11. General Liabilities

Question 1

What are the three important characteristics of a liability?

Answer 1

• Probable future sacrifice of economic benefit.
• Arises from a present obligation to transfer assets or provide services to other entities.
• Results from past transactions or events

Question 2

What distinguishes a liability as a current liability or a non-current liability?

Answer 2

Current liabilities are liabilities that will be settled with current assets within the next year or the operating cycle, whichever is longer. Most companies’ operating cycles are less than one year. Non-current liabilities are any liabilities that have a due date beyond the next year or operating cycle, whichever is longer.

Question 3

What criteria must be met for an organization to classify an existing current liability as non-current at the balance sheet date?

Answer 3

•The intent to refinance the liability into a non-current liability and the intent must be documented.

•The ability to refinance the liability into a non-current liability. This can be done in the following ways:
◦The liability is refinanced into a long-term liability after the balance sheet date, but before the financial statements are issued.
◦The organization has entered into a financing agreement that clearly permits the organization to refinance to a long-term basis.

Question 4

What are the three methods of accounting for warranties and how is each method used?

Answer 4

• Expense Warranty Approach: Account for warranties that are automatically attached to the sale of a product by expensing the estimated warranty cost at the time of sale.
• Cash Basis: Account for warranties that are automatically attached to the sale of a product by expensing the actual warranty cost when repairs or replacements are made.
• Sales Warranty Approach: Account for extended warranties that are sold separately from the product.