AA015 - CHAPTER 10

ACCOUNTING FOR LIABILITIES AA015
CHAPTER 10

financial accounting
aa015

CHAPTER 10

ACCOUNTING UNIT
KELANTAN MATRICULATION COLLEGE

ACCOUNTING FOR LIABILITIES AA015
CHAPTER 10

10.1 Definition of Liabilities

• Outsider claims against assets.
• Existing obligations and debts that arise due to past transactions.
• Paying off liabilities would probably involve the outflow of economic

resources from the organisation.

Types of Liabilities

A. Current liabilities - Debts that company expects to be paid out of
current assets within one year or the operating cycle, whichever is
longer.

B. Non-current liabilities - Debts that company expects to pay after one
year or the operating cycle.

10.2 Classification of Current Liabilities

Current liabilities

Ø Certain amount
Ø Estimated amount

a) Current Liabilities of Certain Amount characteristics
• The amount and the maturity of liability can be determined
accurately.
• The chance of the liability to be incurred is very likely.

i. Accounts Payable
o Amounts owed to vendors (suppliers) for goods or
services purchased on credit terms.
o Journal entry:
Dr Purchase Account XX
Cr Accounts Payable XX

Example 1
Purchased RM15,000 goods on credit terms from Syarikat Indah
on 16 February 2011.

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Solution :

Feb 16 Dr Purchase Account 15,000

Cr Accounts Payable 15,000

ii. Short-Term Notes Payable

o Written promissory note (agreement) signed by the

company.

o Payable within the year.

o Company recognizes liability to repay principal amount

borrowed and interest on specific date in the future to

the bearer.

o Frequently issued to meet short-term financing needs.

o 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
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
a) To record cash received resulting from the issuance of the

note.
b) To record the payment of the note and interest on the maturity

date.

Solution:

a) To record the issuance of the note to First National Bank

Jan 1 Dr Cash / Bank 20,000

Cr Notes Payable 20,000

ACCOUNTING FOR LIABILITIES AA015
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b) 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

iii. Dividend Payable

o Dividend payable are dividends that a company's board

of directors has declared to be payable to its

shareholders.

o Until such time as the company actually pays the

shareholders, the cash amount of the dividend is

recorded within a dividends payable account as a

current liability.

o Journal entry:

- To record dividend payable (on declaration date}

Dr Dividend XX

Cr Dividend payable XX

- To record payment of dividend (on payment date)

Dr Dividend payable XX

Cr Bank XX

iv. Accrued Expenses

o Expenses incurred but not yet paid or recorded at the

statement date (the end of accounting period).

o Examples:

- Accrued salaries

- Accrued interest

- Accrued taxes

- Accrued rent

o 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

Cr Cash / Bank XX

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Example 3
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

Jan 15 Dr Accrued Rent 1,500

Cr Cash / Bank 1,500

v. Unearned Revenue

o Performance obligation (liability) is incurred when cash

has been received in advance of providing a product or

a service.

o The amount received in advance will be categorised as

liability until the product or service has been delivered to

customer (revenue has been earned).

o Examples:

- Unearned ticket revenue

- Unearned rent revenue

o 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

Cr Service Revenue XX

ACCOUNTING FOR LIABILITIES AA015
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Example 4
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

b) Current Liabilities of Estimated Amount characteristics
• Liability that exists but not know the exact amount.
• The amount of liability is therefore estimated according to
prior experience with the product.

i. Warranty
o 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).

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

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

o This is because the expense occurs when the sale is
made, not when the warranty claim is paid (matching

concept).

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o Journal entry:

- To record sales on credit

Dr Accounts Receivable XX

Cr Sales XX

- To accrue warranty expense

Dr Warranty Expense XX

Cr Warranty Liability XX

- 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
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

Solution: 250,000 250,000
a) (i)To record sales on credit 7,500 7,500

Dr Cash / Accounts Receivable
Cr Sales

(ii)To accrue warranty expense
Dr Warranty Expense
Cr Warranty Liability

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b) (i) To repair defective products sold under warranty

Dr Warranty Liability 7,000

Cr Cash 7,000

(ii)To replace defective products sold under warranty

Dr Warranty Liability 7,000

Cr Inventory 7,000

10.3 Non-current 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.

i. Long-Term Notes Payable

o Written promissory note (agreement) signed by the

company.

o Payable more than a year.

o Company recognizes liability to repay principal amount

borrowed and interest on specific date in the future to

the bearer.

o Frequently issued to purchase fixed assets.

o Journal entry:

