MGT 105: Chapter 13

Define Deferrals

cash transactions that affect future period income
statements

Define Accruals

non-cash transactions that affect current period income statements.

Define: Liability Valuation

Liability Valuation = PV of all expected future economic sacrifices (money outflows)

Define Liability

Probable Future Sacrifices
of Economic Benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Define Notes Payable:
Borrowed funds with a written promise to pay the ______________ at the ________________

Borrowed funds with a written promise to pay the Face Value of Note at the maturity date

How do you calculate borrowing cost (interest cost) on a zero-interest bearing note?

It is the difference between the Face Value and yield of note

In which account does the "interest cost" of a Zero-Interest Note Payable get recorded on issuance date?

It gets recorded in the "Discount on Notes Payable" Account

What are some current liability example accounts?

A/P, Dividends Pay., Unearned Revenues, Income Tax Payable , Notes Payable

Zero-Interest bearing Notes have an _______________ interest rate

implied

What type of account in is "Notes Payable - Discount" and what is its normal balance?

It is a contra-liability account to Notes Payable and has a normal debit balance thus reducing Notes Payable

What does the "Notes Payable-Discount" account represent?

Differed Interest Expense or
the amount(cost) of interest that will be paid to note holder

So for a zero-interest bearing note the person who writes the Note Payable will receive _________ cash than the face value of the note. This is how the____________ is accounted for.
So for example if a firm receives a zero-interest bearing note from the b

So for a zero-interest bearing note the person who writes the Note Payable will receive less cash than the face value of the note. This is how the interest cost is accounted for.
So for example if a firm receives a zero-interest bearing note from the borr

What is the important thing to remember with a zero-interest bearing Note in terms of accounts used to record interest?

The Interest Payable type account is never created!
Instead "Notes Payable - Discount" is used to record interest and is the account that is credited when recording interest expense

For zero-interest bearing Notes Payable:
At maturity, the borrower must pay back an amount _________than the cash received at the issuance date

greater

At what point in time is the interest expense account created?

At the end of each period in which it was incurred

What is the entry to record payment of an interest-bearing note and accrued interest at maturity? (Here $100k note, 2k interest)

Note Payable 100,000
Interest Payable 2,000
Cash 102,000

What is the entry to record issuance of 4-month, zero-interest- bearing note to a bank? (Here $100k note, 2k implied interest)

Cash 100,000
N/P-Discount 2,000
N/P 102,000

When note is interest bearing, we know that the cash actually received in issuance date is equal to the _______________ of the note.

Face Value

For a zero-interest bearing Notes Payable, the cash received by the Note Issuer is equal to the__________________________.

PV of the face value of the note

For a zero-interest bearing Notes Payable, the cash due at maturity is equal to the __________________________.

Face Value of Note

For an interest bearing Notes Payable, the cash due at maturity is equal to the __________________________.

Face Value of the Note plus interest

What are examples of employee related liabilities?

Payroll Deductions, Compensated absences, Bonuses

At the end of the period, what is the generic entry to record accumulated compensated absences accrued?

Compensation Expense XXX
Compensation Pay. XXX

When rate do you use to determine the value of compensation on the date it is USED?

You use the value of the rate of pay on the date used

When thinking about problems related to compensation payments, it is useful to think of the accrued days as a type of _________________ the follows the _______________ method ?

Inventory,
FIFO Method

What are types of loss contingencies?

Loss from Lawsuit,
Warranties

In order to record a loss liability, what two criteria must be met?

The loss contingency must be probable and easily estimated

Describe an assurance type warranty

Assurance type warranty is a warranty included in the initial sale of product.

Describe a service type warranty

warranty that provides additional services other than assurance warranty. This type of warranty uses a Unearned Revenue account.

What is a general journal entry to record a probable loss contingency from a lawsuit?

Loss from Lawsuit XXX
Lawsuit Payable XXX

What is a general journal entry to record a unprobable loss contingency from a lawsuit?

No need to record

What is the valuation of a liability represented by?

Valuation = the PV of all future cash outflows

True or False:
Companies should recognize the expense and related liability for compensated absences in the year earned by employees.

True

True or False:
Companies should accrue an estimated loss from a loss contingency occurring during the fiscal year if information available prior to the issuance of financial statements indicates that it is reasonably possible that a liability has been inc

False, it has to be probable

True or False:
A company recognizes gain contingencies only when a high probability exists for realizing them.

False. Gain contingencies are not realized until they happen

True or False:
Under an assurance-type warranty, companies charge warranty costs only to the period in which they comply with the warranty.

False. The costs are incurred as an adjusting entry at the end of the period when estimated warranty liability is credited

Liabilities are ........

obligations arising from past transactions and payable in assets or services in the future

Among the short-term obligations of Larsen Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Dennison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classifie

Current Liabilities

Which of the following should not be included in the current liabilities section of the balance sheet?:
Trade notes payable
The discount on short-term notes payable
Short-term zero-interest-bearing notes payable
All of these answers are included.

All of these answers are included.

What is the relationship between current liabilities and a company's operating cycle?

Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).

What is a discount as it relates to zero-interest-bearing notes payable?

The discount represents the cost of borrowing.

Which of the following is a condition for accruing a liability for the cost of compensation for future absences?:
-Payment of the compensation is probable.
-The obligation relates to the rights that vest or accumulate.
-The obligation is attributable to e

All of these are conditions for the accrual.

When is a contingent liability recorded?

When the future events are probable to occur and the amount can be reasonably estimated.

