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20-Current-Liabilities

BS Accountancy (Olivarez College)

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UCP :FAR 20_ CURRENT LIABILITIES BATCH 2022 REVIEW

UNIVERSAL COLLEGE OF PARAÑAQUE

COLLEGE OF BUSINESS & ACCOUNTANCY

FAR20 – CURRENT LIABILITIES

TOPIC OUTLINE

Definition
Liabilities
Essential
Characteristics
CURRENT Measurement
LIABILITIES
Current Liabilities
Classification
Non-current
Liabilities

LECTURE NOTES
LIABILITIES
Liabilities are present obligations of an entity arising from past transactions or events, the settlement of
which is expected to result in an outflow from the entity of resources embodying economic benefits.
Essential Characteristics of Liabilities:
(1) Liabilities are PRESENT OBLIGATION.
It is NOT NECESSARY that the payee to whom the obligation is owed be identified. What is important
is that the entity identifies itself as liable to another entity.
(2) Liabilities arise from PAST TRANSACTIONS OR EVENTS.
This means that the liability is not recognized until it is incurred. The past event that leads to a
present obligation is called an obligating event.
An obligating event is an event that creates a legal (the settlement of the obligation can be enforced
by law) or constructive obligation (The event creates valid expectation on the part of other parties
that the entity will discharge the obligation, as in the case of constructive obligation) because the
entity has no realistic alternative but to settle the obligation created by the event.
(3) The settlement of the liability REQUIRES AN OUTFLOW of resources embodying economic benefits.
Settlement may be in the form of: (a) payment of cash; (b) transfer of non-cash assets; (c) provision
of future services. This characteristic is the main reason why STOCK DIVIDENDS PAYABLE is NOT a
LIABILITY but rather presented within EQUITY.
MEASUREMENT
Interest
Initial Subsequent Fair Value
CLASSIFICATION Amortized? Expense is
Measurement Measurement Changes
based on
Financial
Yes
Liabilities at
(Presented
Fair Value Fair Value Fair Value No Nominal Rate
in Profit or
through
FINANCIAL Loss)
Profit or Loss
LIABILITIES
Financial
Fair Value minus
Liabilities at
Transaction Amortized Cost Yes No Effective Rate
Amortized
Costs
Cost
Usually,
Yes, if Effective Rate if
Best Estimate of Best Estimate of
NON-FINANCIAL LIABILITIES measured at No the liability is
Cash Outflow Cash Outflow
present value measured at
present value
NOTES:
(a) Transaction costs are expensed immediately if the financial liability is designated initially as at fair
value through profit or loss. Transaction costs are incremental costs that are directly attributable to
the issue of a financial liability.

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(b) Transaction costs include:

 Fees and commissions paid to agents, advisers, brokers and dealers
 Levies by regulatory agencies and securities exchanges
 Transfer taxes and duties
Transaction costs do not include:
 Debt premiums or discounts
 Financing costs
 Internal administrative or holding costs
(c) Financial liabilities are classified as FVPL (1) through irrevocable designation or (2) if the liability is
held for trading (liabilities with an intention to repurchase them in the near term)
(d) The "amortized cost" of a financial liability is the amount at which the financial liability is measured at
initial recognition minus principal repayment, plus or minus the cumulative amortization using the
effective interest method of any difference between the initial amount and the maturity amount.
FINANCIAL STATEMENTS CLASSIFICATION
An item of liability is classified as current liability if it met any of the following criteria set by PAS 1:
(1) The entity expects to settle the liability within the entity's normal operating cycle.
(2) The entity holds the liability primarily for the purpose of trading.
(3) The liability is due to be settled within twelve months after the reporting period.
(4) The entity does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period.
NOTE: If an item did not meet any of the criteria above, it is classified as a non-current liability.
Examples of current liabilities:
 Trade and other payables (a)
 Financial liabilities held for trading
 Current portion of long-term debt
 Short-term borrowing
 Current provisions
 Current tax liability
 Financial liabilities held for trading
 Bank overdraft
 Credit balances in accounts receivable
 Unearned income realizable within 12 months (b)
 Accrued expenses
 Long-term debt currently maturing
 Refundable deposits (c)
 Payroll taxes payable (d)
 Value-added Taxes (VAT) payable (Output VAT less Input VAT)
 Escrow liability (e)
Note: Non-trade payables are classified as current liabilities if are due for settlement within twelve months
after the reporting period or held primarily for the purpose of being traded.
REFINANCING OF CURRENTLY MATURING OBLIGATION
GENERAL RULE: A currently maturing obligation is presented as CURRENT LIABILITY
EXCEPTIONS: (The liability is presented as NON-CURRENT LIABILITY if it met any of the following
conditions)
(1) The company has the prerogative/option/unconditional right to refinance the liability.
(2) If there is no right but refinancing was completed on or before the balance sheet date.
Refinancing may be done thru extension of maturity date or through issuance of bonds the proceeds of
which is used to settle the currently maturing obligation.
To provide a clear guidance on the above concept, please see the following concept map:
With unconditional right to
refinance the liability
(NON-CURRENT
LIABILITY) But refinancing was made
RULES ON ON OR BEFORE year-end
REFINANCING (NON-CURRENT
LIABILITY)
Without unconditional right
to refinance the liability
But refinancing was made
AFTER year-end
(CURRENT LIABILITY)

BREACH OF CONTRACTS
GENERAL RULE: If the company breached a covenant or contract, the long-term obligation BECOMES
IMMEDIATELY DEMANDABLE, thus presented as a CURRENT LIABILITY
EXCEPTIONS: (The liability is still presented a NON-CURRENT LIABILITY under the following conditions)
(1) If the creditor agreed to give the debtor a grace period for atleast 12 months after the balance sheet
date AND
(2) The said grace period was provide on or before the balance sheet date.

