UNIT 6

SOME FINANCIAL PAYABLES AND

INVESTMENTS
 1. Concept and types of payables.

External financing sources can be divided into:

- Spontaneous external financing sources: these are the debts with suppliers and creditors generated by
commercial operations.
- Negotiated external financing sources: they require an express negotiation. We can distinguish two
types:
Pure financing operations, and among these, credit lines, loans received, leasing.
Financial operations related to other transactions, such as payables for the acquisition of fixed-assets.

The General Accounting Plan distinguishes among the following:

- Debts and payables: trade payables (suppliers and others) and financial payables (loans, finance
leases, debt securities and suppliers of fixed assets)
- Financial liabilities held for trading
- Other financial liabilities at fair value
 2. Credit lines.

Credits lines are pure financing operations by which a financial institution provides the client company
with a variable amount of money (up to an agreed limit, for a period normally set in the short term).
Interests are charged only to the amounts actually drawn. In any moment, the company can carry out
contributions in order to reduce the debt.
The account (5201) Current payables for drawdowns on credit facilities functions as a liability account,
recording exclusively the amount we owe in every moment. Additionally, the company shall recognise in
the annual accounts “the amount available in discount lines, as well as credit lines granted to the
company with their respective limits, specifying the drawn portion”

Exercise

We are given by a bank a credit line with a maximum amount of 140,000.00 Euros and a maturity of six
months. Considering that there is no debt yet, there is no entry.
The costs of the operation are 100.00 Euros, which will be charged to the own financial account by the
bank.
100.00 (626) Banking and similar (5201) Current payables 100.00
services for drawdowns on credit
facilities
 2. Credit lines.

With a charge to the credit account we pay 70,000.00 Euros that we owed to a supplier:

70,000.00 (400) Suppliers (5201) Current payables

for drawdowns on credit 70,000.00
facilities

We deposit 30.000,00 Euros in cash in the credit account:

30,000.00 (5201) Current payables (570) Cash 30,000.00

for drawdowns on credit
facilities

Upon maturity, the amount of accrued interest is 200 Euros

200.00 (662) Interest on (5201) Current payables
payables for drawdowns on credit
200.00
facilities

We cancel the credit account by a transfer from our current account

40,300.00 (5201) Current payables (572) Banks 40,300.00
for drawdowns on credit
facilities
 3. Loans received.

They constitute an operation by which a company (called borrower) receives from another (called
lender, which is usually a financial institution) a fixed amount of money at the very beginning, called
principal amount. In exchange, the borrower company must pay off:

1. Initial expenses of the operation: intermediaries, taxes, the opening bank commission.
2. Accrued interests throughout the life of the operation.
3. To give back the received capital of the loan.
During its lifetime, the principal of the loan constitutes a financial liability for the borrower company:
subgroups (170) Non-current payables for loans, debentures and other and (520) Current payables
for loans and other.

Exercise

On 1-1-X a company obtains a loan of 1,200,000.00 Euros that has to be returned in three
instalments (one per year). Each of these instalments will include the repayment of the principal
amount, and an annual 6% accrued interest of each period, according to the table below. The
opening commission and other costs add up to 1% on the nominal amount.
The table that has been established by the bank in accordance with the French system is as
follows:
 3. Loans received.

Exercise

Date Instalment Interests Capital paid Pending capital

1-1-X - - 1,200,000.00
31-12-X 448,969.38 72,000.00 376,969.38 823,030.62
31-12-(X+1) 448,969.38 49,381.84 399,587.54 423,443.07
31-12-(X+2) 448,969.38 25,526.31 423,443.07 -
Total 1,346,908.10 146,908.10 1,200,000.00

As we have seen, the initial valuation of the loan will be done at the amount received less the processing
expenses. In this case, 1,200,000 Euros less 12,000 Euros (1 % of the capital). That is, 1,188,000
Euros.
Annually, we shall allocate to profit and loss the finance expenses calculated using the effective interest
method. Accordingly, at first, we shall determine it. Then, we shall apply it to the pending capital of each
reporting period. This way, we shall recalculate the table from the economic point of view.
 3. Loans received.

