October 2001
Exercise

Liability Problems

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Abstract

This case provides three examples of the recognition and measurement of liabilities. The first focuses on recognizing when employees have rendered services for which future period benefits have been earned, that is, whether unused vacation, sick, and personal days at the end of a year lead to a future obligation for the company. The second focuses on accounting for debt issues at a discount and at a premium--distinguishing between coupon payments, paid in cash each period, and the recognition of interest expense for that period. The third involves an obligation incurred in the current payment for which payment will be delayed ten years. Although the problem is specifically one of deferred compensation, the principle may be generalized to involve recognition of pension and other post-employment benefit expenses.