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To provide a clear guidance on the above concept, please see the following concept map:
No grace period was
agreed upon
(CURRENT
BREACH OF LIABILITY) After balance sheet
COVENANT date (CURRENT
LIABILITY) Grace period given was
Grace period was less than 12 months
agreed upon (CURRENT LIABILITY)
On or before balance
sheet date
Grace period given was
equal or more than 12
months (NON-CURRENT
LIABILITY)
TRADE AND OTHER PAYABLES (a)
The frequently asked question regarding trade accounts payable is its adjusted balance. As a guide in
computing such, please see the below template:
SOLUTION GUIDE
Unadjusted balance xx
Add: Post-date checks and unreleased checks
(Please see FAR 03 – Cash and Cash Equivalents for further details) xx
Debit balances in AP (if the unadjusted balance is a net amount) xx
Less: Unrecorded purchase returns and allowances (xx)
Discounts forfeited (under net method) (xx)
Effect of Freight terms* xx(xx)
Adjusted balance xx
In relation to freight terms, please see the following guide (Please see FAR 05 – Inventories for
further details):
 If the goods were in transit to the entity and the freight term is
 FOB Shipping Point – Accounts payable and purchases should be increased.
 FOB Destination – Ignore, purchases and accounts payable should be increased upon arrival
of the goods.
 In relation to freight cost, its effect on accounts payable depends on the freight terms as well
and are summarized below:
Effect on Accounts Payable?
 FOB Shipping Point, Freight Collect No effect
 FOB Shipping Point, Freight Prepaid Increase
 FOB Destination, Freight Prepaid No effect
 FOB Destination, Freight Collect Decrease
UNEARNED INCOME (b)
Deferred revenue or unearned revenue is income already received but not yet earned. Unearned income
may come from:
 Goods (Advances from customers)
 Services (Unearned income from service contracts, unearned subscription revenue)
 Use of entity’s resources (Unearned interest income, unearned rental income)
 Gift certificates
Deferred revenue may be realizable within one year or in more than one year from the end of reporting
period.
If the deferred revenue is realizable within one year, it is classified as current liability. Typical examples of
current deferred revenue are unearned interest income, unearned rental income and unearned subscription
revenue. If the deferred revenue is realizable in more than one year, it is classified as noncurrent liability.
Typical examples of noncurrent deferred revenue are unearned revenue from long-term service contracts
and long-term leasehold advances.
In relation to unearned income, the frequently asked questions are (1) Earned portion (income); (2) Ending
balance of unearned income. To answer such question, use the T-account in relation to unearned income:
Unearned Income
Earned portion xx Beginning Balance xx
Cash receipts xx
End. Balance xx
For unearned income from gift certificates, please use the modified T-account:
Gift Certificates Payable
Redemption (whether from prior
Beginning Balance
year or current year sales) xx xx
Expired portion xx Cash receipts from Sales xx
End. Balance xx

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REFUNDABLE DEPOSITS (c)

Refundable deposits consist of cash or property received from customers but which are refundable after
compliance with certain conditions.
The frequently asked question regarding refundable deposits would be its ending balance at balance sheet
date. Use the following T-account as a guide in answering such questions:

Liability for Deposits

Deposits returned or applied xx Beginning Balance xx
Deposits cancelled Xx Cash receipts xx
Deposits expired Xx
End. Balance xx
PAYROLL TAXES PAYABLE (d)
Under our law, the entity as an employer is required to withhold from the salaries of each employee the
following:
(a) Income tax payable by the employee
(b) Employee's contribution to the Social Security System or SSS
(c) Employee's contribution for Philhealth
(d) Employee's contribution to the Pag-ibig Fund
Such amounts withheld from the salaries of the employees shall be recognized as "payroll taxes payable"
until remitted by the entity to the appropriate government authority. In addition to the amounts withheld
from the salaries of the employees, the entity is required by law to make a contribution for SSS
ESCROW LIABILITY (e)
Escrow is the use of a third party, which holds an asset or funds before they are transferred from one party
to another. The third party holds the funds until both parties have fulfilled their contractual requirements.
The frequently asked question regarding escrow liability is its ending balance. To help in solving such,
please use the following T-account:
Escrow Liability
Cash transfers or payments xx Beginning Balance xx
Interest and other charges paid xx Cash receipts xx
Interest income xx
End. Balance xx

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UCP :FAR 20_ CURRENT LIABILITIES BATCH 2022 REVIEW