In this example, the initial book value of liabilities is 1,188,000 Euros and the annual cash flows are
448,969.38 Euros, during three years (which correspond to the instalments that have to be paid)
To calculate the effective interest rate we balance out the initial value with the current value of cash flows
that we shall deliver:

1,188,000 = 448,969.38 / (1 + i) + 448,969.38 / (1 + i )2 + 448,969.38 / (1 + i )3; From where i = 6.55 %

Accordingly, the economic table with the effective interest rate will be:
Date Instalment Interests Capital paid Pending capital

1-1-X - - 1,188,000.00
31-12-X 448,969.38 77,814.00 371,155.38 816,844.62

31-12- 448,969.38 53,503.32 395,466.06 421,378.56

(X+1)
31-12- 448,969.38 27,590.82 421,378.56 -
(X+2)
Total 1,346,908.14 158,908.14 1,188,000.00

1,188,000.00 (572) Banks (170) Non-current debt

with financial institutions 816,844.62
(520) Current debts with 371.155.38
financial institutions
3. Loans received.
77,814.00 (662) Interest on
31-12-X payables

371,155.38 (520) Current debt with (572) Banks 448,969.38

financial institutions

395,466.06 (170) Non-current debt (520) Current debt with

with financial financial institutions
395,466.06
institutions

53,503.32 (662) Interest on (572) Banks 448,969.38

31-12-X+1
payables
395,466.06
(520) Current debt with
financial institutions

421,378.56 (170) Non-current debt (520) Current debt with 421,378.56

with financial financial institutions
institutions
[For the reclassification of
maturity dates]

31-12-X+2 27,590.82 (662) Interest on

payables

421,378.56 (520) Current debt with (572) Banks 448,969.38

financial institutions
 3. Loans received.

EX. TAE. Point 6. On 1 July 20X5 the company received a loan of 160,000 Euros to be repaid in
two years according to the following table:

Date Capital Interest payments Capital due

amortised
1/7/X5 160,000
1/7/X6 80,000 9,600 80,000
1/7/X7 80,000 4,800 0

6)
1-7

160,000.00 572. Banks 170. Non-current debt with financial institutions 80,000.00
520. Current debt with financial institutions 80,000.00
31-12

4,800.00 662. Interest on payables 527. Current interest on debt with financial institutions 4,800.00

1-7-X6

4,800.00 527. Current interest on debt with financial institutions

4,800.00 662. Interest
80,000.00 520. Current debt with financial institutions
572. Banks 89,600.00
3. Loans received.

EX. ES GRAU. Point 4.

The company Es Grau applied for a loan 01-09-2013. The details of the loan, expressed in euros, are as follows.

Date Annual Interests Capital paid Outstanding capital

instalment
01-09-2013 12,000,000
01-09-2014 4,489,700 720,000 3,769,700 8,230,300
01-09-2015 4,489,700 493,900 3,995,800 4,234,500
01-09-2016 4,489,700 255,200 4,234,500 0

The balances of the accounts associated with the loan are the following:

170 Non-current debts 8,230,300

520 Current debts 3,769,700
527 Interest on debts 240,000

So the company made the following entries in 2013

1-9-13
12,000,000 572 520 3,769,700
170 8,230,300
31-12-13

240,000 662 527 240,000

 3. Loans received.

EX. ES GRAU. Point 4.

Date Annual Interests Capital paid Outstanding capital

instalment
01-09-2013 12,000,000
What entries must be made in 2014? 01-09-2014 4,489,700 720,000 3,769,700 8,230,300
01-09-2015 4,489,700 493,900 3,995,800 4,234,500
01-09-2016 4,489,700 255,200 4,234,500 0

4) 1-9-14
480.000 662
240.000 527
3.769.700 520 572 4.489.700

164.633,33 662 31-12-14 527 164.633,33

3.995.800 170 520 3.995.800

 4. Leasing.

4.1. Concept, characteristics and typology.

Leasing operations are derived from a specific type of contract in which one of the parties involved -a
leasing company, also known as lessor- is the legal owner of a fixed asset that is transferred in rent to
another company -lessee-. Therefore, the latter can use the asset in its economic activity, in return for
regular instalments. At the end of the contract, the leasing company shall give the lessee an option to
purchase the asset, enhancing the full ownership of the leased asset if this is the case.

– The purchase option (optional) is included in the contract. The amount is generally equal to that of a
normal instalment.
– The duration of the contract is usually shorter than the real useful life of fixed assets.
– Regular instalments include capital and interests.
– In Spain, the minimum duration is two years.

According to their purpose, the leasing types of contract are:

1. Finance lease, when there is an intention to exercise the purchase. The aim is to obtain the right of
use and the full ownership.
2. Operating lease, when there is no intention to exercise the purchase option. In this sense, the asset
must be returned at the end of the contract. It’s simply a lease (account 621)
 4. Leasing.

