AA015 - CHAPTER 10

Program Matrikulasi Satu Tahun Perakaunan

Chapter 10:
Accounting for Liabilities

Table of Content

Definition and Types of Liabilities
Current Liabilities
Long-Term Liabilities
Financial Statement Presentation of Liabilities

Definition of Liabilities

•Outsider claims against assets
•Existing obligations and debts
that arise due to past transactions
•Paying off liabilities would probably

involves the outflow of
economic resources from

the organisation

Types of Liabilities Debts that company
expects to pay after
Formula one year or the
operating cycle.
Debts that company
expects to be paid out of .

current assets within
one year or the
operating cycle,

whichever is longer.

CLuiarrbeilnitties LiabilTiteirLeosmng-

Current Liabilities

Classification of Current Liabilities

KNOWN
AMOUNT

CURRENT
LIABILITIES

ESTIMATED
AMOUNT

i) Current Liabilities of Known Amount

Characteristics
q The amount and the maturity of liability can be
determined accurately.
q The chance of the liability to be incurred in the is
very likely.

Examples
v Accounts Payable
v Short-Term Notes Payable
v Dividend Payable
v Accrued Expenses
v Unearned Revenue
v Current Portion of Long-Term Debt

Accounts Payable

q Amounts owed to vendors (suppliers) for goods
or services purchased on credit terms.

q Journal entry:
Dr Purchase Account XX
Cr Accounts Payable XX

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

Solution : 15,000

Feb 16 Dr Purchase Account 15,000
Cr Accounts Payable

Short-Term Notes Payables

v Written promissory note (agreement) signed by
the company.

v Payable within the year.
v Company recognizes liability to repay principal

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

Example : The Valley Chamber Orchestra signs a
RM10,000, 60-day note payable in exchange for
some remodeling done in its leased office space.

Journal Entry

•To record cash received resulting from the issuance
of the note to external party

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
Interest Expense XX
Cr Cash / Bank XX

Example 2 :
Short-Term Notes Payables

First National Bank agrees to lend the
company RM 20,000 on 1 January 2010, if the
company signs a RM 20,000, 60-days note.
Annual interest rate is 12%.
(Assumption : 365 days per annum)

Instruction:
Prepare journal entries
-to record cash received resulting from the issuance of
the note
-to record the payment of the note and interest on the
maturity date.

Solution

To record the issuance of the note to First National Bank

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

Interest Expense 394.52

Cr Cash / Bank 20,394.52

Accrued Expenses

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

qExamples :
qAccrued salaries
qAccrued interest
qAccrued taxes
qAccrued rent

Journal Entry

•To record accrued expenses at the end of reporting
period

Dr Expenses XX

Cr Accrued Expenses XX

•To record the payment of accrued expenses

Dr Accrued Expenses XX XX
Cr Cash / Bank

Example 3 : Accrued Expenses

On 31 December 2010, which is the end of
reporting period, it is found that 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 accrued rent at the end of reporting
period

2010
Dec 31 Dr Rent Expense 1,500

Cr Accrued Rent 1,500

•To record the payment of accrued expenses

2011 1,500

Jan 15 Dr Accrued Rent 1,500
Cr Cash / Bank

Unearned Revenue

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

q 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 4 : Unearned Revenue

On 1 Feb 2011, the business receive an order from customer and it
has 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

i) Current Liabilities of Estimated Amount

qLiability that exists but not know the exact
amount.

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

qExample :
qWarranty

Warranty

• Promise made by a seller to a buyer to correct
deficiency of quantity, quality, or performance in a
product for a specified period of time after the sale
(90 days & 1 year from the date of transaction are
common).

• Estimated cost of honoring product warranty
contracts should be recognized as an expense in
the period in which the sale occurs (matching
principle).

Warranty Liability

qWarranty expense will be recorded in the
same reporting period where sales have
been generated.

qThis is because the expense occurs when
the sale is made, not when the warranty
claim is paid (matching concept).

qJournal entry:

1) To record sales on credit

Dr Accounts Receivable XX

Cr Sales XX

Journal Entry

2) To accrue warranty expense

Dr Warranty Expense XX

Cr Warranty Liability XX

3) To repair defective products sold under warranty

Dr Warranty Liability XX

Cr Cash XX

or

To replace defective products sold under

warranty

Dr Warranty Liability XX

Cr Inventory XX

Example 5 : 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 5 : 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 Liability
7,500

Example 5 : Solution
(Question b i & ii )

b i) To repair defective products sold under
warranty

Dr Warranty Liability 7,000
Cr Cash 7,000

b ii)To replace defective products sold under
warranty

Dr Warranty Liability 7,000
Cr Inventory 7,000

Long-Term LiabilIties

§ Obligation towards external parties that
is not due within one year or not due within
the company's reporting period if it is longer
than one year.

