Lesson 14: Liabilities

Question 1

Note:
interest falls under other expense when doing general journal and written as other expense under liabilities in the accounting equation

Question 2

Note:
When calculating interest expense,
keep in mind it differs according to how many months the loan is to be repaid

e.g. loan of $2000 and is 12% annum interest. Borrowed on September and payable on November . Since it is two months, remember to factor in the 2/12 in the calculation. ans: 2000 x 12% x 2/12

Question 3

Note:
Always remember that interest expense affect equity and net profit. e.g. in accounting equations, the interest expense would be written as net profit under equity with the value of negative whatever value (e.g. -40 if the interest expense was 40 dollars)

And under the expense category, it would be written as interest expense

Question 4

What is Principal sum?

Answer 4

the amount to be repaid when taking a loan (not including interest, e.g. if borrowed $30 the principal amount is $30)

Question 5

Note:
When they say “the loan has a repayment period of ‘x’ years” it means that you don’t pay the loan partially every year unless they specify in the preamble

Question 6

Note:
Payment of interest or loan will affect cash flow as well (e.g. if the loan is $30, under assets, liabilities, and cash flow, the headers would be cash at bank, long term borrowings (if it is long term), and cash flow respectively, all reflecting -30 in the values)

Question 7

What are Bonds?

Answer 7

Companies can borrow from the public by issuing bonds. This can potentially help companies raise larger sums than from a single lender. A bond is the issuer’s written promise to pay the par or face value of the bond with interest.

Question 8

What is Maturity date?

Answer 8

The par value of a bond is paid at a specific future date aka the bond’s maturity date

Question 9

Note:
When it is semi-annual interest payments, after crediting cash at bank on july, eventhough the payment is on 1 jan, on 31 dec we should write the interest payments in the general journal as well but instead of crediting cash at bank, we credit ‘other payables -interest’ and the bottom header would be “interest owing on bonds’

Question 10

Note:
The bottom header after paying off the long term borrowing would be ‘Payment of bonds on maturity”, if question is about bonds

Question 11

How do you calculate interest using simple interest?

Answer 11

Interest = Rate x Principal x Time