4.2. Finance lease.

Finance lease, when there is an intention to exercise the purchase. The aim is to obtain the right of use
and the full ownership. This happens when there are no reasonable doubts that the option of purchase
is going to be exercised.

Accounting will be done recording, on the one hand, the item of property, plant and equipment
according to its nature and, on the other hand, a financial liability by the same amount, which will be the
lower amount of:
- The fair value of the leased asset.
- The present value of periodic payments (including the purchase option), using the interest rate implicit
in the contract.

The initial expenses are treated as major value of the asset and financial expenses will be distributed
and recorded using the effective interest method.
 4. Leasing.

4.2. Finance lease.

Exercise

A company arranges with a financial institution an finance lease for the acquisition of a computer on
January 1. The fair value of the item is 5,817.80 Euros. The contract will last two years, with the
following costs that the financial institution breaks down as follows (plus 21% VAT).
- At the end of the first year: Total instalment: 3,412.28 Euros, divided into 2,693.08 Euros of capital and
719.20 Euros of interest.
- Second year: Total instalment: 3,412.28 Euros, divided into 3,016.25 Euros of capital and 396.03
Euros of interest.
- Purchase option: 284.00 Euros.
- The interest rate is 12%.
The lessee considers that the item will have a useful life of five years, and that its residual value will be
zero, thus applying the straight line criterion.

It constitutes a fixed asset according to the nature of the good, and it shall be recorded in (217)
Information technology equipment. Their valuation will be done according to the lower of the following
amounts:
- The fair value, 5,817.80 Euros.
- The present value of the periodic payments using the interest rate implicit in the lessor.
Present value = 3,412.80 / (1 + 0.12) + 3,496.80 / (1 + 0.12)2 = 5,993.33
 4. Leasing.

4.2. Finance lease.

Exercise

The legal debt table, which in the example is as follows:

Date Instalment Interests Capital paid Capital due
1-1-X - - 5,993.33
31-12-X 3,412.28 719.20 2,693.08 3,300.25
31-12-(X+1) 3,696.28 396.03 3,300.25 -
Total 7,108.56 1,115.23 5,993.33

On the other hand, we have the table from the economic point of view, using the effective
interest method. The first step is to calculate the interest rate. This implies equating the value of
the asset with the cash flows and determining the interest rate:
5,817.80 = 3,412.28 / (1 + i)1 + (3,412.28 + 284.00) / (1 + i)2, from where i = 14.26 %.

Date Instalment Interests at Capital paid Capital due

14.26%
1-1-X - - 5,817.80
31-12-X 3,412.28 829.62 2,582.66 3,235.14
31-12-(X+1) 3,696.28 461.14 3,235.14 -
Total 7,108.56 1,290.76 5,817.80
 4. Leasing.

4.2. Finance lease.

Exercise
5,817.80 (217) Information (174) Non-current finance
technology equipment lease payables 3,235.14
Year 1 (524) Current finance lease
payables 2,582.66

2,582.66 (524) Current finance lease

payables
For the payment of the principal (572) Banks 4,128.86
instalment
829.62 (662) Interest on payables
For the imputation of interests

716.58 (472) Input VAT

1,163.56 (681) Depreciation of (2817) Accumulated 1,163.56

property, plant and depreciation of information
equipment technology equipment

3,235.14 (174) Non-current finance (524) Current finance lease 3,235.14

lease payables payables
For the reclassification
 4. Leasing.

4.2. Finance lease.

Exercise
(524) Current finance lease
Year 2 2,951.14 payables
For the payment of the fee. (572) Banks 4,472.50
284.00 (524) Current finance lease
payables
For the payment of the option
(662) Interest on payables
461.14 For the imputation of interests

776.22 (472) Input VAT

1,163.56 (681) Depreciation of property, (2817) Accumulated 1,163.56

plant and equipment depreciation of
information technology
equipment

In the third, the fourth and the fifth year only the annual depreciation accounting will be done,
for the same amount as in the two-year duration of the lease contract:

1,163.56 (681) Depreciation of (2817) Accumulated 1,163.56

property, plant and depreciation of information
equipment technology equipment
4. Leasing.

