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Chapter 13: Question 5IFRS (page 715)

Distinguish between a current liability, such as accounts payable, and a provision.

Short Answer

Expert verified

Accounts payable is defined as the sum total of debts a company owes to its creditors for goods or services purchased on credit. Whereas a provision is defined as the amount that is kept aside out of profit earned for incurring anticipated expense or depreciation in the asset value, although the exact amount is yet to be ascertained.

Step by step solution

01

Definition of Current liabilities

Current liabilities are liabilities payable in an accounting year. These liabilities are created either out of realization from current assets or by the formation of new current liability.

02

Difference between provision and accounts payable

Accounts payable and provision can be differentiated on the following grounds:

  • Provision is regarded as an estimated liability that may take place in the future, whereas accounts payable is considered as an actual amount of liability that has already taken place in an accounting year but yet is to be paid off.
  • Provisions are recorded separately under the heading provision in the liabilities section of the balance sheet. Whereas accounts payable are recorded under the current head liabilities in the liabilities section of the balance sheet.
  • Examples for provision are proposed dividend, provision for depreciation, repairs and renewals, provisions for doubtful debts, and provident fund. On the other hand, examples for accounts payable include acquisition of raw materials, transportation expense, traveling expense, leasing, and licensing.

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Most popular questions from this chapter

Where can authoritative IFRS be found related to investments?

Why is the liabilities section of the balance sheet of primary significance to bankers?

Define (a) a contingency and (b) a contingent liability.

Journal Entries for Fair Value and Equity Methods) The following are two independent situations.

Situation 1: Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of \(13 per

share on March 18, 2017. On June 30, Martinez declared and paid \)75,000 cash dividends to all stockholders. On December 31,

Martinez reported net income of \(122,000 for the year. At December 31, the market price of Martinez Fashion was \)15 per share.

Situation 2: Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles鈥檚 30,000 outstanding shares

of common stock at a total cost of \(9 per share on January 1, 2017. On June 15, Seles declared and paid cash dividends of \)36,000

to all stockholders. On December 31, Seles reported a net income of $85,000 for the year.

Instructions

Prepare all necessary journal entries in 2017 for both situations.

(Available-for-Sale and Held-to-Maturity Debt Securities Entries) The following information relates to the debt

securities investments of Wildcat Company.

1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of \(300,000 at 100 plus accrued interest.

Interest is payable on April 1 and October 1.

2. On April 1, semiannual interest is received

3. On July 1, 9% of bonds of Sampson, Inc. were purchased. These bonds with a par value of \)200,000 were purchased at 100

plus accrued interest. Interest dates are June 1 and December 1.

4. On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 99 plus accrued interest.

5. On October 1, semiannual interest is received.

6. On December 1, semiannual interest is received.

7. On December 31, the fair value of the bonds purchased February 1 and July 1 were 95 and 93, respectively.

Instructions

(a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are

available-for-sale securities.

(b) If Wildcat classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (a).
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