DISCUSSION EXERCISES
STRAIGHT PROBLEMS
IDENTIFICATION OF CURRENT LIABILITIES
1. DAVAO COMPANY had the following accounts taken from the balance sheet as of December 31, 2019:
Cash in bank (net of bank overdraft of P20,000) P500,000
Trade accounts receivable (net of credit balance on
ABC INC. amounting to P10,000) 200,000
Trade accounts payable (net of debit balances in supplier’s
accounts of P15,000) 385,000
Accrued electric and power bills 40,000
Property dividends payable (at fair value) 150,000
Share dividends payable 130,000
Cash dividends payable (payable after 14 months) 120,000
Mortgage payable 250,000
8% Serial bonds payable –with 5 equal annual payments,
issued July 1 this year 500,000
Trade notes payable (15 months left before maturity) 150,000
Financial liabilities held for trading 145,000
Unearned rent income 50,000
Deferred income from service contracts 150,000
Accrued taxes payable 75,000
10% 5 year loans payable (October 1, 2019) 200,000
Deferred tax liability – expected reversal is early next year 90,000
Estimated premiums liability 110,000
Contested BIR tax assessment – possible obligation 60,000
Taxes withheld from employees 70,000
Loan of LANAO INC. guaranteed by DAVAO – possible that DAVAO will be liable 185,000
12% Notes Payable – maturing on October 31, 2020 1,500,000
10% Notes Payable – maturing on December 31, 2020 300,000
8% Loans Payable – maturing on July 1, 2021 500,000
15% Notes payable – maturing on April 1, 2021 1,000,000
Bonds payable 2,000,000
Additional Information:
 The cash in bank comprises 2 bank accounts in 2 different banks.
 In relation to the 12% Notes payable, the entity entered into a refinancing agreement with
BPIDO Bank to refinance 75% of the notes on December 15, 2019.
 The whole 10% notes payable was refinanced on January 7, 2020. FOREVERMORE INC. has the
discretion to roll over the liability for at least 12 months from December 31, 2019.
 The bank loan agreement on the 8% loans payable requires DAVAO to maintain a current ratio
of 3:1. If the current ratio falls down below 3:1, the loan becomes automatically payable on
demand. Unfortunately, DAVAO’s current ratio on December 31, 2018 is 2:1. However, On
January 2, 2020, the bank agreed not to collect the loan until after 13 months from December
31.
 The term of the 15% notes payable give the holder a right to demand immediate payment if the
entity fails to make monthly interest payment within 10 days of the date the payment is due. On
December 31, 2019, DAVAO is three months behind in paying its required interest payment. On
December 31, 2019, the bank agreed to give DAVAO a 180 day grace period to pay the
outstanding balance.
 The bonds payable are 5-year 12% bonds issued March 31, 2015. Interest is payable semi-
annually on March 31 and September 30.
 Except for the 15% notes payable and bonds payable, all interests are payable annually. There
were no interest accruals made on any interest bearing liability as of year-end.
REQUIREMENT: How much is the total current liabilities to be presented on the balance sheet as of
December 31, 2019?
ACCOUNTS PAYABLE
2. The balance in BICOL INC.’s accounts payable account at December 31, 2019 was P810,000 before
any year-end adjustments relating to the following:
(a) Checks drawn but not yet released to payees amounted to P15,000 while checks drawn and
released to payees but were post-dated amounted to P35,000.
(b) On December 27, 2019, one of the suppliers of BICOL INC. allowed the latter to return for full
credit goods shipped and billed at P50,000 on December 15, 2019. BICOL shipped the returned
goods on December 31, 2019 but the credit memo was received and recorded only on January
5, 2020.
(c) Goods purchased and shipped FOB shipping point, freight prepaid from a vendor on December
29, 2019 was still in transit as of year-end. The freight cost was P5,000. The invoice cost of
P65,000 of the goods was recorded only when it arrived on January 7, 2020.