EX. SEQUOIA P.5.- On 1st January 2013 the company bought, by means of a
financial leasing contract, computers worth 11,635.60 euros. Useful life 5 years. The
payment table is as follows. Account for the transactions od 2014

Date Quota Interests Amort. Capital Outstanding

capital
01-01-2013 11,635.60
31-12-2013 6,824.56 1,659.24 5,165.32 6,470.28
31-12-2014 7,392.56 922.28 6,470.28 -
Total 14,217.12 2,581.52 11,635.60

5)
6.470,28 524. Current lease
payables
922,28 662.Interest 572. Banks 7.392,56

2.327,12 681. Deprec. 2817. Accu.deprec. 2.327,12

 5. Provisions and contingencies.

The accounting term provision, according to the 15th measurement standard in the General
Accounting Plan, refers to non-financial liabilities that are uncertain as for their amount or the date
on which they shall be cancelled. Nonetheless, they shall meet the recognition criteria established
for liabilities, that is:

1. They must be obligations. For their cancellation the company shall transfer resources.
2. The transfer of resources must be probable, and their amount, although undetermined, must be
measured reliably.

On the other hand, contingencies are defined as contingent assets or liabilities, that might be
possible. However, since they do not meet the requirements of probability they shall not be
registered. In any case, their nature, possible evolution and valuation shall be recorded in the
annual report.
 5. Provisions and contingencies.

(143) Provisions for dismantlement, removal or restoration of fixed assets

Upon acquiring a fixed asset element the company may estimate that for the dismantlement, removal
or restoration of the site on which the assets are located, a series of costs may incur, when the useful
life of the asset is over. In such cases, the company will account for the value of the asset at the
purchase price. In addition, it shall increase the value of the asset at the current value of the
estimated costs of dismantlement, removal or restoration of the site, with a credit to the provision
account.

Exercise

A company buys some silos for wheat storage, whose purchase price is 100,000.00 Euros, plus 21%
VAT. A useful life of 20 years is estimated. Once this period of time is over, the dismantlement costs
will be 10,000.00 Euros. 5 % interest rate.

- For the acquisition:

100,000.00 (212) Technical
installations
21,000.00 (472) Input VAT (572) Banks 121,000.00
 5. Provisions and contingencies.

(143) Provisions for dismantlement, removal or restoration of fixed assets

- For the activation of the current value of removal costs over the asset value and the entry of the
provision: P.V = 10,000 / (1+0.05)20 = 3,768.90

3,768.90 (212) Technical (143) Provisions for 3,768.90

installations dismantlement,
removal or
restoration of fixed
assets

- For the update during the first year of the provision:

188.45 (660) Finance (143) Provisions for 188.45

expenses arising dismantlement,
from provision removal or
adjustments restoration of fixed
3,768.90 x 0.05 assets
 5. Provisions and contingencies.

(142) Provisions for other liabilities

These are non-financial liabilities arising on obligations for which the amount is uncertain and which
are not recognised under any other account, including obligations relating to litigations underway,
indemnities or obligations deriving from bank or other similar guarantees, etc.
The initial valuation will base on the current value of the estimated amount that the company shall
assume.

Exercise

A company is involved in a litigation whose estimated duration is two years. If at the end of this period
there is a favourable verdict for the claimant, the company shall assume payments for a probable
amount of 30,000.00 Euros.
 5. Provisions and contingencies.

(142) Provisions for other liabilities

Firstly, we shall determine the current value of that obligation, which is 30,000.00 Euros. If we
suppose a 5 % interest rate,
Current value = 30,000.00 / (1 + 0.05)2
From where the current value is 27,210.88

For the recording of the provision:

27,210.88 (678) Exceptional (142) Provisions for 27,210.88
expenses other liabilities

At the end of the reporting period we shall update the value of the provisions, since it has to be
valued at 30,000.00 Euros in two years.
Accordingly, during the first year, we shall revalue up to 5 % the initial provisions, as the General
Accounting Plan states, with a charge to finance expenses.

1,360.54 (660) Finance (142) Provisions for 1,360.54

expenses arising from other liabilities
provision adjustments
27,210.88 x 0.05
 5. Provisions and contingencies.

(142) Provisions for other liabilities

Now, the amount of the provision is: 27,210.88 + 1,360.54 = 28,571.42

And at the end of the second reporting period: updating the provision and considering it short term

1,428.58 (660) Finance (142) Provisions for 1,428.58

expenses arising other liabilities
from provision
adjustments
28,571.42 x 0.05

. 30,000.00 (142) Provisions for (5292) Current 30,000.00

other liabilities provisions for other
liabilities

Once the dispute is solved, in case the 29,000.00 Euros had to be paid, we shall record:

30,000.00 (5292) Current (572) Banks 29,000.00

provisions for other (7952) Surplus
1,000.00
liabilities provisions for other
liabilities
 5. Provisions and contingencies.

(142) Provisions for other liabilities

ES GRAU Point 5.

