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Lecture Notes - Reporting Current
d and Non-current Liabilities
Reading from Tutorial Exercises
Topic and Topic Learning Objectives
digital sources
Reporting Current and Non-current Liabilities
Areas explored in relation to liabilities will be payables,
provisions for warranties and employee benefits. An
understanding of the theory relating to leases and contingent
liabilities.
The disposal of depreciable non-current assets including
gains and losses will also be explored.
Learning objectives
Liabilities
1. Explain the differences between current and non- current liabilities.
2. Identify common types of current liabilities and explain how to account for them.
3. Explain the differences between provisions, contingencies and other types of liabilities
and explain how to report contingent liabilities.
4. Prepare entries to record provisions for warranties.
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Reporting and danalysing liabilities
CURRENT LIABILITIES
A current liability is an _____________ that can reasonably be expected to be paid within one
year or within the operating cycle, whichever is the longer.
Liabilities that do not meet this definition are classified as non-current.
Examples of current liabilities include:
notes payable
accounts payable
revenue received in advance
accrued liabilities
Notes Payable
Notes payable record obligations in the form of written promissory notes.
Usually require borrower to pay interest or borrowing costs.
Frequently issued to meet short-term financing needs and are issued for varying periods of time.
Example – Notes payable
East State Bank agrees to lend $100,000 on 1 March 2010 in exchange for a $100,000
12% 4 month note.
Journal entry when note issued:
Mar 1
To record issue of 12%, 4-month note to West State Bank
Interest accrues over the life of the note and must be recorded periodically. If balance date is 30
June, an adjusting entry is required to recognise interest expense and interest payable of
$4,000 ($100,000 x 12% x ¼).
Journal entry to record interest:
June 30
To accrue interest for 4 months on West State Bank note
Journal entry to settle liabilities:
Jul 1
To record payment of West State Bank interest-bearing
note and accrued interest at maturity
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d
Payroll and payroll deductions payable
Employers deduct amounts from employees’ wages and salaries if they are required to be paid
to other parties.
These include deductions for:
tax (pay-as-you-go or PAYG)
superannuation
trade union fees
health insurance
donations to charity
Employers are responsible to remit these withheld funds to the appropriate parties. Until this
occurs, they are credited to appropriate liability accounts.
Example – Payroll deductions
Entity withholds tax of $32,036 from its employees’ wages and salaries of $100,000.
Journal entry for payroll accrual and payment:
Mar 7
Payroll and withheld taxes for week ending 7 March
To record payment of the 7 March payroll
Journal entry when payments are made:
Apr 6
Payment of withheld taxes for March
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d
Revenues received in advance
Occurs when customers pay ahead of time for goods or services
purchase of plane tickets
magazine subscription
season passes to sporting events
Example – revenue received in advance
Stadium Vietnamania Ltd sells 10,000 season football tickets at $50 each for its 5 game
home schedule.
Journal entry to record revenue received in advance:
Aug 6
To record sale of 10,000 season tickets
Journal entry when service is delivered:
Sep 5
To record football ticket revenue
NON-CURRENT LIABILITIES
Obligations expected to be paid _________________or outside normal _________________.
Common forms of these obligations are:
bank loans
long-term notes
Debentures are notes that are subject to a secured charge on the issuer’s assets.
Unsecured notes are not subject to a security over assets.
Loans Payable by Instalment
Entities may borrow money from a single borrower in the form of loan.
It is common for such loans to be repayable by instalment, e.g., mortgages.
A mortgage is a loan secured by a charge over property. If the borrower is unable to repay the
loan, the lender may sell the property and use the proceeds to repay the loan.
Accounting for loans payable by instalment
Mortgage payments consist of:
interest expense and
reduction of loan liability.
Example – Loans payable by instalment
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MAB Ltd has a mortgage on which interest is payable at 12% per annum, with monthly
d of March 2012, the balance of the Loan Payable
payments of $10,000. At the beginning
account was $100,000.
Interest expense = $100,000 x 12% = $12,000 p.a. x 1/12 = $1,000 per month
The payment of $10,000 in March includes $1,000 interest expense and $9,000
reduction in the loan principal.
Journal entry to record mortgage payment:
March 31
To record the loan payment for March
Current and non-current components of long-term debt
Entities often have a portion of long-term debt that falls due within the coming year.
This portion of the long-term debt should be classified as a current liability.
The remainder will be classified as a non-current liability.
An adjusting entry is not necessary to recognise the current portion of the liability. It is
recognised by proper classification on the statement of financial position.
Provisions and Contingent Liabilities
Accruals are liabilities to pay for goods or services that have been provided but not yet invoiced
e.g., next telephone or electricity account. Involve a low level of uncertainty.
Provisions are liabilities for which the ____________of the future sacrifice is still uncertain e.g.
long service leave. Involve significant level of uncertainty.
A warranty is an obligation of the supplier of goods or services to the purchaser that the
product will be functional.
There is significant uncertainty in measuring the future sacrifice with respect to warranties
because:
it is conditional upon the customer making a claim
the costs of satisfying the claim depend on the nature of the fault.
Contingent liabilities are liabilities for which the amount of future sacrifice is so uncertain that it
cannot be _________________ e.g., an unresolved legal action.
Contingent liabilities are not recognised in the accounts because they are neither probable nor
able to be measured reliably. However, they must be _______________ in the notes to the
financial statements.
Recording provisions for warranties
From the manufacturer’s point of view, providing a warranty creates an obligation to repair or
replace the goods free of charge if certain faults arise within the warranty period. Unexpired
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warranties at balance date are a liability because they are a present obligation to make a future
d
sacrifice (the repair or replacement of faulty goods) resulting from a past transaction (the sale of
goods).
Warranty liabilities are provisions because the amount of the future sacrifice is uncertain. It will
depend on the amount of claims made and the cost of servicing the warranty claims.
Reporting entities that provide warranties estimate the cost of servicing unexpired warranty
contracts at balance date (e.g., as a percentage of the current year’s sales) and record the
amount in the ___________________________ account.
Example - Warranties
Neutron Ltd. sells electronic equipment with a 12-month warranty and has a balance
date of 30 June. Neutron Ltd estimates that the cost of servicing unexpired warranties
will be $200,000.
Journal entry to record liability for outstanding warranties:
June 30
To record the liability for outstanding warranty
contracts
Journal entry to record goods replaced under warranty:
July 12
To record replacement of goods under warranty
Assume that at balance date the following year after warranty claims have been made
during the year, the Warranty Provision account has a credit balance of $5,000. Neutron
Ltd estimates that the cost of servicing unexpired warranty contracts will be $210,000.
Journal entry to increase cost of servicing unexpired warranty contracts:
June 30
To adjust the Warranty Provision account to total
estimated liability for contracts outstanding at
balance date ($210,000 - $5,000)
