Financial accounting 9th kieso kimmel appendix j

[3] Identify additional fringe benefits associated with employee compensation.. [3] Identify additional fringe benefits associated with employee compensation.. The present value of the

Accounting in Action

Learning Objectives

After studying this chapter, you should be able to:

[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.

Appendix

J Other Significant Liabilities

Potential liability that may become an actual liability in the

Accounting Probability

Contingent Liabilities

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

Product warranty contracts result in future costs that

companies may incur in replacing defective units or

repairing malfunctioning units

Estimated cost of honoring product warranty contracts

should be recognized as an expense in the period in

which the sale occurs

Recording a Contingent Liability

Contingent Liabilities

Illustration: Denson Manufacturing Company sells 10,000

washers and dryers at an average price of $600 each The

selling price includes a one-year warranty on parts Denson

expects that 500 units (5%) will be defective and that warranty

repair costs will average $80 per unit In 2015, the company

honors warranty contracts on 300 units, at a total cost of

$24,000 At December 31, compute the estimated warranty

Warranty Expense 40,000

Contingent Liabilities

Illustration: Denson Manufacturing Company sells 10,000

washers and dryers at an average price of $600 each The

selling price includes a one-year warranty on parts Denson

expects that 500 units (5%) will be defective and that warranty

repair costs will average $80 per unit In 2015, the company

honors warranty contracts on 300 units, at a total cost of

$24,000 At December 31, compute the estimated warranty

liability Make the required adjusting entry.

Illustration: Prepare the entry to record the repair costs

incurred in 2015 to honor warranty contracts on 2015 sales

Assume that the company replaces 20 defective units in

January 2016, at an average cost of $80 in parts and labor

Contingent Liabilities

Contingent Liabilities

Disclosure of Contingent Liabilities

Illustration J-2

Accounting in Action

Learning Objectives

After studying this chapter, you should be able to:

[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.

Appendix

J Other Significant Liabilities

A lease is a contractual arrangement between a lessor (owner

of the property) and a lessee (renter of the property)

Illustration J-3

Types of leases

Lease Liabilities

Although technically legal

title may not pass, the

benefits from the use of

the property do

Substance versus

Lease Liabilities

For a capital lease, the FASB has identified four criteria.

1. Lease transfers ownership of the property to the lessee.

2. Lease contains a bargain-purchase option.

3. Lease term is equal to 75 percent or more of the estimated

economic life of the leased property.

One or more

must be met for capital lease

accounting.

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

Lease Liabilities

Illustration: Gonzalez Company decides to lease new

equipment The lease period is four years; the economic life of the leased equipment is estimated to be five years The present value of the lease payments is $190,000, which is equal to the

fair market value of the equipment There is no transfer of

ownership during the lease term, nor is there any bargain

purchase option

Instructions

(a) What type of lease is this? Explain.

(b) Prepare the journal entry to record the lease

Lease Liabilities

Illustration: (a) What type of lease is this? Explain.

Illustration: (b) Prepare the journal entry to record the lease.

Lease Liability

190,000

The portion of the lease liability expected to be paid in the next year is a

current liability The remainder is classified as a long-term liability.

Lease Liabilities

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

Lease Liabilities

Accounting in Action

Learning Objectives

After studying this chapter, you should be able to:

[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.

Appendix

J Other Significant Liabilities

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 Liabilities for Employee

Fringe Benefits

Vacation Benefits Expense 3,300

Vacation Benefits Liability3,300

Illustration: Academy Company employees are entitled to oneday’s vacation for each month worked If 30 employees earn an average of $110 per day in a given month

CashAcademy pays vacation benefits for 10 employees

Employee Fringe Benefits

Postretirement Benefits

Employee Fringe Benefits

Post-retirement benefits are benefits that employers

provide to retired employees for

1 health care and life insurance

2 pensions

Companies account for post-retirement benefits on the

accrual basis.

Postretirement Health-Care and Life Insurance Benefits

Employee Fringe Benefits

 Companies estimate and expense postretirement costs

during the working years of the employee

 Companies rarely sets up funds to meet the cost of the

future benefits

► Pay-as-you-go basis for these costs

► Major reason is that the company does not receive a

tax deduction until it actually pays the medical bill.

An arrangement whereby an employer provides benefits to employees after they retire for services they provided while they were working.

Pension Plan Administrator

Pension Plan Administrator

Contributions

Employer

Retired

Employee Fringe Benefits Pension

Plans

Defined-Contribution Plan Defined-Benefit Plan

 Employer contribution

determined by plan (fixed)

 Risk borne by employees

 Benefits based on plan value

 Benefit determined by plan

 Employer contribution varies (determined by Actuaries)

 Risk borne by employer

 Companies record pension costs as an expense.

 Actuaries estimate the employer contribution by considering

mortality rates, employee turnover, interest and earning rates, early

Employee Fringe Benefits Pension

Plans

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