LectureNoteswk11_209 - THE UNIVERSITY OF NEW SOUTH WALES...

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Unformatted text preview: THE UNIVERSITY OF NEW SOUTH WALES School of Accounting ACCT 1501: Accounting and Financial Management 1A Weeks 11 Accounting forLiabilitics Student Handout Lecturer: Trish Strong School of Accounting UNSW QUAD 3067 Ph: 93 85 665 7 t.strong@unsw.edu.au Course website: http;//www.eleamin,g.unsw.edu.auf Table of Contents Sections 1. Introduction to Weeks 11 Lectures 2. Learning Outcomes for Weeks 11 3. Required Readings for Weeks 1 1 4. Tutorial questions — Week 12 4.1 Preparation questions 4.2 Tutorial questions Learning checklist for Weeks 11 Supplemental Readings — Weeks 11 Lecture slides Week 11 — Liabilities Lecture 11 — Liabilities worksheet 9°39.“ 1. Introduction For the last two weeks we have been discussing the investment side of the balance sheet. Now our attention turns towards discussing the “financing” side of the balance sheet. We begin by focusing our understanding on what is a liability; how a provision differs from other liabilities; what we mean by “contingent liability”; the financial statement presentation of liabilities; and how to prepare accounting entries for current liabilities including accounts payable, short-term accruals, employee deductions and notes payable. We will not discuss the concept of GST. Given that accounting for GST is pretty straightforward, we encourage you to study this topic independently. GST will not be examinable. However, if you plan to pursue a career in Australia or in any country that has a similar type of value added tax, it would be prudent to understand the discussion in the textbook. After discussing current liabilities, we will focus on accounting for long-term debt, in particular, accounting for non-current interest bearing liabilities. This discussiori leads into our study of another form of financing called “equity”, you should appreciate that debt and equity are at either end of a continuum of financial instruments. Sometimes financial instruments exhibit both debt and equity like qualities and that some financing arrangements do not appear in the balance sheet at all! In our study of equity financing, we discuss the option of using equity as a source of financing. Shareholders are a key source of initial finance for a company. While traditionally regarded as the owners of a company’s assets, contemporary thinking suggests that the shareholder exchanges their investment in a company for a right to the residual cash flows of the firm. In contrast to finance theory, accounting for owners’ equity concerns itself largely with recording the initial investment in a company and its’ cumulative performance since formation. Session 2, 2009 AFMlA 2 2. Learning Outcomes for Weeks 11 At the end of this topic, you should be able to: Define a liability and outline the essential characteristics of liabilities Explain the basic measurement principles for liabilities Outline the financial statement presentation for liabilities Prepare accounting entries for current liabilities including accounts payable, short—term accruals, notes payable and employee deductions Explain the different types of long-term debt Account for the issue of debentures Explain how a provision differs from other types of liabilities and when they are recognised Identify and explain the purposes of contingent liabilities Explain the financial statement ratios relevant to the liability sections of the financial statements 3. Required Readings for Weeks 11 Required reading for Week 1 1 Trotman & Gibbins, 4rd Edition 0 Chapter 10, pages 455—474 3 Appendix to Chapter 10, pages 491-494 0 Chapter 14, pages 645-655 BUT only read sections on liquidity ratios and financial structure ratios. Supplemental reading for Week 12 - Gittins, Ross. Time takesrits toll on value of HECS discount. Sydney Morning Herald. 