Chapter 36 - Liabilities

Question 1

Definition of a Liability – Recognition Conditions

Answer 1

A liability is recognized only if:

There is a present obligation

It involves transferring an economic resource

It arises from a past event

Question 2

Current Liabilities – Definition

Answer 2

Liabilities expected to be settled within one year or in the operating cycle, whichever is longer.

Question 3

Current Liabilities – Criteria

Answer 3

A liability is current if any of the following apply:

Expected to be settled in the normal operating cycle

Held for trading

Due within 12 months after reporting date

Entity cannot defer settlement for at least 12 months

Question 4

Non-Current Liabilities – Definition

Answer 4

Liabilities that are not current.

Expected to be settled after 12 months from the reporting date.

Question 5

Examples of Common Current Liabilities

Answer 5

Accounts payable

Notes payable, loans payable, bonds payable

Interest payable

Dividends payable

Taxes payable

Payroll liabilities

Deferred revenues

Warranties

Contingent liabilities

Question 6

ASPE – Contingent Liabilities Recognition

Answer 6

Recognized if likely to occur and reasonably estimable.

Question 7

IFRS – Contingent Liabilities Recognition

Answer 7

Recognized if probable or more likely than not (lower threshold).

Question 8

IFRS vs. ASPE – Terminology

Answer 8

Under IFRS, recognized obligation = provision

Unrecognized but disclosed = contingent liability

Question 9

Measurement of Liabilities – Initial

Answer 9

Initially measured at the amount owed (e.g., purchase price or face value).

Question 10

Measurement of Liabilities – Subsequent

Answer 10

May include adjustments for:

Accrued interest

Amortization of premiums or discounts

Question 11

Derecognition of Liabilities – When

Answer 11

Liability is removed when the obligation is:

Discharged

Cancelled

Expired

Question 12

Derecognition of Liabilities – How

Answer 12

Usually occurs when:

Payment is made

Creditor formally releases the obligation

Question 13

Initial Measurement – Additional Considerations

Answer 13

Assess if company has practical ability to avoid the obligation

Obligations may involve transfer of cash, goods, or services

Event must occur before the balance sheet date

Question 14

Accounts Payable – Definition

Answer 14

Amounts owed for goods or services used in operations.

Question 15

Accounts Payable – Characteristics

Answer 15

Usually due within 30–60 days.

Classified as current liabilities.

Question 16

Notes Payable – Definition

Answer 16

Formal written promises to pay a fixed amount at a specific date.

Question 17

Notes Payable – Characteristics

Answer 17

Typically interest-bearing.

Can arise from purchases or financing arrangements.

Question 18

Bank Overdraft – Definition

Answer 18

Occurs when withdrawals exceed cash balance.

Question 19

Line of Credit – Definition

Answer 19

Revolving borrowing arrangement with a maximum limit.

Interest is paid only on the amount borrowed.

Question 20

Bank Loans – Definition

Answer 20

Formal loan agreements with repayment schedules and interest.

Question 21

Bank Loans – Classification

Answer 21

Portion due within 12 months = current liability.

Remaining balance = non-current liability.

Question 22

Interest Payable – Definition

Answer 22

Accrued interest expense owed but not yet paid.

Question 23

Dividends Payable – Definition

Answer 23

Liability recognized on the declaration date of dividends.

Question 24

Dividends Payable – Settlement

Answer 24

Remains a liability until payment is made to shareholders.

Question 25

Taxes Payable – Definition

Answer 25

Liabilities for income and sales taxes owed to the government.

Question 26

Taxes Payable – Timing

Answer 26

Taxes accrue as income is earned and are paid later.

Question 27

Payroll Liabilities – Definition

Answer 27

Liabilities for amounts owed to employees and government agencies.

Question 28

Payroll Liabilities – Components

Answer 28

Include: Salaries and vacation pay CPP, EI, income tax deductions Employer contributions to benefits

Question 29

Payroll Liabilities – Classification

Answer 29

Employee deductions: Liabilities, not expenses Employer contributions: Both expenses and liabilities

Question 30

Bonds Payable – Definition

Answer 30

Long-term debt representing a promise to repay principal and interest.

Question 31

Bonds Payable – Characteristics

Answer 31

May be secured (collateralized) or unsecured (debentures). Issued at par, premium, or discount.

Question 32

Bonds Payable – Measurement

Answer 32

Transaction costs reduce bond proceeds at issuance.

Question 33

Deferred Revenues – Definition

Answer 33

Cash received before goods/services are provided.

Question 34

Deferred Revenues – Measurement

Answer 34

Recorded as a liability until earned.

Question 35

Warranties – Definition

Answer 35

Obligation to repair or replace goods under warranty terms.

Question 36

Warranties – Measurement

Answer 36

Recognized based on estimated costs using historical data. Recorded as expense and liability at sale date.

Question 37

Contingent Liabilities – Definition

Answer 37

Possible obligation from past events, confirmed by a future outcome.

Question 38

Contingent Liabilities – Recognition (ASPE)

Answer 38

Record if likely and measurable.

Question 39

Contingent Liabilities – Recognition (IFRS)

Answer 39

Record if probable, which is a lower threshold than ASPE.

Question 40

Customer Loyalty Programs – Definition

Answer 40

Create an obligation to provide goods/services for earned points.

Question 41

Customer Loyalty Programs – Recognition

Answer 41

Liability recognized when points are earned and reduced when redeemed.

Question 42

Rents and Royalties Payable – Definition

Answer 42

Liabilities from contracts for the use of intellectual property or resources.

Question 43

Rents and Royalties Payable – Measurement

Answer 43

Based on sales, production, or usage as specified in contracts.