TOPIC 2 pt.1

Question 1

What are Financial Liabilities?

Answer 1

They are long term obligations that imply a financial expense.

Question 2

Rules for measurement

Answer 2

1. Initial Measurement
   Measured at fair value, the transaction price. Always deducting commissions.
2. Subsequent Measurement
   Valued at amortised cost. Accused interest is recognised in the income statement using the effective interest rate method.

Question 3

Amortised Cost Table + Calculations

Answer 3

1. Period (Years/Months)
2. Interest = % over previous year’s debt (Amortised Column)
3. Payment (Debt with Interest)= Principal Paid + Accrued Interest. When it says payment on the exercise its that.
4. Principal Paid (Debt without Interest) = What I owe
5. Amortized Cost = Previous Year - Principal Amortised

Question 4

Long-term financing of purchases of non-current assets Entries

Answer 4

1. First Year Acquisition

D
Machinery (Full price)

C
Current Payables to supplier of F.A
(Principal paid of Y1)
Non-Current Payables to supplier of FF.A
(The rest)

2. Monthly Accounting (Will be mentioned on the exercise) = We divide the Interest amount of the year by the number of months.

D
Interest Expense

C
Current Interest on Payables

3. End of First Year
4. Payment of Interest

D
Current Interest on Payables
(Full interest Amount)
C
Cash in Banks

2. Payment Principal + Reclassification

D
Current Payables to Supplier of F.A

C
Cash in Banks

D
Non-Current Payables to Supplier of F.A

C
Current Payables to Supplier of F.A

4. Monthly recognition of Depreciation

D
Depreciation of PPE

C
Accumulated Depreciation of PPE

Question 5

Financial Leases

Answer 5

The leasing company purchases the asset for me, and then leases it to me. Even though we don’t legally own the asset, we account it as if we did.

Question 6

Financial Leases Entries

Answer 6

(They are the same as purchases of N.C.A but the entry name changes)

1. Contract Arrangement. 1st Year
   D
   Machinery

C
Non-Current Finance Lease Payables
Current Finance Lease Payables

2. Interest Monthly Accural
   D
   Intrest Expense
   C
   Current Interest on Payables
3. Payment Instalments (End of year)
   D
   Current Interest on Payables
   C
   Cash in Banks

D
Current Finance Lease Payables
C
Cash in Banks

4. Reclassification
   D
   Non-Current Finance Lease Payables

C
Current Finance Lease Payables

Question 7

Overdrafts/Credit Facilities

Answer 7

There is no table of amortised costs because there isn’t a schedule of payments to be made. I can use them whenever I want, then I will pay interest based on the used cash.

Question 8

Bank Overdrafts Entries

Answer 8

1. Inception (When I sign the contract)

D
Bank commissions and fees

C
Cash in Banks

2. Drawdown (Any time I use the money)

D
Cash in Banks

C
Current payables for drawdowns on credit facilities (This is a liability, I now owe this to the bank)

3. Accural of Interest + Payment

D
Intrest Expense

C
Current Interest on Payables

D
Current Interest on Payables

C
Cash in Banks

Question 9

How Interest is Calculated in Bank Overdrafts

Answer 9

Amount Withdrawn x % x How many days you have used the money (since withdrawal to payment) /360

Question 10

If credit lines dont follow monthly accounting and dont get paid monthly:

Answer 10

The new interest of the new withdrawal is added to the previous interest. Until payment. But you have to recalculate the previous ones, for instance if the first entry was 50/360 days, when u recalculate it for the new entry which is maybe a month later you will do 80/360.