In this video, we walk through 5 FAR practice questions teaching about calculating the carrying amount of accrued liabilities. These questions are from FAR content area 2 on the AICPA CPA exam blueprints: Select Balance Sheet Accounts.

The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.

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## Calculating the Carrying Amount of Accrued Liabilities

Calculating the carrying amount of accrued liabilities plays a crucial role in financial reporting, ensuring that expenses are recorded in the period in which they are incurred, regardless of when cash changes hands. Key accrued liabilities include wages, vacation, bonuses, and self-insured liabilities, each requiring careful calculation to accurately reflect a company’s financial obligations. Here’s a detailed look at calculating the carrying amount for these common types of accrued liabilities, with examples to illustrate.

### Accrued Wages

**Definition**: Accrued wages represent the unpaid wages owed to employees at the end of an accounting period. This commonly occurs when payroll periods don’t align perfectly with financial reporting periods, such as when employees are paid for the previous work week after the current period ends.

**Calculation**: To determine the carrying amount for accrued wages, calculate the daily or weekly wage rate and multiply it by the number of unpaid days/weeks.

**Example**:

A company has a weekly payroll of $84,000, paid every Friday for the preceding Monday–Friday work week. If the accounting period ends on a Tuesday, the company owes employees for last week (5 days) and for Monday and Tuesday of the current week (2 days). Here’s the calculation:

- Daily Wage Rate: $84,000 ÷ 5 days = $16,800
- Total Accrued Wages: $16,800 × 7 days = $117,600

Thus, the company should record an accrued wage liability of $117,600 to cover the unpaid days.

**Journal Entry**:

Debit Wage Expense $117,600

Credit Accrued Wages Payable $117,600

### Accrued Vacation

**Definition**: Accrued vacation represents the company’s obligation to pay for unused vacation time that employees have earned. Many companies allow vacation days to carry over to future periods, often with a maximum cap, which influences the amount accrued.

**Calculation**: To calculate accrued vacation, determine the number of vacation hours or days remaining, apply any carryover limits, and multiply by the employee’s wage rate.

**Example**:

An employee at XYZ Inc. accrues 2.5 vacation days per month and makes $400 per day. They had 4 vacation days at the beginning of the year, earned 30 more (2.5 days × 12 months), used 10, and are allowed a maximum carryover of 10 days.

- Total Available Vacation Days: 4 (beginning balance) + 30 (earned) – 10 (used) = 24 days
- Carryover Cap: 10 days (so the employee forfeits 14 days)
- Accrued Vacation Liability: 10 days × $400/day = $4,000

The company should record a liability of $4,000 at year-end to reflect the employee’s carryover vacation days.

**Journal Entry**:

Debit Vacation Expense $4,000

Credit Accrued Vacation Payable $4,000

### Accrued Bonuses

**Definition**: Accrued bonuses represent the liability for performance-based bonuses that employees are expected to receive in future periods. Often, bonuses are calculated based on income after deducting the bonus itself, creating a “feedback” condition that requires careful calculation.

**Calculation**: To calculate the accrued liability for a bonus, set up an equation that accounts for the percentage of income the bonus is based on, adjusted by any additional conditions like the income tax rate.

**Example**:

Maple Corp. promises its CFO a bonus of 15% of the company’s pre-tax income after deducting the bonus itself. For the year, Maple Corp. has a net income of $425,000 after taxes and the bonus, with a tax rate of 30%.

- Step 1: Calculate pre-tax income after the bonus deduction. Since the net income represents 70% of the pre-tax income (100% – 30% tax rate), pre-tax income after the bonus is $425,000 ÷ 0.70 = $607,143.
- Step 2: Set up an equation for the bonus, B = 15% × (607,143 – B)
- Step 3: B = 91,071 – 0.15B
- Step 4: 1.15B = 91,071
- Step 5: B = 91,071 / 1.15 =
**79,193**

**Journal Entry**:

Debit Bonus Expense $79,193

Credit Accrued Bonuses Payable $79,193

### Accruals for Self-Insurance Liabilities

**Definition**: Self-insurance accruals represent estimated liabilities for potential future claims that a company expects to pay directly, instead of using third-party insurance. Common examples include workers’ compensation, health benefits, and auto liability.

**Calculation**: To calculate self-insured liabilities, companies estimate the cost of future claims based on historical claims data, actuarial analysis, and known incidents.

**Example**:

Metro Logistics operates a fleet of delivery trucks and self-insures for auto liability. Based on historical claims data, the company expects to incur $400,000 in claims annually. For the current year, Metro has received claims totaling $250,000, of which $160,000 has been paid, and $90,000 is still pending. Additionally, the company estimates $60,000 for incurred but not reported (IBNR) claims.

- Total Accrued Liability: Pending claims ($90,000) + IBNR claims ($60,000) = $150,000

**Journal Entry**:

Debit Auto Liability Expense $150,000

Credit Accrued Auto Liability $150,000

These examples illustrate the nuances of calculating accrued liabilities for various purposes. Understanding each type’s specific requirements and calculation methods is crucial for accurate financial reporting and managing a company’s obligations.