LIABILITIES

WEEK 6

UNIVERSITAS BINA NUSANTARA

SUBJECT MATTER EXPERT

Maria Paramastri Hayuning Adi, S.E., M.Sc., CertDA
 LEARNING OUTCOME

LO 3 : Apply the accounting concept, principles and methods in recording and measuring Liabilities and
Equity based on International Financial Reporting Standards (IFRS) and Financial Accounting Standard
(SAK)
OUTLINE
LIABILITIES

- Notes Payable
CURRENT
LIABILITIES - Sales Tax Payable
- Unearned revenue
- Current maturities of long term debt

- Overview of Bonds
NON CURRENT
LIABILITIES - Accounting for Bond Issues
- Bond Retirement
- Long term Notes Payable

• Statement of Presentation and Analysis

 THESE SLIDES HAVE BEEN ADAPTED FROM:
WEYGANDT, J.J. AND KIMMEL, P.D. (2022). FINANCIAL ACCOUNTING WITH
INTERNATIONAL FINANCIAL REPORTING STANDARDS. 5TH EDITION. JOHN
WILLEY & SONS INC. ISBN: 978-1-119-78700-6

Acknowledgement
UNIVERSITAS BINA NUSANTARA
CURRENT LIABILITIES
WHAT IS A CURRENT LIABILITY?

• A debt that a company expects to pay within one year or the

operating cycle, whichever is longer.

• Current liabilities include notes payable, accounts payable,

unearned revenues, and accrued liabilities such as taxes
payable, salaries and wages payable, and interest
payable.
NOTES PAYABLE

• Written promissory note.

• Usually requires borrower to pay interest.
• Frequently issued to meet short-term financing needs.
• Issued for varying periods of time.
• Usually classified as current liability if due for payment within one
year of statement of financial position date.
 NOTES PAYABLE EXAMPLE

Illustration: First Hunan Bank agrees to lend ¥100,000 on September 1, 2025,

if Yang Enterprises signs a ¥100,000, 12%, four-month note maturing on
January 1 (amounts in thousands). When a company issues an interest-bearing
note, the amount of assets it receives upon issuance of the note generally
equals the note’s face value. Yang therefore will receive ¥100,000 cash and will
make the following journal entry.
Cash 100,000
Sept. 1
Notes Payable 100,000
 NOTES PAYABLE EXAMPLE – INTEREST

Illustration: If Yang prepares financial statements annually, it makes

an adjusting entry at December 31 to recognize interest expense and
interest payable. The interest for the four months ended December 31,
2025:
Face Annual Time in
Value of × Interest × Terms of = Interest
Note Rate One Year
¥100,000 × 12% × 4/12 = ¥4,000

ILLUSTRATION 10.1: FORMULA FOR COMPUTING

INTEREST

YANG MAKES AN ADJUSTING ENTRY AS FOLLOWS:

Interest Expense 4,000

Dec. 31
Interest Payable 4,000
 NOTES PAYABLE EXAMPLE – MATURITY

Illustration: At maturity (January 1, 2026), Yang must pay the face

value of the note plus interest. It records payment of the note and
accrued interest as follows.

Notes Payable 100,000

JAN. 1
Interest Payable 4,000

Cash 104,000
VALUE-ADDED AND SALES TAXES PAYABLE

• Most countries have a consumption tax.

• Consumption taxes either value-added or sales tax.
• Purpose of taxes is to generate revenue for government and they tax the final
consumer of a good or service.
• Cost to end user, normally a private individual, similar to a sales tax.
• Tax is collected every time a business purchases products from another
business in the product’s supply chain.
• Different from a sales tax which is collected only once at the consumer’s
point of purchase; no one else in the production or supply chain is involved
in its collection.
VALUE-ADDED TAXES PAYABLE EXAMPLE

Illustration: Hill Farms Wheat grows wheat and sells it to Sunshine

Baking for €1,000. Hill Farms Wheat makes the following entry to record
the sale, assuming the VAT is 10%.

CASH 1,100

SALES REVENUE 1,000

VALUE-ADDED TAXES PAYABLE 100

SALES TAXES PAYABLE

• Sales taxes are expressed as a stated percentage of the sales

price.

