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Liabilities
Learning objectives
LO1: Describe the recording and reporting of various current liabilities.
LO2: Describe the reporting of non-current liabilities and the cash flows
associated with those liabilities.
LO3: Understand the nature of bonds (debentures) and record a bond’s
issuance, interest payments and maturity.
LO4: Account for a bond that is redeemed prior to maturity.
LO5: Understand additional liabilities such as leases & contingent liabilities.
LO6: Evaluate liabilities through the calculation and interpretation of
horizontal, vertical and ratio analyses.
Learning objectives: Appendix
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LO1 Current liabilities
Most current liabilities (like accounts payable and notes payable) will be
satisfied through cash payment. Other current liabilities (like deferred
revenues or customer prepayments) will be satisfied when a service is
performed.
Taxes as current liabilities
Businesses have a number of current tax obligations that are
classified as current liabilities.
These include:
• income taxes
• GST payable
• withholding taxes on the employee’s behalf
• payroll taxes that employers must pay (if their total payroll is over
threshold limit – e.g. 5.45% in NSW if total payroll is over $750,000 pa).
Income taxes payable
Corporations (companies) like individuals, are subject to federal
taxation of income, which are typically current liabilities.
General journal
Date Description Debit Credit
1 Mar. Cash 30,000
Note Payable 30,000
Calculation of interest
On 31 August, Brown must pay Murray Bank the original $30,000
borrowed plus the interest on the note. Interest over the six months
is calculated as follows:
Interest = Principle x Annual rate of interest x Time
outstanding
= $30,000 x 0.08 x 6/12 months
= $1,200
An adjusting entry would be required if Brown had a 30 June
financial year end ($30,000 x 0.08 x 4/12 months with a
Cr to Interest Payable).
.
Payment of a notes payable
Brown would pay $31,200 to the bank and make the following entry on
31 August, increasing interest expense to reflect cost of borrowing the
$30,000, decreasing note payable because the note is paid back, and
decreasing cash for the principal and interest payment.
General journal
Date Description Debit Credit
31 Aug. Note Payable 30,000
Interest Expense 1,200
Cash 31,200
Current portion on long-term debt
• Companies that borrow money on a long-term basis often pay part of
the principal on a short-term basis
• The current portion of non-current liabilities represents the portion of
the liability that will be paid within one year.
• The classification does not affect the borrowing or repayment of the
note. However, the statement of financial position reporting is
important.
• With Centro, ABC Learning and other companies, the incorrect
classification was said to have mislead investors.
LO2 Non-current liabilities
General journal
Date Description Debit Credit
1 Jul. Cash 100,000
Bonds Payable 100,000
Recording interest payments
York Products pays interest on 1 July and 1 January of each year.
Interest paid = Face value x Stated interest rate x Time outstanding
= $100,000 x 0.06 x 6/12 months
= $3,000
General journal
Date Description Debit Credit
1 Jan. Interest Expense 3,000
Cash 3,000
Recording accrued interest payments
York’s financial year ends 30 June and pays interest on 1 July.
General journal
Date Description Debit Credit
30 June Interest Expense 3,000
Interest Payable 3,000
1 July Interest Payable 3,000
Cash 3,000
Bond repayment at maturity
On 1 July, 2031, York would record the repayment of the bonds in
addition to the last interest payment.
General journal
Date Description Debit Credit
2031
1 July. Bonds Payable 100,000
Cash 100,000
Bond issuance at a discount
On 1 July, 2016, Nguyen Company issues bonds with a face value of
$200,000, a stated rate of 7 per cent, and a maturity date of 30 June,
2021. Interest is payable semiannually on 30 June and 31 December.
The bonds sell at 98 per cent of the face or $196,000.
General journal
Date Description Debit Credit
2016
1 July Cash 196,000
Discount on Bonds Payable 4,000
Bonds Payable 200,000
Reporting discounted bonds on the
statement of financial position
The statement of financial position (balance sheet) will show the
carrying amount (or book value) of the bonds, which in this case, is
equal to the face amount minus the discount.
1 July, 2016
Bonds payable $200,000
Less: Discount on bonds payable 4,000
Carrying amount $196,000
Recording interest payments
Nguyen pays interest on 30 June and 31 December
Discount at issuance
Discount amortised =
Number of interest payments
Discount at issuance
Discount amortised =
Number of interest payments
Bond repayment at maturity
On 31 December, 2018, McCarthy would record the repayment of the
bonds in addition to the last interest payment.
General journal
Date Description Debit Credit
2018, 31 Dec. Bonds Payable 50,000
Premium on Bonds Payable 100
Interest Expense 1,900
Cash 52,000
LO4 Redeeming a bond before maturity
Premium case
8% market rate
Present value of a single payment
of $100,000 $73,500
Present value of an annuity
of $10,000 33,121
Issuance price 106,621
$10,000 X 3.3121
https://www.youtube.com/watch?v=o2EnAIMMGIM
LO8 Effective interest method of
amortisation
Recording bond interest payments under the effective
interest method.
$6,621 $106,621