13-14 March 2004. Other references used Hoggett, 1., L. Edwards '& J. Medilin. 2006. Accounting. Melton ALD: John Wiley & Sons Australia Ltd Carlon, S., Mladenovic, R., Loftus, J., Palm ., Kimmel P., Kieso, D.E., & Weygandt, J .J . 2009, Accounting Building Business Skills. 3rd Edition Milton (211): John Wiley & Sons Australia Ltd. Session 2, 2009 AFMlA 4. Tutorial Questions — Week 12 4.1 Preparation Questions Students should complete ALL questions before the tutorial TG Discussion Question 10.4 and DQ 10.8 TG Problems 10.4 TG Problems 109 TG Problems 10.10 TG Problems 10.29 TG Case 10A all parts 4.3 Tutorial Questions Students should attempt ALL questions before the tutorial 5. TG Problem 10.13 TG Problems 10.25 TG Problems 10.30 TG CaselOB Learnin checklist for Weeks 11 Have you: )> Read the required readings from Trotman & Gibbins; Completed ALL the tutorial preparation questions; Completed the tutorial questions; and Clarified any problem you had with the text or tutorial problems? Reviewed each learning outcome and can honestly state that you have attained each one? Can you: Session 2, 2009 Define a liability and outline the essential characteristics of liabilities? Explain the basic measurement principles for liabilities? Outline the financial statement presentation for liabilities? Prepare accounting entries for current liabilities including accounts payable, short-term accruals, and notes payable? Account for the issue of debentures? Account for the payment of interest (if debentures? Explain how a provision differs from other types of liabilities and when they are recognised? Identify and explain the purposes of contingent liabilities? Explain the financial statement ratios relevant to the liability sections of the financial statements? AFMlA 6. Supplemental Readings for Weeks 11 Supplemental Readings for Week 11: Time Takes Its Toll On Value Of HECS Discount Ross Gittins . 13 March 2004 The Sydney Morning Herald © 2004 Copyright John Fairfax Holdings Limited. www.5mh.com.au o This is the time of year when a 'lot of uni students and their parents demonstrate their ignorance of a key concept in economics and business the "time value of money". Actually, when it's used in business and finance to evaluate investment proposals as it is every day it's more commonly referred to as "discounted cash flow" analysis, which yields a bottom line called the NPV net present value. If you've ever come across these terms and been puzzled by them, keep reading. But why would uni students and their parents benefit‘from knowing about such arcane stuff? Because it's the key to jumping the-right way when you decide whether to pay your HECS (higher education contribution scheme) fees in advance an get the 25 per cent upfront discount or let them ride and have the taxman take the repayments out of your pay after you graduate and get a job. A lot of people take one look at that whopping 25 per cent discount and conclude it's a no-brainer. If you had the money, you'd be a mug not to take advantage of the discount. But get this: it's not at all obvious that the 25 per cent discount is a good deal, and for most students it won't be. They'll end up richer if they let their HECS debt pile up. How could that possibly be? Because o'f the "time value of money". Economists believe that, when it comes to paying or receiving money, it's not just how much that matters, but also when it happens. The basic proposition is that a dollar today is worth more than a dollar tomorrow (or in a year's time). Why? Not just because of inflation. The proosition would still be true if there were no inflation. No, the real reason is because humans are impatient animals. .If‘we had the dollar today, we could spend it today, which would be better than having to wait. (Or we could