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(d) Goods shipped FOB shipping point on December 20, 2019 from a vendor to BICOL, were lost in
transit. The invoice cost was P45,000. On January 5, 2020, BICOL filed a P32,500 claim against
the common carrier.
(e) Goods shipped FOB destination, freight prepaid on December 21, 2019, from a vendor to BICOL,
were received on January 6, 2020. The invoice cost was P35,000 and the freight cost is P7,000.
(f) Goods with invoice cost of P25,000 were received in January 5, 2020 and included in the count
as <goods in transit=. Since the invoice was received in advance, it was recorded as purchases. It
was found out that the goods were shipped under FOB Destination.
REQUIREMENT: How much is the amount to be reported as accounts payable on December 31, 2019
Statement of Financial Position?
UNEARNED INCOME
3. QUEZON INC. sells subscriptions to a specialized directory that is published semi-annually and
shipped to subscribers on May 15 and November 15. Subscriptions received after the April 30 and
October 30 cut-off dates are held for the next publication. Cash from subscribers is received evenly
during the year and is credited to deferred revenues from subscriptions. Data relating to 2019 are as
follows:
Unearned revenue – January 1, 2019 P3,300,000
Receipts from subscriptions during 2019 18,000,000
REQUIREMENTS: (1) How much of the current year cash collections were recognized as revenue as of
the end of the year? (2) What amount should be reported as unearned income from subscription on
December 31, 2019?
4. PANGASINAN CORP. sells appliance service contracts agreeing to repair appliances for two-year
period. The past experience is that, of the total amount spent for repairs on service contracts, 40% is
incurred evenly during the first contract year and 60% is incurred evenly during the second contract
year. Receipts from service contract sales are P300,000 for 2018 and P400,000 for 2019. Receipts
from contracts are credited to unearned service revenue. All sales are made evenly during the year.
REQUIREMENTS: (1) What amount should be recognized as revenue from service contracts for the
years 2018, 2019 and 2020? (2) What amount should be reported as unearned service revenue on
December 31, 2018, December 31, 2019 and December 31, 2020?
5. CAVITE DEPARTMENT STORES sells gift certificates redeemable only when merchandise is purchased.
Upon redemption, the entity recognizes the unearned revenue as realized. Information for the current
year is as follows:
Gift certificates payable, January 1 360,000
Gift certificates sold 800,000
Gift certificates redeemed 730,000
Gift certificates expected not to be redeemed 60,000
Cost of goods sold 70%
REQUIREMENT: Compute the unearned revenue on December 31.
REFUNDABLE DEPOSITS
6. LAGUNA COMPANY sells products with reusable, expensive containers. The customer is charged a
deposit for each container delivered and receives a refund for each container returned within two
years after the year of delivery.
The entity provided the following information for 2019:
Containers held by customers on January 1, 2019 from deliveries in:
2017 75,000
2018 215,000 290,000
Containers delivered in 2019 390,000
Containers returned in 2019 from deliveries in:
2017 45,000
2018 125,000
2019 143,000 313,000
REQUIREMENT: Compute the liability for containers deposit on December 31, 2019.
ACCRUED EXPENSES
7. BATANGAS RETAIL STORES INC. is currently operating various retail stores in Batangas. The following
information was gathered in order for the company to prepare its year-end accrual on various
expenses:
 BATANGAS pays its salespeople a salary plus a commission. Salaries are being paid twice a
month on the 5th day and 20th day of the month. The cut-off dates are every 13th day and 28th
day of the month. Information regarding the six salespeople are as follows:
No. of Years Employed Daily Salary
Abraham 10 2,000
Isaac 9 1,600
David 8 1,400
Samuel 6 1,200
Mary 3 900

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Sarah 0.75 800

 BATANGAS also pays its salespeople commission based on a percentage of the entity’s total
gross sales. Commissions are paid annually 5 days after year-end and varies by length of
employment of the salesperson. Each salesperson starts with a commission of 1.0%, which is
increased by an additional 0.5% for each full year of employment to a maximum of 5.0%. The
total gross sales for 2019 amounted to P3,200,000.
 An electric bill was received by BATANGAS on January 20, 2020 amounting to P80,000 covering
the period December 17, 2019 through January 16, 2020.
 A P100,000 advertising bill was received January 7, 2020, comprising costs of P65,000 for
advertisements in December 2019 issues, and P35,000 for advertisements in January 2020
issues of the newspaper.
 The store lease calls for fixed rent of P200,000 per month, payable at the beginning of the
month, and an additional rent equal to 5% of gross sales over P1,200,000 per calendar year,
payable on January 31 of the following year.
REQUIREMENT: How much is the total amount of accrued expense to be reported on the December
31, 2019 Statement of Financial Position?
PAYROLL TAXES PAYABLE
8. RIZAL COMPANY paid employees at the end of each month. The payroll for December revealed the
following:
Office staff Officers Sales staff
Gross payroll 154,000 310,000 200,000
Income tax 24,000 63,000 42,000
SSS 8,000 9,000 8,500
Philhealth 4,500 10,000 6,000
Pagibig 4,000 5,000 4,500
The employer's contributions in relation to the December payroll are as follows:
Office staff Officers Sales staff
SSS 10,000 5,000 11,000
Philhealth 6,000 11,000 8,000
Pagibig 5,000 7,000 6,000
REQUIREMENT: In the financial statements for the month of December, what amount should be
reported respectively as payroll tax liability and payroll tax expense?

ESCROW LIABILITY
9. On the first day of each month, MINDORO INC. receives from MARINDUQUE CORP. an escrow deposit
of P500,000 for real estate taxes. The entity records the P500,000 in an escrow account.
MARINDUQUE's 2019 real estate tax is P4,000,000, payable in equal installments on the first day of
each calendar quarter. On January 1, 2019, the balance in the escrow account was P600,000.
REQUIREMENT: On September 30, 2019, what amount should be reported as an escrow liability?
MULTIPLE CHOICE (THEORIES)
1. Which of the following is not an essential characteristic for a liability to exist?
A. The liability arises from an obligating event.
B. The settlement of the liability requires an outflow of resources embodying economic benefits.
C. The identification of the payee is a requirement.
D. None from the choices.
2. Which of the following is a liability item rather than equity item?
Redeemable Preference Stocks Dividends Cash Dividends
Shares Payable Payable
A. No Yes Yes
B. Yes Yes Yes
C. Yes No Yes
D. No No Yes
3. S1: Financial liabilities are classified as financial liabilities at fair value through profit or loss (FVPL),
financial liabilities at fair value through other comprehensive income (OCI) or financial liabilities
at amortized cost.
S2: Transaction costs are expensed immediately if the financial liability is designated initially as at
fair value through profit or loss.
S3: Financial liabilities at amortized cost present gains on losses on changes in fair value within
profit or loss.
A. True, false, false D. False, true, false
B. False, true, true E. True, true, true
C. True, true, false
4. An entity shall measure initially a financial liability designated at fair value through profit loss at
A. Fair value C. Fair value plus transaction costs

