectedtobesatisfiedwithcurrentassetsorbythecreationofothercurrentliabilities(CommitteeonAccountingProcedure,AmericanInstituteofCPAs,AccountingResearchandTerminologyBulletin,FinalEdition,p.21).Usually,butwithexceptions,currentliabilitiesareobligationspayablewithinoneyearorwithinthefirm'soperatingcycle,whicheverislonger.
Question13-3
Inconcept,liabilitiesshouldbereportedattheirpresentvalues;thatis,thevaluationamountisthepresentvalueofallfuturecashpaymentsresultingfromthedebt,usuallyprincipaland/orinterestpayments.Inthiscase,theamountwouldbedeterminedasthepresentvalueof$100,000,discountedforthreemonthsatanappropriaterateofinterestforadebtofthistype.
Thisisproperbecauseofthetimevalueofmoney.Inpractice,liabilitiesordinarilyarereportedattheirmaturityamountsifpayablewithinoneyearbecausetherelativelyshorttimeperiodmakestheinterestortimevaluecomponentimmaterial.AccountingPrinciplesBoardOpinionNo21,“InterestonReceivablesandPayables,”specificallyexemptsfrompresentvaluevaluationallliabilitiesarisinginconnectionwithsuppliersinthenormalcourseofbusinessandduewithinayear.
AnswerstoQuestions(continued)
Question13-4
Linesofcreditpermitacompanytoborrowcashfromabankuptoaprearrangedlimitatapredetermined,usuallyfloating,rateofinterest.TheinterestrateoftenisbasedoncurrentratesoftheprimeLondoninterbankborrowing,certificatesofdeposit,bankers’acceptance,orotherstandardrates.Linesofcreditusuallymustbeavailabletosupporttheissuanceofcommercialpaper.
Linesofcreditcanbenoncommittedorcommitted.Anoncommittedlineofcreditallowsthecompanytoborrowwithouthavingtofollowformalloanproceduresandpaperworkatthetimeoftheloanandislessformal,usuallywithoutacommitmentfee.Sometimesacompensatingbalanceisrequiredtobeondepositwiththebankascompensationfortheservice.Acommittedlineofcreditismoreformal.Itusuallyrequiresacommitmentfeeintheneighborhoodof1/4ofonepercentoftheunusedbalanceduringtheavailabilityperiod.Sometimescompensatingbalancesalsoarerequired.
Question13-5
Wheninterestis“discounted”fromthefaceamountofanoteatthetimeitiswritten,itusuallyisreferredtoasa“noninterest-bearing”note.Theydo,ofcourseentailinterest,buttheinterestisdeducted(ordiscounted)fromthefaceamounttodeterminethecashproceedsmadeavailabletotheborrowerattheoutsetandincludedintheamountpaidatmaturity.Infact,theeffectiveinterestrateishigherthanthestateddiscountratebecausethediscountrateisappliedtothefacevalue,butthecashborrowedislessthanthefacevalue.
Question13-6
Commercialpaperrepresentsloansfromothercorporations.Itreferstounsecurednotessoldinminimumdenominationsof$25,000withmaturitiesrangingfrom30to270days.ThefirmwouldberequiredtofilearegistrationstatementwiththeSECifthematurityisbeyond270days.Thename“commercialpaper”impliesthatapapercertificateisissuedtothelendertorepresenttheobligation.But,increasingly,nopaperiscreatedbecausetheentiretransactioniscomputerized.Recordingtheissuanceandpaymentofcommercialpaperisthesameasfornotespayable.
Theinterestrateusuallyislowerthaninabankloanbecausecommercialpaper(a)typicallyisissuedbylarge,soundcompanies(b)directlytothelender,and(c)normallyisbackedbyalineofcreditwithabank.
Question13-7
Thisisanexampleofanaccruedexpense–anexpenseincurredduringthecurrentperiod,butnotyetpaid.Theexpenseandrelatedliabilityshouldberecordedasfollows:
Salariesexpense5,000
Salariespayable5,000
Thisachievesapropermatchingofthisexpensewiththerevenuesithelpsgenerate.
AnswerstoQuestions(continued)
Question13-8
Anemployershouldaccrueanexpenseandtherelatedliabilityforemployees'compensationforfutureabsences,likevacationpay,iftheobligationmeetseachoffourconditions:
(1)theobligationisattributabletoemployees'servicesalreadyperformed,
(2)thepaidabsencecanbetakeninalateryear–thebenefitvests(willbecompensatedevenifemploymentisterminated)orthebenefitcanbeaccumulatedovertime,(3)thepaymentisprobable,and(4)theamountcanbereasonablyestimated.
Customarypracticeshouldbeconsideredwhendecidingwhetheranobligationexists.Forinstance,whethertherightstopaidabsenceshavebeenearnedbyservicesalreadyrenderedsometimesdependsoncustomarypolicyfortheabsenceinquestion.Anexampleiswhethercompensationforupcomingsabbaticalleaveshouldbeaccrued.Isitgrantedonlytoperformresearchbeneficialtotheemployer?
Or,isitcustomarythatsabbaticalleaveisintendedtoprovideunrestrainedcompensationforpastservice?
Similarconcernsalsoinfluencewhetherunusedrightstothepaidabsencescanbecarriedforwardorexpire.Althoughholidaytime,militaryleave,maternityleave,andjurytimetypicallydonotaccumulateifunused,ifitiscustomarypracticethatonecanbecarriedforward,aliabilityisaccruedifit’sprobableemployeeswillbecompensatedinafutureyear.Similarly,sickpayisspecificallyexcludedbySFAS43frommandatoryaccrualbecausefutureabsencedependsonfutureillness,whichusuallyisnotacertainty.But,ifcompanypolicyorcustomisthatemployeesarepaid“sickpay”evenwhentheirabsenceisnotduetoillness,aliabilityforunusedsickpayshouldberecorded.
Question13-9
Whenacompanycollectscashfromacustomerasarefundabledepositorasanadvancepaymentforproductsorservices,aliabilityiscreatedobligatingthefirmtoreturnthedepositortosupplytheproductsorservices.Whentheamountistobereturnedtothecustomerincash,itisarefundabledeposit.Whentheamountwillbeappliedtothepurchasepricewhengoodsaredeliveredorservicesprovided(giftcertificates,magazinesubscriptions,layawaydeposits,specialorderdeposits,andairlinetickets)itisacustomeradvance.
Question13-10
Examplesofamountscollectedforthirdpartiesthatrepresentliabilitiesuntilremittedaresalestaxes,andpayroll-relateddeductionssuchasfederalandstateincometaxes,socialsecuritytaxes,employeeinsurance,employeecontributionstoretirementplans,anduniondues.
AnswerstoQuestions(continued)
Question13-11
1.Currentliability—Therequirementtoclassifycurrentlymaturingdebtasacurrentliabilityincludesdebtthatiscallable,or
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