Finals Handout 1:

Liabilities are obligations that a business or individual owes to another party. These can include loans, accounts
payable, and other debts that must be repaid over time. Understanding liabilities is crucial for financial planning
and management, as well as for compliance with accounting and reporting requirements. In this handout, we will
explore the different types of liabilities and how they are recorded and reported in financial statements.
Current Liabilities
Current liabilities are debts that must be paid within a year or less. They include items such as accounts payable,
short-term loans, and accrued expenses. These liabilities are usually recorded on the balance sheet and are
subtracted from current assets to calculate working capital. Examples of current liabilities are:
Accounts Payable: This is the money a company owes to its suppliers for goods or services that have been
delivered but not yet paid for.
Accrued Expenses: These are expenses that have been incurred but not yet paid, such as wages or utilities.
Short-term Loans: These are loans that must be repaid within a year or less.
Long-term Liabilities
Long-term liabilities are debts that are due more than a year from the date of the financial statement. They include
items such as long-term loans, bonds, and deferred taxes. These liabilities are also recorded on the balance sheet,
but separately from current liabilities. Examples of long-term liabilities are:
Long-term Loans: These are loans that must be repaid over a period of more than one year.
Bonds: These are debt securities that are issued by companies or governments to raise capital. They usually have a
maturity date of more than one year.
Deferred Taxes: These are taxes that have been incurred but not yet paid, usually due to differences between
accounting and tax rules.
Contingent Liabilities
Contingent liabilities are potential liabilities that may or may not become actual liabilities depending on the
outcome of a future event. These liabilities are not recorded on the balance sheet, but they may need to be
disclosed in the notes to the financial statements. Examples of contingent liabilities are:
Lawsuits: If a company is involved in a lawsuit, it may have to pay damages if it loses the case.
Guarantees: If a company has guaranteed a debt of another party, it may have to pay if the other party defaults on
the debt.
Product Warranties: If a company has issued warranties on its products, it may have to pay for repairs or
replacements if the products fail.
In summary, liabilities are important financial obligations that must be carefully managed and tracked. By
understanding the different types of liabilities and how they are recorded and reported, businesses and individuals
can make informed financial decisions and comply with accounting and reporting requirements.
Multiple Choice- Theory:

1. These are debts that must be paid within a year or less.

a. current liabilities c. noncurrent liabilities
b. deferred liabilities d. bonded liabilities
2. This is the money a company owes to its suppliers for goods or services that have been delivered but not
yet paid for.

a. Accounts receivable c. accounts payable

b. Prepaid asset d. prepaid expense
3. These are debt securities that are issued by companies or governments to raise capital. They usually have
a maturity date of more than one year.
a. Bonds c. notes
b. Contingencies d. mortgage
4. These are expenses that have been incurred but not yet paid, such as wages or utilities.

a. Accrued income c. accrued expense

b. Prepaid expense d. depreciation expense
5. Contingent liabilities are potential liabilities that may or may not become actual liabilities depending on
the outcome of a future event.
a. Contingent liabilities c. Long term liabilities
b. Negligent liabilities d. Incurred liabilities
Illustration: On December 31, 2020, Happy Company provided the following information:

Accounts payable, including deposits and advances

from customer of P250,000 P 1,250,000
Notes payable, including note payable to bank due on
December 31, 2022 of P500,000 1,500,000
Share dividend payable 400,000
Credit balances in customer’s accounts 200,000
Serial bonds payable in semiannual installment
Of P500,000 5,000,000
Accrued interest on bonds payable 150,000
Contested BIR tax assessment – possible obligation 300,000
Unearned rent income 100,000

How much is the total current liabilities on December 31, 2020?

Practice set 1 (15mins)

Fun company provided the following information on December 31, 2020:
Notes payable:
Trade 3,000,000
Bank loans 2,000,000
Advances from officers 500,000
Accounts payable – trade 4,000,000
Bank overdraft 300,000
Dividends payable 1,000,000
Withholding tax payable 100,000
Mortgage payable 3,800,000
Income tax payable 800,000
Estimated warranty liability 600,000
Estimated damages payable by reason of breach of contract 700,000
Accrued liabilities 900,000
Estimated premium liability 200,000
Claim for increase in wages by employees covered
In pending lawsuit 3,500,000
Contract entered into for the construction of building 5,000,000

How much is the total current liabilities on December 31, 2020?

