Lecture 7 - Liabilities

Question 1

What is the definition of a liability?

Answer 1

A PRESENT obligiation of the entity arising from PAST EVENTS that is expected to result in an OUTFLOW OF ECONOMIC BENEFIT from the entity.

Question 2

When is a liability recognised? (2 points)

Answer 2

1) PROBABLE that the outflow will occur

2) The Liability may be RELIABLY MEASURED

Question 3

How is a Liability Measured? (4 possible ways)

Answer 3

1) Historical Cost/Value
2) Current Cost/Value
3) Realisable Cost/Value
4) Present Cost/Value

Question 4

What is the definition of a CURRENT LIABILITY?

Answer 4

A liability that arises and is expected to be settled in the same period.

eg bank overdraft, short term accruals etc.

Question 5

How are Current Liabilities measured? (2 points)

Answer 5

1) Don’t record interest that will be paid but has not yet been accrued.
2) Ignore inflation

Question 6

What is the JE for Trade and other Payables?

Answer 6

Dr Expense

Cr Accrued Expenses (payables)

Question 7

What is the JE for Current tax payable?

Answer 7

Dr Income Tax expense

Cr Income tax payable

Question 8

What is the definition for a Non-current liability?

Answer 8

Not a current liability basically.

eg. long term borrowing suchs as mortgages, interest bearing liabilities etc.

Question 9

What is the JE for a loan?

Answer 9

Dr Investment Property
Cr Cash
Cr Mortgage Loan

Question 10

What is the JE to record an interest payment (for one period)?

Answer 10

Dr Interest Expense
Dr Mortgage Loan
Cr Cash

Question 11

What is a Debenture?

Answer 11

A written promise to pay a principal amount @ a specified time. Making it a non-current liability.

Question 12

What is the JE to buy a Debenture? (3 steps)

Answer 12

Dr Cash Trust
Cr Application Debentures

Dr Cash @ Bank
Cr Cash trust

Dr Application Debentures
Cr Debentures

Question 13

What is the JE for Debenture interest payments?

Answer 13

Dr Debenture Interest Expense

Cr Debenture Interest Payable

Question 14

What is a Provision?

Answer 14

A liability of UNCERTAIN TIMING OR AMOUNT.

eg. provisions for future insurance claims

Question 15

What is the recognition criteria for a Provision?

Answer 15

1) PROBABLE that benefit will flow FROM the entity

2) Amount may be MEASURED RELIABLY

Question 16

How are provisions measured?

Answer 16

As a ‘Best estimate’. The measurement must be revised at each reporting date.

Question 17

What is the JE for a provision?

Answer 17

Dr Expense

Cr Provision

Question 18

What is a contingent liability? (2 types)

Answer 18

A POSSIBLE OBLIGATION arising from past events, whose existence is confirmed by the OCCURRENCE/NON-OCCURRENCE of an event. i.e. tax payment arising from an audit
OR
A PRESENT OBLIGATION that arises but does NOT meet RECOGNITION CRITERIA (Probable/reliably measured. i.e. defending a claim for unspecified damages

Question 19

What is the recognition criteria for a Contingent Liability?

Answer 19

They are not recognised! They are disclosed unless the possibility of outflow is low. Then once disclosed they must meet the LIABILITY RECOGNITION CRITERIA

Question 20

What are three third party collection Liabilities?

Answer 20

1) GST payable -> collected on revenue
2) GST recoverable -> paid on Goods/Services
3) Payment or Refund -> 1 - 2

Question 21

What is the Journal entry for GST payable?

Answer 21

Dr Accounts Rec
Cr GST payable
Cr Sales Revenue

Question 22

What is the JE for GST Recoverable?

Answer 22

Dr Repair Expense
Dr GST Recoverable
Cr Accounts Payable

Question 23

What is the JE for Remitting GST?

Answer 23

Dr GST payable
CR GST Recoverable
Dr OR Cr Cash (GST Payable - Recoverable)