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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

Question: When should liabilities for each of the following items be recorded on the books of an ordinary business corporation?

  1. Acquisition of goods by purchase on credit.
  2. Officers’ salaries.
  3. Special bonus to employees.
  4. Dividends.
  5. Purchase commitments.

Question: The presentation of current and non-current liabilities in the statement of financial position (balance sheet):

  1. is shown only on GAAP financial statements.
  2. is shown on both a GAAP and an IFRS statement of financial position.
  3. is always shown with current liabilities reported first in an IFRS statement of financial position.

(d)includes contingent liabilities under IFRS.

(Fair Value Measurement Issues) Assume the same information as in E17-19 for Lilly Company. In addition,

assume that the investment in the Woods Inc. stock was sold during 2018 for \(195,000. On December 31, 2018, the following

information relates to its two remaining investments of common stock.

Cost Fair Value

(at purchase date) (at December 31)

Investment in Arroyo Company stock \)100,000 \(140,000

Investment in Lee Corporation stock 250,000 310,000

Total \)350,000 \(450,000

Net income before any security gains and losses for 2018 was \)905,000.

Instructions

(a) Compute the amount of net income or net loss that Lilly should report for 2018, taking into consideration Lilly’s securitytransactions for 2018.

(b) Prepare the journal entry to record unrealized gain or loss related to the investment in Arroyo Company stock atDecember 31, 2018.

How does the acid-test ratio differ from the current ratio? How are they similar?

Question: On February 1, 2018, one of the huge storage tanks of Viking Manufacturing Company exploded. Windows in houses and other buildings within a one-mile radius of the explosion were severely damaged, and a number of people were injured. As of February 15, 2018 (When the December 31, 2017, financial statements were completed and sent to the publisher for printing and public distribution), no suits had been filed or claims asserted against the company as a consequence of the explosion. The company fully anticipates that suits will be filed and claims asserted for injuries and damages. Because the casualty was uninsured and the company is considered at fault, Viking Manufacturing will have to cover the damages from its own resources.InstructionsDiscuss fully the accounting treatment and disclosures that should be accorded the casualty and related contingent losses in the financial statements dated December 31, 2017.
See all solutions

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