Intermediate accounting answer chapter13.docx

Intermediate accounting answer chapter13.docx

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Intermediateaccountinganswerchapter13

Chapter13CurrentLiabilitiesandContingencies

AACSBassuranceoflearningstandardsinaccountingandbusinesseducationrequiredocumentationofoutcomesassessment.Althoughschools,departments,andfacultymayapproachassessmentanditsdocumentationdifferently,oneapproachistoprovidespecificquestionsonexamsthatbecomethebasisforassessment.Toaidfacultyinthisendeavor,wehavelabeledeachquestion,exerciseandprobleminIntermediateAccounting,5ewiththefollowingAACSBlearningskills:

Questions

AACSBTags

Exercises（cont.）

AACSBTags

13-1

Reflectivethinking

13-6

Analytic

13-2

Reflectivethinking

13-7

Analytic

13-3

Reflectivethinking

13-8

Analytic

13-4

Reflectivethinking

13-9

Reflectivethinking

13-5

Reflectivethinking

13-10

Analytic

13-6

Reflectivethinking

13-11

Analytic,Reflectivethinking

13-7

Reflectivethinking

13-12

Analytic

13-8

Reflectivethinking,Communications

13-13

Analytic,Reflectivethinking

13-9

Reflectivethinking

13-14

Analytic,Communications

13-10

Reflectivethinking

13-15

Analytic

13-11

Reflectivethinking

13-16

Reflectivethinking

13-12

Reflectivethinking

13-17

Analytic

13-13

Reflectivethinking

13-18

Reflectivethinking

13-14

Reflectivethinking

13-19

Analytic

13-15

Reflectivethinking

13-20

Analytic

13-16

Reflectivethinking

13-21

Analytic

13-17

Reflectivethinking

13-22

Analytic

13-18

Reflectivethinking

CPA/CMA

13-19

Reflectivethinking

13-1

Analytic

13-20

Reflectivethinking

13-2

Analytic

13-21

Reflectivethinking

13-3

Analytic

13-22

Reflectivethinking

13-4

Analytic

BriefExercises

13-5

Analytic

13-1

Analytic

13-6

Analytic

13-2

Analytic

13-1

Reflectivethinking

13-3

Analytic

13-2

Reflectivethinking

13-4

Analytic

13-3

Analytic

13-5

Analytic

13-4

Analytic

13-6

Analytic

Problems

13-7

Analytic

13-1

Analytic

13-8

Analytic

13-2

Analytic

13-9

Analytic

13-3

Analytic

13-10

Analytic

13-4

Analytic

13-11

Analytic

13-5

Analytic

13-12

Analytic

13-6

Analytic

13-13

Analytic

13-7

Analytic

Exercises

13-8

Analytic

13-1

Analytic

13-9

Analytic

13-2

Analytic

13-10

Analytic

13-3

Analytic

13-11

Reflectivethinking

13-4

Analytic

13-12

Analytic,Communications

13-5

Analytic

13-13

Analytic

QuestionsforReviewofKeyTopics

Question13-1

Aliabilityentailsthepresent,thefuture,andthepast.Itisapresentresponsibility,tosacrificeassetsinthefuture,causedbyatransactionorothereventthatalreadyhashappened.Specifically,“ElementsofFinancialStatements,”StatementofFinancialAccountingConceptsNo.6,par.36,describesthreeessentialcharacteristics:

Liabilities–

1.areprobable,futuresacrificesofeconomicbenefits

2.thatarisefrompresentobligations（totransfergoodsorprovideservices）tootherentities

3.thatresultfrompasttransactionsorevents.

Question13-2

Liabilitiestraditionallyareclassifiedaseithercurrentliabilitiesorlong-termliabilitiesinaclassifiedbalancesheet.Currentliabilitiesarethoseexpectedtobesatisfiedwithcurrentassetsorbythecreationofothercurrentliabilities（CommitteeonAccountingProcedure,AmericanInstituteofCPAs,AccountingResearchandTerminologyBulletin,FinalEdition,p.21）.Usually,butwithexceptions,currentliabilitiesareobligationspayablewithinoneyearorwithinthefirm'soperatingcycle,whicheverislonger.

Question13-3

Inconcept,liabilitiesshouldbereportedattheirpresentvalues;thatis,thevaluationamountisthepresentvalueofallfuturecashpaymentsresultingfromthedebt,usuallyprincipaland/orinterestpayments.Inthiscase,theamountwouldbedeterminedasthepresentvalueof$100,000,discountedforthreemonthsatanappropriaterateofinterestforadebtofthistype.

Thisisproperbecauseofthetimevalueofmoney.Inpractice,liabilitiesordinarilyarereportedattheirmaturityamountsifpayablewithinoneyearbecausetherelativelyshorttimeperiodmakestheinterestortimevaluecomponentimmaterial.AccountingPrinciplesBoardOpinionNo21,“InterestonReceivablesandPayables,”specificallyexemptsfrompresentvaluevaluationallliabilitiesarisinginconnectionwithsuppliersinthenormalcourseofbusinessandduewithinayear.

AnswerstoQuestions（continued）

Question13-4

Linesofcreditpermitacompanytoborrowcashfromabankuptoaprearrangedlimitatapredetermined,usuallyfloating,rateofinterest.TheinterestrateoftenisbasedoncurrentratesoftheprimeLondoninterbankborrowing,certificatesofdeposit,bankers’acceptance,orotherstandardrates.Linesofcreditusuallymustbeavailabletosupporttheissuanceofcommercialpaper.

