Intro to

Liabilities_Part 1
PROBLEM 1-1
Accounts payable (P1,250,000 - P250,000) 1,000,000
Deposits and advances from customers 250,000
Notes payable (P1,500,000 - P500,000) 1,000,000
Credit balances in customers' accounts 200,000
Serial bonds payable (P500,000 x 2) 1,000,000
Accrued interest on bonds payable 150,000
Unearned rent income 100,000
TOTAL CURRENT LIABILITIES 3,700,000

Explanations:
1. Accounts payable and deposits and advances from customers are both current
liabilities but they must be presented separately.

2. The note payable to bank due on 12.31.2022 is excluded, it being a noncurrent

liability.

3. Share dividend payable is not an accounting liability since its settlement does
not require the transfer of economic resource (see recognition of liabilities).

4. Credit balances in customers' accounts represent collections from customers in

excess of their account balances. Hence, the same are due for refund or
application against future sales which qualifies them as current liabilities.
PROBLEM 1-1
Accounts payable (P1,250,000 - P250,000) 1,000,000
Deposits and advances from customers 250,000
Notes payable (P1,500,000 - P500,000) 1,000,000
Credit balances in customers' accounts 200,000
Serial bonds payable (P500,000 x 2) 1,000,000
Accrued interest on bonds payable 150,000
Unearned rent income 100,000
TOTAL CURRENT LIABILITIES 3,700,000

Explanations:
5. Serial bonds are bond obligations that mature in series of installments. Hence,
the installments due within 1 year from the cut-off date are reported as current
liabilities.

6. Accrued interest on bonds payable is a usual current liability, it being a regular

accrual (already incurred, but not yet paid).

7. The contested BIR tax assessment, though measurable (P300,000) is not

recognized as a liabillity since its likelihood of occurrence is only possible (must be
probable and measurable to justify the recording of an accounting liability).
However, this will require a note disclosure (narrative discussion) in the notes to
financial statements.
PROBLEM 1-2
Note payable - trade 3,000,000
Note payable - bank 2,000,000
Note payable - offic ers 500,000
Ac c ounts payable - trade 4,000,000
Bank overdraft 300,000
Dividends payable 1,000,000
Withholding tax payable 100,000
Inc ome tax payable 800,000
Estimated warranty liability 600,000
Estimated liability - damages arising from breac h of c ontrac t 700,000
Ac c rued liabilities 900,000
Estimated premium liability 200,000
TOTAL CURRENT LIABILITIES 14,100,000

Explanations:
1. The Note Payable - Trade, it being a trade liability is a usual c urrent liability.

2. The Notes Payable due to the bank and offic ers are non-trade liabilities. If the
problem is silent as to their maturity, the same are assumed to be c urrently
payable.

3. The Ac c ounts Payable - Trade, it being a trade liability is a usual c urrent

4. Bank Overdraft is an overdrawn bank ac c ount, henc e, reported as a c urrent

liability. However, if the overdraft is maintained in a bank where the Company holds
another ac c ount with a positive balanc e, the same c an be appropriately offset
against the latter.
PROBLEM 1-2
Note payable - trade 3,000,000
Note payable - bank 2,000,000
Note payable - offic ers 500,000
Ac c ounts payable - trade 4,000,000
Bank overdraft 300,000
Dividends payable 1,000,000
Withholding tax payable 100,000
Inc ome tax payable 800,000
Estimated warranty liability 600,000
Estimated liability - damages arising from breac h of c ontrac t 700,000
Ac c rued liabilities 900,000
Estimated premium liability 200,000
TOTAL CURRENT LIABILITIES 14,100,000

Explanations:
5. Dividends payable is a c urrent liability sinc e its settlement will require the
transfer of either c ash or nonc ash assets (ec onomic resourc e).

6. Withholding tax payable pertains to the tax on c ompensation of employees

and/or tax on inc ome payments made to suppliers that were withheld by the
Company from the payments made to the employees and suppliers on behalf of the
government.

7. Mortgage payable refers to liabilities that are c overed by real-estate properties

as c ollateral sec urity for the loan. If the problem is silent on its maturity, the
liability is presumed to be nonc urrent.
PROBLEM 1- 2
Note payable - trade 3,000,000
Note payable - bank 2,000,000
Note payable - offic ers 500,000
Ac c ounts payable - trade 4,000,000
Bank overdraft 300,000
Dividends payable 1,000,000
Withholding tax payable 100,000
Inc ome tax payable 800,000
Estimated warranty liability 600,000
Estimated liability - damages arising from breac h of c ontrac t 700,000
Ac c rued liabilities 900,000
Estimated premium liability 200,000
T OT AL CURRENT LIABILIT IES 14,100,000

Explanations:
8. Inc ome tax payable is a c urrent liability of the Company to the government
arising from its legal obligation (statutory provision of law) to pay inc ome tax on its
earnings.

