F4 Liabilities Flashcards

Question

How are NP and AR with terms less than one year recorded?

Answer 1

@ Face Value

Answer 2

Accting rule: PPE is recorded @ FV of what you give up, not just the face value of the note Eg w/ a non int bearing NP, where pd 10K in cash and NP 100K with 24868 disc Dr PPE 85132 (diff) Dr Disc 24868 Cr NP 100K Cr Cash 10K PPE will not change in value (although it will be depreciated) eg w/ int bearing NP - Equip cost 100K, pd 10K cash, NP for 90K @ 8% Dr PPE 100k Cr Cash 10K Cr NP 90K

Answer 3

OG: dr cash/exp cr liab for amt of instrument Then dr the liab cr CS / APIC

Answer 4

- imputed = mkt rate when none is stated or the stated rate is unreasonable - it is used to calc PV on the note - imputed int rate = effective int rate used for amortization when no stated or low int rate exists

Answer 5

Sinking fund requirement: ❌ NOT a liability 📄 Disclosed in footnotes only Sinking fund deposits: ✅ Recorded as an asset Classified as: • Restricted cash OR LT investment B/S: - Asset side → Restricted asset (sinking fund) - Liab side → Full debt remains (no reduction) Classification: Current → if used within 1 year Noncurrent → if tied to long-term debt 🚨 Key trap: - Do NOT net against the liab - Do NOT record a liab for the requirement

Answer 6

1st pymt: 500K * .12 / 12 = 5K in int, so 11,122-5k = 6122 prin reduction, leaving NP balance at 493,878 2nd pymt: 493,878 * .12 / 12 = 4939 int, pymt 11,122 - 4939 int = 6183 prin, new NP bal 487,685

Answer 7

= face amt * stated rate * time - what you expect to collect from the borrower based on the contract Dr Interest Receivable (stated) Dr Discount on Bond (plug) Cr Interest Revenue (effective)

Answer 8

= carrying amt * effective rate * time - b/c this is based on amt actually lent out - what you actually earn on the investment (cash lent out), incl the fee spread over time

Answer 9

= maturity value @ PV eg, $10K loan @ 3% due in 5 years. PV at 8% is .680 MV = 10K *3% * 5 yrs = 1500 int + 10K prin = 15K PV = 15K * .680 = 7,820 BS value

Answer 10

st8 line is recognized evenly over the life of the loan or bond the same amt of int exp is recorded each period, regardless of the changing carry amt of the debt simple to calc: total int cost / # of periods ≠ GAAP effective int method is where int exp is based on the BV amt of the debt * the effective int rate (mkt rate at issuance) int exp varies each period b/c BV changes as prin is amortized more accurate reflection fo the cost of borrowing over time = GAAP Eg, $1M NP @ 9% interest, due in 4 quarterly pymt 264,200 GAAP method: 1M * 9% * 3/12 = $22,500 non GAAP method: 264,200 -250,000 = 14,200 (each quarter)

Answer 11

It is the sales price charged to customers, excluding sales tax Sales tax is based on the total retail sales eg, $800k total retail sales w/ 5% sales tax means 40K is a tax liab --> 800K * 5%

Answer 12

it means the principal amt due w/in the next 12 months -- not interest ≠ sinking fund pymt, which is just disclosed in notes but not included as a current maturity of LT debt

Answer 13

🔹 Interest RECEIVABLE = based on stated (coupon) rate [Face × stated rate × time] 👉 Represents cash owed by borrower 🔹 Interest REVENUE = based on effective int rate [Carrying value × effective rate × time] 👉 Represents true economic return 🔹 Difference = amortization [Rev − Receivable = fee/discount amortization] Increases (or decreases) carrying value of loan eg. 200K loan, $6k fee @ 12% stated, 13.4% effective Step 1: What is receivable? Receivable = what borrower owes you in cash 200K * 12% = 24K / 12 mo = 2k Step 2: What is revenue? 194K * 13.4% = 25,996 / 12 = 2166 / mo Step 3: What is the difference? 2166-2000 = 166 👉 That is: amortization of the loan fee increases the carrying value of the loan

Answer 14

At the time of sale, based on estimated warranty costs: Dr Warranty Expense Cr Warranty Liability ** Wty exp is recognized when the sale happens, not spread over the warranty term b/c rev is recognized when rec'd, then liab needs to fully rec at that time also When actual repair costs happen: Dr Warranty Liability Cr Cash / Inventory / Payables

Answer 15

🔹 Assurance-Type Warranty = 👉 “Included guarantee” Ensures product works as intended Included in sale price (no separate charge) Not a separate performance obligation Accounting: Recognize warranty expense at time of sale Estimate future costs JE at sale: Dr Warranty Exp (recorded ONLY once @ OG) Cr Warranty Liab JE when repairs occur: Dr Warranty Liab (Liab reduced, not exp'd) Cr Cash / Inventory / Payables 🔹 Service-Type Warranty = 👉 “Extended warranty / extra service” Optional / sold separately Provides additional service beyond normal assurance Separate performance obligation Accounting: Recognize unearned revenue at sale Recognize revenue over time JE at sale: Dr Cash Cr Unearned Warranty Revenue JE over time: Dr Unearned Warranty Revenue Cr Warranty Revenue 🔥 Key takeaway: 👉 Assurance = expense now 👉 Service-type = revenue later

Answer 16

this liab doesn't need to be disclosed b/c remote. BUT the related party trx, does need to be disclosed!

