When should liabilities for each of the following items be recorded on the books of an ordinary business corporation?
(a) Acquisition of goods by purchase on credit.
(b) Officers' salaries.
(c) Special bonus to employees.
(d) Dividends.
(e) Purchase Commitments.
(a) Liability for goods purchased on credit should be recorded when control passes to the purchaser. If the terms of purchase are f.o.b. destination, title passes when the goods purchased arrive; if f.o.b. shipping point, title passes when the shipment is made by the vendor.
(b) Officers' salaries should be recorded when they become due at the end of a pay period. Accrual of unpaid amounts should be recorded in preparing financial statements dated other than at the end of a pay period.
(c) A special bonus to employees should be recorded when approved by the board of directors or person having authority to approve if the bonus is for a period of time and that period has ended at the date of approval. If the period for which the bonus is applicable has not ended but only a part of it has expired, it would be appropriate to accrue a pro rata portion of the bonus at the time of approval and make additional accruals of pro rata amounts at the end of each pay period.
(d) Dividends should be recorded when they have been declared by the board of directors.
(e) Usually it is neither necessary nor proper for the buyer to make any entries to reflect commitments for purchases of goods that have not been shipped by the seller. Ordinary orders, for which the prices are determined at the time of shipment and subject to cancellation by the buyer or seller, do not represent either an asset or a liability to the buyer and need not be reflected in the books or in the financial statements. However, an accrued loss on purchase commitments which results from formal purchase contracts for which a firm price is in excess of the market price at the date of the balance sheet would be shown in the liability section of the balance sheet.
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