Appendix F-1
Dec 24, 2015
Appendix F-1
Appendix F-2
Other Significant Liabilities
Other Significant Liabilities
Financial Accounting, Seventh Edition
Appendix Appendix FFAppendix Appendix FF
Appendix F-3
1. Describe the accounting and disclosure requirements for contingent liabilities.
2. Contrast the accounting for operating and capital leases.
3. Identify additional fringe benefits associated with employee compensation.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Appendix F-4
Contingent LiabilitiesContingent LiabilitiesContingent LiabilitiesContingent Liabilities
SO 1 Describe the accounting and disclosure requirements for contingent liabilities.
The likelihood that the future event will confirm the incurrence of a liability can range from probable to remote.
FASB uses three areas of probability:
Probable.
Reasonably possible.
Remote.
Appendix F-5
AccountingProbability
Accrue
Footnote
Need not record or disclose
Probable
ReasonablyPossible
Remote
Contingent LiabilitiesContingent LiabilitiesContingent LiabilitiesContingent Liabilities
SO 1 Describe the accounting and disclosure requirements for contingent liabilities.
Appendix F-6
A contingent liability should be recorded in the accounts when:
a. it is probable the contingency will happen, but the amount cannot be reasonably estimated.
b. it is reasonably possible the contingency will happen, and the amount can be reasonably estimated.
c. it is probable the contingency will happen, and the amount can be reasonably estimated.
d. it is reasonably possible the contingency will happen, but the amount cannot be reasonably estimated.
QuestionQuestion
Contingent LiabilitiesContingent LiabilitiesContingent LiabilitiesContingent Liabilities
SO 1 Describe the accounting and disclosure requirements for contingent liabilities.
Appendix F-7
Product Warranties
Promise made by a seller to a buyer to make good on a deficiency of quantity, quality, or performance in a product.
Recording a Contingent Liability
Estimated cost of honoring product warranty contracts should be recognized as an expense in the period in which the sale occurs.
Contingent LiabilitiesContingent LiabilitiesContingent LiabilitiesContingent Liabilities
SO 1 Describe the accounting and disclosure requirements for contingent liabilities.
Appendix F-8
Exercise: On December 1,Vina Company introduces a new product that includes a 1-year warranty on parts. In December 1,000 units are sold. Management believes that 5% of the units will be defective and that the average warranty costs will be $60 per unit. Instructions: Prepare the adjusting entry at December 31 to accrue the estimated warranty cost.
Dec. 31 Warranty Expense 3,000Estimate Warranty Liability 3,000
Contingent LiabilitiesContingent LiabilitiesContingent LiabilitiesContingent Liabilities
SO 1 Describe the accounting and disclosure requirements for contingent liabilities.
1,000 units x 5% x $60 = $3,000
Appendix F-9
Disclosure should identify the:
Nature of the item.
Amount of the contingency.
Expected outcome of the future event.
Contingent LiabilitiesContingent LiabilitiesContingent LiabilitiesContingent Liabilities
SO 1 Describe the accounting and disclosure requirements for contingent liabilities.
Disclosure of Contingent Liabilities
Appendix F-10
Lease Liabilities
A lease is a contractual arrangement between a lessor (owner of the property) and a lessee (renter of the property).
Lease LiabilitiesLease LiabilitiesLease LiabilitiesLease Liabilities
SO 2 Contrast the accounting for operating and capital leases.
Illustration F-3
Appendix F-11
Operating LeaseOperating Lease Capital LeaseCapital Lease
Journal Entry:Journal Entry:
Rent ExpenseRent Expense xxx xxx
CashCash xxx xxx
Journal Entry:Journal Entry:
Leased Equipment xxxLeased Equipment xxx
Lease Liability Lease Liability xxxxxx
The issue of how to report leases is the case of The issue of how to report leases is the case of substance versus form. Although technically legal title may not pass, the . Although technically legal title may not pass, the benefits from the use of the property do.benefits from the use of the property do.
Statement of Financial Accounting Standard No. 13, Statement of Financial Accounting Standard No. 13, “Accounting for Leases,” 1980“Accounting for Leases,” 1980
A lease that transfers substantially all of the benefits and risks A lease that transfers substantially all of the benefits and risks of property ownership should be capitalized (only of property ownership should be capitalized (only noncancellable leases may be capitalized).noncancellable leases may be capitalized).
SO 2 Contrast the accounting for operating and capital leases.
Lease LiabilitiesLease LiabilitiesLease LiabilitiesLease Liabilities
Appendix F-12
To capitalize a lease, one or more of four criteria must be met:
1. Transfers ownership to the lessee.
2. Contains a bargain purchase option.
3. Lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.
4. The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90 percent of the fair value of the leased property.
SO 2 Contrast the accounting for operating and capital leases.
