Topic 9 liabilites PDF

TOPIC LIABILITIES Topic Learning Objectives On completion of this topic, you should be able to: 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 payroll Identify common types of non-current liabilities, such as loans, debentures and unsecured notes Explain the differences between provisions & contingencies Prepare entries to record provisions for warranties Evaluate an entity’s liquidity and solvency LIABILITIES DEFINED Three essential characteristics: Present obligation to an external party Obligation must have resulted from past events 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 | NOTES PAYABLE (Promissory notes or Bills of exchange) Example: On the April 2018 one of Kelly Cook travel P/L’s major suppliers of luxury travel accessories, Louis BitMuch, agrees to accept a 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 Accounts Payable 10,000 Notes Payable 10,000 (Record issue of 6mth note payable to LBM at 10%) 30/6/2018 Interest Expense 250 Interest Payable 250 (Record mths accrued interest 10,000 x 10% x 3/12) 30/9/2018 Interest Expense 250 Interest Payable 250 Notes Payable Cash (Payment of note and interest expense) 10,000 10,500 | 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 Salaries & Wages Expense 2,500 256 PAYG Tax Payable 2,244 Cash (Record fortnightly payroll) 17/8/2018 Salaries & Wages Expense 237 Superannuation Payable 237 (Record fortnightly superannuation obligation of 9.5%) 7/9/2018 PAYG Tax Payable 512 Superannuation Payable 475 Cash 987 (Record payment of Superannuation Guarantee for August) | NON-CURRENT LIABILITIES - Loans payable by instalment 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 • 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 | 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 | PROVISIONS Nature of provisions  Liabilities of uncertain timing or amount Examples include  Provision for warranties  Provision for longservice 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 Warranty Expense 1,200 Warranty Provision 1,200 (Record liability for warranty on luggage at year end) 21/8//2018 Warranty Provision Inventory 250 250 (Record replacement of goods under warranty) | 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 | 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 | 10 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 | 11 Topic Learning Objectives On completion of this topic, you should be able to: 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 payroll Identify common types of non-current liabilities, such as loans, debentures and unsecured notes Explain the differences between provisions & contingencies Prepare entries to record provisions for warranties Evaluate an entity’s liquidity and solvency  ... Payable 237 (Record fortnightly superannuation obligation of 9. 5%) 7 /9/ 2018 PAYG Tax Payable 512 Superannuation Payable 475 Cash 98 7 (Record payment of Superannuation Guarantee for August) |... payments as they become due Also referred to as INTEREST COVERAGE From Topic | 11 Topic Learning Objectives On completion of this topic, you should be able to: Define liabilities and explain the differences.. .Topic Learning Objectives On completion of this topic, you should be able to: Define liabilities and explain the differences