• Selling company:
• collects tax from customer
• remits collections to taxing authority
Illustration: Cooley Grocery sells loaves of bread totaling €800 on a given day.
Assuming a sales tax rate of 6%, Cooley makes the following entry to record the sale.

Cash 848

Sales Revenue 800

Sales Taxes Payable 48

 SALES TAXES PAYABLE – ADDITIONAL EXAMPLE

• Sometimes companies do not enter sales taxes separately in the cash

register.

• Assume Cooley Grocery enters total receipts of €10,600. Because the

amount received from the sale is equal to the sales price 100% plus
6% of sales, we compute the sales amount as follows:
The journal entry is:

Cash 10,600

Sales Revenue 10,000

Sales Taxes Payable 600

€10,600 ÷ 1.06 = €10,000

UNEARNED REVENUES

Revenues received before the company

• delivers goods or
• provides services

Account Title
Type of
Unearned Revenue Revenue
Business
Airline Unearned Ticket Revenue Ticket Revenue
Magazine Unearned Subscription Subscription
publisher Revenue Revenue
Hotel Unearned Rent Revenue Rent Revenue

ILLUSTRATION 10.2: UNEARNED REVENUE AND REVENUE ACCOUNTS

 UNEARNED REVENUES EXAMPLE
AUG. 6

Illustration: Liverpool F.C. (GBR) sells 10,000 season soccer

(football) tickets at £50 each for its five-game home schedule.
The entry for the sale of season tickets is:
Cash (10,000 × £50) 500,000

Unearned Ticket Revenue 500,000

As each game is completed, Liverpool records the recognition of
revenue with the following entry.

Unearned Ticket Revenue 100,000

Sept. 7
Ticket Revenue (£500,000 ÷ 5) 100,000

• LO 1
SALARIES AND WAGES

• Companies report as a current liability the amounts owed to employees

for salaries or wages at the end of an accounting period.

• In addition, they often also report as current liabilities the following

items:

• Payroll deductions
• Bonuses
PAYROLL DEDUCTION – SOCIAL SECURITY

Most common types of payroll deductions: taxes, insurance premiums,

employee savings, union dues.

Social Security Taxes

• Social benefits (for retirement, unemployment, income, disability, and

medical benefits) to individuals and families

• Funds generally come from taxes levied on both the employer and the
employee
PAYROLL DEDUCTION – INCOME TAX

Income Tax Withholding

• Income tax laws generally require employers to withhold from each

employee’s pay the applicable income tax due on those wages

• Employer computes the amount of income tax to withhold according to

a government-prescribed formula or withholding tax table

ILLUSTRATION 10.3: SUMMARY OF PAYROLL LIABILITIES

 PAYROLL DEDUCTION EXAMPLE
JAN. 14
Illustration: Assume Cumberland Company records its payroll for the week of
January 14 as follows:
Salaries and Wages Expense 10,000

Income Taxes Payable 1,320

Social Security Taxes Payable 800

Union Dues Payable 88

Salaries and Wages Payable 7,792

Records the payment of this payroll on January 14
Jan. 14
as follows:
Salaries and Wages Payable 7,792

Cash 7,792
PAYROLL DEDUCTION EXAMPLE - EMPLOYER
JAN. 14

Illustration: As the employer, Cumberland is also required to

pay Social Security taxes and often other taxes as well (referred
to as employer payroll taxes). It records payroll taxes related to
the January 14 payroll as follows.

Payroll Tax Expense 800

Social Security Taxes Payable 800

• LO 1
PROFIT-SHARING AND BONUS PLANS

Many companies give a bonus to certain or all employees in addition to their

regular salaries or wages.

Illustration: Palmer Group will pay out bonuses of NT$10,700 in January 2026.
Palmer makes an entry dated December 31, 2025, to record the bonuses as
follows.