put the dollar in the bank and earn interest.) IfI could quantify your degree of impatience, I could express it as your personal "discount rate". And if, for example, your discount rate was .6 per cent a year, this would mean that the promise of receiving a dollar in a year's time would be worth 94.3c to you today. That 94.3c is said to be the "present value“ of a dollar in a year‘s time, at a discount rate of 6 per cent. Note that this calculation works both ways. If you're going to be paid a dollar in a year's time, its value to you today is only 94.3c. But if you have to pay the dollar in a year's time, its cost to you today is only 94.3c. If today you were to put that 94.3c into a bank account paying 6 per cent interest, in a year's time you'd have the dollar needed to pay your debt. (So discounting is compound interest in reverse.) Most business investments take the form of having to she'll out a lot of money now in the hope of getting back a small stream of money over many years into the future. Those distant-future dollars aren't worth nearly as much as the .one‘s you'll have to cough up right now. So, to put all the dollars in the sum on a comparable basis, the distant dollars need to be discounted before they're set against the present dollars to give the investment project's "net present value". Now, if you're .a financial type who is highly conscious of the need to discount future events, you view the HECS arrangement as remarkably generous. Students owe the Government money, but it allows them to delay repaying until they can afford to. Session 2, 2009 AFMIA 5 Normally, a bank would charge you interest on such a deal, but all the Government does is adjust the amount of your HECS debt in line with inflation. In other words, it charges you a real interest rate of zero. What? Someone's offering to lend you money at a zero real interest rate? A "rational" person would need a lot of persuading to pay off such a loan before they were obliged to. The only thing that could induce them to do so would be a really huge discount for repaying upfront. So the key question is: is 25 percent big engugh to outweigh the attraction of a loan with no real interest rate? Let's say the amount of HECS involved this year is $4000. With a 25 per cent discount you'd make an upfront payment of $3000. You compare that figure with the present value of all the repayments you'd have to make over the years after you graduate. If that present value is greater than $3000, make the upfront payment and the difference (not the $1000 discount) is how much you save. But if the present value is less than $3000, you'd be a mug to pay upfront (assuming you've got the money). At a discount of only 25 per cent, it's just not worth your while. That's the theory of it. In practice, however, working out the present value of the stream of future debt repayments is a job for an expert with a computer program. And you have to guess how much income you'll be earning (because that's how the size of your repayments is determined). Don't forget, however, that the HECS rules are about to change. Students who've started their courses before next year won't be affected by the 25 per cent increase in fees (a fact the vociferous opponents of the changes haven't bothered to stress). But from July this year, the income threshold at which you have to start making repayments jumps from $25,348 a year to $35,000 (and goes to $36,184 from Juiy next year). And from January next year, the upfront discount drops from 25 per cent to 20 per cent. It's obvious that this cut in the upfront discount makes paying upfront less attractive. But, for many students, so too does the jump in the repayment threshold. Why? Because it tends to push repayments further off into the future, meaning they‘re more heavily discounted to reduce them to their present