Greeson Corp. signed a three-month, zero-interest-bearing note on November 1, 2020 for the purchase of $500,000 of inventory. The face value of the note was $507,800. Greeson used a "Discount of Note Payable" account to initially record the note. Assuming

Interest Expense 5,200
N/P-Disc 5,200

Craig borrowed $700,000 on October 1, 2020 and is required to pay $720,000 on March 1, 2021. What amount is the entry recorded at on October 1, 2020 and how much interest is recognized from October 1 to December 31, 2020?

Entry to record Note: so here since it is clearly stated what value is owed on due date it is a note with a stated interest rate. This results in a N/P account only at borrowing date.
Cash 700,000
N/P 700,000
Then at the end of the accounting period an en

Venible Newspapers sold 6,000 of annual subscriptions at $150 each on June 1. How much unearned revenue will exist as of December 31?

$375,000

A company gives each of its 75 employees (assume they were all employed continuously through 2020 and 2021) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next ye

Compensation liability in 2020 = $151,200
where entry to record is:
Comp. Exp. 151,200
Comp. Pay. 151,200
Compensation liability in 2021 = $210,600
where first entry to record payment of used days is:
Comp. Pay. 113,400
Comp. Exp. 16,200
Cash 129,600
and

Composite provides extended service warranty contracts on electronic equipment sold through major retailers. The standard contract is for four years. During the current year, Composite provided 42,000 such warranty contracts at an average price of $162 ea

Answer: $901,000
Because Unearned Service Revenue that year was $6,804,000 and only $1,701,000 was recognized as revenue that year. so $1,701,000 - 800k = 901,000

A company offers a cash rebate of $2 on each $6 package of batteries sold during 2021. Historically, 10% of customers mail in the rebate form. During 2021, 5,000,000 packages of batteries are sold, and 175,000 $2 rebates are mailed to customers. What is t

Rebate Expense in 2021 = $1,000,000
- this represents the whole estimated liability where 5,000,000 x .1 x $2 = 1,000,000
Rebate Payable in 2021 = $650,000
- this represents the whole estimated liability account minus what consideration was paid to custom

During 2019, Rao Co. introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the

Warranty Payable on Dec 31,2021 = $319,000
where 6,200,000 x .09 = $558,000 estimated liability
558,000 - 239,000 = 319,000 remaining in liability account

Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Muggs $4 each. Muggs estimates that 45 percent of the coupons will be redeemed. Data for 2020 and 2021 are as follows:

$112,500

How do you record an Interest Bearing Note Payable on the Issuance Date?

For an Interest-Bearing Note, on the Issuance Date you debit Cash for the amount of money borrowed and you credit N/P for the principal amount ONLY!
Ex:
Cash XX
N/P XX

How and when do you record the interest expense of a Note Payable that is Interest-Bearing?

You accrue the interest in an adjusting entry at period end with a debit to interest expense and a credit to interest payable
Ex:
Interest Expense XX
Interest Payable XX

Company signs a $100k, 6%, four month Note. What is the entry on issuance date?

Cash 100,000
N/P 100,000

What kind of account in "N/P-Discount" and what is its normal balance? Also what does it represent?

It is a contra-liability account to N/P with a normal debit balance. It represents the cost of borrowing or implied interest.

In the case of a Zero-interest Note, how is the amount of cash received on issuance date calculated?

It is just the PV of the face value of the note on maturity date

In the case of a Zero-interest Note Payable, what amount will the lender receive on the maturity date?

He will receive the face value of the note or the total amount in the N/P account

Company signs a $100k, 6%, four month Note on March 1. What is the entry to record interest on June 30?

Interest Expense 2,000
Interest Payable 2,000

Company signs a $100k, 6%, four month Note on March 1. What is the entry to record maturity of note on June 30 if interest has already been accounted for?

N/P 100,000
Interest Payable 2,000
Cash 102,000

Company signs a $102,000, four-month, zero-interest bearing note. The PV of the note is $100k. What is the entry to record the issuance?

Cash 100,000
N/P-Discount 2,000
N/P 102,000

A N/P-Discount only occurs for which type of Note Payable?

Only for a Zero-interest bearing Note Payable

Company signs a $102,000, four-month, zero-interest bearing note. The PV of the note is $100k. What is the entry to record interest expense on April 30th?

Interest Expense 1,000
N/P - Disc. 1,000

What is the general entry to record Compensated Payable at period end when it is accrued?

Comp Expense XX
Comp Payable XX

What rate is used when creating the compensation liability?

The rate at the time it is earned

What rate is used when recording the payment/use of compensation liability?

the rate at the time it is used

What is the general entry for compensation liability payment when it is being used where the pay rate is higher on the date used then the date earned?

Comp. Payable XX
Comp Expense XX
Cash XXXX
where comp expense represents the difference in cash paid out in compensation at new rate and previous accrued liability recorded

What is the general entry that should be recorded at time of sale for an assurance type warranty?

No entry needed since you just record the sale and the warranty is included as part of the sale

What is the general entry that should be recorded at time of sale for a service type warranty?

Cash XX
Unearned Revenue-Service XX

What is the general entry for an assurance type warranty when a company incurs an actual cost due to the warranty that period?

Warranty Expense XX
Parts Inv. XX

What is the general entry for an assurance type warranty at period end when the company is recording the estimated liability?

Warranty Expense XX
Warranty Liability XX

What is the general entry for a service type warranty at period end?

Unearned Revenue - Service XX
Warranty Revenue XX

For a service type warranty, do you estimate the warranty expense?

No. If there are any expenses then
Warranty Expense XX
Parts Inv XX

What are the general steps for a considerations payable problem?

1) Record sale
2) Record estimated liability from redemptions which results in a credit to consideration payable
3) Record any payment of actual consideration to customers by debiting consideration payable an crediting cash