9. Estimated liabilities related to warranties, premiums and breac h of c ontrac t are

all reported as c urrent liabilities bec ause at the end of the reporting period, the
Company has a present obligation arising from the sale of produc ts that offer
warranty and premium items and from the breac h of a c ontrac t, respec tively.

10. No liability is rec ognized on the c laim for inc rease in wages sinc e the suit is still
pending as at year- end. For a liability to exist, the same must be probable and
measurable.

11. No liability is rec ognized on the c ontrac t for the c onstruc tion of the new
building sinc e no mention was made as to whether c onstruc tion ac tivities already
started whic h would have triggered the rec ognition of a present obligation.
PROBLEM 1-3
Withholding tax on compensation (income taxes withheld from employees) 900,000
Cash overdraft at Harbor Bank 1,300,000
Credit balances in customers' accounts (AR with credit balances) 750,000
Estimated warranty liability 500,000
Estimated damages - unsatisfactory performance on a contract 1,500,000
Accounts payable 3,000,000
Interest payable (P5,000,000 x 12% x 3/12) 150,000
TOTAL CURRENT LIABILITIES 8,100,000

Explanations:
1. Withholding tax on compenstaion pertains to the taxes on compensation of employees
that were withheld by the Company from the payments made to the employees on behalf of
the government.

2. Cash overdraft at Harbor Bank cannot be offset against the cash in bank balance at First
State Bank since the two bank accounts are maintained in different banks.

3. Credit balances in customers' accounts represent collections from customers in excess of

their account balances. Hence, the same are due for refund or application against future
sales which qualifies them as current liabilities.

4. Estimated liabilities related to warranties and damages on unsatisfactory performance of

a contract are all reported as current liabilities because at the end of the reporting period,
the Company has a present obligation arising from the sale of products that offer warranty
and from the unsatisfactory delivery of a contract, respectively.
PROBLEM 1-3
Withholding tax on compensation (income taxes withheld from employees) 900,000
Cash overdraft at Harbor Bank 1,300,000
Credit balances in customers' accounts (AR with credit balances) 750,000
Estimated warranty liability 500,000
Estimated damages - unsatisfactory performance on a contract 1,500,000
Accounts payable 3,000,000
Interest payable (P5,000,000 x 12% x 3/12) 150,000
TOTAL CURRENT LIABILITIES 8,100,000

Explanations:
5. The Accounts Payable - Trade, it being a trade liability is a usual current liability.

6. The Deferred Serial Bonds are payable in equal semi-annual installments of P500,000.
Hence, the term of the bonds, in years, is equal to 5 years (P5,000,000 divided by
P500,000 = 10 semi annual installments or 5 years). Since the last installment is scheduled
to be paid on October 01, 2026, the first installment therefore will be paid on April 01,
2022. Accordingly, no portion of the bond is reported as current liability as at December
31, 2020.

7. Though there is no current liability reported for bonds payable, interest for 3 months
(Oct 01 2020 to Dec 31, 2020) has already accrued. Thus, interest payable is recognized
for 3 months. The interest payment on April 01, 2020 is presumed to have been properly
paid as scheduled.

8. Stock dividend payable is not an accounting liability since its settlement does not require
the transfer of economic resource (see recognition of liabilities).
PROBLEM 1-4
Accounts payable (P500,000 + P100,000) 600,000
Accrued liabilities 50,000
Note payable - due March 31, 2021 1,000,000
Note payable - due May 01, 2021 800,000
TOTAL CURRENT LIABILITIES 2,450,000

NONCURRENT LIABILITIES:
Bonds payable - due December 31, 2022 2,000,000

Explanations:
1. The debit balances in suppliers' accounts should not be offset against the credit balance
in accounts payable. Since it was deducted from the accounts payable balance, the debit
balances in suppliers' accounts should be added back to the balance and must be
reclassified and presented among current assets (trade and other receivables).

2. Accrued liabilities are reported as regular current liabilities.

3. Currently maturing obligations (notes due on Mar 31, 2021 and May 01, 2021) which
were refinanced on or before or after the issuance of the FS will remain to be classified as
current liabilities. To effect the reclassification from current to noncurrent, refinancing
should happen on or before the end of the accounting year (see discussion on Special
Cases - Intro to Liabilities Handout).

