NR INTERMEDIATE ACCOUNTING 2 2021 Edition BASED ON PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRSs) Nation's Foremost CPA Review Inc. (NCPAR) 48 Pelizloy Centrum, Lower Session Road, Baguin City 2600, Philippines Mobile Number: (0917) 870 6962 5 Like us on Facebook Nation's Foremost CPARTABLE OF CONTENTS CHAPTER GURRENT LIABILITIES ene au = DBF oan Transfer of an eeonomic resource... Present obligation as a result of past event: Exceutory contracts. secognition citeria FFruavciA AND NeW-PNANEIALLASIITAS PRESENTATION OF FINANOALINSTAUWENTS FRECOSMTION OF HIBANCIAL LABIUTES. (CuassiCATION OF FINANCIAL LAAT, AMASUREMENT OF FINAHCIAL Las ms MEASUnt ENT OF Non-rewarcaL URDIITIES FoulnCiALSTATERIREE PRESENTATION Conner iaBaImts.. Trade and non-irade payables REFAANCING AGREEMENT LuasimesPavamue on nentanb.. Non-adjusting events... “TRADE ACCOUNTS PAYAME, UNEARNED INCOR Ger cernncares.. LUABUITY FOR DEPOSITS RECEIVED... S Deposit for future subscription of shares of stocks... ACCRUED EXPENSES... Dvtoenos Pavaaae Lasurry ron arwrraa.ecoureTons.. Corres 1; SUMMARY PROBLEMS .. CHAPTER 2 NOTES PAYABLE. Notes avai, IMTAL MEASUREMENT | vil SURSTOUENT veASUREMHT. istration 2: Shart-term non Mstration interest... = Ulustration 4: Noninterest-bearing note Lump yarn ‘lastration 5: Noninterest-tearing note ~ instalment : neutent and nancutrent portions f ante payable 64 stration 6: Noninterest-bearing note Installment in advanoe me BB Mlustration 6.1 ~instatiments due atthe start of ech year ee \hustration 7: Noninterest-bearing note—Semiannual inatalimance ey Mustration & Noninterest-bearing note— Mustration 9: Noninterest-beering note— Thal and error apprach.. a ne lMustretion 10: Long-term note issued solely far cash... llustration 11: Note with ‘below-market rate of interest LOS PAYABLE enna Origination fees... ‘Trial and error apprcach with Interpolation Cort of banicloan ‘Cash price equivalant Credit lines. Commercial paper ‘HAPTER 2: Sava... PROBLEMS... CHAPTER 3 | BONDS PAYABLE & OTHER CONCEPTS... Bowos PavAate. Types of bands... ACCOUNTING FOR BORD ncn Bond gremium and discount. s Unamortized balance of discount or premium Accounting far tranczction costs (Bond issue costs}. Iesuance of bonds between interest payment dates Issue price of bonds Bond refunding. 7 Retirement of bonds prior to maturity... ‘Non-uniform installments 68 ay n m4sill ‘Serial bonds 2ero-coupon bard ow Cafratse bonds. PurtmemsrauMent ‘orvation: Redeemable preference shaves. onde with share warrants... eciassn canon. [DrAECOGMITION OF A IKAMCIAL LABILITY. Transfer of noncash assets (Asset swap}. Tranter of equity securities (Equity swap) . Modification Of te21 5 erncron Troubled-debt restructuring. Waver ar cancellation by the creditor. W-SURSTANCE DEFEASANC, COFFSETTING A PREARCIAL ASSET AND A FIVANCIAL Lai, (Cuapren 3: Sunanarv.. PROBLEMS. ‘CHAPTER 4 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS... i 159 Provisions. 159 coGtaTsON z 160 Present obligat 7 160 Past EVEN eon Dees 160 Prabeble outflaw of resources embodying economic benefits... 161 Reliable estimate of the obligation = BL CONTINGENT UADTIS essen 161 CONTINGENT ASSETS entree 162 MEASUREMENT CF PROMISING, rere 3 RECORDEVG THE PROWESION nnn Riss AND UNCERTAINTIES Presenrvalue Future evens, EXPECTED ESPOSAL OF ASSETS. REMMBURSEMENTS ore CHANGES iN PROVISIONS USEF pRavinOHE... a ee eee | -APPUCATION OF ve RECOGRITION AND MEASURE ENT RLS. Future operating asses... Onerous contracts... Restructuring Examoles of application ef the tecogritan principe. OTHER cone TPES OF POISON caer Product warranties anal guarantees Applicable standard: PAS. 37 vs. PERS LUability fer pramiuens. Applicable standard, PAS 37 vs. PFRS 15. Guarantee af indebtedness ‘Ouarten 4: Sunway, PROBLEMS... CHAPTER 5. EMPLOYEE BENEFITS (PART 4 EMPIDYEE BENET Recoowmion, eral: SSmORT-TeRM EUS LGYEE BENET. Posts s.yMenT BERETS Defined contribution plans. Defined benefit plans. HAR PAM Muuri-rrunven pans. STATE LARS... Ins uneD BFS, [ACCOUNTING FOR DEFINED CowmmuaLTION pA (CHAPTER S: SUMMARY PROBLEMS... CHAPTER 6 EMPLOYEE BENEFITS (PART 2). ACCOUNTING FOR DEFINED UENEFIT PLAN Step 1; Determine