SALARIES AND WAGES EXPENSE 10,700

SALARIES AND WAGES PAYABLE 10,700

In January 2026, Palmer records the bonus payment as follows:

Salaries and Wages Payable 10,700

Cash 10,700
CURRENT MATURITIES OF LONG-TERM DEBT

• Portion of long-term debt that comes due in current year

• No adjusting entry required; at the statement of financial position date, all

obligations due within one year are classified as current

Illustration: Wendy Construction issues a five-year, interest-bearing €25,000

note on January 1, 2025. This note specifies that each January 1, starting January
1, 2026, Wendy should pay €5,000 of the note. When the company prepares
financial statements on December 31, 2025, it would report

Current liability €5,000

Long-term €20,00
liability 0
RECOGNITION OF A PROVISION

Companies accrue an expense and related liability for a provision only if the
following three conditions are met:

1. A company has a present obligation as a result of a past event;

2. It is probable that an outflow of resources will be required to settle the
obligation; and

3. A reliable estimate can be made of the amount of the obligation.

The term “probable” is defined as “more likely than not to occur”.
REPORTING A PROVISION

Product Warranties

• Future costs that a company may incur in replacing or repairing

malfunctioning units

• Estimated cost of honoring product warranty contracts should be

recognized as an expense in the period in which the sale occurs.
REPORTING A PROVISION EXAMPLE

Illustration: Assume that in 2025, Denson Manufacturing sells 10,000

washers and dryers at an average price of €600 each. The selling price
includes a one-year warranty on parts. Denson expects that 500 units
(5%) will be defective and that warranty repair costs will average €80
per unit. In 2025, the company honors warranty contracts on 300
units, at a total cost of €24,000. Denson records those repair costs
incurred in 2025 to honor warranty contracts on 2025 sales as follows.

WARRANTY EXPENSE 24,000

REPAIR PARTS 24,000

PROVISION EXAMPLE – ESTIMATING LIABILITY

At December 31, to accrue the estimated warranty costs on the

2025 sales, less the amount already honored in 2025 of €24,000,
Denson computes the warranty liability at December 31 as follows.

Number of units sold 10,000

Estimated rate of defective units × 5%
Total estimated defective units 500
Average warranty repair cost × €80
Estimated warranty liability €40,000
Less: Warranty claims honored 24,000
Warranty liability at December 31,
2025 €16,000
ILLUSTRATION 10.4 –
COMPUTATION OF ESTIMATED
PROVISION EXAMPLE – ADJUSTING ENTRY

The company makes the following adjusting entry at December 31 for

€16,000 after it adjusts for €24,000 of warranty claims honored
during 2025.
WARRANTY EXPENSE 16,000

WARRANTY LIABILITY 16,000

The company reports:

• warranty expense under selling expenses
• warranty liability as a current liability, assuming it is estimated to be
honored in the next year
PROVISION EXAMPLE – SUBSEQUENT YEAR

In the following year, assume that the company replaces 20

defective units in January 2026, at an average cost of €80 in
parts and labor. The company would record expenses
incurred in honoring warranty contracts on 2025 sales as
follows:
WARRANTY LIABILITY 1,600

REPAIR PARTS 1,600

ANALYSIS OF CURRENT LIABILITIES

Liquidity refers to the ability to pay maturing

obligations and meet unexpected needs for cash.

Current Current Working

− =
Assets Liabilities Capital
€20,856 − €16,210 = €4,646

CURRENT RATIO PERMITS US TO COMPARE LIQUIDITY OF

DIFFERENT-SIZED COMPANIES AND OF A SINGLE COMPANY AT
DIFFERENT TIMES.
Current Current
÷ = Current Ratio
Assets Liabilities
€20,856 ÷ €16,210 = 1.29:1

Illustration 10.6-7: Working capital formula and computation

(6) and Current ratio formula and computation (7)
NON-CURRENT LIABILITIES
OVERVIEW OF BONDS

Bonds are a form of interest-bearing notes payable

issued by companies, universities, and governmental
agencies.

Sold in small denominations (usually €1,000 or multiples

of €1,000).

