AA0115 TOPIC 10

FINANCIAL ACCOUNTING
AA015

KOLEJ MATRIKULASI
NEGERI SEMBILAN
SESSION 2020/2021

Topic 10:

Accounting for
Liabilities

Learning objectives

Definition and Types of Liabilities
Current Liabilities
Non Current Liabilities
Presentation of Liabilities in the Statement of
Financial Position

Definition of Liabilities

A COMPANY’S FINANCIAL DEBT OR OBLIGATION THAT ARISE
DURING THE COURSE OF ITS BUSINESS OPERATIONS.

LIABILITIES ARE SETTLED OVER TIME THROUGH THE
TRANSFER OF ECONOMIC BENEFIT INCLUDING MONEY,

GOODS OR SERVICES

TYPES OF LIABILITIES

Debts that company Debts that company
expects to be paid expects to pay after
out of current assets
within one year. one year or the
operating cycle.
Current
Liabilities .

Non Current
Liabilities

Classification of Current Liabilities

CERTAIN CURRENT
AMOUNT LIABILITIES

ESTIMATED
AMOUNT

Current Liabilities of Certain Amount

Characteristics
❑ The amount and the maturity of liability can be determined accurately.
❑ The level of certainty of the liability can be determined.

Examples
❖ Accounts Payable
❖ Short-Term Notes Payable
❖ Dividend Payable
❖ Accrued Expenses/ expense payable
❖ Unearned Revenue

Accounts Payable

Amounts owed to suppliers for goods or services purchased on
credit terms.

Journal entry:

Dr Purchase XX

Cr Accounts Payable XX

Example:

Purchased RM15,000 goods on credit terms from Syarikat Indah on 16 February 2011.

Solution : Dr Purchase 15,000
Feb 16

Cr Accounts Payable 15,000

Short-Term Notes Payables

• Written promissory note (agreement) signed by the company.
• Payable within the year.
• Company recognizes liability to repay principal amount borrowed

and interest on specific date in the future to the bearer.
❖Frequently issued to meet short-term financing needs.

Example : The Valley Chamber Orchestra signs a RM10,000, 60-
day note payable.

Journal Entry

•To record cash received

Dr Cash / Bank XX

Cr Notes Payable XX

•To record the payment of the note and interest on the
maturity date

Dr Notes Payable XX

Dr Interest Expense XX

Cr Cash / Bank XX

Example 2 : Short-Term Notes Payables

A company borrowed RM 20,000 from the bank and signed a
promissory note on 1 January 2010, 60-days note payable.
Annual interest rate is 12%.
(Assumption : 365 days per annum)
Instruction:
Prepare journal entries
-to record cash received issued from note payable
-to record the payment of the note and interest on the maturity
date.

Solution

To record the issuance of the note payable

Jan 1 Dr Cash / Bank 20,000
Cr Notes Payable 20,000

To record the payment of the note and interest on the
maturity date

Mac 1 Dr Notes Payable 20,000
Dr Interest Expense 394.52

Cr Cash / Bank 20,394.52

Example 3 : Short-Term Notes Payables

On 1 Nov 2014, Smart Touch borrows RM 10 000 from First Street Bank at 6%
for five months. Accounting period ending on 31st December

Nov 1 Dr Cash 10 000

Cr Notes payable 10 000

(received cash in exchange for 5 month, 6% note)

Dec 31 Dr Interest expense 100

Cr Interest payable 100

(accrued interest expense at year end)

(10000 x 0.06 x 2/12)

Example 3 : Short-Term Notes Payables

31 March Dr Notes payable 10 000
Dr
Dr Interest expense 150

Interest payable 100

Cr Cash 10 250

( paid note and interest at maturity)

(10000 x 0.06 x 3/12)

Example 4 : Short-Term Notes Payables

On 1 Feb 2018, Cumi borrow RM 25 000 from Anna Bank at 10% for
7 month. Accounting period ending on 31 March.

Feb 1 2018 Dr Bank 25 000

Cr Notes payable 25 000

(to record note payable)

31/3/2018 Dr Interest expense 417
Cr Interest payable 417

(to record interest payable)

Example 4 : Short-Term Notes Payables

31/8/2018Dr Notes payable 25 000
Dr
Dr Interest expense 1 042

Interest payable 417

Cr Bank 26 459

( paid note and interest at maturity)

Accrued Expenses

Expenses incurred but not yet paid or recorded at the
statement date (the end of accounting period).

Examples :
❑ Salaries payable
❑ Interest payable
❑ Taxes payable
❑ Rent payable

Journal Entry

•To record accrued expenses at the end of
accounting period

Dr Expenses XX
Cr Expenses payable
XX

•To record the payment of accrued expenses

Dr Expenses payable XX
Cr Cash / Bank XX

Example 5: Accrued Expenses

On 31 December 2010, which is the end of accounting
period, the business has not settled premise rental for
RM1,500.
The payment of rental is scheduled on 15 January 2011.

