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1. Current liabilities are obligations that must be paid within one year, while non-current liabilities are obligations due after one year.
2. Examples of common liabilities and their classifications are provided, such as long-term bank loans being non-current, while bank overdrafts and trade payables are current.
3. Some liabilities can be split into their current and non-current portions based on their due dates, like a two-year bank loan that is split equally between current and non-current.
1. Current liabilities are obligations that must be paid within one year, while non-current liabilities are obligations due after one year.
2. Examples of common liabilities and their classifications are provided, such as long-term bank loans being non-current, while bank overdrafts and trade payables are current.
3. Some liabilities can be split into their current and non-current portions based on their due dates, like a two-year bank loan that is split equally between current and non-current.
1. Current liabilities are obligations that must be paid within one year, while non-current liabilities are obligations due after one year.
2. Examples of common liabilities and their classifications are provided, such as long-term bank loans being non-current, while bank overdrafts and trade payables are current.
3. Some liabilities can be split into their current and non-current portions based on their due dates, like a two-year bank loan that is split equally between current and non-current.
According to IASB Frmework liability is defined as follows:
A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits (IASB Framework). The classification of Liabilities divided into two, Current liabilities and Non- current liabilities. The distinction is made on the basis of time period within which the liability is expected to be settled by the entity. Current Liability is one which the entity expects to pay off within one year from the reporting date. Non-Current Liability is one which the entity expects to settle after one year from the reporting date. Also, non current liabilities terms according Businessdictionary.com is Obligation that is not to required to be satisfied within 12 months of the balance sheet date. Also, Current liability The requirement to classify currently maturing debt as a current liability includes debt that is callable, or due on demand, by the creditor in the upcoming year even if the debt is not expected to be called. Following are examples the common types of liabilities along with their usual classifications. Liability Classification Long Term Bank Loan Non-current Bank Overdraft current Short Term Bank Loan current Trade Payables current Debenture Non-current Tax Payble Current It may be appropriate to break up a single liability into their current and non current portions. For instance, a bank loan spanning two years and carrying 2 equal installments payable at the end of each year would be classified half as current and half as non-current liability at the inception of loan. In concept, liabilities should be reported at their present values; that is, the valuation amount is the present value of all future cash payments resulting from the debt, usually principal and/or interest payments.In this case, the amount would be determined as the present value of $100,000, discounted for three months at an appropriate rate of interest for a debt of this type. This is proper because of the time value of money. In practice, liabilities ordinarily are reported at their maturity amounts if payable within one year because the relatively short time period makes the interest or time value component immaterial. Accounting Principles Board Opinion No 21, "Interest on Receivables and Payables," specifically exempts from present value valuation all liabilities arising in connection with suppliers in the normal course of business and due within a year. When interest is "discounted" from the face amount of a note at the time it is written, it usually is referred to as a "noninterest-bearing" note. They do, of course entail interest, but the interest is deducted (or discounted) from the face amount to determine the cash proceeds made available to the borrower at the outset and included in the amount paid at maturity. In fact, the effective interest rate is higher than the stated discount rate because the discount rate is applied to the face value, but the cash borrowed is less than the face value. This is an example of an accrued expense an expense incurred during the current period, but not yet paid. The expense and related liability should be recorded as follows: Salaries expense 5,000 Salaries payable 5,000 This achieves a proper matching of this expense with the revenues it helps generate. 3 Key Issues in Current liabilities: 1. Effective interest method 2. Types of non-current liabilities 3. Understanding the financials Explanation: 2 implications: 1) the net book value (NBV) of the liability = present value of the future cash flows discounted at the effective (market required rate) rate in effect at the liability issuance [i.e., any subsequent changes in interest rates are ignored] 2) interest expense = 3) beginning of period NBV 4) x 5) the effective market rate 4)
EXAMPLE We will show the accounting for each of the 5 examples, by using an amortization schedule (amortization table same as JE). In each case, the liability has a 5 year life, a 10% effective market rate, and a $1000 present value at inception. Only the pattern of (and total) future cash outflows differs. Key: effective interest method ANSWER
amount (par) principal liability coupons cash annual rate coupon ZERO COUPOUN BOUND The inception j.e. is: DR Cash 1,000 CR Liability 1,000 The periodic j.e.s are: Period Beg. Liab. Interest Expense - DR Liability - CR Cash - CR EndLiab 1 1,000 100 100 0 1,100 2 1,100 110 110 0 1,210 3 1,210 121 121 0 1,331 4 1,331 133 133 0 1,464 5 1,464 146 146 0 1,610 End 1,610 0 1610 DR 1610 0 Total cash outflows = 1610 (note: 1610 = 1000 x 1.10 5 )
DISCOUNT BOND (5% COUPONS=$50) The inception j.e. is: DR Cash 1,000 CR Liability 1,000 Period Beg. Liab. Interest Expense - DR Liability - CR Cash - CR EndLiab 1 1,000 100 50 50 1,050 2 1,050 105 55 50 1,105 3 1,105 110 60 50 1,165 4 1,165 117 67 50 1,232 5 1,232 123 73 50 1,305 End 1,305 0 1305 1305 0 Total cash outflows = (5 x 50) + 1305 = 1555 PV of coupons = 50 x 3.791(5 yr,10% annuity factor)=190 PV of principal = 810(810x1.10 5 = 1305)
PAR BOND The inception j.e. is: DR Cash 1,000 CR Liability 1,000 Period Beg. Liab. Interest Expense - DR Liability - CR Cash - CR EndLiab 1 1,000 100 0 100 1,000 2 1,000 100 0 100 1,000 3 1,000 100 0 100 1,000 4 1,000 100 0 100 1,000 5 1,000 100 0 100 1,000 End 1,000 100 1000 DR 1000 CR 0 Total cash outflows = (5 x 100) + 1000 = 1500 PV of coupons=100 x 3.791 = 379; PV of principal = 621 (621 x 1.10 5 = 1000)
PREMIUM BOND (15% COUPONS = $150)
The inception j.e. is: DR Cash 1,000 CR Liability 1,000 Period Beg. Liab. Interest Expense - DR Liability - DR Cash - DR EndLiab 1 1,000 100 50 150 950 2 950 95 55 150 895 3 895 90 60 150 835 4 835 84 66 150 769 5 769 77 73 150 696 End 696 0 696 696 0
Total cash outflows = (5 x 150) + 696 = 1446 PV of coupons = 150 x 3.791 = 569; PV of principal = 431 (4311 x 1.10 5 = 696)