Week 9 - Topic 9 - Accounting for Liabilities

Question 1

What are the 3 criteria that must be satisfied to be classified as a liability?

Answer 1

1. The entity has an obligation.
2. The obligation is to transfer an economic resource, and
3. It is a present obligation from past events.

Question 2

Define the term ‘Obligation’?

Answer 2

a duty or responsibility that the entity cannot avoid.

Question 3

Name the 3 economic resources that may be involved in a typical transfer of a liability?

Answer 3

1. The payment of cash
2. The delivery of goods or services
3. an exchange on unfavourable terms

Question 4

Define the term ‘Provision’?

Answer 4

a liability of uncertain timing or amount.

Question 5

What are the 3 criteria that must be met for a provision to be recognised?

Answer 5

1. An entity has a present obligation (legal or constructive) as a result of a past event;
2. An outflow of resources embodying economic benefits will probably be required to settle the obligation.
3. A reliable estimate can be made of the amount of the obligation.

Question 6

Define ‘Contingent Liability’?

Answer 6

a possible obligation, from past events, and can only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Question 7

Are contingent liabilities recognised on the balance sheet?

Answer 7

They’re NOT, due to their highly uncertain behaviour

Question 8

What is ‘GST’?

Answer 8

A 10% tax is applied to most goods and services

Question 9

Name 3 goods/services that GST is exempt from?

Answer 9

1. Food
2. Residential rent
3. Healthcare

Question 10

Which one of the 5 elements are ‘employee entitlements’ recognised as?

Answer 10

They are Liabilities, as they meet the criteria;

1. Present obligation to the employee
2. A transfer of an economic resource to the employee
3. A past transaction is the hours worked

Question 11

Which one of the 5 elements are ‘warranties’ recognised as?

Answer 11

Warranties are liabilities, as they meet the recognition criteria;

1. Present obligation to the customer
2. A transfer of an economic resource to the customer
3. A past transaction, being the sale of inventory

Question 12

Define the term ‘Current liability’?

Answer 12

an obligation that can reasonably be expected to be paid within 1 year or the operating cycle, whichever is the longer.

Question 13

Define the term ‘Mortgage’?

Answer 13

a loan secured by a charge over property.

Question 14

Define the term ‘Warranty’?

Answer 14

an obligation of the supplier of goods or services to the purchaser that the product will be functional or that the work performed will remain satisfactory for a stated period after the sale of goods or the provision of services.

Question 15

Name 2 examples of contingent liabilities?

Answer 15

1. An unresolved lawsuit was brought against an entity.
2. Potential liability resulting from a tax audit in progress.

Question 16

Are ‘Provisions’ considered to be current or non-current?

Answer 16

Depending on the expected timing of the future sacrifice, they could be either current or non-current