Chapter 13 : Short term Liability

Examples of short term liability

A/P Tax Payable Dividend payable Interest Payable Contingent liability - Warranty p
N/P U/R Short term debt (Loan) Refinancing

A/P
2/10, n/30 Penalty charge is 2%p.a (pa means per annum)

May 1: you have purchased a good worth of 10,000 on credit.

May 6: You have paid 4,000
May 25: You have paid 5,000
June 15: You paid 1,000 Discount

May 1: Dr. Purchase 10,000 May 6: Dr A/P

Cr. A/P 10,000 Cr Cash
Cr Purchase discount
June 15: Penalty 0.83 20
Dr A/P 1000 0.83
Dr Penalty cha 0.83
Cr Cash 1000.83333

Ex 2: Suppose you have purchased goods worth of 10,000 on May 1 on credit. Credit terms are 1/1, n/30
If the Deposit interest rate is 15% pa, Should you avail the discount? And at what rare you will avail th

Discount 100 Conclusion: If the discount rate is 1%, availing bank int is b
Interest avail 125 If the discount rate is 1.5%, availing the discou

Tax Payable

Ex 3 XYZ has sold 50,000 goods cash. 4% tax is not included. Write journal for XYZ

Dr Cash 52,000 Tax 2000

Cr Sales Revenue 50,000
Cr Tax payable 2000

Ex 4 XYZ has sold 50,000 goods cash. 4% tax is included. Write journal for XYZ

Dr Cash 50,000 50000-2000

 Cr Sales Revenue 48,077
Cr Tax Payable 1,923 50,000/1.04

48077*1.04=
U/R You have received the cash in advance 48000*4%=

XYZ is selling ticket @ 50 per person. They sold 1,000 tickets and the movie will be shown after 10 day

Cash 50000
After 10 days when the movie is been shown
Dr Cash 50,000
Cr U/R 50,000 Dr UR 50,000
Cr Sales Revenue
ability

ntingent liability - Warranty payable

80

4000 May 25: Dr A/P 5,000

3920 Cr Cash 5,000
Purchase discount 80

Credit terms are 1/1, n/30

d at what rare you will avail the discount?

ate is 1%, availing bank int is better

ate is 1.5%, availing the discount is better

50000*4%

Revenue Tax
48,000 2000
 48,077 1,923

50,000 X*(1.04)=50,000
49920

vie will be shown after 10 days.

hen the movie is been shown

50,000
Refinancing

Ex Suppose, you have taken a loan from XYZ worth of 300,000 for 5 years at 9% rate on January 1, 2018
Today is July 1, 2020 and you have been offered 200,000 for 6% by another bank, ABC.

Explanantion: on Dec 31, 2022, the loan of 300,000 at 9% will be expired.

you have laready hold the loan for 2.5 years which means you have already repaid 150,000 at 9%
the rest of the loan 150,000 is supposed to be paid at 9% which will be expired in Dec 31 2022.
However, you have been offered for a loan at 6% for 200,000. what should be your decision?

You have already paid at 9% for 150,000 and snce you are paying off the loan early, you wont have to
any interest to XYZ for the rest 150,000. However, you are replacing the XYZ loan with ABC and since
have taken 150,000 from ABC, you willhave to pay 6% interest to ABC now.
How much is your savings?
150,000*3% for one year 4500 per year 11250 for 2.5 years

If ABC offers you the same loan 150,000 @ 6% but the duration of the loan is 3.5
years instead of 2.5 years. Should you go for refinancing?

Extra interest amount 150,000*6%

9000
Savings 3% for 2.5 yrs
Extra int for another 1 year
Net Savings

Contingent Liability

When you are not sure about the outcome, you are not sure about the future liability.

Ex Warranty

Q1 XYZ has sold 500,000 goods at 600,000 on August 1, 2020.