Instruction:

Prepare relevant journal entries.

Solution

• To record rent payable at the end of reporting
period

2010
Dec 31 Dr Rent Expense 1,500

Cr Rent payable 1,500

•To record the payment of accrued expenses

2011

Jan 15 Dr Rent payable 1,500

Cr Cash / Bank 1,500

Unearned Revenue

❑Performance obligation (liability) is incurred when cash has been
received in advance of providing a product or a service.

❑The amount received in advance will be categorised as liability until
the product or service has been delivered to customer (revenue has
been earned).

Examples

Source: Weygandt, Kimmel & Kieso, 2015.

Journal Entry

•To record cash receipt in advance and the related
increase in liability

Dr Cash / Bank XX

Cr Unearned Service Revenue XX

•To recognise revenue when the product/service has
been delivered to customer

Dr Unearned Service Revenue XX XX
Cr Service Revenue

Example 6 : Unearned Revenue

On 1 Feb 2011, the business received an order from customer and it had been paid
fully RM6,000. Nevertheless, the service will be delivered later on 25 Mac 2011.

Instruction: Prepare relevant journal entries.

Solution : • To record cash receipt for the order

Feb 1 Dr Cash / Bank 6,000

Cr Unearned Service Revenue 6,000

• To recognise revenue when the product/service has been
delivered to customer

Mac 25 Dr Unearned Service Revenue 6,000

Cr Service Revenue 6,000

Current Liabilities of Estimated Amount

❑Liability that exists but not know the exact
amount.

❑The amount of liability is therefore estimated
according to prior experience with the product.

❑Example :
❑Warranty

Warranty

• An agreement that guarantees a company’s
product against defect of quantity, quality, or
performance in a specified period of time after
the sale (90 days & 1 year from the date of
transaction are common).

Warranty Liability

❑Warranty expense will be recorded in the same accounting period
where sales have been generated.
❑This is because the expense occurs when the sale is made, not
when the warranty claim is paid (expense recognition).

❑Journal entry:

1) To record sales on credit

Dr Accounts Receivable XX

Cr Sales XX

2) To accrue warranty expense

Dr Warranty Expense XX

Cr Warranty Payable XX

3) To repair defective products sold under warranty

Dr Warranty Payable XX

Cr Cash XX

or

To replace defective products sold under

warranty

Dr Warranty Payable XX
Cr Inventory XX

Example 7: Warranty Liability

The business has made RM250,000 sales in 2010. According to prior experience
with the product, about 2% - 4% goods sold are defective. Therefore, the business
reasonably estimate 3% of sales are defective within the warranty period and they
will be replaced or repaired.

Instruction:
a) Prepare journal entries to record sales and warranty expense.

b) The actual warranty expenses is RM7,000, prepare the journal entry if :
i. Defective goods are repaired
ii. Defective goods are replaced

Example 7 : Solution (a)

1) To record sales on credit

Dr Cash / Accounts Receivable 250,000

Cr Sales 250,000

2) To accrue warranty expense

Dr Warranty Expense 7,500
Cr Warranty Payable 7,500

Example 7 : Solution (Question b i & ii )

b i) To repair defective products sold under warranty

Dr Warranty Payable 7,000
Cr Cash 7,000

b ii)To replace defective products sold under warranty

Dr Warranty Payable 7,000
Cr Inventory 7,000

Non Current LiabilIties

▪ A liability that does not need to be paid
within one year or within the entity”s
operating cycle, whichever is longer

▪ Obligation derives from prior transactions.

Examples of Non Current Liabilities

❑ Long Term Notes Payable
❑ Bonds Payable
❑ Mortgage Payable

Long-Term Notes Payable

❖Written promissory note (agreement) signed by the
company.
❖Payable more than a year.
❖Company recognizes liability to repay principal amount
borrowed and interest on specific date in the future .
❖Frequently issued to purchase fixed assets.

Example 8 : Long Term Notes Payable

Suria Trading signed a RM 20 000 note payable on December 31,2014.The note will
be paid over four years with payments of RM 5000 plus 6% interest due each
December 31.

Long-term notes payable Amortization Schedule

Principal Interest Total Ending
Payment Expense Payment balance
31/12/2014 20 000
6 200
31/12/2015 5 000 1 200 5 900 15 000
5 600
31/12/2016 5 000 900 5 300 10 000

31/12/2017 5 000 600 5 000

31/12/2018 5 000 300 0

31/12/2014

Dr Cash / Bank 20 000

Cr Notes payable 20 000

( received cash in exchange for a year, 6% note)

31/12/2015

Dr Notes payable 5 000

Dr Interest expense 1 200

Cr Cash 6 200

( paid principal and interest payment)

Example 9 : Long-Term Notes Payable

Sri Merinding Enterprise purchased a machine worth RM25,000 on 1
January 2012. Payment was made by cheque for RM5,000 and the
remaining will be paid by signing notes payable, 5 years. Annual
interest rate is 8%. The end of accounting period 31 December
annually.

