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PAYABLES
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Learning Objectives
1.Outline and apply the definition of liability
and financial liabilities.
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What is a liability?
Three essential characteristics:
1. Present obligation.
3. Results in an outflow of
resources (cash, goods,
services).
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Financial Liabilities
IFRS 9/MFRS 9
A financial liability is any liability that is:
(a) A contractual obligation:
(i) to deliver cash or another financial asset i.e.
trade account payables, notes payable
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Recognition of Liabilities
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Initial recognition Financial Liability
IFRS 9/MFRS 9
An entity shall recognise..a financial liability in its statement of
financial position when and only when the entity becomes a
party to the contractual provisions of the instruments.
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Example 1: Trade Payable
1 Dec 2014 A bookshop decides to place an order for
1,000 books from a supplier.
10 Dec 2014- The bookshop orders the books from the
supplier. The order is fully cancellable (the bookshop can
nullify the order at any time before it accepts delivery of the
books from the supplier).
20 Dec 2014- The bookshop takes delivery of 1,000 books
from a supplier, and have to make a payment within 14 days
after delivery (legal title and control of the books passes to
the bookshop when the bookshop takes delivery of the
books).
3 Jan 2015- The bookshop pays the supplier the full amount
owed.
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Question: When does the bookshop have to recognise the
liability (trade payable)?
Example 1: Trade Payables
The bookshop should recognise the trade payable as a
liability on 20 Dec 2015 as on this date the bookshop
becomes a party to the purchase contract (MFR 9) and, as a
consequence, has a legal obligation (present obligation) to
pay money to the supplier (result in an outflow of
resources embodying economic benefits- The Conceptual
Framework).
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Example 2: Employee Benefits
On 1 January 2015 ABC Bhd paid one of its employees RM5,000
for work performed under contract of employment in December
2014.
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Typical examples of Current Liabilities:
Accounts payable. Customer advances and
deposits.
Notes payable.
Unearned revenues.
Current maturities of long-
term debt. Sales taxes payable/GST.
Short-term obligations Income taxes payable.
expected to be refinanced.
Employee-related liabilities.
Dividends payable.
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Initial Measurement
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Accounts Payable (trade accounts payable)
Journal entry:
Jan 1 Inventory 6,500
GST input credit/Outlays 390
Accounts payable 6,890
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Notes Payable
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Notes Payable
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Notes Payable: Example
Cash 102,000
Zero-Bearing Note Issued (Non-interest
bearing)
interest rate is not stated, but the amount to be settled is more
than amount borrowed
Cash 100,000
Notes payable 100,000 23
If Landscape prepares financial statements semiannually, it
makes the following adjusting entry to recognize interest expense
and the increase in the note payable of $2,000 at June 30.
LO 2
Short-term obligation A: Hendricks has a $50,000 short-term
obligation due on March 1, 2011. The CFO discussed with its
lender whether the payment could be extended to March 1, 2013,
provided Hendricks agrees to provide additional collateral. An
agreement is reached on February 1, 2011, to change the loan
terms to extend the obligations maturity to March 1, 2013. The
financial statements are authorized for issuance on April 1, 2011.
Current Liability
of $50,000 Since the agreement was not in place as of the reporting
date (December 31, 2010), the obligation should be
Dec. 31, 2010 reported as a current liability.
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Short-term obligation B: Hendricks also has another short-term
obligation of $120,000 due on February 15, 2011. In its discussion
with the lender, the lender agrees to extend the maturity date to
February 1, 2012. The agreement is signed on December 18,
2010. The financial statements are authorized for issuance on
March 31, 2011.
Dec. 18, 2010 Dec. 31, 2010 Feb. 15, 2011 Mar. 31, 2011
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Short-term obligation B: Hendricks also has another short-term
obligation of $120,000 due on February 15, 2011. In its discussion
with the lender, the lender agrees to extend the maturity date to
February 1, 2012. The agreement is signed on December 18,
2010. The financial statements are authorized for issuance on
March 31, 2011.
Non-Current
Refinance Liability of Since the agreement was in place as of
completed $120,000
the reporting date (December 31, 2010),
the obligation is reported as a non-
Dec. 18, 2010 Dec. 31, 2010
current liability.
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Accrued Liability
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Dividends Payable
Amount owed by a corporation to its shareholders as a
result of board of directors authorization.
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Dividends payable
Arises when the Board of Directors of a company
decides and announces to distribute cash
dividends to its shareholders.
On announcement date:
Retained earnings XX
Dividends payable XX
On payment date:
Dividends payable XX
Cash XX 34
Goods and Services Tax (GST)
Businesses (with annual sales of RM500K and above) must
collect Goods and Services Tax (GST) from customers on
transfers of tangible personal property and on certain
services and then remit to the proper governmental authority
(Malaysian Royal Custom).
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Example- Dillons Bhd made credit sales of RM30,000 which are
subject to 6% GST. The corporation also made cash sales which
totaled RM20,670 including the 6% GST. (a) prepare the entry to
record Dillons credit sales. (b) Prepare the entry to record Dillons
cash sales (assuming Dillons Bhd uses perpetual inventory system).
Cash 20,670
Sales ($20,670 1.06 = $19,500) 19,500
GST payable 1,170
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LO 2
Unearned Revenues
Payment received before delivering goods or rendering
services.
Illustration 13-2
Unearned and Earned
Revenue Accounts
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Example: Sports Pro Magazine sold 12,000 annual subscriptions
on August 1, 2010, for $18 each (with 6% GST). Prepare Sports
Pros August 1, 2010, journal entry and the December 31, 2010,
annual adjusting entry.
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Payroll deductions.
Compensated absences.
Bonuses.
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The employer must remit to the government its share of Social Security tax
along with the amount of Social Security tax deducted from each employees
gross compensation.
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Cash 10,800
LO 3
Profit-Sharing and Bonus Plans
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Example 1: De-recognition
10 Dec 2014- The bookshop orders the books from the supplier. The
order is fully cancellable (the bookshop can nullify the order at any time
before it accepts delivery of the books from the supplier).
20 Dec 2014- The bookshop takes delivery of 1,000 books from a
supplier, and have to make a payment within 14 days after delivery
(legal title and control of the books passes to the bookshop when the
bookshop takes delivery of the books).
1 Jan 2015- The bookshop pays the supplier 50% of the full amount
owed.
3 Jan 2015 The bookshop pays the remaining balance of the amount
owed to the supplier.
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Presentation, Disclosure, and Analysis
Presentation of Current Liabilities
Usually reported at their full maturity value.
Difference between present value and the maturity
value is considered immaterial.
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Presentation and Analysis
Presentation of Current Liabilities
Illustration 13-13
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Presentation of Current Liabilities
Illustration 13-15
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Presentation and Analysis
Disclosure of Current Liabilities
If a company excludes a short-term obligation from
current liabilities because of refinancing, it should include
the following in the note to the financial statements:
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Presentation and Analysis
Presentation & Disclosure of Current
Liabilities
Actual Refinancing of Short-Term Debt Illustration 13-14
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Presentation and Analysis
Analysis of Current Liabilities
Liquidity regarding a liability is the expected time to elapse
before its payment. Two ratios to help assess liquidity are:
Current Assets
Current Ratio =
Current Liabilities