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Appendix F-1

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Page 1: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

Appendix F-1

Page 2: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

Appendix F-2

Other Significant Liabilities

Other Significant Liabilities

Financial Accounting, Seventh Edition

Appendix Appendix FFAppendix Appendix FF

Page 3: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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

Page 4: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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.

Page 5: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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.

Page 6: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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.

Page 7: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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.

Page 8: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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

Page 9: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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

Page 10: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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

Page 11: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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

Page 12: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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

Page 13: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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

Page 14: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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

Page 15: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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

Page 16: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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

Page 17: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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

Page 18: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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

Page 19: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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

Page 20: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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.

Page 21: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

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.

Page 22: Appendix F-1. Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

Appendix F-22

“Copyright © 2010 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”

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