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B. Face amount D. Fair value minus transaction costs

5. Which of the following statements is not true regarding the presentation of current liabilities in
accordance with IFRS?
A. The noncurrent liabilities follow the current liabilities.
B. Current liabilities are generally recorded at face amount.
C. Current liabilities should not be offset against the assets used for liquidation.
D. Current liabilities may be listed in the order of maturity, in descending order of magnitude or in
the order of liquidity preference.
6. Which of the following is not a current liability?
A. Financial liabilities held for trading.
B. A loan obligation where the entity has an unconditional right to defer settlement of the liability
for 6 months after the end of reporting period.
C. Deferred tax liability expected to reverse within 6 months
D. Accrued operating expenses expected to be paid after 1 year
7. Which of the following is a current liability?
I. Current portion of a long-term debt.
II. A long-term debt that is immediately demandable but the creditor agreed to provide before
year-end a grace period of 12 months.
III. A long-term debt that is currently maturing was refinanced after-year end.
IV. A breach of covenant on one of the company’s long-term debt where the creditor, after year-
end, agreed to provide a grace period of 7 months.
A. I, II and III D. I, III and IV
B. I and IV E. II and IV
C. I and III
8. A retail store received cash and issued gift certificates that are redeemable in merchandise. How
would the deferred revenue account be affected by the redemption and non-redemption of
certificates, respectively?
A. B C. D.
Redemption of certificates No effect No effect Decrease Decrease
Non-redemption of certificates No effect Decrease No effect Decrease
9. Which of the following increases the balance of the accounts payable?
(1) Post-dated checks issued to suppliers.
(2) Goods in transit from a supplier shipped FOB Destination
A. 1 only C. 1 and 2
B. 2 only D. Neither 1 nor 2
10. Which of the following liabilities that are not part of the normal operating cycle of an entity should be
classified as noncurrent?
A. Bank overdrafts
B. Financial liabilities classified as held for trading
C. Current portion of noncurrent financial liabilities
D. Financial liabilities that provide financing but are not due for settlement within twelve months
after the reporting period

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QUIZZER (DO-IT-YOURSELF DRILL)

THEORIES
1. For a liability to exist
A. a past transaction or event must have occurred.
B. the exact amount must be known.
C. the identity of the party owed must be known.
D. an obligation to pay cash in the future must exist.
2. I. A stock dividend payable is not a liability account but rather forms part as an equity item.
II. A redeemable preference shares capital is not an equity item but a liability item.
A. True, false C. False, false
B. False, true D. True, true
3. Which of the following represents a liability?
A. The obligation to pay for goods that an entity expects to order from suppliers next year.
B. The obligation to provide goods that customers have ordered and paid for during the current
year.
C. The obligation to pay interest on a five-year note payable that was issued the last day of the
current year.
D. The obligation to distribute an entity's own shares next year as a result of a stock dividend
declared near the end of the current year.
4. An entity shall measure initially a financial liability not designated at fair value through profit loss at
A. Fair value
B. Face amount
C. Fair value plus directly attributable transaction costs.
D. Fair value minus directly attributable transaction costs.
5. Financial liabilities are classified as
I. FVPL III. Amortized cost
II. FVOCI
A. I or II D. I, II or III
B. II or III E. Answer not given
C. I or III
6. In accordance with PAS 1, Presentation of Financial Statements, which of the following shall be
classified as current liability?
I. A liability is expected to be settled liability beyond 12 months but within operating cycle (i.e. in
the case of trade payables)
II. A loan obligation where the entity has an unconditional right to defer settlement of the liability
for 6 months after the end of reporting period.
III. A financial liability held for trading
A. I and II D. I, II and III
B. II and III E. Answer not given
C. I and III
7. Some liabilities, such as trade payables, accruals for employee and other operating costs, are
expected to be settled in more than twelve months after the reporting period. How will an entity
classify these items in the statement of financial position?
A. Current
B. Noncurrent
C. It will depend on the entity's policy.
D. First classify as noncurrent since the term is more than twelve months, then reclassify to
current if the term is less than twelve months.
8. A currently maturing obligation is classified as current. Which of the following scenarios will make the
liability as non-current?
I. A refinancing is completed after year-end but the entity has discretion to refinance as of year-
end.
II. A 7-month grace period was received from the creditor after year-end.
A. I only C. I and II
B. II only D. Neither I nor II
9. Which of the following is a current liability?
I. Bank overdrafts
II. Deferred tax liability (expected to reverse within 12 months)
III. Held for trading financial liabilities
A. I and II D. I, II and III
B. II and III E. Answer not given
C. I and III