§ Obligation derives from prior transactions.

Examples of Long-Term Liabilities

q Long-Term Notes Payable
q Bonds Payable
q Mortgage Payable

Long-Term Notes Payable

vWritten promissory note (agreement) signed
by the company.

vPayable more than a year.

vCompany recognizes liability to repay
principal amount borrowed and interest on
specific date in the future to the bearer.

vFrequently issued to purchase fixed assets.

Journal Entries

1) To record asset purchase

Dr Fixed Asset XX

Cr Notes Payable XX
XX
2) To record interest expense

Dr Interest Expense XX

Cr Interest Payable

Journal Entries

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

maturity date (31 December)

Dec 31 Dr Notes Payable XX

Interest Expense XX

Interest Payable XX

Cr Bank / Cash XX

or

To record payment of the note and interest on the

maturity date (the following day)

Jan 1 Dr Notes Payable XX

Interest Payable XX

Cr Bank / Cash XX

Example 6 : Long-Term Notes
Payable

Sri Merinding Enterprise has purchased a machine
worth RM25,000 on 1 January 2012. Payment is 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 reporting period is by 31
December annually.

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

Solution

1) To record asset purchase

Jan 1 Dr Machine 25,000

Cr Bank 5,000
20,000
Notes Payable

2) To record interest expense
Dec 31 Dr Interest Expense 1,600

Cr Interest Payable 1,600

(20,000 x 8%)

Solution

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

Dec 31 Dr Notes Payable 20,000 28,000
Interest Expense 1,600
Interest Payable 6,400
Cr Bank

(interest payable= 1,600 x 4)

Mortgage

Loans used to buy houses or other
properties,

In mortgage agreements, you (the
borrower) give the lender (usually the
bank) the rights to the property until
you (the borrower) fully settles all
payments together with their benefits.

Mortgage

vIn short, when you use a mortgage to
buy a house, you actually get a loan
to buy the house.

vThis loan is secured by the same
house, your house is used as a
security for the loan.

Contoh 7 : Mortgage Notes
Payable

Warisan Nusantara Bhd issues a RM200,000, 12%, 10-
year mortgage on December 21, 2014 to obtain
needed financing for a new research laboratory. The
monthly installment is RM2,057 (including annual
interest 12%).

Instruction:
1) Prepare Mortgage Installment Payment Schedule
for the first four monthly installment (round up the
answer to nearest Ringgit).

2) Prepare entry to record the fourth installment
payment (principal & interest expense)
.

Solution: Mortgage Installment Payment
Schedule

Monthly Monthly Interest Reduction of Principle
Expense (B) Principal Balance
Interest Period Payment (A) (A – B)

Original 200,000
Balance

1 2,057 2,000 57 199,943

2 2,057 1,999 58 199,885
3 2,057 1,999 58 199,827

4 2,057 1,998 59 199,768

(B) = Principle balance x 12% x 1/12

Solution : Journal Entry

qTo record the fourth installment payment
(principal & interest expense)

Dr Interest Expense 1,998
Mortgage Payable 59
Cr Bank
2,057

Bonds Payable

v A form of interest-bearing notes payable
issued by government or corporation which
is financially stable and strong.

vThe issuer is going to pay face value and
interest (based on contractual interest rate
to investor at the maturity date).

Journal Entries

qTo record issuance of bonds at face value

Dr Bank XX

Cr Bonds Payable XX

Example 7 : 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.
.

Example 7 : Bonds Issuance

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

Solution : Journal Entries

qBonds Issuance

May 1 Dr Bank 20,000,000

Cr Bonds Payable AA, 6% 20,000,000

(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)

Solution : 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

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

q Journal Entry : XX
XX
Dr Interest Expense
Cr Interest Payable

Example 7 : To record interest
payment

Based on Example 6, Warisan Nusantara
Bhd pay interest twice per year to investors.

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

Solution:

qInterest payment Bond AA for 6 months (2012)

Oct 31 Dr Interest Expense 600,000 600,000

Cr Bank
(20,000,000 x 6% x 6/12)

qInterest payment Bond BB for 6 months (2012)

Dec 31 Dr Interest Expense 200,000 200,000
Cr Bank

(5,000,000 x 8% x 6/12)

Bond Redemptions

qIssuing corporation retires bonds by buying
them back (redeem)

qRedemption can be done at maturity or
before maturity for Callable Bonds.

qJournal Entry : XX
XX
Dr Bonds Payable
Cr Bank

Example 8 : Bond Redemptions

Based on Example 6, Warisan Nusantara
Bhd. would like to redeem Bonds AA with
cash at maturity.

Instruction:
Prepare journal entry to record this
transaction.

Solution

q Journal entry at maturity

2017

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

Cr Bank 20,000,000

(To record redemption of bonds at maturity)