When a company issues bonds, it is borrowing money. The

person who buys the bonds (the bondholder) is lending
money.
TYPES OF BONDS

Secured and Unsecured Bonds

• Secured bonds have specific assets of issuer pledged as

collateral for bonds

• Unsecured bonds are issued against general credit of

borrower
 ADDITIONAL TYPES OF BONDS

Convertible and Callable Bonds

• Convertible bonds can be converted into ordinary shares

at bondholder’s option

• Callable bonds can be redeemed (bought back), by

issuing company, at a stated currency amount prior to
maturity
BOND TERMINOLOGY

• Bond certificate
• Issued to investor
• Provides name of the issuer, face value, contractual interest
rate, and maturity date

• Face value - principal due at maturity

• Maturity date - date final payment is due
• Contractual interest rate – annual rate used to determine
cash interest paid, also referred to as the stated rate
DETERMINING THE MARKET PRICE OF A BOND

Current market price (present value) of a bond is a function of three

factors:

1. amounts to be received,
2. length of time until amounts are received, and
3. market rate of interest.
The process of finding the present value is referred to as discounting the
future amounts.
DETERMINING THE PRICE OF A BOND

Illustration: Assume that Acropolis SA on January 1, 2025, issues €100,000

of 9% bonds, due in five years, with interest payable annually at year-end.

ILLUSTRATION 11.3: TIME DIAGRAM DEPICTING CASH FLOWS

€
Present value of €100,000 received in 5 years
64,993
Present value of €9,000 received annually for 5
years 35,007
Illustration 11.4: Computing the market €100,0
price of bonds
Market price of bonds
00
ACCOUNTING FOR BOND TRANSACTIONS

• A company records bond transactions when

• it issues (sells) or redeems (buys back) bonds
• bondholders convert bonds into ordinary shares
• Bonds may be issued at
• face value
• below face value (discount)
• above face value (premium)
• Bond prices are quoted as a percentage of face value
 ISSUING BONDS AT FACE VALUE
JAN. 1
Illustration: On January 1, 2025, Candlestick AG issues €100,000, five-year,
10% bonds at 100 (100% of face value). The entry to record the sale is:
Cash 100,000

Bonds Payable 100,000

Prepare the entry Candlestick would make to accrue interest on December

31.
Interest Expense 10,000

Dec. 31 Interest Payable 10,000

(€100,000 × 10% × 12/12)

ISSUING BONDS AT FACE VALUE – INTEREST PAYMENT
JAN. 1

Prepare the entry Candlestick would

make to pay the interest on Jan. 1, 2026.

Interest Payable 10,000

Cash 10,000

• LO 2
DISCOUNT OR PREMIUM ON BONDS
Interest Rates and Bond Prices

ILLUSTRATION 11.5: INTEREST RATES AND BOND

PRICES
ISSUING BONDS AT A DISCOUNT – ILLUSTRATION
JAN. 1

Illustration: Assume that on January 1, 2025, Candlestick AG sells

€100,000, five-year, 10% bonds for €98,000 (98% of face value).
Interest is payable annually on January 1. The entry to record the
issuance is as follows.

Cash 98,000
Bonds Payable 98,000
ISSUING BONDS AT A DISCOUNT EXAMPLE

Statement Presentation

ILLUSTRATION 11.6: STATEMENT PRESENTATION OF BONDS ISSUED AT A DISCOUNT

THE ISSUING COMPANY MUST PAY NOT ONLY THE CONTRACTUAL INTEREST RATE OVER
THE TERM OF THE BONDS BUT ALSO THE FACE VALUE (RATHER THAN THE ISSUANCE
PRICE) AT MATURITY.
TOTAL COST OF BORROWING ILLUSTRATED (1 OF 2)
Bonds Issued at a Discount

Annual interest payments

(€100,000 × 10% = €10,000: €10,000 × 5)
€50,000

Add: Bond discount (€100,000 − €98,000) 2,000

€52,00
Total cost of borrowing
0
Illustration 11.7: Total cost of borrowing─ bonds issued at a discount
Bonds Issued at a Discount
Principal interest €100,000
Annual interest payments (€10,000 ×
5) 50,000
Cash to be paid to bondholders 150,000

Less: Cash received from bondholders

98,000

Total cost
ILLUSTRATION 11.8: ALTERNATIVE of borrowing
COMPUTATION OF TOTAL COST OF BORROWING─ BONDS ISSUED AT A DISCOUNT
ISSUING BONDS AT A DISCOUNT

Amortization of bond discount:

• Allocated to expense in each period

• Increases amount of interest expense reported each period
• Amount of interest expense reported each period will exceed contractual amount
paid

• As discount is amortized, its balance declines

• Carrying value of bonds will increase, until at maturity carrying value of bonds equals
their face amount
ISSUING BONDS AT A PREMIUM
JAN. 1
Illustration: Assume that the Candlestick AG bonds previously
described sell for €102,000 (102% of face value) rather than for €98,000.
The entry to record the sale is as follows:

Cash 102,000

Bonds Payable 102,000

• LO 2
ISSUING BONDS AT A PREMIUM – PRESENTATION

Statement Presentation

ILLUSTRATION 11.10: STATEMENT PRESENTATION OF BONDS ISSUED AT A PREMIUM

THE BORROWER IS NOT REQUIRED TO PAY THE BOND PREMIUM AT THE MATURITY
DATE OF THE BONDS. THUS, THE BOND PREMIUM IS CONSIDERED TO BE A REDUCTION
IN THE COST OF BORROWING.
TOTAL COST OF BORROWING ILLUSTRATED (2 OF 2)
Bonds Issued at a Premium
Annual interest payments
(€100,000 × 10% = €10,000; €10,000 × 5) €50,000

Less: Bond premium (€102,000 − €100,000)

2,000

Total cost of borrowing

Illustration 11.7: Total cost of borrowing─ bonds issued at a
€48,000
premium
Bonds Issued at a Premium
Principal interest €100,000

Annual interest payments (€10,000 × 5)

50,000
Cash to be paid to bondholders 150,000

Less: Cash received from bondholders

102,000

Total cost of borrowing

€48,000
ILLUSTRATION 11.12: ALTERNATIVE COMPUTATION OF TOTAL COST OF BORROWING─
BOND PREMIUM AMORTIZATION

• Allocated to expense in each period

• Decreases amount of interest expense reported each period
• Amount of interest expense reported each period will be
less than contractual amount paid

• As premium is amortized, its balance declines

• Carrying value of bonds will decrease, until at maturity
carrying value of bonds equals their face amount
REDEEMING BONDS AT MATURITY
JAN. 1
Candlestick AG records the redemption of its bonds at maturity as
follows:

Bonds Payable 100,000

Cash 100,000

• LO 2
REDEEMING BONDS BEFORE MATURITY (1
OF 2)

When a company retires bonds before maturity, it is necessary to:

1. eliminate carrying value of bonds at redemption date

2. record cash paid
3. recognize gain or loss on redemption
The carrying value of the bonds is the face value of the bonds less
unamortized bond discount or plus unamortized bond premium at the
redemption date.
REDEEMING BEFORE MATURITY EXAMPLE
JAN. 1

Illustration: Assume at the end of the fourth period, Candlestick AG having

sold its bonds at a premium, retires the bonds at 103 after paying the annual
interest. Assume that the carrying value of the bonds at the redemption date is
€100,476. Candlestick records the redemption at the end of the fourth interest
period (January 1, 2029) as follows:
Bonds Payable 100,476

Loss on Bond Redemption 2,524

Cash 103,000
LONG-TERM NOTES PAYABLE

• May be secured by a mortgage that pledges title to specific assets as

security for a loan

• Typically terms require borrower to make equal installment payments over

term of loan. Each payment consists of

1.interest on unpaid balance of loan

2.a reduction of loan principal

• Companies initially record mortgage notes payable at face value

LONG-TERM NOTES PAYABLE ILLUSTRATION

Illustration: Mongkok Technology Ltd. issues a HK$500,000, 8%, 20-year

mortgage note on December 31, 2025. The terms provide for annual
installment payments of HK$50,926.
(C)
(B) Reduction (D)
(A) Interest of Principal
Interest Cash Expense (D) × Principal Balance
Period Payment 8% (A) − (B) (D) − (C)
Issue date HK$500,000
HK$50,92
1 HK$40,000 HK$10,926 489,074
6
2 50,926 39,126 11,800 477,274
3 50,926 38,182 12,744 464,530
4 50,926 37,162 13,764 450,766

ILLUSTRATION 11.14: MORTGAGE INSTALLMENT PAYMENT SCHEDULE

LONG-TERM NOTES PAYABLE EXAMPLE - JOURNAL
DEC. 31
Illustration: Mongkok records the mortgage loan and first installment
payment as follows:

Cash 500,000

Mortgage Payable 500,000

Dec. 31 Interest Expense 40,000

Mortgage Payable 10,926

Cash 50,926
PRESENTATION

• Companies report non-current liabilities in a separate section of the statement

of financial position immediately before current liabilities

• Alternatively, companies may present summary data in the statement of

financial position, with detailed data (interest rates, maturity dates, conversion
privileges, and assets pledged as collateral) shown in a supporting schedule.