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10. I. A dividend declared which was payable 13 months after year-end is classified as current liability.
Entity’s normal operating cycle is 14 months.
II. Non-financial liabilities are initially and subsequently measured at the best estimate of amounts
needed to settle those obligations
III. Obligating events create either a legal or contractual obligations.
Which of the above statements is (are) correct?
A. I and II D. I, II and III
B. II and III E. Answer not given
C. I and III
11. Essential characteristics of liabilities:
I. The obligation must be to pay cash, transfer noncash asset or provide service at some future
time.
II. The liability arises from transaction or event that will happen at some future time.
III. It is not necessary that the payee to whom the obligation is owed be identified.
A. I and II D. I, II and III
B. II and III E. Answer not given
C. I and III
12. Which of the following does not meet the definition of a liability?
A. An obligation that is estimated in amount
B. A note payable with no specified maturity date
C. An obligation to provide goods or services in the future
D. The signing of a three-year employment contract at a fixed annual salary
13. Which of the following should be classified as noncurrent liability?
A. Unearned revenue
B. Accrued salaries payable to management
C. Mandatorily redeemable preference share
D. The currently maturing portion of long-term debt
14. A currently maturing obligation is classified as current. Which of the following scenarios will make the
liability as non-current?
I. The liability was refinanced before year-end for at least 12 months from year-end.
II. A 9-month grace period was received from the creditor after year-end.
A. I only C. I and II
B. II only D. Neither I nor II
15. Which of the following is a current liability?
A. Deferred tax liability C. Accrued expenses
B. Mortgage payable D. None from the choices
16. Which of the following is a noncurrent liability?
A. Income tax payable
B. Estimated warranty liability
C. One-year magazine subscription received in advance
D. Unearned interest income related to noninterest-bearing long-term note receivable
17. Which of the following is not considered a characteristic of a liability?
A. Present obligation
B. Arises from past event
C. Results in an outflow of resources
D. Liquidation is reasonably expected to require use of current assets
18. Which of the following statements is true in relation to the fair value option of measuring a financial
liability?
I. At initial recognition, an entity may irrevocably designate a financial liability at fair value
through profit or loss.
II. The financial liability is measured at every year-end and any changes in fair value are
recognized in profit or loss.
III. The interest expense on the financial liability is recognized using the nominal interest rate.
A. I and II only C. II and III only
B. I and III only D. I, II and III
19. Which of the following increases the balance of the accounts payable?
(1) Undelivered checks where the payee is a supplier of the entity.
(2) Goods in transit from a supplier shipped FOB Shipping Point.
(3) Goods received after year-end by the entity but recorded before year-end
A. 1 and 3 C. 1 and 2
B. 2 and 3 D. 1, 2 and 3

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PROBLEMS
1. The following liabilities were obtained from the records of PALAWAN CORP. for the year ended
December 31, 2018:
Trade Accounts Payable (net of debit balances in supplier’s accounts of P10,000) P300,000
Financial liability held for trading 150,000
10% Serial bonds payable –with 10 equal annual payments, issued
October 1 this year 1,000,000
Deferred tax liability – expected reversal is next year 200,000
Deferred revenue 120,000
Share dividend payable 180,000
12% 5 year note payable issued on June 30, 2014 300,000
Unearned rent 50,000
Loan of CEBU CORP. guaranteed by PALAWAN – possible that
PALAWAN will be liable 125,000
Bank Overdraft 40,000
Claims for increase in wages and allowances by employees of the company,
covered in a pending lawsuit 125,000
All interests are payable annually and there were no accruals made as of year-end.
What is the total amount of current liabilities?
A. 1,065,000 C. 993,000
B. 950,000 D. 1,093,000
2. GUIMARAS CORP. provided the following data on December 31, 2014:
Trade accounts payable, including cost of goods
received on consignment of P150,000 1,350,000
Accrued taxes payable 125,000
Customers' deposit 100,000
GUIMARAS as guarantor 200,000
Bank overdraft 55,000
Accrued electric and power bills 60,000
Reserve for contingencies 150,000
What total amount should be reported as current liabilities?
A. 1,540,000 C. 1,740,000
B. 1,650,000 D. 1,840,000
3. The following liabilities are taken from the records of ILOILO INC. as of December 31, 2018:
12% Notes Payable – maturing on October 31, 2019 P1,500,000
10% Notes Payable – maturing on December 31, 2019 1,000,000
8% Loans Payable – maturing on July 1, 2019 500,000
Additional Information:
a) In relation to the 12% Notes payable, the entity entered into a refinancing agreement with
BPIDO Bank to refinance 75% of the notes on December 15, 2018.
b) The whole 10% notes payable was refinanced on January 7, 2019. ILOILO has the discretion to
roll over the liability for more than 12 months from December 31, 2018.
c) All interests are paid annually.
In relation to the above balances, what is the amount of current liability?
A. 875,000 C. 925,000
B. 500,000 D. 1,500,000
4. ILOCOS INC. has the following liabilities as of its year-end December 31, 2018:
15% Notes payable P2,000,000
12% Notes payable 1,000,000
Additional information:
1) The 15% notes payable was issued by ILOCOS on July 1, 2017 and will mature on July 1, 2020
with interest payment every July 1. The bank loan agreement requires ILOCOS to maintain a
current ratio of 3:1. If the current ratio falls down below 3:1, the loan becomes automatically
payable on demand. Unfortunately, ILOCOS’ current ratio on December 31, 2018 is 2:1.
However, On January 2, 2018, the bank agreed not to collect the loan until after 13 months
from December 31.
2) The 12% notes payable was issued by the Company on January 1, 2018 and will mature on
December 31, 2021 with interest payments every December 31. Unfortunately, the company
breached one of its provisions, thereby making the loan payable on demand as of year-end.
But on December 29, 2018, the bank agreed to give ILOCOS 180 days of grace period, after
which the bank will resume collection
How much is the amount of current liabilities based from the above amounts?
A. 3,000,000 C. 2,150,000
B. 2,000,000 D. 3,150,000