Instruction:
i. Prepare journal entries to record transactions in 2012
ii. to record payment of the note with interest on the maturity date.

Solution

1) To record asset purchase

Jan 1,2012 Dr Machine 25,000

Cr Bank 5,000
20,000
Notes Payable

2) To record interest expense 1,600

Dec 31,2012 Dr Interest Expense 1,600
Cr Interest Payable
(20,000 x 8%)

3) To record payment of the note and interest
on the maturity date

Dec 31,2016 Dr Notes Payable 20,000

Dr Interest Expense 1,600

Dr Interest Payable 6,400

Cr Bank 28,000

(interest payable= 1,600 x 4)

Mortgages
Example 10

Assume on December 31, 2014 that Titi Learning purchases a building for RM
150000, paying RM 49 925 in cash and signing a 30- year mortgage for RM 100
075, taken out at 6% interest that is payable in RM 600 monthly payments, which
includes principal and interest, beginning January 31, 2015.

Mortgages payable Amortization Schedule

Beginning Principal Interest Total Ending
balance Payment Expense payment Balance

31/12/2014 100 075.00

31/01/2015 100 075.00 99.62 500.38 600.00 99 975.38

28/02/2015 99 975.38 100.12 499.88 600.00 99 875.26

31/03/2015 99 875.26 100.62 499.38 600.00 99 774.64

31/12/2014

Dr Building 150 000

Cr Mortgage Payable 100 075 (principal)

Cr Cash 49 925

( to record mortgage)

31/1/2015 99.62
Dr Mortgage payable 500.38
Dr Interest expense
Cr Cash 600
(payment for the mortgage)

Bonds

• Large companies need large amounts of money to finance their operations. They may take
out long-term loans from banks and/ or issue bonds to the public to raise the money. Bonds
payable are long term debts issued to multiple lenders called bondholders, usually in
increments of RM 1 000 per bond.

• For example, a company could borrow RM 100 000 from one lender(the bank), or it could
issue 100 bonds payable, each at RM 1 000, from 100 different lenders.

• By issuing bonds payable ,company can borrow millions of dollars from thousand of
investors rather than depending on a loan from one single bank or lender. Each invertor
can buy a specified amount of the company’s bonds.

• People invest bonds to earn interest.



❑Face value : the amount a borrower must pay back to the
bondholders on the maturity date .

❑Maturity date : The date on which the borrower must pay
the principal amount to the bondholders

❑To record issuance of bonds at face value

Dr Bank XX

Cr Bonds Payable XX

Example 11 : Bonds Issuance

Warisan Nusantara Bhd is allowed to issue 40,000 unit 6% bond, 5-year,
face value RM1,000 each and 10,000 unit 8% bond, 10-year, face value
RM1,000 each.

Additional information:
Bond AA : RM20,000,000, 6% bond, face value RM1,000 each, issued on 1
May 2012
Bond BB : RM5,000,000, 8% bond , face value RM1,000 each, issued on 1
July 2012.

Instruction:

Prepare journal entry to record the issuance of bonds and to show the
presentation of Statement of Financial Position on 31 December 2012.

May 1 Dr Bank 20,000,000 20,000,000
Cr Bonds Payable AA, 6%

(To record sale of bonds AA at face value)

Jul 1 Dr Bank 5,000,000

Cr Bonds Payable BB, 8% 5,000,000

(To record sale of bonds BB at face value)

Statement of Financial Position

Warisan Nusantara Bhd
Statement of Financial Position

As at 31 December 2012

Long-Term Liabilities : RM
Bonds Payable, AA 6% 20,000,000
Bonds Payable, BB 8%
5,000,000

To record interest payment

❑Bond interest payment will be paid to investor periodically
(6 months or 1 year period).

❑ Journal Entry : XX
Dr Interest Expense XX
Cr Bank

To record interest payment

Based on Example 11, Warisan Nusantara Bhd pay interest twice
per year to investors on 30 June and 31 Dec.

Instruction:
Prepare journal entry to record the payment of interest for Bonds
AA & Bonds BB.

Bond AA

30 June Dr Interest expense 200 000

Cr Bank 200 000

31 Dec Dr Interest expense 600 000

Cr Bank 600 000

Bond BB

31 Dec Dr Interest expense 200 000

Cr Bank 200 000

Bond Redemptions

❑Issuing corporation retires bonds by buying
them back (redeem)

❑Redemption can be paid at maturity.

❑Journal Entry : XX
Dr Bonds Payable XX
Cr Bank