Illustration 11.15: Statement of financial position presentation

of non-current liabilities
 ANALYSIS

Two ratios that provide information about debt-paying ability and long-run
solvency are:
• Debt to Assets Ratio
• Times Interest Earned Ratio

To illustrate these ratios, we will use data from an LG (KOR) annual report. The company
had total liabilities of ₩ 22,839 billion, total assets of ₩ 35,528 billion, interest expense
of ₩ 827 billion, income taxes of ₩ 354 billion, and net income of ₩ 223 billion.
Total Debt to Assets
Total Liabilities ÷ =
Assets Ratio
₩22,839 ÷ ₩35,528 = 64.3%
Net Income +
Interest Expense
Interest Times Interest
+ ÷ =
Expense Earned
Income Tax
Expense
₩223 + ₩827 +
COMPARE THE ACCOUNTING LIABILITIES UNDER I FRS AND U.S. GAAP.
U.S. GAAP AND IFRS SIMILARITIES

• The basic definition of a liability under G A A P and I F R S is very similar. In a more

technical way, liabilities are defined by the I A S B as a present obligation of the
entity arising from past events, the settlement of which is expected to result in an
outflow from the entity of resources embodying economic benefits.

• The accounting for current liabilities such as notes payable, unearned revenue, and
payroll taxes payable are similar between G A A P and I F R S.

• IFRS specifically states, however, that industries where a presentation based on

liquidity would be considered to provide more useful information (such as financial
institutions) can use that format instead.

• The basic calculation for bond valuation is the same under GAAP and IFRS. In
addition, the accounting for bond liability transactions is essentially the same
between GAAP and IFRS.
U.S. GAAP AND IFRS ADDITIONAL SIMILARITIES

• Under both G A A P and I F R S, liabilities are classified as current if they are expected to
be paid within 12 months or the operating cycle, whichever is longer.

• Both G A A P and I F R S require accrual of liabilities even when there is some

uncertainty related to the liability as to its existence or amount. Both require that a
liability should be accrued when it is probable that an outflow will occur and a reliable
estimate can be made of the obligation.

• Under IFRS, companies sometimes show liabilities before assets. Also, they will
sometimes show non-current liabilities before current liabilities. Neither of these
presentations is used under GAAP.

• IFRS bases the determination of whether a liability is current or non-current on the facts
that are present on the reporting date. GAAP, on the other hand, permits events that
occur after the reporting date but before the financial statements are issued to impact
the determination of current or non-current.

• IFRS requires use of the effective-interest method for amortization of bond discounts
U.S. GAAP AND IFRS DIFFERENCES

• Companies using G A A P show assets before liabilities. Also, they will show current liabilities
before non-current liabilities.

• I F S R indicates that probable means more likely than not to occur; G A A P standards using
the term probable are often interpreted as having a greater than 70% chance of occurring.

• GAAP often uses a separate discount or premium account to account for bonds payable. IFRS
records discounts or premiums as direct increases or decreases to Bonds Payable.

• The accounting for convertible bonds differs between IFRS and GAAP. GAAP requires that the
proceeds from the issuance of convertible debt be shown solely as debt. Unlike GAAP, IFRS
splits the proceeds from the convertible bond between an equity component and a debt
component. The equity conversion rights are reported in equity.

• Under G A A P, some contingent liabilities are recorded in the financial statements, others are
disclosed, and in some cases no disclosure is required. I F R S reserves the use of the term
contingent liability to refer only to possible obligations that are not recognized in the
financial statements but may be disclosed if certain criteria are met.

• IFRS uses the term provisions to refer to liabilities of uncertain timing or amount. Under
GAAP, these are considered recordable contingent liabilities.
REFERENCES

Weygandt, J.J. and Kimmel, P.D. (2022). Financial Accounting with International
Financial Reporting Standards. 5th Edition. John Willey & Sons Inc.
 THANK YOU
INTRODUCTION TO ACCOUNTING
UNIVERSITAS BINA NUSANTARA