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5. The balance in PANGASINAN COMPANY’s accounts payable account at December 31, 2014 was
P1,170,000 before any year-end adjustments relating to the following:
□ Goods were in transit from a vendor to PANGASINAN on December 31, 2014. The invoice cost
was P65,000 and the goods were shipped FOB shipping point on December 29, 2014. The goods
were received on January 2, 2015.
□ Goods shipped FOB shipping point on December 20, 2014 from a vendor to PANGASINAN, were
lost in transit. The invoice cost was P32,500. On January 5, 2015, PANGASINAN filed a P32,500
claim against the common carrier.
□ Goods shipped FOB destination on December 21, 2014, from a vendor to PANGASINAN, were
received on January 6, 2015. The invoice cost was P19,500.
What amount should PANGASINAN report as accounts payable on its December 31, 2014 statement
of financial position?
A. P1,202,500 C. P1,235,000
B. P1,222,000 D. P1,267,500
6. On December 31, 2018, LA UNION INC. has accounts payable balance of P1,000,000 before
adjustments for the following:
a) Checks drawn but not yet released to payees amounted to P12,000 while checks drawn and
released to payees but were post-dated amounted to P5,000.
b) On December 28, 2018, a vendor authorized LA UNION to return for full credit goods shipped
and billed at P25,000 on December 14, 2018. LA UNION shipped the returned goods on
December 31, 2018 but the credit memo was received and recorded only on January 3, 2019.
c) Goods purchased and shipped FOB shipping point, freight prepaid from a vendor on December
29, 2018 was still in transit as of year-end. The freight cost was P3,000. The invoice cost of
P50,000 of the goods was recorded only when it arrived on January 4, 2019.
d) Goods with invoice cost of P15,000 were received in January 5, 2019 and included in the count
as <goods in transit=. It was found out that the goods were shipped under FOB Destination.
What is the adjusted accounts payable?
A. 1,028,000 C. 1,025,000
B. 1,030,000 D. 1,010,000
7. BOHOL CORP. sells appliance service contracts agreeing to repair appliances for two-year period. The
past experience is that, of the total amount spent for repairs on service contracts, 40% is incurred
evenly during the first contract year and 60% is incurred evenly during the second contract year.
Receipts from service contract sales are P500,000 for 2014 and P600,000 for 2015. Receipts from
contracts are credited to unearned service revenue. All sales are made evenly during the year. What
amount should be reported as unearned service revenue on December 31, 2015?
A. 360,000 C. 480,000
B. 470,000 D. 630,000
8. CAPIZ COMPANY sells subscriptions to a specialized directory that is published semi-annually and
shipped to subscribers on April 15 and October 15. Subscriptions received after the March 31 and
September 30 cut-off dates are held for the next publication. Cash from subscribers is received evenly
during the year and is credited to deferred revenues from subscriptions. Data relating to 2014 are as
follows:
Deferred revenue from subscriptions, 12/31/13 P1,500,000
Cash receipts from subscribers 7,200,000
In its December 31, 2014 statement of financial position, how much should CAPIZ report as deferred
revenues from subscriptions?
A. P1,800,000 C. P3,600,000
B. P3,300,000 D. P5,400,000
9. ANTIQUE CORP. sells gift certificates, redeemable for store merchandise. The gift certificates have no
expiration date. The entity has the following information pertaining to the gift certificate sales and
redemptions:
Unearned revenue on January 1, 2014 750,000
2014 sales 2,500,000
2014 redemptions of prior year sales 250,000
2014 redemptions of current year sales 1,750,000
What amount should be reported as unearned revenue on December 31, 2014?
A. 500,000 C. 1,125,000
B. 1,000,000 D. 1,250,000
10. CAMIGUIN INC. operates a retail store and must determine the proper December 31, 2014, year-end
accrual for the following expenses:
□ The store lease calls for fixed rent of P6,000 per month, payable at the beginning of the month,
and an additional rent equal to 6% of net sales over P1 ,250,000 per calendar year, payable on
January 31 of the following year. Net sales for 2014 were P2,250,000.
□ An electric bill of P4,250 covering the period December 17, 2014 through January 16, 2015 was
received January 23, 2012.

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□ A P2,000 telephone bill was received on January 2, 2012, covering:

Service in advance for January 2015 P 750
Local and toll calls for December 2014 1,250
In its December 31, 2014 statement of financial position, what amount of accrued liabilities should
CAMIGUIN report?
A. P63,375 C. P65,500
B. P64,125 D. P75,375
11. On the first day of each month, DAVAO CORP. receives from LANAO CORP. an escrow deposit of
P250,000 for real estate taxes. The entity records the P250,000 in an escrow account. LANAO's 2014
real estate tax is P2,800,000, payable in equal installments on the first day of each calendar quarter.
On January 1, 2014, the balance in the escrow account was P300,000.
On September 30, 2014, what amount should be reported as an escrow liability?
A. 150,000 C. 850,000
B. 450,000 D. 1,150,000
12. ABRA CORP. sells monthly subscriptions for an industry publication. Subscriptions received after
November 1 cut-off date is held for publication in the following year. Receipts during 20x1 for
subscriptions were made evenly. Information on subscriptions is shown below:
Unearned revenue – January 1, 20x1 P3,000,000
Receipts from subscriptions during 20x1 24,000,000
How much of the current year cash collections were recognized as revenue as of the end of the year?
A. P4,000,000 C. P23,000,000
B. P20,000,000 D. P24,000,000
13. SIQUIJOR INC. issues gift certificates in denominations of P50, P100, P500 and P1,000. These
certificates are redeemable in merchandise having an average gross profit of 30% of selling price.
During the current year, the entity sold P500,000 worth of gift certificates and redeemed certificates
having a sales value of P400,000. It is estimated that 8% of the certificates issued will not be
redeemed. The entity uses the periodic inventory system. What is the ending balance of gift
certificates payable account?
A. 92,000 C. 60,000
B. 89,000 D. 100,000
14. CAGAYAN INC. had the following liabilities on December 31, 2014:
Accounts payable 550,000
Unsecured note payable, 8%, due July 1, 2015 4,000,000
Accrued expenses 350,000
Contingent liability 450,000
Deferred tax liability 250,000
Senior bonds payable, 7%, due March 31, 2015 5,000,000
What total amount should be reported as current liabilities?
A. 4,900,000 C. 10,150,000
B. 9,900,000 D. 10,350,000
15. On July 1, 2014, the city government issued realty tax assessments for the fiscal year ended June 30,
2014. On September 1, 2014, AURORA CORP. purchased a warehouse within the city. The purchase
price was reduced by a credit for accrued realty taxes.
The entity did not record the entire year's real state tax obligation, but instead records tax expenses
at the end of each month by- adjusting prepaid real estate taxes or real estate taxes payable, as
appropriate. On November 1, 2014, the entity paid the first of two equal installments of P12.000 for
realty taxes.
What amount of the payment should be recorded as a debit to real estate taxes payable?
A. 4,000 C. 10,000
B. 8,000 D. 12,000
16. As of December 31, 2014, the current liabilities of ALBAY CORP. totaled P1,500,000 before any year-
end adjustment relating to the following:
On December 19, 2014, a supplier authorized ALBAY to return, for full credit, goods shipped and
billed at P45,000 on December 9, 2014. The returned credit memo was received and recorded by
ALBAY on January 2, 2015.
During December 2014, Maze received P75,000 from a customer as an advance payment for a
merchandise which ALBAY will make according to the customers' specifications. For this transaction,
Maze has a P75,000 credit balance in its accounts receivable from the said customer on December 31,
2014.
On December 28, 2014, the company wrote and recorded checks to creditors totaling P400,000 which
would cause an overdraft of P100,000 in the company's bank account on December 31, 2014. The
checks were mailed on January 9, 2015.

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What amount should ALBAY CORP. report as total current liabilities in its December 31, 2014
statement of financial position?
A. P1,555,000 C. P1,855,000
B. P1,630,000 D. P1,930,000
17. SULTAN KUDARAT CORP. requires refundable advance payments with special orders for machinery
constructed to customer's specifications. Information for 2014 is as follows:
Customer advances - balance, December 31, 2013 P 885,000
Advances received with orders in 2014 1,380,000
Advances applied to orders shipped in 2014 1,230,000
Advances applicable to orders cancelled in 2014 375,000
What amount should SULTAN KUDARAT CORP. report as current liability for customer's deposits in its
December 31, 2014 statement of financial position?
A. None C. P1,035,000
B. P660,000 D. P1,110,000
18. COTABATO CORP. reported the following payroll for the month of January:
Total wages 500,000
Income tax withheld 60,000
All wages paid were subject to SSS. The SSS tax rates were 7% each for employee and employer. The
entity remits payroll taxes on the 15th of the following month. In the financial statements for the
month of January, what amount should be reported respectively as payroll tax liability and payroll tax
expense?
A. 60,000 and 70,000 C. 95,000 and 70,000
B. 95,000 and 35,000 D. 130,000 and 35,000
19. PAMPANGA CORP. collects 15% in city sales taxes on room rentals, in addition to a P200; per room,
per night, occupancy tax. Sales taxes for each month are due at the end of the following month, and
occupancy taxes are due fifteen days after the end of each calendar quarter. On January 3, 2014, the
entity paid the November 2013 sales taxes and the fourth quarter 2013 occupancy taxes. Additional
information for the fourth quarter of 2013 is as follows:
Room rentals Room nights
October 1,000,000 1,100
November 1,100,000 1,200
December 1,500,000 1,800
What amount should be reported respectively as sales taxes payable and occupancy taxes payable on
December 31, 2013?
A. 390,000 and 600,000 C. 540,000 and 600,000
B. 390,000 and 820,000 D. 540,000 and 820,000
20. ZAMBALES INC. sells 1- and 2-year subscriptions for the video-of-the-month business. Subscriptions
are collected in advance and credited to sales. An analysis of the recorded sales activity revealed the
following:
2014 2015
Sales 420,000 500,000
Less cancelations 20,000 30,000
Net sales 400,000 470,000
Subscription expirations:
2014 120,000
2015 155,000 130,000
2016 125,000 200,000
2017 . 140,000
400,000 470,000
On December 31, 2015, what amount should be reported as unearned subscription revenue?
A. 340,000 C. 470,000
B. 465,000 D. 495,000
- END OF HANDOUTS -

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