From their past experience, they estimated the warranty expense in 2020 should be 4,000.
and in 2021, it should be 16,000. Warranty is for 1 year.
The actual warranty expence in 2020 was 4,000 but in 2021 it was 15,000.

Aug 1, 2020
Dr Cash or AR 600,000 Dr. COGS 500,000
Cr Sales Rev 600,000 Cr FG inv

Dr. Warranty expense 20,000 Explanation: XYZ is creating a provision and t

Cr. Est warranty payable 20,000 immediately reduce the net profit

December 31, 2020

If they pay payable,
Dr. Est warranty payable 4,000 Dr Warranty Payable
Cr Warranty payable 4,000 Cr Cash

The warranty is going to be expired on July 30, 2021

July 30, 2021

Dr. Est warranty payable 15,000 If they pay payable,

Cr Warranty payable 15,000 Dr Warranty Payable
Cr Cash
You need to adjust the execss 1,000 est warranty payable

Dr Est Warranty payable 1,000

Cr Warranty expense 1,000

If XYZ incurred another 18,000 in 2021 instead of 15,000,

Dr. Warranty expense 2,000

Cr. Est warranty payable 2,000

Dr. Est warranty payable 18,000 If they pay payable,

Cr Warranty payable 18,000 Dr Warranty Payable
Cr Cash
at 9% rate on January 1, 2018
ther bank, ABC.

eady repaid 150,000 at 9%

expired in Dec 31 2022.
ould be your decision?

he loan early, you wont have to pay

he XYZ loan with ABC and since you
interest to ABC now.

Note: Considering that interest calculation is based on simple interest rate, not a
compounding one

11,250
9,000
2,250

20 should be 4,000.
 500,000

XYZ is creating a provision and they

diately reduce the net profit

hey pay payable,

Warranty Payable 4,000
4,000

hey pay payable,

Warranty Payable 15,000
15,000

hey pay payable,

Warranty Payable 18,000
18,000
 Chapter 14: Long Term Liability

Valuation Method
Ex Long term loan Amortization
Bond Amortization Or Straight line method
N/P Amortization
Mortgage Amortization

Loan amount is 10,000,000 for 5 years. Interest rate is 10% pa. Interest payable is quarterly basis. H
the installment size for each quarter?

Interest + Principle payment in every quarter.

Loan amortization.

BOND
Financial instrument
Every bond has two parties: Investor/Buyer and Bond issuer
Bond underwriter
Face value
Coupon interest rate
Duration of the bond
Market price of the bond

0 1 2 3 4 5 Years

-10,000 -10,000 -10,000 -10,000 -10,000

XYZ Sell bond -100,000
100,000/95,000/104,000

XYZ receive
100,000/95,000/104,000 today

Since bond purchasers are investing their money into your bond, so they are looking for interest rate which is coup
rate
Suppose, coupon interest rate is 10%
XYZ wil have tp pay 100,000*10% = 10,000 to the investor in every year
When the bond expires on the 5th year, XYZ will have to pay back entire 100,000 to the bond investor

When the market interest rate > Coupon Interest rate Suppose, Market int rate =12%, coupon intere
When the market interest rate < Coupon Interest rate Suppose, Market int rate =8%, coupon interes
PV of the BOND (REF: CH 14 Amortization Table file)
Coupon interest amount 100,000*4% 4000 per period

Pv of Coupon interest amount (4000,5%,10) 30,887 (ordinary ann

PV of Face Value (100,000,5%,10) 61,391 (PV formula)
PV of the BOND is 92,278

That means, selling price of the bond is 92,278

Dicsount? Face value - PV of the bond
100,000-92278
7,722 (This is the total amont of discount in the entire life periods)

Straight line method

Discount per period 772.2 per period (Total discount/Total number of periods)
t payable is quarterly basis. How much is
ter?

In case of annual bond What if it is semi annual bond?