the deficit or SUED ..u Step 2: Determine the Net defined benefit habirty/asset. Step 3: Determine the Defined Benefit CastGainer tee mses : net inert othe net defined bona iy fas Remessarerents lhe net dened benete tag cs Tasuerolpsmesndioven ne fetumon pan ase : ‘PRESENT VALUE OF THE DEED BENEFIT OBUGATON T accouy. (FAIR WARE OF PLAN ASSETS Tec COUNT, a ‘, Dremu i unoere osr or sched bl Actuarial valuation method — Projecta Unit a it Auta eft pods afsenice nt tt Acomona steam ns conse Rensunisneins ne Overunome /Untenfvn OWEN nn One emer const wes, Teanaron worn Cen Suman promt ts CHAPTER 7 LEASES (PART 1). LEASE se DESTIPRING 4 LEASE Identified asset . Portions of assets . ‘Substantive substitution rights. “ Right to obtain economic benefits fram use... ‘Right to direct the use ..... Protective right: LenS TERNR ACCOUNTING FO” LEASES ar Lessee. Recognition, - tnitial measurement of Lease liability... Discount rate... ” Initial measurement of Right of use asset Subsequent measurement of Lease liability. Subsequent measurement of the Right-of-use asset, ee qecopnition exernptions Fearne THECOMPONEITS OF ACEnmacy sefzace of multiale assets tuom ease elements practical opecton su suBSraned FHEDAIASE PATENTS, IRENE. Mamaaut AEASEPAIMENTS eguAt VALUE GUARANTEE punensse ODN. ~ ‘current and Noacurent portions ofthe lease Laie usm RECT COTS Sita {USE PRYIENTSROETO LESSOR A OF SEFOM COMMENCEMENT Sect CPEB ne en Current and Nonesrrent portions ofthe lsieEabley. EO EASESSER OF THE LEASE ABT TEASEMODFEATONS oorennnpenn LIaserou IMPROVEMENT PRESSNTAVON.. Ceanren 7: SUMMA PROBLEMS om CHAPTER 8 LEASES (PART 2). ACCOUNTING FOR LEBSES BY LESSOR WHcATORS 4 NANCE LEASE... INCEPTION ANG COMMENCERIENT OF LEASE Finance LenS Ean Initial measurement... Lease payments. Discount rate wns ‘Subsequemt measurement . Initial direct costs. nu Classification of finance lease Direct financing lease Sales type lease ‘Residual value. Lease modifications OnenaTING LEAs. Initial direct ensts. bythe lessarmata Sheartind na be Pesnttion Serio steel ances Taadtrof ast oe, Taraer ofthe eit oncko sale oui Sinema Prone CHAPTER'S INCOME TAXES. ACCOUNTING PROSIT YS, TARABLE PROF PERMANENT OMFERERCS..... TEMPORARY OFERENEES one ‘Taxable vs, Deductible temporary difference un INCOME TAX EXPERSE VS. CURRENT TA EXPENSE... Current Tax Liabilities and AgseRS Formula, vn Deferred tax expense vs Deferred tax income ar benefit Deferred tax asset and Deferred tax Hablity T-accounts Tie AsseT-LiASIUTY METHOD Tersparary differences {PFRS det Taxable temporary differences. Deductible temparary differences Tax base of liabilities. RECOGATTION OF DEFERRED TAXES Deferred tax lability. Deferred tax a3seteon. — Mlastration 1: Deferred tax asset from Unused tar Ise... illastrstion 2: Reversal of deferred tax asset and liability... Ilwstration 3: Revaluation surplus ustration 4: Compound financial instrument eun.onnnn Hlustration $: Investment in subsidiary ~ Inter-ca, wansaction. Ulstraton 3: Change in tax rate Income tin expence ‘Wustration 4; ‘Change in tax rate~ Fiseal year. if Different tax rates spy to differen Difforert tx renes apy te etfeten FPreseatani ree aren ge PRESETaTION IN STATEMENT OF COMPREREMENE HICOME Ieerre ino aso IvTRAPERoN tax ALLOCATION , (iasoten 9: Sunn, PROBLEMS... CHAPTER 10 ‘SHAREHOLDERS’ EQUITY (PART 4). CoRR RAON SwanDeocoens taUITT = ACCOUNTING fon SHAR err. CUSSESOF SHARE CaP. Ordinary shaves. Prelerence shares Seat acRBUA Panwhiu ANBND-FAR ALE SHARES, AGAR OARTAL Shine svat costs. Shanes asus At OcDENT ‘Watered stacks, secret reserve. ‘Tatasuny stan. ‘Accounting for treasury shares. ARETiNEMENT Cr SHA Beunaver sumcarmons ‘SALE OF OFERENG CLASSES GP SHDRE CAPITAL QUIT INETRUMENT YS, Fron UAL. Redeemable nd Callabe preference share OnicNATION OF WHER COUIY INSTRUMENT, SAO IgRS ecparte ena sree earnee 10: Sanda PROBLEMS one CHAPTER I SHAREHOLDERS’ EQUITY (PART 2] prraneo ARI Dt aca EONS aoa F LASUTY FOR DDN rn FEED FORA DOENDS JceDowaos rORPEGPERTY OMIOENES seeaunting fr property dividends payable oo aes for poneeash asset decared as property dlusteng eeee betwezn property and cash divisends shane MOCNOS Accor ves cerwed ot ends