Comm 295 - Liabilities

Definition of a liability

Present obligation from a past event requiring future outflow of resources.

Two classifications of liabilities

Current (<1 year) and Non‑current (>1 year).

Actual Liability

Amount certain, obligation certain.

• Accounts payable, notes payable

Provision Liability

Amount/timing uncertain, obligation certain

• Warranties, lawsuits

Estimate now, settle later.

Contingent liability

Amount/timing uncertain, obligation uncertain.

• Lawsuits (depends on outcome)

Disclose when possible (not remote).

Examples of current liabilities

Accrued liabilities, income tax payable, payroll liabilities, current portion of long‑term debt.

What is the current portion of long‑term debt?

Amount of long‑term debt due within 1 year; reclassified but total liabilities unchanged.

Accrue income tax at year‑end entry

Dr Income Tax Expense

Cr Income Tax Payable

Pay income tax entry

Income Tax Payable XXX

Cash XXX

Accrue Salaries (before payment) entries

Dr. Compensation Expense (Gross Pay)              

    Cr. Income Tax Payable (Employee deduction)

    Cr. CPP Payable (Employee portion)                   

    Cr. EI Payable (Employee portion)                       

    Cr. Salaries Payable (Net Pay)                  

Net pay formula

Gross pay – employee deductions.

What does employer contribute?

CPP match + EI × 1.4

Journal entry for employer contributions

Dr. Compensation Expense (Employer portion)

    Cr. CPP Payable                                             

    Cr. EI Payable.      

Journal entry when paying employees + remitting deductions

Dr. Salaries Payable (Net Pay)                

Dr. CPP Payable (Employee + Employer)

Dr. EI Payable (Employee + Employer).   

Dr. Income Tax Payable (Employee).      

    Cr. Cash       

When do you record warranty expense?

In the period of sale (matching principle).

Journal entry to record estimated warranty

Dr Warranty Expense

Cr Provision for Warranty

When warranty work is performed

Dr Provision for Warranty

Cr Cash or Inventory

Does reclassifying current portion of long‑term debt change total liabilities?

NO

Record as a liability when:

• Probable and estimable

Disclose in notes when:

possible

No entry or disclosure needed:

when remote

What is a bond

Long‑term liability where company borrows money and pays periodic interest + face value at maturity.

Stated (coupon) rate

determines cash interest

Market (effective) rate

determines issue price + interest expense

When is a bond issued at par?

Stated rate = market rate → issue price = face value.

When is a bond issued at a discount?

Stated rate < market rate → issue price < face value.

When is a bond issued at a premium?

Stated rate > market rate → issue price > face value

Discount vs Premium — Borrowing Cost

Discount: Interest expense > cash interest Premium: Interest expense < cash interest

Discount vs Premium — Carrying Value Movement

Discount: CV increases toward face value Premium: CV decreases toward face value

Effective Interest Method Formula

Interest Expense = Carrying Value × Market Rate

discount and premium amortization formula

Discount amortization = Interest expense – cash interest

Premium amortization = Cash interest – interest expense

PV of a Bond

Issue price = PV of interest payments + PV of face value

JOURNAL ENTRY Issuing at Par

Dr Cash

Cr Bonds Payable

JOURNAL ENTRY Issuing at Discount

Dr Cash

Dr Discount on Bonds Payable

Cr Bonds Payable

JOURNAL ENTRY Issuing at Premium

Dr Cash

Cr Bonds Payable

Cr Premium on Bonds Payable

JOURNAL ENTRY Interest Expense (Discount)

Dr Interest Expense

Cr Discount on Bonds Payable

Cr Cash

JOURNAL ENTRY Interest Expense (Premium)

Dr Interest Expense

Dr Premium on Bonds Payable

Cr Cash

JOURNAL ENTRY Maturity (repaying face value)

Dr Bonds Payable

Cr Cash