Answer 17

This is the Increase in ARO liability due to passage of time b/c ARO is initially recorded at PV, so liab grows over time to reach future settlement value use original discount rate (do NOT update) 🔹 Formula: Accretion Expense = Beg ARO × credit-adjusted risk-free rate 🔹JE: Dr Accretion Expense Cr ARO Liability 🔥 Key takeaway: 👉 Accretion = “unwinding the discount”

Answer 18

🔹 Included (Recognize liability when incurred): - Employee termination benefits (involuntary only) - Contract termination costs (non-capital leases)(OPER LEASES) - Costs to consolidate or close facilities - Employee relocation costs ✅ 🔹 NOT Included ❌ Voluntary employee termination benefits - Treated as compensation, not exit costs ❌ Retirement of fixed assets - Handled under asset disposal / ARO rules ❌ Termination of capital leases (finance leases) - Accounted for separately under lease accounting ⚠️ Exam Traps “Termination benefits” → check voluntary vs involuntary “Lease termination” → check capital (finance) vs operating Asset retirement ≠ exit activity 🔥 Key takeaway: 👉 Exit costs = costs to shut down or restructure operations 👉 NOT routine compensation or asset accounting

Answer 19

🔹 General Rule: 👉 Recognize liab when incurred NOT when the plan is announced 🔹 1. Involuntary Employee Termination Benefits Recognize when ALL are met: - Plan is approved - Employees are identified - Terms are communicated - Plan is unlikely to change 👉 Then record liability immediately 🔹 2. Contract Termination Costs Recognize at earlier of: - When contract is terminated - When entity stops using the rights under the contract 🔹 3. Other Exit Costs (e.g., relocation, closing facility) 👉 Recognize as incurred (no upfront accrual) ⚠️ Exam Traps ❌ Do NOT accrue costs just because a restructuring plan exists ❌ Do NOT include future operating losses 🔥 Key takeaway: 👉 “Plan” ≠ liability 👉 Liability = when you’re actually obligated or have incurred the cost

Answer 20

1: Involuntary termination benefits 20 employees × $5,000 = 100,000 Recognize on October 15 (communication date) 👉 exp and liab Step 2: Relocation costs Not accrued upfront Recognized when incurred 👉 0 at 12/31/Y1 Step 3: Operating lease (cease-use) Remaining lease payments: Nov–June = 8 months 8 × $8,000 = 64,000 👉 Recognize liability when use ceases (Nov 1)

Answer 21

Add them to the DEPLETION BASE If a company is obligated to restore land after extraction, the estimated restoration cost is part of the total cost of obtaining and using the natural resource. So it is: - capitalized - included in the depletable base - recognized through depletion expense over the life of the resource 🔹 Key distinction: Natural resources are depleted, NOT "DEPRECIATED". 🔹 Example Mine cost = $10M Estimated restoration cost = $2,500,000 Depletion base = 10M + 2,500K = 12,500,000 ⚠️ Exam traps ❌ Do NOT expense restoration costs as incurred ❌ Do NOT subtract them from the depletion base ❌ Do NOT depreciate them 🔥 Key takeaway: 👉 Asset retirement/restoration costs for natural resources are capitalized into the depletion base

Answer 22

Depletion Base Formula --> Incl ALL costs to acquire and prepare the resource: - Purchase/acquisition cost - Development/preparation costs - Restoration (ARO) costs -Other capitalized costs 👉 LESS: Salvage value 🔹 Example Purchase price = 2,640,000 Development costs = 360,000 Restoration cost = 180,000 Salvage value = (300,000) Depletion base = 2,640K + 360K + 180K - 300K = 2,880K 🔹 Depletion Calculation Estimated tons = 1,200,000 {Rate per ton} = 2,880,000 ÷ 1,200,000 = 2.40 Tons extracted = 60,000 {Depletion expense} = 60,000 × 2.40 = 144,000 ⚠️ Exam Traps ❌ Forgetting restoration costs ❌ Forgetting to subtract salvage value ❌ Mixing up depletion vs depreciation 🔥 Key takeaway: 👉 Depletion base = all capitalized costs − salvage value

Answer 23

at YE, before purchase occurs: Dr. Est Loss of pur commitment Cr Est LIAB on pur commitment when purchase occurs: Dr. Inv @ MV Dr. Est Liab on pur commitment Cr AP for the full contract commitment amt

F4 Liabilities Flashcards

AP / Liab, Contingencies, LT Liab (47 cards)