Module 5 Liabilities and Equity

Question 1

What is a Liability?

Answer 1

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

Question 2

What is a current liability and what are some examples?

Answer 2

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

Typical examples of current liabilities include:

-Accruals
-Deferred income
-Employee benefits
-Taxation payable
-VAT account
-Bank overdraft
-Interest payable

Question 3

What is a Non-current liability and what are some examples?

Answer 3

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

Typical examples of non-current liabilities include:

-Bank loans – usually having a term of more than 1 year
-Long-term leases – provides a company the right to use property, plant and equipment
-Long-term employee benefits – amounts due to employees after 12 months, for example, pension benefits
-Debentures or bonds – a written promise to pay a principal amount at a specified time, and interest on the principal at a specified rate over a specified period, for example, 5 years

Question 4

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

Answer 4

Dr Bank
Cr Loan payable

Question 5

What is the formula for Closing Loan Payable?

Answer 5

Closing Loan Payable = Opening Loan Payable + Effective Interest - Nominal Payment