Define liabilities, apply the recognition criteria, and distinguish between current and non-current liabilities;
What is the definition of a liability?
A present obligation to transfer an economic resource due to past events.
What is a provision?
A liability with uncertain timing or amount.
What is the percentage of GST paid on goods and services in Australia
10%
Name three forms of employee leave
Are warranties considered liabilities?
Yes, warranties meet the definition of liabilities because they involve a present obligation to the customer, require a transfer of economic resources, and result from past transactions, such as the sale of goods.
What is the difference between current and non-current liabilities?
Current liabilities are due within one year, non-current liabilities are due after one year.
Are contingent liabilities recorded in the balance sheet?
No
What are deductions taken for gross pay classified as for employers until they are remitted
Liabilities
XYZ Ltd has a total payroll of $500,000 per week and provides all employees with two weeks of paid sick leave annually. How much should ABC Ltd accrue each week as a provision for sick leave?
Total annual sick leave value: $500,000 (weekly payroll) x 2 weeks = $1,000,000
Accrue the leave provision regularly
Spread the amount over the year by dividing it by the number of pay periods (weekly)
Thus each week, XYZ Ltd should accrue $19,230.77 as provision for sick leave
(Increase in the Leave Provision (current liability), and an increase in Leave expense (expense) in the financial statements)
How do companies estimate the value of a warranty provision?
Companies estimate the value of a warranty provision based on past experience, using data on the likelihood of claims being made. This estimation helps determine the probable outflow of resources required for repairs or replacements.
Why is the classification of liabilities into current and non-current important?
It affects how users perceive the company’s ability to meet short-term and long-term obligations.
How does a contingent liability differ from a normal liability in terms of uncertainty?
A contingent liability has uncertainty around its occurrence or amount, while a normal liability is definite.
Hailey borrowed $10,000 to buy new equipment for her tutoring business. The interest rate was 9% per annum, which equates to 0.75% per month. Let’s assume she had to make a payment of $600 after one month: what amount of this payment was on interest
$75
XYZ Ltd has an employee who earns $72,800 annually and is entitled to four weeks of annual leave per year. How much should XYZ accrue each week as a provision for the employee’s annual leave?
Determine the employee’s leave entitlement
To calculate the total value of the annual leave:
Accrue the leave provision regularly
(Spread this total leave value over the year by dividing it by the number of pay periods (weekly).
ABC Ltd sold $400,000 worth of product A, which carries a 12-month warranty. The company expects 2.5% of sales to result in claims. Calculate the warranty liability at the end of the financial year and record the journal entry.
Answer: The warranty liability is calculated as $400,000 x 2.5% = $10,000.
Journal Entry:
Debit Warranty Expense: $10,000
Credit Provision for Warranties: $10,000