FAR · Select balance sheet accounts · 6 practice questions
Accrue services and utilities used but unbilled at year-end
Accrue expenses and liabilities when services were received by the balance sheet date and the amount is reasonably estimable. Below: clear steps and free practice questions, plus a mixed drill.
Try one first
Hint
Focus on when the utility service was used and whether the obligation exists at year-end, not on when the invoice arrives.
Answer B. The electricity was used in Year 1, so the related expense must be recognized in Year 1 under accrual accounting. Because the obligation exists at year-end and the amount can be reasonably estimated, Noll should record a liability. Since the bill has not yet been received, the liability is recorded as an accrued liability (accrued expense) rather than accounts payable.
Why not A: Tempting because students often link liabilities to receiving an invoice, but accrual accounting requires recognizing expenses and related liabilities when incurred. The absence of a bill does not prevent recognition when the obligation exists and is reasonably estimable.
Why not C: Plausible because the company does owe money, but 'accounts payable' typically refers to amounts supported by a supplier invoice or routine trade payables. When the bill hasn't been received but the expense is incurred and estimable, the correct classification is an accrued liability (accrued expense).
Why not D: This appeals to those who equate uncertainty with disclosure instead of recognition. However, because the amount can be reasonably estimated and the service was consumed by year-end, recognition (expense and accrued liability) is required rather than note-only disclosure.
Step by step
- Identify services received
List utilities, maintenance, legal, and similar services that were provided by year-end.
- Confirm a present obligation
Accrue only if the services were received by the balance sheet date and the amount can be reasonably estimated.
- Ignore billing dates
Invoice and payment dates do not affect recognition when the obligation existed at year-end.
- Record the accrual
Debit the expense and credit an accrued liability for the estimated amount at year-end.
- Classify correctly
Use accrued liabilities (not accounts payable) when no routine vendor invoice exists at year-end.
- Exclude discretionary items
Do not accrue discretionary costs like bonuses without a binding plan or approval creating an obligation at year-end.
- Assess omission effects
Missing accruals understate current liabilities and overstate net income.
- True-up to actual
When the bill arrives, compare to the estimate and adjust the accrual to the actual amount.
Key points
- Record utilities, maintenance, legal services, wages, and employer payroll taxes for work and services received by year-end if reasonably estimable.
- Invoice and payment dates do not control recognition; they provide measurement evidence for obligations that already existed at year-end.
- Do not accrue discretionary bonuses when no binding plan or approval created a present obligation at year-end.
- Use accrued liabilities (accrued expenses) when no routine vendor invoice exists; accounts payable generally refers to invoiced trade payables.
- Omitting a required accrual understates current liabilities and overstates net income at year-end.
- Ownership terms (for example, FOB shipping point) can require recording a payable for goods owned at year-end even if the invoice arrives later.
How the exam traps you
- Waiting to recognize expense and liability until the vendor invoice is received. Recognize when services were received and the amount can be reasonably estimated. Invoice timing does not delay accrual.
- Skipping accruals because the exact bill is not in hand or the amount is not exact. Use a reasonable estimate at year-end and adjust to actual when the bill arrives.
- Classifying unbilled services as accounts payable. Record an accrued liability when no routine vendor invoice exists at year-end.
- Accruing discretionary bonuses with no present obligation at year-end. Do not accrue unless a binding plan or approval created an obligation by the balance sheet date.
Question 2
Hint
Focus on whether the company has already incurred an expense by year-end, even if the bill has not arrived yet.
Answer C. An accrued liability is recorded when an expense has been incurred by the balance sheet date but not yet paid or billed. Because Brill used utilities in December, the utility expense has been incurred and should be accrued as a liability at December 31. The other choices represent different treatments (deferred revenue, no payable until goods are received, and a long-term formal borrowing).
Why not A: Tempting because cash was received before performance, but this creates unearned (deferred) revenue, a liability category distinct from an accrued expense, since Brill still owes services.
Why not B: This may lure candidates who equate placing an order with creating a payable. Absent receipt of the goods or transfer of title (or other special terms), no liability is recorded until the company receives the inventory.
Why not D: A note payable is a formal borrowing and is a liability, but with an 18-month maturity it is generally a long-term liability rather than a current accrued expense.
Question 3
Hint
Focus on the accrual basis: ask when the obligation arose, not when the bill was received or paid.