Illustration:
Joy company provided the following information on December 31, 2020:

Income taxes withheld from employees 900,000

Cash balance at First State Bank 2,500,000
Cash overdraft at Harbor Bank 1,300,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties on
merchandise previously sold 500,000

Estimated damages as a result of unsatisfactory

Performance on a contract 1,500,000
Accounts payable 3,000,000
Deferred serial bonds, issued at par and bearing
Interest at 12%, payable in semiannual installment
Of P500,000 due April 1 and October 1 of each year,
 the last bond to be paid on October 1, 2026 5,000,000
Stock dividend payable 2,000,000

How much is the total current liabilities on December 31, 2020?

Practice Set 2: (15mins)

Challenging Company provided the following information on December 31, 2020:

Accounts payable after deducting debit balances in

Supplier’s accounts of P100,000 500,000
Accrued liabilities 50,000
Note payable – due March 31, 2021 1,000,000
Note payable – due May 1, 2021 800,000
Bonds payable – due December 31, 2022 2,000,000

On March 1, 2021 before the 2020 financial statements were

Issued, the note payable of P1,000,000 was replaced by an 18-month
note for the same amount.

The entity is considering similar action on the P800,000 note due on May 1, 2021. The financial
statements were issued on March 31, 2021.

How much is the total current liabilities on Dec 31, 2020?

How much is the total noncurrent liabilities on Dec 31, 2020?

Illustration:
On December 31, 2020, Survivor Company reported the following liabilities:
Note payable – 9% 3,000,000
Note payable - 8% 6,000,000
Note payable – 10% 4,000,000
Note payable – 11% 5,000,000

The 9% note payable is noncancelable and matures on July 31, 2021. Sufficient cash is expected to be available to
retire the note at maturity.

The 8% note payable matures on May 31, 2026 but the creditor has the option of calling the note or demanding
payment on June 30, 2021.

However, the call option is not expected to be exercised given the prevailing market condition.

The 10% note payable is due on March 31, 2022. A debt covenant requires Survivor company to maintain current
assets at least equal to 150% of current liabilities.

On December 31, 2020, Survivor company is in violation of this covenant.

However, Cordillera company obtained a waiver from the creditor until June 2021 having convinced the creditor
that Survivor’s normal 2 to 1 ratio of current assets to current liabilities will be reestablished during the first half of
2021.

The 11% note payable matures on June 30, 2021. On January 31, 2021 before the issuance of the 2020 financial
statements, the note payable was refinanced on a long term basis.
Which of the notes payable are current?
Which of the notes payable are noncurrent?
Practice set 3: (15mins)

Hope Company is planning to refinance certain short-term obligations on a long term basis. The 2020 financial
statements are issued on March 15, 2021.

On December 31, 2020, before reclassification of short term debt, the liabilities are:

Accounts payable 7,000,000

Note payable-bank 12,000,000
Accrued expenses 4,000,000
Mortgage payable 4,000,000
Note payable – due in 2022 3,000,000

The entity intends to refinance P9,000,000 of the P12,000,000 bank note payable on a long term basis.
Although the entire P12,000,000 is due on June 30, 2021, the bank has informally agreed to extend the maturity
date for P6,000,000 to June 30,2022 if necessary.

How much is the current liabilities on December 31, 2020?

Illustration:
Palaban Company provided the following information on December 31, 2020:

Accounts payable 6,500,000

Notes payable – bank 8,000,000
Interest payable 150,000
Mortgage note payable – 10% 2,000,000
Bonds payable 4,000,000

 Bank notes payable include two separate notes payable to First Bank.
A P3,000,000, 10% note issued March 1, 2019, payable on demand. Interest is payable every six months.

A one year, P5,000,000, 11% note issued January 2, 2020. On December 31, 2020, the entity negotiated a
written agreement with First Bank to replace the note with a 2-year, P5,000,000, 10% note to be issued
January 2, 2021.

 The 10% mortgage note was issued October 1, 2019 with a term of 10 years.

Terms of the note give the holder the right to demand immediate payment if the entity fails to make a
monthly interest payment within 10 days of the date the payment is due.

On December 31, 2020, the entity is three months behind paying the required interest payment.