Face Value 100,000 Face Value 100,000
Coupon int rate 10% Coupon int rate 5%
Periods 5 Periods 10
Int. Payament 1 time Int. Payament 2 times
Coupon Amount 10,000 Payment date 1st January
per period 1st july
Market Int rate 12% Coupon Amount 5000 per period
Market int rate 6%

or interest rate which is coupon interest PV formula = FV/(1+i)^n

Here, i is the market interest rate
n is the number of periods

e bond investor

t int rate =12%, coupon interest rate = 10% Your bond price will be discounted it’s a discounted bond
t int rate =8%, coupon interest rate = 10% Your bond price will be Primum it’s a primum bond
 Ordinary annuity calculation from table
PV Factor(5%,10 period) 7.72173 (pg 340)
Coupon amount 4000
Since it is semi annual bond, PV of coupon amount 30,887
Market interest rate becomes
5% (half of 10%) and number
of periods becomes 10 (5*2) PV calculation from the table
PV factor (5%,10) 0.61391 (pg 336)
face value 100,000
PV of Face value 61,391
ntire life periods)

Total number of periods)

s a discounted bond
s a primum bond
Suppose, XYZ has issued a 100,000 semi annual bond on January 1, 2010. Coupon interest rate was 8% pa and ma
interest rate is 10% pa

Coupon interest amount 100,000*4% $4,000 per period

Pv of Coupon interest amount (4000,5%,10) $30,887 (ordinary annuity)

PV of Face Value (100,000,5%,10) $61,391 (PV formula)
PV of the BOND is $92,278

January 1, 2010 July 1, 2010

Dr Cash $92,278 Dr. Bond Interest expense

Dr Discount o $7,722 Cr Cash
Cr Bonds Payable 100,000
Under straight line method coupon payment is 772.2/perio

Discount on B/P $7,722 Dr. Bond Interest expense

Total after 2st period amort -1544.4 Cr Discount on B/P
Net Discount $6,178

When the bond expires on 31 December 2014:

Dr B/P 100,000
Cr Cash 100,000

EFFECTIVE INTEREST RATE METHOD

January 1, 2010 July 1, 2010

Dr Cash $92,278 Dr. Bond Interest expense

Dr Discount o $7,722 Cr Cash
Cr Bonds Payable 100,000
Dr Bond Int exp 614
Cr Discount on B/P
Discount on B/P $7,722
Total after 2nd period amort -1259
Net Discount $6,463

When the bond expires on 31 December 2014:

Dr B/P 100,000
Cr Cash 100,000

Suppose, XYZ has issued a 100,000 semi annual bond on March 1, 2010. Coupon interest rate was 8% pa and mark
interest rate is 10% pa

Coupon interest amount 100,000*4% $4,000 per period

January 1, 2010
Since Bond was issued on March 1, XYZ will collect interest from bond holder = (2*4000)/6
1,333
Dr Cash $93,611
Dr Discount o $7,722 July 1, 2010
Cr B/P 100,000
Cr Bond int exp 1,333 Dr Bond int exp 4,000
Cr Cash 4,000

Dr Bond Int exp 614

Cr Discount on B/P

Suppose, XYZ has issued a 100,000 semi annual bond on January 1, 2010 at 97 PAR. Coupon interest rate was 8%

January 1, 2010 If it is 102 PAR

Dr Cash 100,000*97% 97000 Dr Cash 100,000*1.02

Dr Discount 100,000*3% 3000 Cr B/P
Cr B/P 100,000 Cr Premium od bond (100,000*2%)
est rate was 8% pa and market

dinary annuity)

January 1, 2011

4,000 Dr. Bond Interest expense 4,000

4,000 Cr Cash

on payment is 772.2/period Under straight line method coupon payment is 772.2/period

772.2 Dr. Bond Interest expense 772.2

772.2 Cr Discount on B/P

January 1, 2011

4,000 Dr. Bond Interest expense 4,000

4,000 Cr Cash

Dr Bond Int exp 645

614 Cr Discount on B/P 645
st rate was 8% pa and market

January 1, 2011

Dr Bond int e 4,000

Cr Cash 4,000

Dr Bond Int exp 645

614 Cr Discount on B/P 645

upon interest rate was 8% pa.

