APPENDIX J
Other Significant Liabilities
LEARNING OBJECTIVES
1. DESCRIBE THE ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR CONTINGENT LIABILITIES.
2. CONTRAST THE ACCOUNTING FOR OPERATING AND
CAPITAL LEASES.
3. IDENTIFY ADDITIONAL FRINGE BENEFITS ASSOCI–
ATED WITH EMPLOYEE COMPENSATION.
APPENDIX J REVIEW
Contingent Liabilities
1. (L.O. 1) A contingent liability is a potential liability that may become an actual liability in the future.
The accounting guidelines require that:
a. If it is probable that the contingency will happen and the amount can be reasonably estimated,
Product Warranties
2. Product warranties are a good example of a contingent liability. They are recorded by estimating the
Leases
3. (L.O. 2) A lease is a contractual agreement between a lessor (owner) and a lessee (renter) that
Operating Leases
4. In an operating lease, the intent is temporary use of the property by the lessee while the lessor
Capital Leases
5. A capital lease transfers substantially all the benefits and risks of ownership from the lessor to the
lessee:
a. The lessee is required to record an asset and the related obligation at the present value of the
future lease payments.
Employee Compensation
6. (L.O. 3) When the compensation for paid absences (paid vacations, sick pay benefits, and paid
7. A pension plan is an agreement whereby an employer provides benefits to employees after they
a. The employer sponsors the plan.
b. The plan administrator receives the contributions, invests the pension assets, and makes the
benefit payments.
8. There are two common types of pension arrangements:
a. In a defined contribution plan, the plan defines the employer’s contribution but not the benefit
that the employee will receive at retirement.
LECTURE OUTLINE
A. Contingent Liabilities
1. A contingent liability is a potential liability that may become an actual
liability in the future.
(Both conditions required for recording.)
b. If the contingency is only reasonably possible (it could happen), then it
need only be disclosed in the notes accompanying the financial
statements.
disclosed.
d. Product warranties are an example of a contingent liability that
companies should record in the accounts. The accounting for warranty
cannot reasonably estimate the amount, or when the contingent
liability is only reasonably possible, only disclosure of the contingency
is required.
Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only) J-5
f. Contingencies that may require disclosures are:
(1) Pending or threatened lawsuits.
(2) Assessment of additional income taxes pending an IRS audit of
the tax return.
B. Lease Liabilities
3. In a capital lease the company capitalizes the present value of the cash
payments for the lease and records that amount as an asset. A capital
lease is in substance an installment purchase by the lessee.
4. The lessee must record the lease as an asset (a capital lease) if any one of
the following conditions exists:
a. The lease transfers ownership of the property to the lessee.
b. The lease contains a bargain purchase option.
leased property.
d. The present value of the lease payments equals or exceeds 90% of
the fair value of the leased property.
C. Additional Fringe Benefits
1. Additional fringe benefits associated with wages are paid absences (paid
2. Employees often are given rights to receive compensation for absences
when they meet certain conditions of employment.
a. When the payment for such absences is probable and the amount can
paid future absences.
b. When the amount cannot be reasonably estimated, the company
should disclose the potential liability.
3. Postretirement benefits are benefits that employers provide to retired
employees for pensions and health-care and life insurance.
administrator, and the pension recipients.
4. The two most common types of pension arrangements are a defined-
contribution plan and a defined-benefit plan.
a. In a defined-contribution plan, the plan defines the employer’s
contribution but not the benefit that the employee will receive at
period based on a formula.
b. In a defined-benefit plan, the benefits that the employee will receive at
the time of retirement are defined by the terms of the plan. In these
plans, it is necessary to determine what the contribution should be
today to meet the commitments that will arise at retirement.
10 MINUTE QUIZ
Circle the correct answer.
True/False
1. A refrigerator is sold in year 1, and a repair is made in year 2. The company’s entry upon
making the repair would include a debit to Warranty Liability.
True False
reasonably estimated.
True False
3. Under a capital lease, Rent Expense should be recorded each period.
True False
4. Vacation pay is properly charged as an expense in the month in which the employee takes
the vacation.
True False
5. In a defined–contribution plan, the employer’s contribution to the plan is defined by the terms
of the plan.
True False
Multiple Choice
1. Which of the following is not a contingent liability?
a. Product warranties
b. Pending or threatened lawsuits
c. Current maturities of long-term debt
principle?
a. Consistency
b. Full disclosure
c. Expense recognition
d. Materiality
a. Leased Asset.
b. Lease Liability.
c. Rent Expense.
d. Cash.
4. A liability should be accrued for paid future absences when the amount can be reasonably
a. remote.
b. reasonably possible.
c. unlikely.
d. probable.
5. An employee-sponsored pension plan which makes no promise concerning the ultimate
a. defined benefit plan.
b. ERISA plan.
c. defined contribution plan.
d. unfunded plan.
ANSWERS TO QUIZ
True/False
Multiple Choice