value. And the lower the present value, the less the likelihood that paying upfront will yield genuine savings. From what I can gather, it's only those students whose earnings in their first 10 or 15 years as a graduate are significantly above the average for graduates who are likely to be better off paying upfront. Session 2, 2009 AFMIA 6 9/22/2009 {1) Understand “whens a iiagiiitf'. andwhen to recognize it. :1:- Explain the nature of grgvisions and sentiment liabilities G) Explain the classification of liabilities and distinguishrbetween. currentand nan-current liabilities _ ' Session 2, 2009 Liabilities (IEPrepare accounting entries for int re -b in current liabilities I (5 independent study {understand basic present value analysis - 6’) Prepare accounting entries for i§§uance cf ngn-curren; gggzt (=13 Self study - be familiar with ratios relevant‘for'liabilities for deeision-rnaking purposes Lecturer. Trish Strong Quad 3967 hstmng@unsw.edLI-au eSnapshot of the cempan'y —.. : 1. '. ' i ' ece‘bt (Le; liabilities!) resources available and how they are sourced ' @1393?” CCBSWCEVS Obligations, 9-9- WV??? ' ' ' ' ' ' ' ' ' ' ' " '. ' ' lean. debentures, unsecured notes, leases eEgm‘ty gagital . ‘ @the residual interest in the assets of the-entity Resources Sou—r586 after deducting all its liabilities, eg. sidinary shares. preferred shares ASSEIS _ LIABILITIES @Hybrid Instruments EQmTy - @Financing forms that exhibit both 'debt and equity characteristics, e.g. convertible notes. and convertible preference shares Even. . .r G) a retail investment organization specializing in the ownership, management and development of retait Shopping centers. G) Major clients include Coles. Target. David Jones, etc. (9 $3.9 billion liabilities resulted in a crisis about the company's ‘going concern’ in December 2007 A liability is a present obligation of the entity arising ftom past events, the settlement of which is expected to result in an outflow frdm the entity of resources embddyihg" ” economic benefits. (Framework. AASB, Para. 49(b)) 9/22/2009 Present obligations The enti has no realistic alternative but to make the sacri ice of economic benefits to settle the obligation - - - - Examples: 9) Legal contract, loan contract GJAn entity makes a public announcement to pay dividends of $10m. (DE-tcamples. .. @Actiuisition of goods and Sen/ices give n'se' to trade payables (unless paid for in advance or on delivery) - (DA bank‘loan results in an obligation-to repay the loan. IThere must be an obligation that has arisen from a past event. - 1.Probablerthat economic benefits will flotv from the entity, " and 2. The liability has a cost or value that can be-measured with reliability if these criteria are not met the liabilitiesrmay be recorded in notes to the accounts as contingent liabilities. more on this later... My is recognition important”??? 9/22/2009 313 emen o apresen ob tgatron.. @ayment of cash ®transforof other assets @provision of services 'GDreplaoer-nent of that obligation with another obligation Goonversion of the obligation to equity. Provisions: , @Liabilities wan "rt. in. limlr'i j :9r1_.__..arr¢rnt_. ' . ' . . @Ansesfrom a legal or constructive obligation, 6.9. warranties-orenvirOnmentaI-damage- - - @Mato‘hes expense with benefits. @Reported separately from payables and accruals (Dif no greet-m1 obligation then noprovision. e.g. no provision for future repairs 8; maintenance @Measurement is "best" estimate at reporting date of cash flows required to settle provisiorl. G3--Contmgent-llabllltles ARE NOT recognized liabilities on the balance sheet! @They are a possible-obligation whose recognition depends on future events; or @A provision not recognized because it does not meet the recognition criteria: 6) ‘Pitovis.ions.’..ARE.‘liabilitiesthat'are.'