Intermediate 2 Exam 1

company must pay special attention to \n transactions occurring near the end of one accounting period and at the beginning of the next to make sure \n it properly records the liability.

do not forget about interest expense even if the note is zero-interest-bearing

When recording a sale, some companies separate the cash received between the revenue and the sale tax payable.

Some companies do NOT separate the sales tax and the sales amount at the time of the sale.

When the sales revenue amount includes the sales tax, first, take that amount and divide by one plus the \n tax rate to get the sales revenue amount, e.g., $105 / 1.05 = $100 = the sales revenue amount. Second, \n take the figure that includes both the sales revenue amount and the sales tax collected and reduce it by the \n sales revenue amount that you just calculated, e.g., $105 - $100 = $5 = amount of sales tax collected.

to the extent a company has not yet remitted amounts withheld from an employee’s paycheck, the company should recognize a current liability.

Old age, survivor, and disability insurance, i.e., FICA – Federal insurance contribution act. Combined with the federal hospital insurance tax, these taxes are often referred to as social security taxes.

Remember the employer’s share is an expense AND a liability until the employer remits the amount to the taxing authorities. The employee’s share (withheld from employee’s paycheck) is a liability of the employer until the employer remits the amount to the taxing authorities.

FUTA – Federal unemployment tax act and SUTA – State unemployment tax act. Only employers pay. State rates vary. Federal rate is 6% on the first $7,000 of compensation paid to each employee. Employers receive a FUTA credit (reduction) of up to 5.4% for SUTA. Thus, if an employer is subject to a state unemployment tax of 5.4% or more, it pays only a 0.6% tax to the federal \n government.

Recognize the cost in the year earned by the employee. Accrue for compensated absences if each of the following conditions exists:

• the employer’s obligation exists because of work already performed by the employee

• the employer’s obligation relates to employee rights that vest or accumulate (To vest means that \n the employer still owes the employee even if the employee no longer works for the employer. To \n accumulate means that the employee’s rights to the benefit can carry forward to future periods.)

• payment is probable

• the employer’s obligation amount can be reasonably estimated; what happens if amount cannot be \n reasonably estimated?

introduces complexity in accounting for gift cards. When can a company remove the liability for a gift card that is not redeemed? Certain states do not recognize expiration dates. Also, state laws regarding unclaimed gift cards may fall under the abandoned-and-unclaimed-property laws which can require unclaimed items be remitted to the state after a five-year period.

Under this method, breakage revenue is recognized on a pro-rata basis determined by the redemption pattern of the outstanding gift cards redeemed

estimate of people who do not use all of their gift cards

an existing situation involving uncertainty that will eventually be resolved when one or more future events occur or fail to occur

Companies tend to follow a conservative approach. They tend not to record gain contingencies. Instead, they only disclose gain contingencies when there is a high probability they will materialize.

Referred to as contingent liabilities. Important terminology: \n - Probable (estimated outcome) \n - Reasonably possible (disclose) \n - Remote (dont have to do anything per GAAP, but can disclose)

on or before the balance sheet date

in order to accrue for a loss, the cause for the litigation must have occurred on or before the balance sheet date.

a classic example of a contingent liability.

• cash basis (OK only if costs are immaterial or period is short)

• accrual basis (used when the warrenty is an integral and inseparable part of the sale)

more examples of contingent liabilities

When a long-term obligation finally becomes payable within the next year, it should be reported in the current liabilities section of the balance sheet.

1. Debt will be retired using assets that are classified as long-term.

2. Debt will be refinanced or retired from the proceeds of a new long-term debt issue; make sure that as of the balance sheet date there is a contract in place for the new long-term debt issue.

3. Debt will be converted into capital stock; again, make sure that as of the balance sheet date there is a contract in place stipulating the debt will be converted into stock.

company may not call for debt to be paid right away

cash dividends payable are a current liability. Stock dividends payable are NOT a liability because they do not require the use of assets to satisfy the obligation. Stock dividends are satisfied by distributing company stock.

the contract between an issuer of bonds and the bondholders.

a promise; a covenant places restrictions on the borrower and specifies the terms under which the lender can force the borrower to repay funds otherwise not yet due

backed by a pledge or collateral

an unsecured AND very risky bond

mature on a single date

mature in installments

the issuer has the right to “call-in” (retire) the bonds prior to their maturity

can be converted into other securities of the issuer

paying off debt before it is due

interest accrued

• Nature of the liabilities, e.g., is it a term bond; disclose any call or conversion features

• Maturity dates; make sure to disclose the required principal payments over each of the next five \n years

• Interest rate information

• The fair value of the liabilities

makes it inconvenient for corporations to issue \n large amounts of additional stock

represents the basic ownership interest in a corporation

stockholders tend to profit the most if the company is successful, however, they are guaranteed neither dividends nor assets upon dissolution of the company.

a special class of stock

stockholders receive some kind of special preference in exchange for sacrificing some of the “inherent rights” of stock ownership

means if the corporation fails to pay a dividend in any year, it must make that dividend up in a later year before paying any dividends to common shareholders

cumulative preferred dividends that have not been declared

allows the stockholder, at its discretion, to exchange preferred shares for common shares at a predetermined ratio

allows the corporation, at its discretion, to redeem (buy back) the stock at specified future dates at set prices. When a corporation redeems any preferred stock, it must also pay any dividends in arrears.

allows the stockholder, at its discretion, to make the corporation repay to the stockholder the stock proceeds. Preferred stock that must be redeemed is reported as a liability

no relationship to its fair value. Some states restrict dividend payments based on the amounts in a company’s capital stock account and its APIC account.

Record at either the fair value of the stock issued OR the fair value of the noncash item received, whichever is more clearly determinable.

educe the proceeds received from the issuance \n AND are a cost of financing the business. They are recorded via a debit to the APIC account

After reacquiring shares, a company may either retire the shares or hold them for reissue. If not retired, the shares are referred to as treasury shares or treasury stock

Once a company starts to pay a cash dividend, it is reluctant to reduce or eliminate the dividend for fear the stock market might view this negatively. Before declaring and ultimately paying a cash dividend, a company must assess the current and future availability of cash to pay the dividend.

the date the BOD approves/authorizes the dividend to be paid

stockholders who own the stock on the record date are entitled to receive the cash dividend

the day the cash dividend is paid to the stockholders

When declaring one, first adjust property to be distributed to its fair market value.

They are a return of the stockholders’ investments, not a return of corporate profits

when number of shares to be issued is less than 25% of the already outstanding shares

when number of shares to be issued is 25% or more of the already outstanding share

No JE recorded. Instead, change par value of the shares & number of shares outstanding.