Appendix F-1

Appendix F-2 Other Significant Liabilities Financial Accounting, Seventh Edition Appendix F

Appendix F Describe the accounting and disclosure requirements for contingent liabilities Contrast the accounting for operating and capital leases Identify additional fringe benefits associated with employee compensation. Study Objectives

Appendix F-4 Contingent 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 Reasonably Possible Remote Contingent 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. Question Contingent 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 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 3,000 Estimate Warranty Liability3,000 Contingent 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 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 Liabilities SO 2 Contrast the accounting for operating and capital leases. Illustration F-3

Appendix F-11 Operating Lease Capital Lease Journal Entry: Rent Expense xxx Rent Expense xxx Cash xxx Cash xxx Journal Entry: Leased Equipment xxx Leased Equipment xxx Lease Liability xxx Lease Liability xxx The issue of how to report leases is the case of. Although technically legal title may not pass, the benefits from the use of the property do. The issue of how to report leases is the case of substance versus form. Although technically legal title may not pass, the benefits from the use of the property do. Statement of Financial Accounting Standard No. 13, “Accounting for Leases,” 1980 A lease that transfers substantially all of the benefits and risks of property ownership should be capitalized (only noncancellable leases may be capitalized). SO 2 Contrast the accounting for operating and capital leases. Lease 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 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 Expense80,000 Cash80,000 SO 2 Contrast the accounting for operating and capital leases. Lease Liabilities

Appendix F-14 Exercise: The Zander Company leases a new building from Joel Construction, Inc. The present value of the lease 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 - Building900,000 Lease Liability900,000 SO 2 Contrast the accounting for operating and capital leases. Lease 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. Question SO 2 Contrast the accounting for operating and capital leases. Lease Liabilities

Appendix F-16 SO 2 Contrast the accounting for operating and capital leases. Additional Liabilities For Employee Fringe Benefits 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 Absences Additional 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. 31Vacation Benefits Expense6,000 Vacation Benefits Payable 6,000 SO 2 Contrast the accounting for operating and capital leases. Lease 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 Benefits Additional Employee Fringe Benefits

Appendix F-20 A Pension Plan is an arrangement whereby an employer provides benefits (payments) to employees after they retire for services they provided while they were working. Pension Plan Administrator Pension Plan Administrator Contributions Employer Retired Employees Benefit Payments Assets & Liabilities Pension Plans SO 3 Identify additional fringe benefits associated with employee compensation.

Appendix F-21 Defined-Contribution Plan Defined-Benefit Plan Employer contribution determined by plan (fixed) Employer contribution determined by plan (fixed) Risk borne by employees Risk borne by employees Benefits based on plan value Benefits based on plan value Benefit determined by plan Benefit determined by plan Employer contribution varies (determined by Actuaries) Employer contribution varies (determined by Actuaries) Risk borne by employer Risk borne by employer Types 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.

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