.un.ceita'in in timihgroramdun-t: .. .. VERSUS ©“Contingent liabilities” ARE NOT liabilities as they depend on future events 95 they are provisions that do not meet the recognition criteria 9/22/2009 oLiability arising Outfofl'itigation in Progress. . . eATO review of past period tax- - deductions Disclosure of “contingent liabilities” a} Disclosure in notes to the financial statements is required if the amount is material, unless the possibility of an outflow of economic resources is remote Q-Manufacturer-g es warranties attirne-of-saie for its product - i . .. .. ... ... . G) Under contract's terms, manufacturer will “make good” any manufacturin‘g'defects' within 3 years 7 from the date of safe @Based on past experience, it is probable that there will be some claims under the warranties @Assume obligation can be reliably measured Would this be a PROVISION, CONTINGEN LIABILITY OR NOTHING? 9/22/2009 P .9 .past event? PaSt event (sale prmdmt Wifh a_ -, of thercosts of 5making- good’ under the warranty warranty) reSuIted "1 Iegal Obl'gat'cm - products- sold before the balance-date (Le. and of ' financial period} ®C°"9'I~.‘SI°‘T.. . . . EBA Erovigio'n is.-recognised for the best estimate t31>Likeliheod that there will be an outflow of economic resources? Probable for warranties as a whole (3.3 10 peepte die ataweddlng from food paleonan from . . . .. . . . .. .. . . . . products sold by a firm - .- @Present obligation as‘a :re5ultof. apast event? - - - - - - - On-the basis-of the evidence-available, no ' 6;: Legal proceedings have started butfirm disputes-its liability - - obligation as a result of. past events. - G) Unto the date of authorisation of the balance sheet, firm's ‘ @Gonclusion lawyersradvise that it is probable that the firm gill got be r N o provisien {S .remgnised_ The matter is . found liable. . r. ‘ disclose as a contin ent liabili ifmaterial (a: Assume-obtlgatlon can be reliably measured unless t 9 pm- a my 0 any eu ow is regarded as remote. Is this a PROVISION, CONTINGENT LIABILITY OR NOTHING? 9/22/2009 _ . {Dllnl'p' , ssified as current or non current Q) Paga’bl’es: ' .. I'ZQMiaiiin'd-lfierence [dates to the timing Of'semement G) Goods/services receivedisupplied that have -- . .. __ -. . - beenzinvoicedi’fczrmally'agreed.withthesunplier, 5-95 Gender)? considerationsisbased 0" uncertainty e.g.amounts.owin'g'..for.'inventory ' ' ' ' ' ' 'or theamOUnt and timing'of' cash flows ' ' ' ' (2) Amounts owing for third party collections (e.g. (DAppropriate classification is critical so that users PAYE payable. GST payable) can assess entity's: @Liquidity @Solvency (3.) Other Creditors & Accruals . Q) .W. .. erfirbivigibhéifdfi............_ .. ' I .I .I .H. ' exchange"), trade bills ' ' (1.)- Deferred income tax Commercial bills payable (2) Provisions Bank loans and credit facilities q; Dividends Debentures (J) Employee entitlements Mortgages Q) Warranties Lease Liabilities 9/22l2009 Currentimbiilfiss __ __ __ __ _ mmmmrmmes . . . . bearing llabllitIeS' QGfl’OW-TnfiS . ' _" ' "" .:'...:. mmmm “mm - _ @Current Llabmtles fimislms , _ _ @Norespayable Von! current iifihilflies _ _ _ __ _ _ __ _ __ _ _ . _ @Bfmumnofesfiayame Nm-Qurrent imam ‘ awwmm , ‘ c3) Debgntureg mm? financial flahilifias . EDin of debenture grfifiaims ‘ . A EDDebentunes issued 'at par/discounb’prsmium l 1131' Tmsh6nlkuwehiiiah1ifiés V 7 7 N 7 _ @Ifmarket rates=oeupon ratesfihen issued at Par Tmnwmw , @lf market rates > coupon rates, than issued at Discount WW (Elf market rates < oeupon rates. than issued at Premium (discuss the terms in more details laler) - Record-borrower’s entry at matunty date to _ regard'payment @fprincipa! and interest: ' " @Tahiti Co. (borrower) issues a 90-day, 10% note for - - $5000. dated 1- August 2006 to F117 Ca. (creditor) for a $5000 overdue accoum. 03 Record from the bormwer's 9g rsg'ectfve, the entry for r-the issuance of the note: Aug.1 DR NP ~FijiCo.