- To record asset purchase

Dr Fixed Asset XX

Cr Notes Payable XX

- To record interest expense XX
Dr Interest Expense

Cr Interest Payable XX

- 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

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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
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:

a) To record the payment of accrued expenses

Jan 1 Dr Machine 25,000

Cr Bank 5,000

Notes Payable 20,000

b) To record the payment of accrued expenses

Dec 31 Dr Interest Expense 1,600

Cr Interest Payable 1,600

(20,000 x 8%)

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

Dec 31 Dr Notes Payable 20,000

Interest Expense 1,600

Interest Payable 6,400

Cr Bank 28,000

(interest payable= 1,600 x 4)

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ii. Bonds Payable

o A form of interest-bearing notes payable issued by

government or corporation which is financially stable

and strong.

o The issuer is going to pay face value and interest (based

on contractual interest rate to investor at the maturity

date.

o Journal entry:

- To record issuance of bonds at face value

Dr Bank XX

Cr Bonds Payable XX

- To record interest payment. Bond interest

payment will be paid to investor periodically (6

months or 1 year period).

Dr Interest Expense XX

Cr Interest Payable/Bank XX

- To record bond redemptions

Dr Bonds Payable XX

Cr Bank XX

- To record bond payable at maturity

Dr Bonds Payable XX

Cr Bank XX

Example 7
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.

ACCOUNTING FOR LIABILITIES AA015
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Solution:

a) Bonds issuance

i. May 1 Dr Bank 20,000,000

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

(To record sale of bonds AA at face value)

ii. Jul 1 Dr Bank 5,000,000

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

(To record sale of bonds BB at face value)

b) Statement of Financial Position
Warisan Nusantara Bhd

Statement of Financial Position
As at 31 December 2012

Non-current Liabilities: RM
Bonds Payable, AA 6% 20,000,000
Bonds Payable, BB 8%
5,000,000

Example 8
Based on Example 7, 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: 600,000
a) Interest payment Bond AA for 6 months (2012) 200,000

Oct 31 Dr Interest Expense 600,000
Cr Bank

(20,000,000 x 6% x 6/12)
b) Interest payment Bond BB for 6 months (2012)

Dec 31 Dr Interest Expense 200,000
Cr Bank

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

ACCOUNTING FOR LIABILITIES AA015
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Example 9
Based on Example 7, Warisan Nusantara Bhd. would like to redeem
Bonds AA with cash at maturity.

Instruction:
Prepare journal entry to record this transaction.

Solution:

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)

iii. Mortgage Payable
o The long-term financing used to purchase property.
o The property itself serves as collateral for the mortgage
until it is paid off.

o A mortgage usually requires equal payments,
consisting of principal and interest, throughout its term.

o The early payments consist of more interest than
principal.

o Over the life of the mortgage, the portion of each
payment that represents principal increases and the

interest portion decreases.

o Schedule use for calculation

Monthly Interest Reduction Principle
Payment Balance
Expenses Of
(A)
(B) Principal
-
(A – B)

Original --
balance

1
2
3

4

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o Journal entry:

- To record the installment payment (principal &

interest expense).

Dr Interest Expense XX

Mortgage Payable XX

Cr Bank XX

Example 10
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:
a) Prepare Mortgage installment payment schedule for the first four
monthly installment (round up the answer to nearest Ringgit).
b) Prepare entry to record the fourth installment payment (principal &
interest expense)

Solution:
a)

Original Monthly Interest Reduction Principle
balance Payment Expenses Of Balance

1 (A) (B) Principal 200,000
2 (A – B)
3 - - 199,943
- 199,885
4 2,057 199,827
2,057 2,000 57 199,768
2,057 1,999 58
2,057 1,999 58
1,998 59

b) To record the fourth installment payment (principal & interest

expense)

Dr Interest Expense 1,998

Mortgage Payable 59

Cr Bank 2,057

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10.4 Financial Statement Presentation of Liabilities

Non-current Liabilities RM RM
Long-Term Notes Payable XX
Mortgage Payable XX XXX
Bonds Payable 6% XX XXX
Bonds Payable 8% XX
Total non-current Liabilities

Current Liabilities RM RM
Account Payable XX
Notes Payable XX XXX
Warranty Liability XX XXX
Accrued Expenses XX
Unearned Revenues XX
Total Current Liabilities

Summary
• Liabilities are item in Statement of Financial Position.
• Formed by current liabilities and non-current liabilities.
• Current liabilities would be paid off within a year.
• Non-current liabilities would to be paid off in more than a year.

ACCOUNTING FOR LIABILITIES AA015
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Exercises

Question 1

(a) (i) State one (1) current liabilities of defined characteristics, current liabilities
and non-current liabilities estimated.

