ACCT1110
Financial Reporting and Analysis
Lecture 8
CRICOS code 00025B
Chapter 9: - 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. identify common types of non-current liabilities, such as debentures and unsecured notes,
and explain how to account for them.
4. prepare journal entries for loans payable by instalment and distinguish between current and
non-current components of long-term debt.
5. identify the advantages of leasing and explain the difference between an operating lease
and a finance lease.
6. complete basic journal entries for accounting for leases and explain how to report leases
7. explain the differences between provisions, contingencies and other types of liabilities and
explain how to report contingent liabilities.
8. prepare entries to record provisions for warranties.
9. evaluate an entity’s liquidity and solvency.
Learning Objectives
2
CRICOS code 00025B
Learning objectives (continued)
3
Chapter 10: – Reporting and analyzing equity
1. explain the business context and the importance of decision making relating to equity.
2. identify and discuss the main characteristics of a corporation (company).
3. record the issue of ordinary shares.
4. describe the effects of share splits.
5. prepare the entries for cash dividends and share dividends and describe the impact on
equity and assets.
6. understand the concept of earning power and indicate how irregular items are presented.
7. identify components of comprehensive income and changes in equity.
8. identify the items that affect retained earnings.
9. evaluate a company’s dividend and earnings performance from a shareholder’s
perspective.
10. evaluate debt and equity as alternative sources of finance.
CRICOS code 00025B
Overview of Liabilities
4
Liability
1. Overview
2. Distinguish normal liability,
provision, and contingent
liability
Current liability
1. Notes payable
2. Payroll and payroll
deductions payable
3. Revenues received in
advance
Non-current liability
1. Unsecured notes and
debentures
2. Loans payable by
instalment (Current and
non-current components of
long-term debt)
3. Leasing
CRICOS code 00025B
✓A present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits.
Liabilities are recognised when:
✓It is probable that an outflow of economic benefits will result from
the settlement of a present obligation;
✓The amount of liability can be reliably measured.
Liabilities are displayed in statement of financial position in order of
liquidity.
What is a liability?
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CRICOS code 00025B
1. Notes payable
2. Payroll and payroll deductions payable
3. Revenues received in advance
4. Accounts payable
Current Liabilities
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CRICOS code 00025B
Current Liabilities – Dominos
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CRICOS code 00025B
Wellington University sold 5000 season football tickets at $50 each
for its 5-game home schedule. What entries should be made:
a) when the tickets are sold and
b) after each game?
Your Weekly Task
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CRICOS code 00025B
1. Unsecured notes and debentures
2. Loans payable by instalment (Current and non-current
components of long-term debt)
3. Leasing
Non-current liabilities
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Why issue unsecured notes or debentures?
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CRICOS code 00025B
Lecture Exercise 1
11
Admiralty Pty Ltd borrows $1m on 30 June from the bank by signing a $1m,
10% 1-year note payable. Prepare the journal entries to record:
a) The proceeds of the note and
b) Accrued interest at 31 December (assuming adjusting entries are made only
at the end of the year)
CRICOS code 00025B
• Entities may borrow money from a single lender 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.
Mortgage payments consist of:
- interest expense
- reduction of loan liability.
Loans payable by instalment
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CRICOS code 00025B
What is the journal entry to record the following monthly mortgage
payment:
- Loan balance $100 000
- Interest rate 12%p.a
- Instalment amount $10 000
Lecture Exercise 2
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CRICOS code 00025B
Leases are liabilities payable by instalment.
A lease is an agreement between a lessee and lessor where the
lessor (owner of the asset) grants the lessee the right to use the
asset for an agreed period of time.
Operating lease — treated as rental payment when instalment
payments are made.
Finance lease — both asset and liability recorded on the statement
of financial position.
Covered in more detail in ACCT3102
Leasing
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CRICOS code 00025B
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 amount of the future sacrifice
is still uncertain:
• e.g. long service leave
• involve significant level of uncertainty.
Provisions
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CRICOS code 00025B
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
because:
• it is conditional upon the customer making a claim
• the costs of satisfying the claim depend on the nature of the fault.
Provisions
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CRICOS code 00025B
How does a company determine the amount to report for a
provision?
Management must use judgement, based on past or similar
transactions, discussions with experts, and any other pertinent
information.
Provisions
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Toyota warranties. Toyota might determine that 80 percent of its cars will not
have any warranty cost, 12 percent will have substantial costs, and 8 percent
will have a much smaller cost. In this case, by weighting all the possible
outcomes by their associated probabilities, Toyota arrives at an expected value
for its warranty liability.
CRICOS code 00025B
On 30 June Marshall Ltd estimates that in the future it will cost them $200,000
to repair or replace goods which are defective.
On 5 July they have to replace some defective goods at a cost of $1,000
On 30 June of the following year they decide that the warranty provision should
be $404,000 as they have had some major issues with their products.
Record the following three entries to reflect the above items:
a) Entry to record liability for outstanding warranties
b) Entry to record goods replaced under warranty
c) Entry to increase estimated cost of servicing unexpired warranty contracts
Lecture Exercise 3
CRICOS code 00025B
Trish’s Toasters Pty Ltd sells toasters with a 1-year warranty. At 30 June,
it is estimated that the liability for unexpired warranties is $18,000. The
warranty provision account has a debit balance of $4,000. What should be
the adjusting entry to record the warranty provision at 30 June?
1. Debit $18,000
2. Credit $18,000
3. Debit $22,000
4. Credit $22,000
Lecture Exercise 4
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Semester 1, 2019
CRICOS code 00025B
Contingent liabilities are liabilities for which the amount of future
sacrifice is so uncertain that it cannot be measured reliably:
• 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 disclosed in the notes to the financial
statements.