Answer A. Accrued liabilities are recognized when the entity has incurred an obligation by the balance sheet date and the amount can be reasonably estimated. The timing of the invoice or payment does not prevent recognition. Because Pine received the services and labor before December 31 and the amounts are estimable, Pine should accrue the liabilities at year-end.
Why not B: This is tempting because recording payables is often associated with receiving a bill, but accrual accounting focuses on when the obligation arose. An invoice may help measure the amount, but it is not the governing recognition factor if the liability existed and is estimable.
Why not C: Payment timing after year-end affects cash flow and classification, but it does not determine whether a liability existed at the balance sheet date. The key is whether the obligation was incurred before December 31.
Why not D: Intended settlement method can affect whether a liability is classified as current, but it does not govern initial recognition. Recognition depends on whether an obligation existed by year-end and the amount is reasonably estimable.
Question 4
Hint
Determine what was incurred by December 31, accrue interest and other expenses incurred by year-end and follow the stem's instruction about including or excluding the note principal.
Answer D. The stem requests the subtotal for payables and accrued liabilities but instructs excluding the note principal. Include the $48,000 accounts payable, the $6,200 accrued utilities, and accrued interest for November and December on the note: $100,000 × 12% × 2/12 = $2,000. Total = $48,000 + $6,200 + $2,000 = $56,200.
Why not A: This reflects only the invoiced accounts payable. It is tempting because the $48,000 is billed, but it omits the $6,200 utility accrual and the $2,000 of interest accrued by December 31.
Why not B: This equals accounts payable plus the utility accrual but omits two months of accrued interest ($2,000). Interest that has been incurred through December 31 must be included in the subtotal.
Why not C: This adds the $100,000 note principal to the $56,200 subtotal. Although the note principal matures within the next year and would ordinarily be current, the question explicitly excluded the note principal from the requested subtotal.
Question 5
Hint
Focus on when the utility was consumed, not when the invoice arrived or was paid.
Answer D. Under accrual accounting, expenses are recognized when incurred. Since the utilities were used in Year 1 and the amount was reasonably estimable, Year 1 should have included the utility expense and an accrued liability. Omitting the accrual understates expenses and current liabilities, which causes net income to be overstated.
Why not A: This reflects a cash-basis shortcut. Under accrual accounting, recognition depends on when the utility was consumed and whether the amount is estimable, not on the invoice or payment date.
Why not B: This is tempting because it correctly notes the missing liability, but it misstates the income effect. If the expense is omitted, expenses are understated, so net income is actually overstated, not understated.
Why not C: This choice reverses both effects. No year-end accrual was recorded, so liabilities cannot be overstated; they are understated. Likewise, the related expense is missing, which leads to net income being overstated, not understated.
Question 6
Hint
Focus on when the obligation was incurred, not on when the vendor sends paperwork or when cash will be paid.
Answer A. A liability is recognized when an obligation has been incurred and the amount can be reasonably determined. Apex received and accepted the services and knows the amount by year-end, so it should record an accrued liability; because payment is expected within the next year, it is a current liability.
Why not B: This is tempting because candidates tie recognition to paperwork, but GAAP does not require an invoice before recognizing a liability when the company has already incurred the obligation and can determine the amount. Waiting for the invoice would understate liabilities and expenses at year-end.
Why not C: This confuses accruals with contingencies or commitments. Here the obligation is certain and the amount is known, so it should be accrued rather than merely disclosed; note disclosure only is for uncertain or non-recognizable items.
Why not D: While accounts payable records often begin with an invoice in practice, the lack of a billing document does not eliminate the liability. If services were received before year-end, the company must accrue the obligation at year-end regardless of the invoice date.
Common questions
Do I accrue December utilities if the bill arrives in January?
Yes. Record utility expense and an accrued liability for the amount used by year-end if it can be reasonably estimated. The invoice date does not affect recognition.
Do I need an invoice or exact amount to accrue?
No. Accrue when the obligation existed at year-end and the amount is reasonably estimable. Use the best estimate and adjust to the actual bill when received.
Should a discretionary year-end bonus be accrued?
No, not if there was no binding plan or approval creating an obligation by year-end. Without a present obligation, no accrual is recorded.
Watch it solved
A full CPA FAR task-based simulation on Payables and accrued liabilities, worked step by step.
FAR Simulation: Accounts Payable Cutoff and Accruals on YouTube
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