sracional share Sharedividends of eifferent class theice betwoon share and cash dividends... psec SHAE reference aver assets Preference over dividends. npc IC DNDED AB PENSE LuunbarnG eet Dscosuat oFmEnOS Ens AEA ReFOREAG FEROD Orweecowrasesor Eau REGAMMLEATION nn Sire sot CLLRS! SREORGAN IEATION huoreR LL Suan. PROBLEMS ‘SHAI leer mas free ns WMustration 4: Hof instruments varies $81 oe Far vdeawene Concdition and ear aly set Intrinsic value method, oat Employes Stack Qunership Plans (£5005) loves Sct Oona Sey PROBLEMS CHAPTER 13 SHARE-BASED PAYMENTS (PaRT my, Casiscrao) SHARE-ASE PATENT ransactn exitlove share soreinonrgpe an 1OKCE NEWWTEN EQUITY scTLEDANBEAShseTIED., Counterparty has the right et coleg Transactions with Nun-employees . Transactions with employees Entity has the reht of choi. Deresago tax meueanons Cate 15 Sunega PROBLENS4 CHAPTER I: OK VALUE PER SHARE... panvexence sna REHeXOERE COUT TS TANDIN SHAREE a eraeeane Pagina PREFERENCE BARES. Caren 14: SuneMAny PROBLEMS 0 CHAPTER 15 EARNINGS PER SHARE. ARNON PER SHARE UStsOF EARNINGS PER SHARE Tes OF Easninas eR SHARE BASIC EARNINGS PER SHARE [RETAGSPECTIVE ADIUSERAENTS. ‘Rights issue... DILUTED EARNINGS PER SHARE. pn Convertible preference shaves... Convertible bonds... = ations, warrants and their equivalents... (CONTRAETS THAT MaY BE SETTIEO IN DROIMARTSHARES OF CAS PRESENTATION, Loss rensnane, Muunateporenia’ Ostia SHARES. Test for dilution CONTINGENT ISSLABIE SHARES. PARTLY PIC SHARES ne prernrmnnn nen ‘CHAPTER 15; SUMMARY, PROBLEMS sn REFERENCES... ‘Chapter 1 . Current Liabilities Related standards: PAS: Presentation af Financial Statements PAS 32: Financial Instruments: Presentatinn PERS 9; Financial Instrusients Learning Objectives 1. State the recognition criteria for Lisbiit entity the characteristics of financial ability 3. Classify abilities as current and noncurrene, A.” State the initial and subsequent measurements of financial and non-financial liabilities . : Liability i Lablity is “a-present obligation: ofthe: entity-ta° transfer an economic resource as.a result af past events.” ‘The definition of liability has the fol Detain iy lowing theve aspects: b. Transfer ofan eoonomiczesoure ‘© Present obligation aa result of past events ‘Obligation An obligation is “a duty ar responsibility that an entity hasine Practical ability to-avetd,” (concept Framers 29) An obligation is etther: 2. Legal obligation — an obligation that results from a”ttintraét legislation, or other operation of law; or &. Constructive obligation ~ an obligation that result froma entity's actions (e.g, past practice or pisblished policies) thaer ‘caxate 4 valicbexpectation.on others that the entity will accept sa discharge certain responsibilities. ‘An obligation is always owed to another party. However, ite ot necessary that the’ identity-of-that-partysis known, for ‘example, an obligation for environmental damages may be owed tothe society at lange. One: party's obligation normally corresponds to another pparty‘e right. For example, a buyer's obligation to pay an accounts payable of P100 normally corresponds to the seller's right to callect an acoounts receivable of 100. However, this accounting symmetry is not maintained at all times because the Stondands sometimes contain different recognition and measurement requirements for the liability of one party and the corresponding asset of the other party. For example, direct origination costs result to different measurements of the lender's loan receivatsle and the borrower's loan payable. Similarly, a seller may be required to recognize a warranty obligation but the buyer would Hot recognize a corresponding, asset for that warranty, There can be instances where the existence of an obligation is uncertain. Until that uncertainty is resolved (for example, by a ‘court ruling), it is uncertain whether a liability exists. Transfer of an economic resource The liability is the obligation that has the potential to require the transfer°of'an economic resource to another party and not the future-economic benefits that the obligation may cause to be transferred, Thus, the obligation’s potential to cause a transfer