Linesofcreditcanbenoncommittedorcommitted.Anoncommittedlineofcreditallowsthecompanytoborrowwithouthavingtofollowformalloanproceduresandpaperworkatthetimeoftheloanandislessformal,usuallywithoutacommitmentfee.Sometimesacompensatingbalanceisrequiredtobeondepositwiththebankascompensationfortheservice.Acommittedlineofcreditismoreformal.Itusuallyrequiresacommitmentfeeintheneighborhoodof1/4ofonepercentoftheunusedbalanceduringtheavailabilityperiod.Sometimescompensatingbalancesalsoarerequired.

Question13-5

Wheninterestis“discounted”fromthefaceamountofanoteatthetimeitiswritten,itusuallyisreferredtoasa“noninterest-bearing”note.Theydo,ofcourseentailinterest,buttheinterestisdeducted（ordiscounted）fromthefaceamounttodeterminethecashproceedsmadeavailabletotheborrowerattheoutsetandincludedintheamountpaidatmaturity.Infact,theeffectiveinterestrateishigherthanthestateddiscountratebecausethediscountrateisappliedtothefacevalue,butthecashborrowedislessthanthefacevalue.

Question13-6

Commercialpaperrepresentsloansfromothercorporations.Itreferstounsecurednotessoldinminimumdenominationsof$25,000withmaturitiesrangingfrom30to270days.ThefirmwouldberequiredtofilearegistrationstatementwiththeSECifthematurityisbeyond270days.Thename“commercialpaper”impliesthatapapercertificateisissuedtothelendertorepresenttheobligation.But,increasingly,nopaperiscreatedbecausetheentiretransactioniscomputerized.Recordingtheissuanceandpaymentofcommercialpaperisthesameasfornotespayable.

Theinterestrateusuallyislowerthaninabankloanbecausecommercialpaper（a）typicallyisissuedbylarge,soundcompanies（b）directlytothelender,and（c）normallyisbackedbyalineofcreditwithabank.

Question13-7

Thisisanexampleofanaccruedexpense–anexpenseincurredduringthecurrentperiod,butnotyetpaid.Theexpenseandrelatedliabilityshouldberecordedasfollows:

Salariesexpense5,000

Salariespayable5,000

Thisachievesapropermatchingofthisexpensewiththerevenuesithelpsgenerate.

AnswerstoQuestions（continued）

Question13-8

Anemployershouldaccrueanexpenseandtherelatedliabilityforemployees'compensationforfutureabsences,likevacationpay,iftheobligationmeetseachoffourconditions:

（1）theobligationisattributabletoemployees'servicesalreadyperformed,

（2）thepaidabsencecanbetakeninalateryear–thebenefitvests（willbecompensatedevenifemploymentisterminated）orthebenefitcanbeaccumulatedovertime,（3）thepaymentisprobable,and（4）theamountcanbereasonablyestimated.

Customarypracticeshouldbeconsideredwhendecidingwhetheranobligationexists.Forinstance,whethertherightstopaidabsenceshavebeenearnedbyservicesalreadyrenderedsometimesdependsoncustomarypolicyfortheabsenceinquestion.Anexampleiswhethercompensationforupcomingsabbaticalleaveshouldbeaccrued.Isitgrantedonlytoperformresearchbeneficialtotheemployer?

Or,isitcustomarythatsabbaticalleaveisintendedtoprovideunrestrainedcompensationforpastservice?

Similarconcernsalsoinfluencewhetherunusedrightstothepaidabsencescanbecarriedforwardorexpire.Althoughholidaytime,militaryleave,maternityleave,andjurytimetypicallydonotaccumulateifunused,ifitiscustomarypracticethatonecanbecarriedforward,aliabilityisaccruedifit’sprobableemployeeswillbecompensatedinafutureyear.Similarly,sickpayisspecificallyexcludedbySFAS43frommandatoryaccrualbecausefutureabsencedependsonfutureillness,whichusuallyisnotacertainty.But,ifcompanypolicyorcustomisthatemployeesarepaid“sickpay”evenwhentheirabsenceisnotduetoillness,aliabilityforunusedsickpayshouldberecorded.

Question13-9

Whenacompanycollectscashfromacustomerasarefundabledepositorasanadvancepaymentforproductsorservices,aliabilityiscreatedobligatingthefirmtoreturnthedepositortosupplytheproductsorservices.Whentheamountistobereturnedtothecustomerincash,itisarefundabledeposit.Whentheamountwillbeappliedtothepurchasepricewhengoodsaredeliveredorservicesprovided（giftcertificates,magazinesubscriptions,layawaydeposits,specialorderdeposits,andairlinetickets）itisacustomeradvance.

Question13-10

Examplesofamountscollectedforthirdpartiesthatrepresentliabilitiesuntilremittedaresalestaxes,andpayroll-relateddeductionssuchasfederalandstateincometaxes,socialsecuritytaxes,employeeinsurance,employeecontributionstoretirementplans,anduniondues.

AnswerstoQuestions（continued）

Question13-11

1.Currentliability—Therequirementtoclassifycurrentlymaturingdebtasacurrentliabilityincludesdebtthatiscallable,or