Contingent liabilities
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CRICOS code 00025B
Classification of liabilities
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CRICOS code 00025B
1. Liquidity Ratios:
Measure the short-term ability of an entity to pay its maturing
obligations and to meet unexpected needs for cash.
Three useful measures:
i. working capital
ii. current ratio
iii. quick ratio.
Financial statement analysis
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CRICOS code 00025B
i. Working capital:
= Current assets – Current liabilities
ii. Current ratio:
= Current assets
Current liabilities
iii. Quick ratio:
= Cash + Marketable securities + Net receivables
Current liabilities
• Provides a measure of immediate short-term liquidity.
Financial statement analysis
CRICOS code 00025B
2. Solvency Ratios:
These measure the ability of an entity to survive over a long period
of time.
Two useful measures:
i. debt to total assets ratio
ii. times interest earned.
Financial statement analysis
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CRICOS code 00025B
i. Debt to total assets ratio:
= Total liabilities
Total assets
ii. Times interest earned:
= Profit before income tax + Interest expense
Interest expense
• Provides an indication of an entity’s ability to meet interest
payments as they become due.
Financial statement analysis
CRICOS code 00025B
Lecture Exercise 5
26
Johnson Ltd’s 2022 financial statements contain the following selected data.
For Johnson Ltd calculate:
a) Working capital
b) Current ratio
c) Quick ratio
d) Debt to total assets ratio
$’000
Current assets 294,705
Total assets 1,237,785
Current liabilities 301,830
Total liabilities 436,689
Cash 13,877
Short-term financial assets 941
Accounts receivable 19,092
CRICOS code 00025B
Break
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CRICOS code 00025B
Learning objectives (continued)
28
Chapter 10: – Reporting and analyzing equity
1. explain the business context and the importance of decision making relating to equity.
2. identify and discuss the main characteristics of a corporation (company).
3. record the issue of ordinary shares.
4. describe the effects of share splits.
5. prepare the entries for cash dividends and share dividends and describe the impact on
equity and assets.
6. understand the concept of earning power and indicate how irregular items are presented.
7. identify components of comprehensive income and changes in equity.
8. identify the items that affect retained earnings.
9. evaluate a company’s dividend and earnings performance from a shareholder’s
perspective.
10. evaluate debt and equity as alternative sources of finance.
CRICOS code 00025B
Characteristics of a Corporation
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• Separate legal existence
• Limited liability of shareholders
• Transferable ownership rights
• Continuous life
• Ability to acquire capital
• Company managed through elected board of directors
• Subject to government regulations
CRICOS code 00025B
Equity
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Three elements of Equity on the Statement of Financial Position:
• Contributed equity (share capital)
• Reserves
• Retained profits/(accumulated losses)
CRICOS code 00025B
Private placement involves issue of shares to certain private
investors by invitation.
Public issue requires a prospectus inviting public application for
shares.
The prospectus:
• Reports on the company’s financial position, performance and
plans.
• Contains reports from independent parties.
Issue of Share
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CRICOS code 00025B
When shares are issued by private placement, the proceeds are
immediately available for use by the company.
Journal entry to record private placement:
Accounting for the private issue of shares
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CRICOS code 00025B
1. Application by investors
2. Allotment
a. Issue shares
b. Record amounts owing
c. Transfer of cash already received to company’s own bank
account
3. Receipt of amounts owing from allotment
4. Call made for remainder.
Accounting for the public issue of shares
CRICOS code 00025B
Hydro-Slide Ltd invited the public to subscribe for 10,000 ordinary shares
at $1.00 per share. The terms of the share issue are:
• $0.50 per share is payable on application by 30 September
• $0.20 per share is payable on allotments by 31 October
• $0.30 per share in calls as required
Lecture Exercise 6
34
CRICOS code 00025B
1. Application by investors
Investors return application form with application money for the
number of shares they want.
Accounting for the public issue of shares
Note: The company does not have a right to the funds until the shares are allotted therefore
the funds received from potential shareholders on application must be placed in trust [Corp.
Act s722]
CRICOS code 00025B
2. Allotment
Issue of shares, record amounts owing and transfer of cash already
received to company’s own bank account
a.
b.
c.
Accounting for the public issue of shares
CRICOS code 00025B
3. Receipt of amounts owing from allotment
Accounting for the public issue of shares
CRICOS code 00025B
4. Call made for remainder.
Accounting for the public issue of shares
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Call account 3 000
3
call of shares)
Call account
3
3
3 000
000
000
call of shares)
Called up balance outstanding on partly paid ordinary shares
CRICOS code 00025B
A dividend is a distribution of profit by a company to its shareholders on a pro rata
basis.
Forms of dividends:
• cash
• property
• shares.
Public companies often pay 2 dividends:
• final dividend determined at end of year
• interim dividend paid during the year.
Dividends
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Semester 1, 2019
CRICOS code 00025B
Learning objectives (continued)
40
Chapter 10: – Reporting and analyzing equity
1. explain the business context and the importance of decision making relating to equity.
2. identify and discuss the main characteristics of a corporation (company).
3. record the issue of ordinary shares.
4. describe the effects of share splits.
5. prepare the entries for cash dividends and share dividends and describe the impact on
equity and assets.
6. understand the concept of earning power and indicate how irregular items are presented.
7. identify components of comprehensive income and changes in equity.
8. identify the items that affect retained earnings.
9. evaluate a company’s dividend and earnings performance from a shareholder’s
perspective.
10. evaluate debt and equity as alternative sources of finance.
CRICOS code 00025B
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