102000
100,000
bond (100,000*2%) 2,000
 If it is a premium bond
Face value = 100,000
Suppose, PV = 104,000
4,000 Dr Bond interest expense
Dr Cash 104,000 Cr Cash
t is 772.2/period Cr B/P 100,000
Cr Premium on Bnd 4,000 Dr premium on bond
Cr Bond interest exp
772.2

4,000
Bond interest expense 4,000
4,000

premium on bond 1,333

Bond interest exp 1,333
Q1 Suppose, XYZ has issued a 100,000 semi annual bond on January 1, 2010. Coupon interest rate was 8% pa and
is 10% pa. What is the carrying amount of the bond on November 1, 2014?

From July 1 to Dec 31, Discount amortization is 952 (Ref#Amortization table)

Since you are looking for Carrying amount on Nov 1, 2014,
That means, you need to calculate the discount amortization from July 1 to October 30, 2014
which is (952*4)/6 635
Thus, carrying amount of the bond on Nov 1, 2014 is 99,048 + 635 (99,048 was the carrying amount on
99,683

Q2 Suppose, XYZ has issued a bond 20,000,000 at 97 PAR. Bond issuing cost was 500,000. It was a 10 years semi - a
Bond was issued on Jan 1, 2010. Coupon interest rate is 10%

Jan 1, 2010 July 1, 2010

Dr Cash (20000000*97%) 18,900,000 Dr Bond Interest exp (20,000,000*5%

Dr Discount on B/P 600,000 Cr Cash
Dr Unamortized bond issuing 500,000
Cr B/P 20,000,000 Dr Bond int exp (600,000/20)
Cr Discount on B/P

Dr Bond issuing cost

Cr unamorized bond issung cost

Q3 XYZ has issued 20 years 800,000 annual bond at 97% PAR. Bond issuing cost was 16,000. After 8 years, XYZ ha
at 101 PAR. Calculate the gain or loss at the time of exstinguishment of debt. Journalize the entry.
0 year
PV = ?
776,000 0 - 8 years 9 - 20 years
Amortized Unamortized

Discount 24,000
Bond issuing c 16,000 What is the carrying amount of the bond at this sta

Calculation of the Gain/Loss

Repurchase of the bond after 8 years 808,000

Carrying amount of the bond after 8 years
Carrying amount of the bond at 20th years 800,000
Unamortized discount (24,000*12)/20 (14,400)
Unamorized Bond issuing cost (16,000*12)/20 (9,600)
carrying amount of the bond after discount and 776,000
bond issuing cost adjustment
Loss of bond extingushment 32,000

Journal entry at the time of issuing the bond

Dr Cash (776,000-16,000) 760,000
Dr Discount 24000
Cr B/P 800,000
Dr Unamortized bond issuing 16,000
 on interest rate was 8% pa and market interest rate

ober 30, 2014

48 was the carrying amount on July 1, 2014)

0,000. It was a 10 years semi - annual bond

Jan 1, 2011

nd Interest exp (20,000,000*5%) 1,000,000 Dr Bond Interest exp (20,000,000*5%)

1,000,000 Cr Cash

nd int exp (600,000/20) 30,000 Dr Bond int exp (600,000/20)

scount on B/P 30,000 Cr Discount on B/P

nd issuing cost 25,000 Dr Bond issuing cost

amorized bond issung cost 25,000 Cr unamorized bond issung cost

as 16,000. After 8 years, XYZ has called of the bond

ournalize the entry.
20th year
Carrying amount = 800,000

g amount of the bond at this stage?

