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RP1 > 5. Liabilities and Equity > Flashcards

5. Liabilities and Equity Flashcards

1
Q

What is a liability?

A
  1. A liability represents a present obligation of the entity (from constructive or legal obligation).
  2. It creates an obligation to transfer an economic resource away from the organisation (in the
    form of cash or another asset).
  3. The obligation arises as a result of past events.
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2
Q

What are the criteria for defining and recognising a liability?

A

The Conceptual Framework discusses the recognition criteria for liabilities and specifies that a liability
should be recognised when such recognition provides useful information to the users of financial
statements and that information is relevant and faithfully represented.

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3
Q

What are current and non-current liabilities?

A

Current liabilities are liabilities that are expected to be repaid within the next 12 months.

Non-current liabilities are typically used to finance the overall business and, in particular, the
acquisition of property, plant and equipment. >12months

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4
Q

What is a loan liability?

A

Loan liabilities represent the borrowed funds that a business is obligated to repay, usually with
interest.

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5
Q

What is the correct journal entry to initially recognise cash received as a loan?

A

Dr Bank
Cr Loan Payable

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6
Q

What are the correct journal entries to subsequently recognise the loan?

A

Journal entry for effective interest on
loan: Dr SPL – Finance Costs, Cr Loan Payable

Journal entry for nominal interest on
loan: Dr Loan Payable, Cr Bank

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7
Q

Whats the closing loan payable formula?

A

Closing loan payable = opening loan payable + effective interest - nominal payment

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8
Q

What are bonds and debentures?

A

Bonds and debentures are a type of debt finance an entity can issue.

Therefore bonds/debentures are similar to bank loans, but the money is being borrowed from other
companies rather than a bank. Interest payments are usually made regularly, with the capital being
repaid at the maturity (end) date.

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9
Q

What are the main 3 options for a business to raise money?

A

1) Issue share capital (equity finance).

2) Receive a loan from a financial institution (debt finance).

3) Issue bonds or debentures (debt finance).

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10
Q

What is the correct journal entry to account for the issue of bonds and debentures at nominal (face) value?

A

Dr Bank
Cr Bonds/ Debentures
Journal to record issue of bonds/ debentures at
nominal value

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11
Q

What is the correct journal entry to account for the finance costs of a bond or debenture?

A

Dr SPL – finance costs
Cr Bank
Journal to record payment of bond/ debenture
interest

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12
Q

What is the correct journal entry to account for the redemption of bonds and debentures at
maturity?

A

Dr Bonds/ Debentures
Cr Bank
Journal to record redemption of bonds/
debentures

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13
Q

What is a lease?

A

Leasing involves a contractual arrangement whereby a company (lessee) uses property, plant and
equipment that another entity (the lessor) owns.

The entity does not own the asset, they control the use. This is referred to as the right-of- use
asset.

The RIGHT-OF-USE ASSET and a LEASE LIABILITY must be recognised at commencement of a lease.

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14
Q

What is the correct journal entry to account for the initial recognition of a lease?

A

Dr Right-of-use asset cost
Cr Lease Payable

Journal to record initial recognition of
lease

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15
Q

What is the correct journal entry to account for the subsequent measurement of a lease payable?

A

Dr SPL – Finance costs (Effective interest)
Cr Lease Payable
Cr Bank (Nominal Interest)
Journal entry to record effective and nominal
interest paid

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16
Q

What is the difference between current liabilities and non-current liabilities?

A

Current liabilities within 12 months paying

NCL is >1yr payable.

17
Q

How is depreciation for leased assets calculated and accounted for?

A

The ROU Asset (Right of Use Asset) is always depreciated over the useful economic life if ownership
is transferred from the lessor to lessee at the end of the lease term.

If ownership isn’t transferred e.g. option to purchase then its the shorter of its useful life and the lease period.

18
Q

Which types of assets are exempt from the standard accounting technique?

A

There are two exemptions from the accounting for leases treatment discussed previously:
* Short-term leases (leases of 12 months or less)
* Low-value assets (leases for which the underlying asset is of low value)

19
Q

What happens if a business chooses to take the lease accounting exemption due to low value/low lease life?

A

Take a straight line charge to the SPL - Expense.

19
Q

What types of costs are classed as employee benefits from an accounting perspective?

A
  • Wages and salaries
  • Income Tax (PAYE)
  • National insurance contributions (Employer and Employee contributions)
19
Q

How are wages and salaries with income tax and national insurance contributions
calculated?

A
  1. Staff Costs = Gross salaries + Employers’ pension contribution + Employer’s NI Contributions
  2. Calculate HMRC Payable & Pension Payable

HMRC Payable:
PAYE x
+ Employees’ NI contributions X
+ Employers’ NI contributions X
= HMRC Payable X

Pension payable:
Employees’ pension contributions X
+ Employers’ pension contributions X
= Amount owed/payable to pension payable X

  1. Calculate Net payment to employees £

Gross salaries x
- Deduction for PAYE (X)
- Deduction for Employees’ NI contributions (X)
- Deduction for employee loan payment (X)
- Deduction for employee’s pension contributions (X)
= Net Payment to employees X

20
Q

What are the correct journal entries to account for wages and salaries with income tax and national insurance contributions?

A

Dr SPL – staff costs (Expense)
Cr HMRC payable (liability)
Cr Bank (Assets) (aka Net pay out)
Journal entry to record wages and salaries,
income tax and NI contributions

Dr HMRC payable (liability)
Cr Bank (Assets)
Journal entry to payment to HMRC

20
Q

How are employer and employee pension contributions calculated?

A

Pension payable:
Employees’ pension contributions X
+ Employers’ pension contributions X
= Amount owed/payable to pension payable X

21
Q

What are the correct journal entries to account for loans provided to employees?

A

Dr other receivables
Cr Bank
Journal entry to record issue of loan to
employee

Dr SPL – staff costs
Cr HMRC payable (liability)
Cr other receivables (Asset)
Cr Bank (asset)
Journal entry to employee loan repaid
through deductions from wages & salaries

22
Q

What are the correct journal entries to account for employer and employee pension contributions?

A

Dr SPL – staff costs
Cr HMRC payable
Cr Pension payable
Cr Bank
Journal entry to record staff costs incurred

23
Q

What is a limited company?

A

A limited company is a separate legal entity owned by a group of individuals with shares in its
ownership.

24
Q

What is share capital?

A

Share capital is measured as the number of shares in issue multiplied by the nominal amount of each
share.

The nominal value of a share is the minimum amount at which a share may be issued to a shareholder (normally £1).

25
Q

What is the correct journal entry to record the issue of shares?

A

Dr Bank
Cr Share Capital
Journal entry to record issue of share capital

26
Q

What are share premiums and how are they calculated and accounted for?

A

The share premium is the amount in excess of nominal value. (Extra entry for Share premium above share capital)

Dr Bank
Cr Share Capital
Cr Share Premium
Journal entry to record issue of share capital at
a premium

27
Q

What are retained earnings?

A

Retained earnings is a balance representing profits or losses that have accumulated since the
company started trading.

28
Q

What are cash dividends and how are they calculated and accounted for?

A

Distribution in the form of dividends is authorised by the directors of the company (explained below), and dividends are paid out of retained earnings.

Dr Retained Earnings
Cr Bank
Journal entry to record payment of dividends

RP1 (7 decks)

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