Financial accounting 10th by harmin app k

Lease term is equal to 75 percent or more of the estimated economic life of the leased property.. The present value of the lease payments equals or exceeds 90% of the fair value of the l

Prepared by

Coby Harmon

Discuss additional fringe benefits associated with employee compensation.

3

Potential liability that may become an actual liability in the future.

Three levels of probability:

Accounting Probability

Remote 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 2019, the company honors warranty

contracts on 300 units, at a total cost of $24,000 At December 31, compute the estimated warranty liability

Warranty Expense 40,000

Warranty Liability 40,000

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 2019, 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.

Recording a Contingent Liability

Illustration: Prepare the entry to record the repair costs incurred in 2019 to honor warranty contracts on 2019

Illustration K-2

Disclosure of contingent liability

Disclosure of Contingent Liabilities

The accounting depends on the whether a lease is classified as a finance lease or an operating lease.

Illustration K-3

Types of leases

Accounting for Lease Arrangements

Although technically legal title may not pass,

the benefits from the use of the property do

Substance versus

Form

Accounting for Lease Arrangements

For a finance lease , the lessee must record a lease as an asset if any one of the following conditions

exist

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.

4. The present value of the lease payments equals or exceeds 90% of the fair value of the leased

property

Finance Leases

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

Finance Leases

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

Capitalization Criteria:

1. Transfer of ownership

2. Bargain purchase option

3. Lease term => 75% of economic life of leased property

4. Present value of minimum lease payments => 90% of

FMV of property

NO NO

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

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

Finance Leases

Paid absences for vacation, illness, and holidays.

Accrue a liability if:

 Payment of the compensation is probable.

 The amount can be reasonably estimated.

Vacation Benefits Expense 3,300

Vacation Benefits Liability 3,300

Illustration: Academy Company employees are entitled to one

day’s vacation for each month worked If 30 employees earn an average of $110 per day in a given month

Vacation Benefits Liability 1,100

Academy pays vacation benefits for 10 employees

Paid Absences

Postretirement 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 HEALTHCARE AND LIFE INSURANCE 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

Postretirement Benefits

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

Postretirement Benefits

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 retirement frequency, future salaries, etc.

PENSION PLANS

Postretirement Benefits

While part of the liability associated with (1) postretirement healthcare and life insurance benefits and

(2) pension plans is generally a current liability,

 the greater portion of these liabilities extends many years into the future

 Many companies are required to report significant amounts as long-term liabilities for

postretirement benefits

Postretirement Benefits

POSTRETIREMENT BENEFITS AS LONG-TERM LIABILITIES

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