Dr B/P 800,000
Dr Loss 32,000
Cr Cash 808,000
Cr unamotized discount 14,400
Cr Unamotized Bond issuing co 9,600
exp (20,000,000*5%) 1,000,000
1,000,000

30,000
30,000

25000
ond issung cost 25000
 Ch 17: Investment

Investing in the financial securities

Financial securities
1. Debt security 2. Equity security
Ex: Bond Ex: purchasing shares

Debt Security
When we purchase bond Duration Valuation method
Investors hold the bond Amortization &
1. Held to maturity security
till the end of maturity cost method
2. Available for Sale Investor hold the bond for a Amortization &
security certain period of time Fair value method

3. Trading security Investor hold the bond for Amortization &

a short period of time Fair value method

1. Held to maturity security

Suppose, XYZ has Purchased a 100,000 semi annual bond on January 1, 2010. Coupon interest rate was 8% pa and
interest rate is 10% pa. The bond meets the creteria of held to maturity

January 1, 2010 July 1, 2010

PV of the bond is 92,278 (Ref # Nov 16 class)
Dr Cash 4,000
Dr Held to maturity securit 92,278 Cr Bond int revenue
Cr Cash 92,278
Dr Held to matiruty sec
Cr Bond interest revenue
A= L+ EQ
HTM = 92278
614 Rev = 614 That means, on July 1, 2010, HTM value becomes = 92278+61
645 645 Jan 1, 2011, HTM value becomes = 92278+614+645
Cash = -92278 After 5 years, the value of HTM will become 100,000 through
4,000 Rev = 4000
After 5 years when the bond expires,
Dr Cash 100,000
Cr HTM 100,000

Ex: Continuation of the previous example. Now, You want to sell your HTM on Nov 1, 2014. Write the journal entry
Bond interest revenue = (4000*4)/6 2,667
Dr Cash 102,350
Cr Bond interest revenue 2,667
Cr HTM 99683
erest rate was 8% pa and market

4,000

614
614

alue becomes = 92278+614

2278+614+645
become 100,000 through the process

Write the journal entry

2. Available for Sale Security

Suppose, XYZ has Purchased a 100,000 semi annual bond on January 1, 2010. Coupon interest rate was 8% pa and
market interest rate is 10% pa. The bond meets the creteria of AFS security.

January 1, 2010 July 1, 2010

PV of the bond is 92,278 (Ref # Nov 16 class)
Dr Cash 4,000
Dr Available for sale securit 92,278 Cr Bond int revenue
Cr Cash 92,278
Dr AFS sec
Cr Bond interest revenue

Suppose, On december 31, 2010, the fair value of AFS is 95,000

According to the amortization table, the carrying amount is 93,537 on Dec 31

Differece between Fair value and carrying amount 1463

Dr AFS Sec 1463 A= L+

Cr Unrealized gain/loss on equity 1463 AFS
1463

Suppose, On december 31, 2010, the fair value of AFS is 93,000

According to the amortization table, the carrying amount is 93,537 on Dec 31

Differece between Fair value and carrying amount 537

Dr Unrealized gain/loss on equity 537

Cr AFS 537

AFS Sec Portfolio

Security Carrying amo Fair value Unrealized gain/loss Suppose, you have sold Sec C at 63,000
A 90,000 95,000 5,000
B 65,000 45,000 -20,000 Dr Cash 63,000
C 70,000 60,000 -10,000 Dr Loss on sa 7,000
Value of AFS Sec portfolio -25,000 Cr AFS Sec C
 -15,000
Dr Unrealized gain/loss on equity 25,000
Cr AFS portfolio 25,000
Unrealized gain/loss
After you sold Sec C, the value of portfolio becomes -15,000 25,000

Dr AFS portfolio 10,000 15,000

Cr Unrealized gain/loss on equity 10,000

If, the value of the portfolio becomes -28,000

Dr Unrealized gain/loss on equity 3000
Cr AFS portfolio 3,000

EQUITY SECURITY Bank

% of ownership Valuation method Parent company

0-20% Little influence Fair value method
21-49% Significant influence Equity Method
50%+ Controlling Consolidation C1
70%