 The bonds payable are 10-year,8% bonds issued June 30, 2011. Interest is payable semiannually on June
30 and Dec 31.

How much is the total current liabilities on December 31, 2020?

Practice set 4: (15mins)

Hanamichi company disclosed the following information about liabilities at year end:

Accounts payable, after deducting debit balances

In suppliers’ accounts amounting to P100,000 4,000,000
Accrued expenses 1,500,000
Credit balances of customers’ accounts 500,000
Share dividend payable 1,000,000
Claims for increase in wages and allowance by
 Employees of the entity, covered in a pending lawsuit 400,000
Estimated expenses in redeeming prize coupons
Presented by customers 600,000

What total amount should be presented as current liabilities at year end?

Practice set 5: (15mins)
Kaede company disclosed the following liability account balances on December 31, 2020:
Accounts payable 1,900,000
Bonds payable 3,400,000
Premium on bonds payable 200,000
Deferred tax liability 400,000
Dividends payable 500,000
Income tax payable 900,000
Note payable, due January 31, 2021 600,000

On December 31, 2020, what total amount should be reported as current liabilities?

Illustration:
Cypher company had the following amounts of long term debt outstanding on December 31, 2020:

14% term note, due 2021 30,000

11% term note, due 2023 1,070,000
8% note, due in 11 equal annual principal payments,
Plus interest beginning Dec 31, 2021 1,100,000
7% guaranteed debentures, due 2022 1,000,000
Total 3,200,000

The annual sinking fund requirement on the guaranteed debentures is P40,000 per year.

What total amount should be reported as current liabilities on Dec 31, 2020?

Practice set 6: (15 mins)

Astra company reported the following liabilities on December 31, 2020

Accounts payable and accrued interest 1,000,000

12% note payable issued November 1, 2019
Maturing July 1, 2021 2,000,000
10% debentures payable, next annual principal
installment of P500,000 due February 1, 2021 7,000,000

On December 31, 2020, the entity consummated a noncancelable agreement with the lender to refinance
the 12% note payable on a long term basis.

On Dec 31, 2020, what total amount should be reported as current liabilities?

Illustration:
On December 31, 2020, Largo company had a P750,000 note payable outstanding due
July 31, 2021. The entity planned to refinance the note by issuing long term bonds.

Because the entity temporarily had excess cash, it prepaid P250,000 of the note on January 15, 2021.

In Feb 2021, the entity completed a P1,500,000 bond offering. The entity will use the bond offering proceeds to
repay the note payable at maturity.

On March 31, 2021, the 2020 financial statements were authorized for issue.
What amount of the note payable should be included in current liabilities on December 31, 2020?

Practice set 7: (15mins)

Regent company has a P2,000,000 note payable due on June 30, 2021. On December 31, 2020, the entity signed an
agreement to borrow up to P2,000,000 to refinance the note payable on a long term basis.
The financing agreement called for borrowing not to exceed 80% of the value of the collateral the entity was
providing.

On December 31, 2020, the value of the collateral was P1,500,000.

On December 31, 2020, what amount of the note payable should be reported as current liability?

Practice set 8: (15mins)

Tanjiro company reported the following liabilities on Dec 31, 2020:

Accounts payable 750,000

Short term borrowings 400,000
Mortgage payable, current portion P100,000 3,500,000
Bank loan payable, due June 30, 2021 1,000,000

The P1,000,000 bank loan was refinanced with a 5-year loan on January 15, 2021,
With the first principal payment due January 15, 2022.

The financial statements were issued Feb 28, 2021.

What total amount should be reported as current liabilities on December 31, 2020?

Illustration:
Zurzurpanumaratipakudilu company sells gift certificates redeemable only when merchandise is purchased. Upon
redemption, Cobb company recognizes the unearned revenue as realized.

Information for the current year:

Unearned revenue, January 1 650,000

Gift certificates sold 2,250,000
Gift certificates redeemed 1,950,000
Gift certificates unredeemed for a long time 100,000
Cost of goods sold 60%
What amount should be reported as unearned revenue at year end?

Practice set 9: (15mins)

K company 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, 2020 750,000
2020 sales 2,500,000
2020 redemptions of prior year sales 250,000
2020 redemptions of current year sales 1,750,000
What amount should be reported as unearned revenue on December 31, 2020?