(L} $5300 CR Notes payabte (L) $5000 9/22/2009 . _ . . . . . fl ' J} Record borrower’s entry at maturity date _t_o 3313031143”? 3" a_t_d'gco(:”ted flora pagfé’ggo 90 . . . _ n ugus ,' arm “15 O. OITOWET issues a , .. . .' record payment of punctpai and Interest. day note to Ma'idive's Co. (creditor) in exchange for a yacht. . . . . . - - - -- - - Maldives Co. discounts the note-a_t-a-ra_te-_0f12_%. "As‘s'ume . Mauritius Co. year end is 30 Sept - 16d. 30 DR Notes payame' (L) $5000 Discount = 10,000 x 12%;: QDISSO =-300- - DR Interest expense (E) 125 Mauritius Co. records this entry at issuance date: CR 035“ (A) 5125 10 Aug Dr PPaE (A) $9 700 Dr 0150’: note payable 300 * 125 = 5,000 x 10% x 00/360 days 7 (this is a contra NC) Cr Notes payable (L) 10 000 Entry at year 'end, Sept; _ __ _ _ DR Interest Expense- -_ - ' Ema/m3!) Sept- Interest Expense -- ' " ' .. , , Discount en-the-Pe'yeble'ICOntra) .' 3' CR D'sct‘?" N° * (173 = 10,000 x 12% 2021360900035- - Entry at maturigz date, 8 Nov: Entry at maturity date' 3 "0": DR Note Payable Note Payable DR Interest Expense (5) DR Interest Expense (E) 127“ CR Cash (A) CR Cash (A) 10000 CR Discount on Note Payable (Contra) CR Disct on Note Payable (Contra) 127 “(300 — 173 = 127) 811]? @Oingationsexpeoted to-‘be' paid after on; year 9) Examples include: (a long-term borrowings such as unsecured notes, o mortgages, debentures, leases, Li) long-term provisions for employee entltlements Lu long-term payables and accruals @Focus in this course is on non-current interest bearing liabilities,‘in particular, accounting for gg'benturg r OWfitt'en promise to pay principal and specified ‘ interest rate at specified time. interest generally paid semiannually (6 monthly). ®Generaliy issued in denominations of $1000. called the nominal value, face value or pflnctgai ' @Speoified rate of interest called coupon rate, nominalr rate or stated rate. Stated as annual rate. @Maturiy dates vary. u5ually 1 to 30 years ®Secured by a fixed or floating charge or mortgage over tangible assets 9/22/2009 _ _ n " n-e t payabl . “GD-issued by companies and governments when they need LARGE amounts of money!_ 9mm: @Shareholder control is not affected: eg creditors @Earning per share may be higher; Greater ROE: @Tex saving-may result — interest payments tax deductible @Disadvantageg of clth financing; : G'ilnterest payments may result in-cash flow probiems ®Bankruptcy (default) risk. Debt is more flaky than equity. (Cretfitors pd 15*) GDDebenture’s price is the present value EV) _of'_its _ future cashfiow (FCF)t0 investors 7 ' t?) Use your scientific galwlamr to'find the price for ' a debenture with 1,000 face value, 10% coupon rate. annual payments. 5 years to maturity, market interest rate 3%. 9/22/2009 _ - arket interest'ratesffor. InVestnients'of ' similar-nsk. ' ' ' ' GJli market rates > coupon rates, than issued at Discount @Ii'ma'rket'r'ates < coupon rates, then issued at Premium @lf market rates = coupon rates, then issued at Par @Accounting for debenture need to consider _ _ _ _ @lnterest expense vs. principle repayment Price '5 h'gher than face valuehso the debenture '5 @lnterest expense = principle x market interest rate Issued at premium @Amortization of premium or discount ,JacksonLt ssu . 0" -year'_. . . um... I . . _ _ . _ _. . . . . . . _ . __ . . ebontureissuedatpanmarketrnterestrate-ooupon rate 3 coupon rate, $1_,00.0.debentures at face-value. .- _ - _ -- ' ~ ' ' .. . . . . .. .