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Chapter 9

BUSI 2160U Chapter Notes - Chapter 9: Accounts Payable, Current Liability, Pension

Course Code
BUSI 2160U

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Chapter 9 – Liabilities
Introduction: What are Liabilities?
Liabilities are obligations to provide cash, goods, or services to stakeholders
Liabilities can be classified as current or long term
Entity's liquidity and solvency are assessed using information about its liabilities
Liabilities are obligations arising from past transactions or economic events that require
sacrificing economic resources to settle – IFRS definition
Three types of obligations:
An amount owed to a supplier for inventory purchased—an account payable
A customer pays in advance for a service to be delivered at a later date—
unearned revenue
A customer is given a two-year warranty on a purchased item—an accrued
Current Liabilities
Current liabilities are obligations that will be satisfied in one year or one operating cycle
Bank and Other Current Loans
Loans are reported as current liabilities if the amount must be repaid within the next year
Demand loans are loans that must be repaid whenever the lender requests or demands
Line of credit is an arrangement with a lender that allows an entity to borrow up to a
specified maximum amount when and if the entity requires the money
Line of credit is only classified as a liability if money is actually borrowed
Accounts Payable
Accounts payable are amounts owed to suppliers for goods and services
Measuring the amount of accounts payable is usually not difficult because the recording
is triggered by an invoice from the supplier
On most balance sheets, accounts payable is highly aggregated, capturing all amounts
owed to suppliers
Collections on Behalf of Third Parties
Most entities act as tax collectors for various government taxation authorities
Employers withhold amounts from their employees' pay for income taxes, employment
insurance, and Canada or Quebec Pension Plans

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Entity must also record liabilities when it withholds money from an employee's pay,
again because the money withheld doesn't belong to the employer
Employee receives $3868
Amounts collected on behalf of third parties are usually not disclosed separately but
would be included in accounts payable
Income Taxes Payable
Canadian businesses pay tax on their income to both the federal and provincial
Businesses pay instalments based on the estimated amount of tax they will owe for the
Corporation pays taxes on its income and must file a tax return within six months of its
fiscal year-end
Dividends Payable
Dividends payable is an obligation to pay the corporation's shareholders a dividend that
has been declared
Accrued Liabilities and Provisions
An accrued expense and liability are recorded (with an adjusting journal entry) when an
entity incurs an expense with no external event such as receipt of an invoice to trigger
recording it
Provision is a liability of uncertain timing and amount
This includes wages, interest costs, warranty, liabilities to redeem coupons

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Provisions are more difficult to estimate
For example, managers must estimate the average cost of warranty service
Unearned Revenue
When an entity receives cash in advance of providing goods or services, it has an
obligation to provide those goods or services
Cash is in hand but revenue hasn't been recognized, a liability for the amount received is
IFRS's disclosure requirements for current liabilities are quite general and the financial
statements of public companies show a wide variation in classification and detail
Current liabilities must be segregated by main class
Bonds and Other Forms of Long-Term Debt
Debt is the amounts borrowed and owned by an entity
Non-current debt is long-term
Borrowers can provide receivables, inventory, equipment, buildings, or land to lenders as
collateral for loans
Collateral is the goods held as protection for a lender should the borrower not repay a
Variable-rate loan is a loan whose interest change with market conditions
Fixed-rate loan is a loan whose interest rate does not change
Bond is a formal borrowing arrangement in which a borrower agrees to make periodic
interest payments to lenders as well as repay the principal at a specified time in the future
Debenture is bond with no collateral provided to the lenders
Mortgage is a loan that provides the borrowers property as collateral
Note payable is a formal obligation signed by the borrower, promising to repay a debt
Equity represents ownership in the entity while debt is liabilities that have to be repaid
Interest on debt is tax-deductible, which means the actual cost of borrowing is lower than
the interest rate stated in the loan
Characteristics of Bonds
Face value is the amount the bondholder will receive when the bond matures
Maturity date is the date on which the borrower has agreed to pay back the principal to
the bondholders
Coupon rate is the percentage of the face value the issuer pays to investors each period
Proceeds are the amount of money a bond issuer receives from selling bonds to investor
Effective interest rate is the real or market rate on interest
If the coupon rate is different from the effective interest rate, the bond's selling price must
allow investors to earn the effective interest rate
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