5.- Since 01-10-2014 the company Es Grau is a party in a lawsuit that is expected to last two years. If
the court rules in the plaintiff's favour, the company will have to pay around 40,000 euros (the current
value applying an interest rate of 5% amounts to 36,281.18 euros).

5) 1-10
36.281,18 678. Extr.expenses 142. Provisions 36.281,18
31-12
453,51 660. Interest 142. Provisions 453,51
 5. Provisions and contingencies.

(142) Provisions for other liabilities

EX. VESTA Point 6.

Account (5292) relates to a provision for a compensation in favour of another company. The real
amount fixed is 3,000.00 Euros which is paid by bank transfer and the creditor accepts the write off of
the rest.

6)

4,000.00 5292. Current provisions 795. Provision surpluses 1,000.00

572. Banks 3,000.00

 8. Concept and types of financial investments.

The SGAP defines a financial instrument as a contract that gives rise to a financial asset in one
company and, simultaneously, a financial liability or equity instrument in another company.

This includes:
- Trade receivables.
- Loans and credit extended to third parties, including credits for sale of non-current assets.
- Debt securities (debentures, bonds).
- Equity instruments acquired in other companies (shares and equity holdings).
- Derivatives: futures, options, swaps.
- Deposits in banks, loans to personnel, guarantees and deposits extended, dividends receivable and
receivables on called-up own equity instruments.

As for financial investments, the Chart of Accounts contains specific sub-groups:

- Sub-group 24. Non-current investments in related parties.

- Sub-group 25. Other non-current investments.
- Sub-group 53. Current investments in related parties.
- Sub-group 54. Other current investments.
 9. Valuation of financial investments.

9.1. Measurement of financial assets at amortised cost.

Example of a non-trade receivable for sale of fixed assets with interest

A company has a machine that is accounted for on 30 December X as follows: Purchase Price:
5,000, Accumulated amortisation: 2,500. On that day the machine is sold for 3,200, receiving 2,200
with the remainder (1,000) becoming due on 31/12/(X+1) plus 5% of interest.

2,200.00 (572) Banks

1,000.00 (253) Non-current loans (213) Machinery 5,000.00
for disposal FA
2,500.00 (2813) Acc.Amort. (771) Gains on prop. 700.00
Plant & Equip.

1,000.00 (543) Current loans for (253) Non-current loans 1,000.00

disposal of FA for disposal of FA

1,050.00 (572) Banks (762) Income from 50.00

loans
(543) Current loans for 1,000.00
disposal of FA
 9. Valuation of financial investments.

9.1. Measurement of financial assets at amortised cost.

Example of a loan granted:

On 1/1/X one company grants another company a loan of 1,200 to be repaid over 3 years in
three instalments. Each one of these instalments will include repayment of capital and accrued
interest for each period at 6% per annum, according to the following table:

Date Annual Interest Capital amortised Capital due

instalment
1/1/X - - 1,200.00
31/12/X 448.97 72.00 376.97 823.03
31/12/(X+1) 448.97 49.39 399.58 423.45
31/12/(X+2) 448.97 25.52 423.45 -
Total 1,346.91 146.91 1,200.00

823.03 (252) Non-current (572) Banks 1,200.00

loans

376.97 (542) Current loans

 9. Valuation of financial investments.

9.1. Measurement of financial assets at amortised cost.

448.97 (572) Banks (542) Current loans 376.97

31-12-X (762) Income from 72.00
loans

399.58 (542) Current loans (252) Non-current 399.58

loans

31-12-X+1
448.97 (572) Banks (542) Current loans 399.58
(762) Income from 49.39
loans

423.45 (542) Current loans (252) Non-current 423.45

loans

448.97 (572) Banks (542) Current loans 423.45

31-12-X+2
(762) Income from 25.52
loans
 9. Valuation of financial investments.

EX. VESTA. Point 5.

5) On 1 April X9 the company grants a loan to another company of 12,000.00 Euros to be paid back
in three years in three identical payments, with each one including the repayment of capital and
interest accrued in each period at 6% per annum, in accordance with the following table:

Date Annual instalment Interest Capital amortised Capital due

1/4/X9 12,000.00
1/4/X10 4,489.70 720.00 3,769.70 8,230.30
1/4/X11 4,489.70 493.90 3,995.80 4,234.50
1/4/X12 4,489.70 255.20 4,234.50 0

5)

3,769.70 542. Current loans 572. Banks 12,000.00

8,230.30 252. Non-current loans
31-12

540.00 547. Current interest on loans 762. Income from loans 540.00