(ii) Classify the following account as a liability or non-liability.

No. Account
1. Account payables
2. Revenue receivables
3. Prepaid Insurance
4. Notes payable
5. Accumulated depreciation – equipment
6. Drawings
7. Warranty / Guarantee

(b) On 1st April 2018, Perniagaan Ukhuwah makes a RM100,000 loan from the
Bank and signed an agreement with Bank Umaran with 10% note payable for
a period of 6 months.

(i) Prepare journal entries on 1st April 2018.

(ii) Prepare journal entries to record accrued interest on 30th June 2018 and
prepares half-year financial statements.

(iii) Prepare journal entries on the maturity date of 30th September 2018.

Question 2

On January 1st, 2015, Elite Sdn. Bhd. (ESB) had issued an 8% bond worth
RM300,000. The bonds will be matured on January 1st, 2020. Interest on the bonds
will be paid twice a year, on July 1st and January 1st. ESB Financial year ended 31st
December each year.

ACCOUNTING FOR LIABILITIES AA015
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Required:

(i) Prepare journal entries to record the bond issue on January 1st, 2015.
(ii) Prepare journal entries to record interest on July 1st, 2015.

(iii) Prepare journal entries on December 31st, 2015.

(iv) Show the Financial Statement (extract) as at December 31st, 2015.

Question 3

On January 1st, 2009, Xero Corporation makes loan of RM40,000 for a period of five
(5) years from the Regional Bank at an interest rate of 10% per annum and signed a
payable memorandum worth RM25,000 from Bank of United for a period of three (3)
years at an interest rate of 12% per annum. For both loans, interests are paid once a
year on each January 1st.

Required:

Prepare journal entries to record transactions on the following dates:

(i) January 1st, 2009 : Make a loan with United Bank and Regional Bank.

(ii) December 31st, 2009 : Record the interest expenses.

(iii) January 1st, 2010 : Payment of interests.

(iv) January 1st, 2012 : Payment of Notes Payable to United Bank.

Question 4
The following information is from Syarikat Teguh Jaya for the year 2018 and 2019.

2018
Mar 8 Make loans from HSBC amounting RM 30,000 for 60 days at an 8% interest

rate. A note has been signed.
May 6 Pay HSBC the amount borrowed on Mar 8th.
Nov 16 Make loans of Maybank and signed a Payable Notes amounting RM6,000

for 90 days with an interest rate of 6%.
Dec 31 do adjustments to interest payable.

2019
Feb 13 Pay Maybank the amount due on November 16th, 2018.

ACCOUNTING FOR LIABILITIES AA015
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Required:

Prepare the general journal entries to record the above transactions.
Question 5

(A) Rawang Sdn. Bhd. (RSB) is dealing with carpet business. The following
information are the business for the year ended 30 September 2017.

1. RSB had been indicted by the user tribunal for involvement in a breach of
contract. On August 4th, 2017, the tribunal found RSB negligence and
ordered to pay compensation to customers who demanded RM25,000.
Payment was made to the relevant customers on the same day.

2. TV6 station has planned to promote RSB services for 2 months beginning
July 1st, 2017. In return, RSB needs to set up the interior decoration of
office of TV6 station after the promotion is completed. The assignment is
expected to be completed in mid-October 2017.

3. RSB has assured in their contract that they will replace any affected
carpet, dirty and not cleaned carpet.

4. RSB had estimated of pay amounting RM250,000 to employees for the
coming financial year.

5. RSB signed a memorandum payable notes of RM40,000 to expire in two
years

6. In the past year, RSB has made losses due to vandalism in their own
storage places. Thus, the Board have estimated the losses which will be
incurred in 2018 financial year amounted to RM50,000.

Required:

(i) Do you agree that each of the above transactions are classified as current
liabilities by RSB. State your reasons.

(ii) Give four (4) features of liabilities.

(B) The following is business transactions in Perniagaan Sarikei (PS) for the year
ended December 31st, 2016.

1. PS had made loans on 1st April 2016 amounted to RM550,000 from
Berhad Bank at an interest rate of 6%.

ACCOUNTING FOR LIABILITIES AA015
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2. It had been the company's policy to create a budget for product
warranty of 3% of annual sales of merchandise. Annual sales in 2016
is RM350,000.

Required:

(i) Prepare the adjusting entries to record interest on loans at the end of 2016.
(Description omitted).

(ii) Prepare journal entries to record warranty expenses for the year 2016.
(Description omitted).

