INTERMEDIATE ACCOUNTING 2 MODULE

Chapter 1: Conceptually, all liabilities are initially measured at present value

LIABILITIES- Introduction and subsequently measured at amortized cost.
 Current Liabilities or short-term obligations
- Are recorded and reported at face amount.
Objectives:
The learner should be able to understand and know:
 Noncurrent liabilities
 The concepts of liabilities.
- Bonds payable and non-interest bearing note payable are
 How to describe the nature and type of current and
initially measured at present value and subsequently
noncurrent liabilities.
measured at amortized cost.
 The measurement of current and noncurrent liabilities.
- Long-term note payable (interest bearing) is initially and
 How to explain the issue of long-term debt falling due within
subsequently measured at face amount or amount equal
one year.
to its present value.

Start of Discussion  CURRENT LIABILITIES

PAS 1 provides that an entity shall classify a liability as current
when:
 LIABILITIES
a. The entity expects to settle the liability within the entity’s
The Revised Conceptual Framework for Financial Reporting
operating cycle.
provides the following definition of liabilities:
b. The entity holds the liability primarily for the purpose of trading.
c. The liability is due to be settled within twelve (12) months after
Liabilities are present obligations of an entity to transfer an
the reporting period.
economic resource as a result of past events.
d. The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the
Essential Characteristics of an accounting liability are:
reporting period.
a. The entity has a present obligation.
b. The obligation is to transfer an economic resource.
 NONCURRENT LIABILITIES
c. The liability arises from past event.
All liabilities not classified as current are classified as noncurrent
liabilities. It includes:
Present obligation
a. Non-current portion of long-term debt
The present obligation may be a legal obligation or a constructive
b. Finance lease liability
obligation.
c. Deferred tax liability
 Obligations may be legally enforceable as a consequence of
d. Long-term obligation to officers
binding contract or statutory requirement,
e. Long-term deferred revenue
 Constructive obligations also give rise to liabilities by reason of
normal business practice, custom and desire to maintain good
Long-term debt falling due within one year
business relations or act in an equitable manner.
A liability which is due to be settled within twelve months after the
reporting period is classified as current, even if:
Transfer of economic resource
a. The original term was for a period longer than twelve months.
The economic resource is the asset that represents a right with a
b. An agreement to refinance or to reschedule payment on a long-
potential to produce economic benefits. Specifically, the obligation
term basis is completed after the reporting period and before
must be to pay cash, transfer noncash asset or provide service at
the financial statements are authorized for issue.
some future time.
Covenants - are often attached to borrowing agreements which
Past Event
represent undertakings by the borrower.
The past event that leads to a legal or constructive obligation is
known as the obligating event. It creates present obligation because
Breach of Covenants
the entity has no realistic alternative but to settle the obligation
If certain conditions relating to the borrower’s financial situation is
created by the event.
breached, the liability becomes payable on demand.
Examples of Liabilities
Liability is classified as current even if the lender has agreed, after
a. Accounts payable to suppliers for the purchase of goods.
the reporting period and before the statements are authorized for
b. Amounts withheld from employees for taxes and for
issue, not to demand payment as a consequence of the breach.
contributions to the SSS.
c. Accruals for salaries, interest, rent, taxes, product warranties
Liability is noncurrent if the lender has agreed on or before the end
and profit sharing bonus.
of the reporting period to provide a grace period ending at least
d. Cash dividend declared but not paid.
twelve months after that date.
e. Deposits and advances from customers.
f. Debt obligations for borrowed funds- notes, mortgages and
Grace period is period within which the entity cannot rectify the
bonds payable
breach and during which the lender cannot demand immediate
g. Income tax payable
repayment.
h. Unearned revenue
 Presentation of Current Liabilities
a. Trade and other payables
 MEASUREMENT OF LIABILITIES
INTERMEDIATE ACCOUNTING 2 MODULE
b. Current provisions The main purpose of bonus is to motivate officers and employees by
c. Short-term borrowings directly relating well-being to the success of the entity.
d. Current portion of long-term debt
e. Current tax liability The bonus computation usually has four variations:
Illustration:
Estimated Liabilities Income before bonus and tax 4,400,000
- Are obligations which exist at the end of reporting period Bonus 10%
although their amount is not definite. Income tax rate 30%
- Estimated liabilities are either current or noncurrent in nature.
1. Bonus is expressed as a certain percent of income before bonus
Deferred Revenue and before tax.
- Or unearned revenue is income already received but not yet
earned. Income before bonus and tax 4,400,000
- May be realized within one year or in more than one year after Multiply by 10%
the end of the reporting period. Bonus 440,000
- Deferred revenue can either be current or noncurrent liability.
2. Bonus is expressed as a certain percent of income after bonus
Illustration: but before tax.
An entity sells equipment service contracts agreeing to service
equipment for a 2-year period. Cash receipts from contracts are B = .10 (4,400,000 – B)
credited to unearned service revenue and service contract costs are B = 440,000 - .10B
charged to service contract expense. B + .10B = 440,000
1.10B = 440,000
Revenue from service contracts is recognized as earned over the B = 440,000/1.10
service period of the contracts. B = 400,000

The following transactions occur in the first year: 3. Bonus is expressed as a certain percent of income after bonus
Cash receipts from service contracts sold 1,000,000 and after tax.
Service contracts costs paid 500,000
Service contract revenue recognized 800,000 B = .10 (4,400,000 – B – T)
T = .30 (4,400,000 – B)
Journal Entries for the First year: B = .10 [4,400,000 – B – .30 (4,400,000 – B)]
1. To record the cash receipts from service contracts sold: B = .10 (4,400,000 – B – 1,320,000 + .30B)
Cash 1,000,000 B = 440,000 - .10B – 132,000 + .03B
Unearned service revenue 1,000,000 B + .10B - .03B = 440,000 – 132,000
1.07B = 308,000
2. To record the service contract costs paid. B = 308,000/ 1.07
Service contract expense 800,000 B = 287,850
Cash 800,000 T = .30 (4,400,000 – 287,850)
T = 1,233,645
3. To record the service contract revenue recognized.
Unearned service revenue 800,000 4. Bonus is expressed as a certain percent of income after tax but
Service contract revenue 800,000 before bonus.

Gift Certificates Payable B = .10 (4,400,000 – T)

Many megamalls, department stores and supermarkets sell gift T = .30 (4,400,000 – B)
certificates which are redeemable in merchandise. The accounting B = .10 [4,400,000 – .30 (4,400,000 – B)]
procedures are: B = .10 (4,400,000 – 1,320,000 + .30B)
B = 440,000 – 132,000 + .03B
1. When the gift certificates are sold. B - .03B = 440,000 – 132,000
Cash xxx .97B = 308,000
Gift certificates payable xxx B = 308,000/.97
B = 317,526
2. When the gift certificates are redeemed.
Gift certificates payable xxx
Sales xxx Refundable Deposits
- Consists of cash or property received from customers but
3. When the gift certificates expire or when gift certificates are not which are refundable after compliance with certain
redeemed. conditions.
Gift certificates payable xxx
Forfeited gift certificates xxx Illustration:
A deposit of P10,000 is required from the customer for returnable
Bonus Computation containers. The containers cost P8,000.
INTERMEDIATE ACCOUNTING 2 MODULE

Cash 10,000
Container’s deposit 10,000
-End of Discussion-