Topic 9 liabilites PDF

Define liabilities and explain the differences between current and non-current liabilities.. Identify the common types of current liabilities and how to account for notes payable and p

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TOPIC 9

LIABILITIES

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Topic 9

Learning

Objectives

On completion of this topic, you should be able to:

1 Define liabilities and explain the differences between current

and non-current liabilities.

2 Identify the common types of current liabilities and how to

account for notes payable and payroll.

3 Identify common types of non-current liabilities, such as loans,

debentures and unsecured notes

4 Explain the differences between provisions & contingencies

5 Prepare entries to record provisions for warranties.

6 Evaluate an entity’s liquidity and solvency.

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LIABILITIES DEFINED

Three essential characteristics:

1 Present obligation to an external

party

2 Obligation must have resulted

from past events

3 Must have future outflow of

resources embodying economic

benefits

Criteria for recognition

 Probable that future economic

benefit will flow from the entity

• On demand

• On a specified date

• On the occurrence of a

specified event

 Cost or value can be reliably

measured

• May require

estimates/discounting

Classification of liabilities

 Appropriate classification allows users to assess short and long term commitments

 Liabilities are classified according to their amount, nature and timing

 Categories on balance sheet

Current liabilities

 Accounts payable (Trade Creditors)

 Notes Payable

 Payroll Expenses

 Revenue received in advance (unearned revenue)

Non-current liabilities

 Debentures

 Mortgages

Provisions & Contingent Liabilities

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NOTES PAYABLE

(Promissory notes or

Bills of exchange)

Example:

On the 1 April 2018 one of Kelly Cook travel P/L’s major

suppliers of luxury travel accessories, Louis BitMuch, agrees

to accept a 6 month note payable fr0m KCeT in exchange for

a $10,000 account payable at an interest rate of 10% pa

Record the exchange, accrued interest at 30 June and the

settlement of the note on maturity.

1/4/2018

30/9/2018 30/6/2018

Accounts Payable Notes Payable

Interest Expense Interest Payable

Interest Expense Interest Payable Notes Payable Cash

(Record issue of 6mth note payable to LBM at 10%)

(Record 3 mths accrued interest 10,000 x 10% x 3/12)

(Payment of note and interest expense)

10,000

250

250 250 10,000

10,500

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PAYROLL & PAYROLL

DEDUCTIONS PAYABLE

 Wages and salaries

 Superannuation &

employment benefits,

amounts deducted from

an employee’s gross pay

are liabilities of the

employer, who acts as a

collection agent for

various organisations

 Payroll ancillary costs

include superannuation

guarantee, long-service

leave, sick leave, annual

leave, maternity leave

 When amounts are settled

with the various entities,

the liability is reduced

 (are not taxable supplies

so no GST)

Record the fortnightly wages of $2,500 on 17 August for Kelly Cook eTravel P/L and settlement

of August’s payroll payables in following month

17/8/2018

7/9/2018 17/8/2018

Salaries & Wages Expense PAYG Tax Payable Cash

Superannuation Payable Salaries & Wages Expense

Superannuation Payable PAYG Tax Payable Cash

(Record fortnightly superannuation obligation of 9.5%) (Record fortnightly payroll)

(Record payment of Superannuation Guarantee for August)

2,500

256

237

987 475

512

2,244

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NON-CURRENT LIABILITIES - Loans payable by instalment

• Entities may borrow money

from a single borrower in

the form of loan.

• It is common for such loans

to be repayable by

instalment e.g mortgages.

• A mortgage is a loan

secured by a charge over

property.

• If the borrower is unable to

repay the loan, the lender

may sell the property and

use the proceeds to repay

the loan.

The mortgage schedule is for a $106 220 loan obtained to purchase property that has been offered as security for the loan

Repayments of $5000 are made at the end

of each month for two years The interest rate is 12% per annum.

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NON-CURRENT LIABILITIES –

UNSECURED NOTES &

DEBENTURES

Debentures (bonds) typically pay a fixed interest return (Coupon).

Can be issued at par, discount or premium

Can be publicly traded (Capital Markets).

Debentures have:

• principal (maturity value, face value)

• interest rate

• interest payment dates

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PROVISIONS

Nature of provisions

 Liabilities of

uncertain timing

or amount

Examples include

 Provision for

warranties

 Provision for

long-service leave

Kelly Cook eTravel P/L sells luggage with a 12 month warranty

At year end KCeT records a provision for warranty claims for

$1,200 On the 21 August a customer returns goods and they are replaced from inventory

30/6/2018

21/8//2018

Warranty Expense Warranty Provision

Warranty Provision Inventory

(Record liability for warranty on luggage at year end)

(Record replacement of goods under warranty)

1,200

250

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CONTINGENT

LIABILITIES

• Conditions existing at

balance date where

uncertainty exists as to:

• Outcome

• Valuation

• Future event is beyond

entity’s control

• Can be either an asset or a

liability

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ANALYSING FINANCIAL

STATEMENTS FOR

DECISION MAKING

LIQUIDITY RATIOs measure the short-term ability of an

entity to pay its maturing obligations and to meet

unexpected needs for cash QUICK is a measure of an

entity’s immediate short-term liquidity It is also referred

to as the ACID TEST

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ANALYSING FINANCIAL

STATEMENTS FOR

DECISION MAKING

SOLVENCY RATIOs measure the ability of an entity to

survive over a long period of time TIMES INTEREST

EARNED provides an indication of an entity’s ability to

meet interest payments as they become due Also referred

to as INTEREST COVERAGE

From Topic 1

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