Lease LiabilitiesLease LiabilitiesLease LiabilitiesLease Liabilities
Appendix F-13
Exercise: The lessee makes a lease payment of $80,000 to the lessor in an operating lease transaction.
Instructions: Prepare the journal entry that the lessee should make to record the following transactions.
Rent Expense 80,000
Cash 80,000
SO 2 Contrast the accounting for operating and capital leases.
Lease LiabilitiesLease LiabilitiesLease LiabilitiesLease Liabilities
Appendix F-14
Exercise: The Zander Company leases a new building from Joel Construction, Inc. The present value of thelease payments is $900,000.The lease qualifies as a capital lease.
Instructions: Prepare the journal entry that the lessee should make to record the following transactions.
Leased Asset - Building 900,000
Lease Liability 900,000
SO 2 Contrast the accounting for operating and capital leases.
Lease LiabilitiesLease LiabilitiesLease LiabilitiesLease Liabilities
Appendix F-15
The lessee must record a lease as an asset if the lease:
a. transfers ownership of the property to the lessor.
b. contains any purchase option.
c. term is 75% or more of the useful life of the leased property.
d. payments equal or exceed 90% of the fair market value of the leased property.
QuestionQuestion
SO 2 Contrast the accounting for operating and capital leases.
Lease LiabilitiesLease LiabilitiesLease LiabilitiesLease Liabilities
Appendix F-16 SO 2 Contrast the accounting for operating and capital leases.
Additional Liabilities For Employee Fringe Additional Liabilities For Employee Fringe BenefitsBenefitsAdditional Liabilities For Employee Fringe Additional Liabilities For Employee Fringe BenefitsBenefits
Illustration F-4
Appendix F-17
SO 3 Identify additional fringe benefits associated with employee
compensation.
Paid absences for vacation, illness, and holidays.Accrue a liability if:
Payment of the compensation is probable.
The amount can be reasonably estimated.
Paid Paid AbsencesAbsences
Additional Employee Fringe BenefitsAdditional Employee Fringe BenefitsAdditional Employee Fringe BenefitsAdditional Employee Fringe Benefits
Accrual Example:
Vacation Benefits Expense 3,300
Vacation Benefits Payable 3,300
Appendix F-18
Exercise: The In Alomar Company, employees are entitled to 1 day’s vacation for each month worked. In January, 50 employees worked the full month.
Instructions: Record the vacation pay liability for January assuming the average daily pay for each employee is $120.
Jan. 31 Vacation Benefits Expense6,000
Vacation Benefits Payable6,000
SO 2 Contrast the accounting for operating and capital leases.
Lease LiabilitiesLease LiabilitiesLease LiabilitiesLease Liabilities
Appendix F-19
SO 3 Identify additional fringe benefits associated with employee
compensation.
Benefits provided by employers to retired employees for:
1. Health care and life insurance (accrual basis)
2. Pensions
Postretirement BenefitsPostretirement Benefits
Additional Employee Fringe BenefitsAdditional Employee Fringe BenefitsAdditional Employee Fringe BenefitsAdditional Employee Fringe Benefits
Appendix F-20
A A Pension PlanPension Plan is an arrangement whereby an employer is an arrangement whereby an employer provides benefits (payments) to employees after they provides benefits (payments) to employees after they retire for services they provided while they were working.retire for services they provided while they were working.
Pension PlanAdministrator
Pension PlanAdministrator
ContributionsEmployerEmployer
Retired Employees Benefit Payments Assets &
Liabilities
Pension PlansPension PlansPension PlansPension Plans
SO 3 Identify additional fringe benefits associated with employee
compensation.
Appendix F-21
Defined-Contribution Defined-Contribution PlanPlan
Defined-Benefit PlanDefined-Benefit Plan Employer contribution Employer contribution
determined by plan (fixed)determined by plan (fixed) Risk borne by employeesRisk borne by employees Benefits based on plan Benefits based on plan
valuevalue
Benefit determined by planBenefit determined by plan Employer contribution Employer contribution
varies (determined by varies (determined by Actuaries)Actuaries)
Risk borne by employerRisk borne by employer
Types of Pension PlansTypes of Pension PlansTypes of Pension PlansTypes of Pension Plans
Companies record
Pension costs as an expense.
A liability when pension expense to date is more than the company’s contributions to date.
An asset when pension expense to date is less than the company’s contributions to date.
SO 3 Identify additional fringe benefits associated with employee
compensation.
Appendix F-22
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