4. The Bonds Payable is reported as a noncurrent liability since it is due on December 31,
2022, more than 1 year from the end of the current accounting year, December 31, 2020.
PROBLEM 1-8
Accounts payable (P4,000,000 + P100,000) 4,100,000
Accrued expenses 1,500,000
Credit balances of customers' accounts 500,000
Estimated liability for coupons 600,000
TOTAL CURRENT LIABILITIES 6,700,000

Explanations:
1. The debit balances in suppliers' accounts should not be offset against the credit balance
in accounts payable. Since it was deducted from the accounts payable balance, the debit
balances in suppliers' accounts should be added back to the balance and must be
reclassified and presented among current assets (trade and other receivables).

2. Accrued liabilities/expenses are reported as regular current liabilities.

3. Credit balances in customers' accounts represent collections from customers in excess of

their account balances. Hence, the same are due for refund or application against future
sales which qualifies them as current liabilities.

4. Estimated liability for coupons us reported as current liabilities because at the end of the
reporting period, the Company has a present obligation arising from the sale of products
with redeemable coupons (the obligating event is the sale with the coupon offer).
PROBLEM 1-9
Ac c ounts payable 1,900,000
Dividends payable 500,000
Inc ome tax payable 900,000
Note payabe - due January 31, 2021 600,000
TOTAL CURRENT LIABILITIES 3,900,000

Explanations:
1. Ac c ounts payable, it being a trade liability, is a regular c urrent liability.

2. Dividends payable is a c urrent liability sinc e its settlement will require the transfer of
either c ash or nonc ash assets (ec onomic resourc e).

3. Inc ome tax payable is a c urrent liability of the Company to the government arising from
its legal obligation (statutory provision of law) to pay inc ome tax on its earnings.

4. The note payable is reported as a c urrent liability sinc e it is due to be settled within 1
year from Dec ember 31, 2020.

5. The bonds payable and related premium are presented as nonc urrent liabilities, unless
otherwise stated that the same are due for payment within 1 year from the end of the
ac c ounting period.

6. The deferred tax liaibility is a regular nonc urrent liability. The ac c ount arises from the
differenc e between the financ ial inc ome as measured using GAAP and taxable inc ome
determined using the Nationa Internal Revenue Code (Tax Code). Deferred tax liability is a
timing differenc e in taxation whic h is rec ognized when financ ial inc ome is higher than
taxable inc ome.
PROBLEM 1-10
14% note payable due 2021 30,000
8% note payable - current portion maturing on December 31, 2021 100,000
TOTAL CURRENT LIABILITIES 130,000

Explanations:
1. The 14% note is presented as a current liability since it is scheduled to be settled in
2021 (within 1 year from the end of the reporting date, December 31, 2020)

2. The 11% note is presented as a noncurrent liability since it is scheduled to be settled in

2023 (more than 1 year from the end of the reporting date, December 31, 2020)

3. Only the current portion (portion due on December 31, 2021) of the 8% note payable in
installments is reported among current liabilities (P1,100,000 divided by 11 installments =
P100,000). Interest, if any, is presumed to have been paid, since it is payable every
December 31. The interest that will be paid on December 31, 2021 cannot be recognized
as interest yet since the period is yet to lapse or accrue.

4. The 7% guaranteed debentures is presented as a noncurrent liability since it is

scheduled to be settled in 2022 (more than 1 year from the end of the reporting date,
December 31, 2020). Debentures are obligations that are not secured by collaterals.
PROBLEM 1-11
12% note payable - refinanced on January 31, 2021 5,000,000
TOTAL CURRENT LIABILITIES 5,000,000

Explanations:
1. The 12% note due on Mar 01, 2021 was refinanced on January 31, 2021 through the
issuance of a long term obligation payable in lumpsum. Since the refinancing was effected
after the end of the accounting year, the liability will remain to be classified as current. To
effect the reclassification from current to noncurrent, refinancing should happen on or
before the end of the accounting year (see discussion on Special Cases - Intro to Liabilities
Handout).

2. The loan agreement for the 10% note due on October 01, 2021 affords the entity the
discretion (unconditional right to defer payment) to refinance the obligation for at
least 12 months after December 31, 2020. Accordingly, the liability is classified as
noncurrent as at December 31, 2020 (see discussion on Classification of Liabilities - Intro to
Liabilities Handout). A debtor afforded such a right would normally choose to extend and
defer payment, hence, the liability is reported among noncurrent liabilities.