Chapter 12

Question 1

definition of a liability

Answer 1

a present obligation of the entity arising form past events or transactions
- settlement of which will result in future outflow of economic benefits

Question 2

settlement of a liability can be

Answer 2

1. future transfer or use of assets
2. provision of services
3. or other yielding of economic benefits

Question 3

what are the 3 elements of a liability

Answer 3

1. a future sacrifice
2. present obligation
3. past event
   - all 3 are necessary for a liability to be recognized

Question 4

what is an obligating event

Answer 4

event that creates an obligation where there is no other realistic alternative but to settle the obligation

Question 5

what are legal obligations

Answer 5

liabilities that arise from contract or legislation

- most liabilities are legal obligations

Question 6

what are some examples of legal obligations

Answer 6

a/p and borrowings

Question 7

what are constructive obligations

Answer 7

a liability exists because there is a pattern of past practice or established policy

Question 8

what is a constructive obligation

Answer 8

a company can create a constructive obligation if it makes a public statement that the company will accept certain responsibilities because the statement creates a valid expectation that the company will honor those responsibilities

Question 9

what are the 2 categories of liabilities

Answer 9

1. financial

2. non-financial

Question 10

what is a financial liability

Answer 10

• is a financial instrument
• a contract that gives rise to a financial liability of one party and a financial asset of another party
  ie A/P and A/R
  or
  loan payable and loan receivable

Question 11

give some examples of a financial liability

Answer 11

ie A/P and A/R
or
loan payable and loan receivable

Question 12

give some examples of a financial liability

Answer 12

ie A/P and A/R
or
loan payable and loan receivable

Question 13

what is a non-financial liability

Answer 13

• defined by what is NOT
• not a financial liability
• no offsetting financial asset on the books of another party

Question 14

what is a type of a non-financial liability

Answer 14

provisions

Question 15

what are provisions

Answer 15

or liabilities that have uncertainty surrounding timing or amount are a major category of non-financial liabilities

Question 16

what are some examples of non-financial liabilities

Answer 16

1. unearned revenues
2. cash outflows that are expected to arise in the future but that are related to transactions, decisions or events of the current period
   - ie a decommissioning obligation

Question 17

what are some examples of non-financial liabilities

Answer 17

1. unearned revenues
2. cash outflows that are expected to arise in the future but that are related to transactions, decisions or events of the current period
   - ie a decommissioning obligation

Question 18

what are the two categories of financial liabilities

Answer 18

1. other and

2. Fair value through profit or loss )FVTPL)

Question 19

what are other financial liabilities

Answer 19

most financial liabilities

- all those except those in FVTPL

Question 20

how do you initially value other financial liabilities

Answer 20

at fair value

• this is the transaction value
• add any transaction costs if any

Question 21

how do you know if the financial liability is FVTPL and not other

Answer 21

a. the liability will be sold or transferred in the short term
or
b. designated FVTPL by management
- to avoid an accounting mismatch
- related/hedged financial instruments are FVTPL)

Question 22

how do you know if the financial liability is FVTPL and not other

Answer 22

a. the liability will be sold or transferred in the short term
or
b. designated FVTPL by management
- to avoid an accounting mismatch
- related/hedged financial instruments are FVTPL)

Question 23

What is discounting for

Answer 23

all liabilities must be valued at Present value

- time value of money

Question 24

what should a discount rate be

Answer 24

discount rate chosen must reflect the current market rate, specific to the risk level of the liability

Question 25

discounting is not possible if

Answer 25

the amount and timing or cash flows is highly uncertain then undiscounted amounts are recorded

Question 26

if you can't use discount what do you use

Answer 26

undiscounted amounts

Question 27

how do you record interest expense on the discounted liablitiy

Answer 27

recorded as time passes

Question 28

how do you record interest expense on the discounted liablitiy

Answer 28

recorded as time passes

Question 29

how do you record interest expense on the discounted liability

Answer 29

recorded as time passes

Question 30

how do you measure other financial liabilities

Answer 30

1. Initial measured - fair value of the consideration plus transition costs 2. then carried at Fair value (which is cost) or amortized cost over their lives

Question 31

What is discounting

Answer 31

time value of money

Question 32

what should the discount rate being chosen be

Answer 32

must reflect the current market rate, specific to the risk level of the liability

Question 33

How do you recognize provisions

Answer 33

recognize if, as the result of a past event, the company has a PRESENT LEGAL OR CONSTRUCTIVE OBLIGATION that can be estimated reliably and that it is PROBABLE that an outflow of economic benefits will be require dto settle the obligation

Question 34

when recognizing a provision the estimate of the amout to recognize is based on what

Answer 34

1. risk | 2. uncertainty of cash flows

Question 35

if effect of discounting is material then they must determine by

Answer 35

discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of TVM and the risk specific to the liability

Question 36

common financial liabilities are classified as and initially measured as

Answer 36

- classified as other financial liabilities | - initially measured as fair value plus transaction costs

Question 37

what are some common financial liabilities

Answer 37

1. a/p 2. Notes payable 3. Loan gurantees??

Question 38

what sort of adjustments need to possibly be done for A/P

Answer 38

1. purchase discounts 2. allowances 3. returns

Question 39

How do notes payable come about

Answer 39

usually form borrowing from a lender | - other notes payable are form suppliers as part of a purchase agreement

Question 40

what is a note payable

Answer 40

a written promise to pay a specified amount at a specified future date (or a series of amoutns over a series of payment dates)

Question 41

what is a note payable

Answer 41

a written promise to pay a specified amount at a specified future date (or a series of amoutns over a series of payment dates)

Question 42

some notes formalize what

Answer 42

collateral security for the lender, assets of the borrower that the secured lender can seize if the note goes into default

Question 43

what is the stated interest rate in a note

Answer 43

may not equal the market rate prevailing on obligations involving similar credit rating or risk

Question 44

What is the market interest rate

Answer 44

the rate accepted by 2 parties for loans or equal profile - identical amounts, with identical credit risk, terms and conditions

Question 45

what are the two categories of notes

Answer 45

1. interest bearing and | 2. non-interest bearing

Question 46

what are interest bearing notes

Answer 46

- do not state an interest rate but command interest through the difference b/w lent and (higher) cash paid

Question 47

a note with stated interest rate that is below market rates may be used why

Answer 47

may be used by suppliers as a sales incentive

Question 48

how do you initial value a note

Answer 48

at fair value (usually loan amount)

Question 49

if the state rate and market rates are different on a note and the term is more than a year (ie not short term)

Answer 49

the present value discounting must be used to establish initial fair value - use market rate for calculations

Question 50

what is a loan guarantee

Answer 50

requires a guarantor to pay the loan principal and interest if the borrower defaults

Question 51

a loan guarantee is a financial liability of the gurantor, how do you record it

Answer 51

at fair value

Question 52

what are cash dividends payable

Answer 52

declared but not year paid

Question 53

how are cash dividends payable reported

Answer 53

reported as a current liability b/w date of declaration and payment because it gives rise to an enforceable contract

Question 54

What do monetary accrued liabilities include

Answer 54

wages and benefits earned by employees, interest earned by creditors but not yet paid COG and Services received but not yet invoiced by the supplier

Question 55

what are advances and returnable deposits

Answer 55

guarantees for payment of future obligations or to guarantee performance on a contract or service - deposits may also be made as guarantees in case of noncollection or for possible damage to property (unearned revenue)

Question 56

how do you report advances and returnable deposits

Answer 56

- as a current liability or long-term liability - if they are interest bearing, an annual adjusting entry is required to accrue interest expense and to increase the related liability