Question 6

On July 1st, 2013, Syukur Jaya Sdn Bhd (SJB) has issued a 5% bonds worth RM
300,000 for the next 10 years period. The Bond interest will be paid on the date of the
end of the period of 6 months and the first payment was made on December 31st,
2013.

On December 31st, 2012, Ufuk Jaya Bhd. (UJB) issued RM 400,000 10% bonds for
10-year period. The interest payments are made twice yearly on 30th June and 31st
December.

Required:

Based on the above situation, prepare journal entries to record:

a) The issue of Bonds.

b) The interest payments for the year 2013 for the SJB and UJB.

c) Redemption of bonds at maturity.

Question 7

On December 31, 2014, the liability position of Citra Klasik Sdn. Bhd. is as follows:

Accounts payable RM
202,500
Sales tax payable
Unearned service revenue 41,000
50,000

The followings are transactions involving the liability during the year 2015.

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Date Transactions
Jan 1
Issue 8% 5-year bonds payable amounted RM500,000. Interest payments
Feb 15 on the bonds due on 1st January each starting January 1st, 2016.
Mar 10
Sell inventories in cash of RM63,000 including 5% sales tax.
Oct 1
Provide RM35,000 services to customers who have made advance
Nov 6 payments.

Make a RM35,000 bank loan by issuing notes at an interest rate of 10%
and a maturity period of 5 months.

Make warranties budget by 20% to 750 units of goods sold. Warranty for
one year in the form of a free repair. Estimated repair costs RM55.00 per
unit.

Required:

(i) Prepare journal entries to record the transactions (description omitted).

(ii) Based on the above transactions, prepare the adjustment of journal entries on
December 31st, 2015 (description omitted).

Question 8

Indiana Jones Company had the following selected transactions.

Feb. Signs a $50,000, 6 months, 9% interest-bearing note payable to
1 Citibank and receives $50,000 in cash.

10 Cash register Sales total $43,200 which includes an 8 % sales tax.
28 The following adjustment data are related:-

1. Interest expense of $375 has been incurred on the note.
2. Some sales were made under warranty. Of the units sold under

warranty 350 are expected to become defective. Repair costs
are estimated to be $40 per unit.

Required:

a) Journalize the February transactions.

b) Journalize the adjusting entries at February 28.

ACCOUNTING FOR LIABILITIES AA015
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Question 9

Details of the account Alam Budiman Sdn Bhd (ABSD) shows the following non-
current liabilities:

Bank Total Interest Interest Date of Notes
Loan RM200,000 per payment issue /
obtained 10% of the loan
annum Once a year 1st January principal is repayable
on 31st 2018 every December 31st
8% on December since 2018
balance 1st April Repayment at maturity
2019 bonds date.
Bonds RM250,000 6% Twice a year
(5 years) on 31st March
and 30th
September

ABSD accounting year ended on each 30th June.

Required:

i) Prepare journal entries on the date of 30th September 2019, December 31st,
2019 and March 31st, 2020. (Omit the description)

ii) Prepare the extract of ABSD Statement of Financial Position (part of current
liabilities and non-current liabilities) as at June 30th, 2020.

Question 10

On January 1st, 2019, the business ledger book of Perniagaan IZ Rizky shows the

current liabilities as follows:

RM

Accounts Payable 44,600

Sales Tax Payable 6,600

Rental Revenue unearned 16,000

In January, the following transactions occurred: -

2013

Jan 1 Loan from CIMB’s amounting RM35,000 in the form of Notes
Payable, 6 months, 9%.

Jan 1 Borrowed from RHB of RM 20,000 in cash by issuing notes for four
months, 12%.

Jan 5 Sell goods and receive cash of RM 16,800 including sales tax of 5%.
The sales tax has not been paid.

ACCOUNTING FOR LIABILITIES AA015
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Jan 12 Serve the customers who have paid an advance rent of RM 10,000.
Jan 14 No service tax is charged.
Jan 20
Settled the previous year sales tax to the Customs department.
Jan 25
Sell a new product on credit totaling 600 units at a price of RM 55 per
unit. The sales tax for these new products is 5%. This new product
release is given a 1 year warranty.

Sell goods and receive cash amounting RM13,125 including sales
tax of 5%.

Required:

a) Record all transactions to the journals.

b) Prepare the adjusting entries on January 31st, 2019 to:
i) Notes Payable retained.
ii) The estimated warrant liability on the assumption that 8% of sales of
new products will be returned to be replaced with new items.

c) Record general journal on the current liabilities in the Statement of Financial
Position of Perniagaan IZ Rizky as at January 31st, 2019.