Chapter 8: Accounting for liabilities

Question 1

What is the initial tax journal for the estimated corporation tax posted at the end of the year?

Answer 1

Debt - income tax expense
Credit - Taxation Payable

Question 2

Once the taxation liability is agreed what is the adjustment for a UNDER provision in the next financial year?

Answer 2

Debt - Income tax expense
Credit - Taxation payable

Question 3

Once the taxation liability is agreed what is the adjustment for a OVER provision in the next financial year?

Answer 3

Debt - Taxation Payable
Credit - Income tax expense

Question 4

IFRS 16: Leasing, what is a lease?

Answer 4

A contract that conveys the right to use an asset for a period of time in exchange for consideration.

Consideration is usually cash

Question 5

Right of use asset

Answer 5

An asset that represents a lessee’s right to use an underlying asset for a period of time (the lease term)

Question 6

Short term lease

Answer 6

Under 12 months, a lease that contains a purchase option is NOT a short term lease

Question 7

Lessee

Answer 7

The entity that obtains the right to use an asset, in exchange for consideration

Question 8

Lessor

Answer 8

the entity provides the asset in exchange for receiving consideration

Question 9

recognition of a lease in SOFP

Answer 9

Debt - the right of use asset (PPE)
Credit - Lease liability

Question 10

what is the double entry if there is a deposit before the lease has started?

Answer 10

Debit - right of use asset
Credit - Bank

Question 11

How will the asset be depreciated?

Answer 11

The shorter of the lease term and the useful life of the asset

if the lease contains a clause where the entity will become the legal owner, the asset will be depreciated over the useful life

possible to revalue the right of use asset

Question 12

Interest rate implicit in the lease

Answer 12

is the discount rate at which the present value of the minimum lease payment and the residual value would be equal to the fair value of the leased asset

Question 13

Incremental borrowing rate

Answer 13

Rate of interest that the lesse would have to pay on a similar lease

Question 14

Accounting for interest payment

Answer 14

Debit finance costs
Credit Lease liability

Question 15

Accounting for repayments

Answer 15

Debit Lease liability
Credit Bank

Question 16

Do you pay interest of the lease or outstanding balance first?

Answer 16

interest

Question 17

if you make the repayments on the first day of the year, how do you account for this?

Answer 17

calculate the interest based on the remaining balance after deducting the repayment

First repayment is posted:
Debit - right of use asset
Credit - Bank

Question 18

short term / low value leases

Answer 18

less than 12 months or low value asset

examples of low value assets as tablets,pc’s, small items of office furniture and telephones

IFRS 16 states cars are not low value assets

Lesee can choose to show lease payments as an expense in p&l on a straight line basis

Debit - Expense
Credit - Bank

Question 19

lease expense on p&l for short term / low value leases

Answer 19

Debit - Expense
Credit - Bank

Lease expense = total payments / life of lease

may have to do accruals / prepayments for a deposit or payment is made part way through the financial year

Expense must be the same throughout!!!!!

Question 20

Provision

Answer 20

is a liability of uncertain timings or amounts

Question 21

recognise a provision

Answer 21

entity has a present obligation as a result of past events

probable that an outflow of economic resources will be required (more than 50%)

reliable estimate

Question 22

Legal obligation

Answer 22

result of a contract or legislation

Question 23

constructive obligation of a provision

Answer 23

from actions where an entity:

established pattern from past practice (done it before)

published policies or a specific statement the entity has indicated to other parties that it will accept certain responsibilities

valid expectation in other parties that it will discharge those responsibilities

Question 24

change in provision - SOFP or SPL

Answer 24

SPL

Question 25

contingent liability (not recognised in sofp but in notes)

Answer 25

possible obligation arising from past events whose existence will be confirmed only by occurrence of one or more uncertain future events

not probable that an outflow of economic benefits will be required to settle the obligation

cannot be measured

Question 26

contingent asset (disclose in statements)

Answer 26

an asset arising from past events whose existence will be confirmed only by occurrence of one or more uncertain future events

recognise an asset when the realisation of the profit is vertually certain

Question 27

certain, probable, possible, remote

Answer 27

Certain - asset/liability

Probable - over 50% - liability, provision, contingent asset

Possible - under 50% contingent liability

Remote - No recognition