- . . interesmxenset100,000x10V/2=5,ooo tpald annually. Jackson Ltd has a-30 June ' ' ' .. P " a Y??? , Record entries through 39 June 2906' En'tryio record semiannual (Gmths) interest expense: Debenture issued at par: no prehrium or discount 30 June 2005 DR interest Expense (E) $5 000 CR Interest Payable (L) 35 000 (to accrue debenture interest) Entry to record the issue: 1Jan. DR Cash (A) 100,000 CR Debentures (L) 100,000 (to record issuance of debenture at face value) 10 Emu 10% - are dock L , . bondrwith face value of‘$1000. Coupons are paid annually. issuing grige is $27.90 given-market interest rate is 12%;- Discount #(1000 427.90) x 100 = 7210 Entry to record this issue: 1 {.1 1'06 DR Cash (A) DR Disct on Bebenture (Contra) CR Debonture-(L) 92.700 7,210 Date' Coupon wares: ’ -Discount ' Biscount' 'Pa'yment 39’9"” Arnonization Balance rpm- m =E‘s-C - 92.790 95.196 ‘ 95.619 93.214 100.000 100 000 ’ 9/22/2009 @We borrowed $927.90 for each. bond, but we Will have- to repay $1.000 at maturity (face value). - (DWe me to amortize thedis'c'oun and increase thg net value .9 f debenture we r the life of the gebentu EQ. @To do so, we need to differentiate interest expense and increase of debenture value at every coupon payment. (See example on the next slide) 7 0) interest expense = Principle at beginning of the year x market interestrate (lntExp = Principie*12%) @Princip‘ie increase = interest Exp. - Coupon payment. . 3012106 DR Interest Expense (E). 11,. 351' . ' CR "lnterest'Payable (L) - 10.000 ' "'Di'scton'Bebenture " ' (Contra) (accrual-of debenture inter. & amortization of debenture discount) 1.11.35 . Joumai Enrol-to record first coupon payment at Jan 1, 2007 01/0110? DR Jnterest Payable 10.000 CR Cash 10,000 (payment of interest on debenture) 1'1 9/22/2009 on 1'J'an. 2006, Ruddcck Ltd sells 100; 5-year, 10% coupon ' 'Q 1 JéhL'ZOOS. Rudoock Ltd sells 100, 5-year, 10%'cpupjojrj_r bond with face value of $1000. Coupons are paid annually. b _lh-_facf3 Vaiue-Of-$_1§}00. Coupons are Paid annually-z ' Issuing price is 1,079.85 given market interest is 3%. Issu'ngpnce ‘5 1'079-85 9'V9” market '"FereSt ‘5 8%- ' ' ' ' ' - {remember We worked this outearlierslide-noiSQj- - - - _ __ _ _ _ _ Premium =(1079.85—1.000)x 100 = 7.935 Premium = (1,079.85 — 1.000) x 100 = 7.985 Entry to record this issue: Entry ‘0 record “1‘5 '55“: 01/0006 DR Cash (A) 107,935 CR Debenture Premium 7,985 (Contra) CR Debenture (L) 100,000 $11!]. 01 [01106 -' - CDWé-borroWed 1 07985 for-each "bond-,- bat-we ' ..halte-to' repav.1.990._a.t.maturity: _ .- -- _ _ _ 7 row need to amortize'the gr mium, and decrease- Lr—n'ci .16: over 'lhé'lif¢.9_-l. it re- " 0To-do so. we need-to differentiate interest expense and decrease of principle at every coupon payment. @lnterest expense = Principle at beginning of the year x market interest rate @Principle decrease = Coupon payment - interest expense 12 9/2212009 Journa ntrya en 0 year 2006 _ ‘ Journal _n_try atend of-year 20.1. —repayment ofdebentore._ : 31-l-12lOl5 DR Interest Expense 8.639 _ - , - - - - - -- .- DR Debenture Premium 1.361 ' : 31112111 Dr interest Expense" ' ' 8,143' CR Interestpayable 10,000 1 . I- - ----'D'r Debentdre'Premi'um' " 17.051" 'Dr ebentute ' ' ' ' ' ' ' 100,000 “(to record accrual of debentnre interest and amortization of ‘ Cr ‘ 110,000 debenture premium) - (to resonzl payment eflnterest &*emortizatlon AND the Joumel Entry to record first coupon payment at Jan 1. 2007 _ repayment of debenture) 01/01/07 DR Interest Payable “10,000 CR Cash 10, 000 ‘(to record payment of interest on debenture) I9 9: r _ ‘ 9 01d; entgtzyartilgsits currentohli'gations? . used to the fouowmg queSt'on' Elworking Cagilal =-CA — CL Can anentity meet its o'blig ations-in 'thelo'n'g - term? . .. . "@Debt to eguity a) Quick'Ratio = (Cash + Mkt securities +-NetAlR1 7 = total iiabiiitiesltotal shareholders” equity CL ‘ @Debt to total assets ratio '= total liabilitiesltotal assets d}C§rrent.Retlo = CNCL These ratios provide a measure of an entity's ability to pay its shortterrn obligations & meet unexpected demands on its cash resouroes. ' (These ratios are used to analyse the ability of an entity to Current ratio; most commonly “55d measure 'of liquidity_ continue its activities