Equity Security
1. Available for Sale security
2. Trading security

EX: XYZ has purchased shares of ABC company on Jan 1, 2010. Suppose XYZ has 20% ownership over ABC
Transactions Fair Value
1. XYZ has purchased 48,000 shares of ABC Dr ABC Shares 480000
Share price = 10/share Cr Cash 480000

2. The value of ABC share has increased to 12/share Dr ABC Shares 96000
on Dec 31, 2010 Cr Unrealized Gain 96000

3. ABC has reported 50,000 profit on Dec 31, 2010

No Entry

4. ABC has declared and paid cash dividend 100,000 Dr Cash 20000
on Dec 31, 2010 Cr Dividend revenue 20000

5. The value of ABC share has decreased to 11/share Dr Unrealized loss 48000
on Dec 31, 2011 Cr ABC share 48000
6. ABC has reported 80,000 loss on Dec 31, 2011
No Entry
on interest rate was 8% pa and

4,000

614
614

Asset 100
Acc Dep 20 Dr Cash 85
BV 80 Cr Asset
Sell 85 Cr Gain on sale

EQ
Other comprehensive income
1463

ve sold Sec C at 63,000

70,000
realized gain/loss
10,000

Bank

Parent company

C3 C2
100% 80%

Z has 20% ownership over ABC

Equity Method
Dr Investment in ABC 480000
Cr Cash 480000

No Entry

Dr Investment in ABC 10000

Cr Revenue from ABC inve 10,000

Dr Cash 20000
Cr Investment in ABC 20000

No Entry
Dr Revenue from ABC inve 16000
Cr Investment in ABC 16000
 Sales
- COGS
= GP
- Selling & admin ex
80 + Other gain/revenue
5 - Other loss/expense
= EBIT
CHAPTER 18: REVENUE RECOGNITION

See the other file: Ch 18

 CHAPTER 22: CASH FLOW

Cash Flow:
Two Method 1. Indirect cash Flow Accrual Based Accounting
2. Direct Cash Flow Cash receipt and payment OR Cash Based accounting
The main difference is in Operating Cash Flow

3 parts of cash Flow statememts:

1. Operating Cash Flow: Net Income +- Non cash Transactions, Adjust CA and CL between current and previous ye

2. Investing Cash Flow: Any Purchase or Sell of Fixed Asset including investment/other company's share

3. financing Cash flow: Taking Long Term Liability+Issuing own shares-Paying Dividend-Paying Loan principle-Pu
Paying Loan principle Purchasing own shares

When you are payin off your loan If you rae receiving the dividend:
Dr Loan (interest+principle) Dr Dividend receivable or Cash
Cr cash Cr Dividend revenue

Introduction Growth Maturity Decline

Company Life Cycle

TER 22: CASH FLOW

Cash Flow
This year Last Year this year
Receivables 100 130 30
etween current and previous year 170 150 -20
Inventory 50 60 10
other company's share 80 70 -10

idend-Paying Loan principle-Purchasing own shares Payables 100 130 -30

170 150 20

ing the dividend:

eivable or Cash It will go inder
operating cash
flow Balance Sheet
Asset CA FA
Liability CL LTL
Equity Shares/Dividend

Die
 Accrual Based Accounting

Dr Interest expense
Cr Interest Payable

Dr Interest Payable
Cr Cash

Cash Based Accounting

Cash Receipt and payment

Dr Interest expense
Cr Cash

Revenue Original price

- COGS Acc Dep
= GP Book Value
- Sales & Admin exp Sell
= EBIT Gain
- Interest Sell
= EBT loss
- Tax
= NI 40,000

Dr Bad Debt Exp

Cr Allowance for doubful debt
 Dr AR Dr Cash
Cr Sales Revenue Cr Sales Rev

Dr Cash
Cr AR

100
30
70
73
3
68
2

Bad Debt Exp

Allowance for doubful debt