Weekly Questions: Liabilities

Q1: What is the definition of a liability?

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Q2: Where can we find the definition of a liability?

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Q3: What is the ‘time-based’ trifecta which aspects of a business need to ‘win’ to meet the definition of a liability?

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Q4: If an aspect of our firm meets the ‘time-based’ trifecta of being a liability, does this mean we will include this aspect of a liability in our firm’s accounts and financial statements? Why or why not?

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Q5 (a): Go to Wesfarmer’s balance sheet (Wesfarmers 2017 Annual Report page 96). Using the ‘time-based’ trifecta, identify whether (and why) each of these items in its balance sheet is a liability:

  • Interest-bearing loans and borrowings
  • Income tax payable
  • Provisions
  • Other liabilities

Q5 (b): For each of these items, also determine whether (and how) they meet the ‘quinella’ (probably/measured reliably) to be recognised, or included, as a liability in Wesfarmer’s balance sheet.

Q5 (c): Do Q5 (a) and (b) again for each item of liabilities in your firm’s balance sheet.

[No answer provided to Q5]

Q6: Explain what the item ‘Liability for current tax’ means to you.

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Q7: What would be the journal entries for creating a Liability for current tax (ie Income tax payable) for Wesfarmers of $292m?

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Q8: Explain what the item ‘Deferred tax liabilities’ means to you.

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Q9: What would be the journal entries for increasing a Deferred tax liability for Wesfarmers by $37m?

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Q10: Explain how Ryman Healthcare has an Income tax expense of $6.3m (See Ryman Healthcare’s 2017 Annual Report – Consolidated income Statement, page 20) and yet it actually paid in cash no tax that year (see Ryman Healthcare’s 2017 Annual Report – Consolidated statement of cash flows, page 23). What would be the journal and ledger entries to record its Income tax expense?

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Q11:  Explain what a ‘provision’ (for example, a Provision for long service leave) means to you. In particular, if our firm has a ‘provision’ in its balance sheet, does this mean our firm has set aside (or ‘provided’) cash to meet this obligation of our firm when it needs to be paid for in the future? Why or why not?

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Q12: What would be the journal entries to recognise an increase of $100 000 in our firm’s Provision for long service leave?

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Q13: What makes a provision different to other liabilities?

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Q14: What are the three types of contingent liabilities?

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