in the long term, to satisfy its long lenn . . _ . . ‘ commitments and still have sufficient wot-king capital to operate QUICK ratio. excludes inventory & prepaid assets successfully) 13 9/22/2009 @The Australian Reporting Environment @Review of ACCT 1A @Information about final exam 14 LBCLUJ‘B ll WUI'KSIIBBL LlaUlllLlBS "" l [‘1511 DLI'UIlg Lecture 11 -— Liabilities worksheet What are the characteristics of a liability: [see slide 7] Note your answer here: What is the recognition criteria for a iiabiiity: (see slide 11) Note youranswer here: What is a provision; a centingent liability. Provide examples to illustrate your answer: {see slides 12 — 15} Provision: A contingent liability: _ Can you explain the difference between a normal liability, a provision and a ' contingent liability? 7 Note your answer here: LBCLUI'E ii WUI'KSIIBEL leUlllLlBS — 1 I'lSIl DLI'UIlg Record whether the following examples would be a PROVISION, CONTINGENT LIABiLITY 0R NOTHING? 11.1 Manufacturer gives warranties at time of sale for its products. Under contract’s terms, manufacturer will "make good” any manufacturing defects within 3 years from the date of sale. Based on past experience, it is |ore-liable that there will be some claims under the warranties. Assume obligation can be reliably measured 11.2 10 people die at a wedding from food poisoning from products sold by a firm. Legal proceedings have started but firm disputes its liability. Up to the date of authorisation of the balance sheet, firm’s lawyers advise that it is lgroimlble that the firm will not be found liable. Assume obligation can be reliably measured Record your answers here: (check slides 16 — 20 for your answers) Interest bearing liabilities - Practice questions issuance of an interest-bearing Note Payable (see slide 27 -— 29) Tahiti Co. (borrower) issues a 90-day, 10% note for $5000, dated 1 August 2006 to FUi Co. (creditor) for a $5000 overdue account. Required: 1. Record the issuane journal from the borrower’s perspective for the issuance of the Note: 2. Record the borrower’sjoumai at maturity date {include payment of principle and interest} Issuance Journal: 1 Aug 06 Maturity date Journal 20 Oct 06 LCCLUI'B 1.1. WUI'KSIIBBL leUlllth‘S - 1 [1511 DLI'UIlg W Example of Discounted Notes Payable question? On 10 August, Mauritius Co. (borrower) issues a $10,000, 90—day note to Maldives Co. (creditor) in exchange for a yacht. Maldives Co. discounts the note at a rate of 12%. Assume Mauritius Co. year end is 30 Sept. (Hint: do not forget the Discount on the Notes Payable See slides 30 ‘— 32 & textbook MSG—467) Required: 1. Calculate the discount amount. 2. Prepare the journals for Mauritius Co a. at the issuance date; b. Mauritius year end date and c. Maturity date of the note. ' Journal Entry Be sure you understand some of the following terms: A-t Par; Discount rate; Premium rate; Face value; coupon .rate; market rate (see slides 38 — 40) Note your answers here: LBCLUI'B J.J_ WUI'KSIIBBL LlaUlllLlBS — l ['1511 DLI'UIlg Dehenture practice questions On 1 Jan. 2006, Jackson Ltd issues 100, 5-year, 10°o coupon rate, $1,000 debentures at face value. Interest paid annually. Jackson Ltd year end is June 30. Record all journal entries to 30 June 2006. The Debenture issued at par, therefore there is no premium or discount Show the journal to record? Journal 1 Jan 2006 A debenture issued at discount Cost 540,000 depreciation rate 25% Use the units of production method to calculate the deprecation for each year? Machine cost 25,000 produces 10,000 over its 4 yr useful life: 3500 yr 1; 4000 yr 2; 1500 yr 3; 8: 1,000 yr 4. Draw a depreciation schedule to show the deprecation charged each year? ...
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LectureNoteswk11_209 - THE UNIVERSITY OF NEW SOUTH WALES...

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