of seonomic benefits need sot be certain, or even likely, for example, the transfer may be required only if a specified uncertain future avent occurs. What is important is that the obligation already exists and that, in at least one circumstance, it would require the entity to transfer an economic resource, Consequently, a liability can exist even if the probability of x transfer-of an.economic resource is low, although that low probability affects decisions on whether the liability is to be Carve Lia recognized, how it is measured, what information is to be provided about the liability, and how that information -is provided. icncepat Famous 6976434) An obligation to transfer an economic resource may be an obligation to: a. spay-cash; deliver goods; of Fender services; bo exchange assets with another party on senfreornble terms; transfer assets if a specified uncertain future event occurs: ot 4. issue a finarical instrument that obliges the entity to transfer aan economic resource. Present obligation as a result of pastevents ‘The obligation must be « present obligation that exists asa result of past events. A present obligation exists as a result of past events it 8. the entity has alseady obtained econ benefits or takerran. “action; and b. ab a consequence, the entity will or may-have'to transfer an, economic resource that it would not otherwise have had to transfer. angst Frm 43 Examples: als [ Envity imtends to acquire goods inthe fut Analysis: Entity A has no present obligation. A present obligation arises only when Entity A: 2. has already purchased and received the goods; and b. os a consequence, Entity A will have fo pay for the purchase price. | Entity B operntesa nuclear power plant. In the current year, & REW law was enacted penalizing the improper disposal of toxic waste. No similar law existed in prior yeaae Seer {a i Current Lisbities 7 cm i —Rosognitistr criteria - : Ariement of legislation pet ee ee { Anlitem is recognized if is present obligation, except w sana a. it meets thedefinition of a liability: and sBquitysinstrement— is “any contract that evidences a esistsal “interest in the assets of an entity after deducting all of its liabilities.” (oasa2.1) ‘This definition reflects the basic accounting equation When determining whether a financial instrument is a financial liability or an equity instrument, the oversiding consideration is whether the instrument meets the definition of 3 financial liability, [ Financiat viability | > Theentity has a coutractual | > The entity has ieebliQaeion obligation to pay cask ot to pay cashor another another financial asset ar to | financial asset orto exchange financial exchange financial instruments under potentially unfavorable condition. instruments under Potentially unfavorable A contract is wot an equity instrument merely because itis to be settled in the entity's own equity instruments. The follwing guidance applies when a contract requires settlement in the entity's own equity instruments> ») a » “The contract requires the detivery” of ‘a tariable munnber of the extiy's we cy instruments in exchange for a fixed amount ofcash oF another financial asset; or a fixed number ofthe entity's ‘ow equity Instruments in exchange for a variable ‘emount of eash or another financial asset. Examples: Vale mabe fr cunt (oa eontract to detiver «= many shares 2s.are equal t0 100,000, : Fixed number for a variable st: TT tide 10 shares im exchange for am amount of cash equal fo the ale of 100 grams of gold. % The contract requires the delivery (receipt) of a fixed rar af ye evi en ‘equity instruments in Srchangelor aftzed amount of cash ot another financial asset % on that Example: a share opti gives the holder the right to Teuy 1,000 shares of the issuer foe PIO per shut, a aceite (ter ean to deve) isa financial asl ¥ FS Vartable number tor a fined -ssciFinnciatily aad. number fora variable amon. Equity instrument [Fiver number fore fined amount. Cm wee An essential feature of anv mitgtinsiensent is the absence "6 Pay cash or anather financial asset. ider of the instrument is Callable p + ate preferred stocks which the fotder has the right to the issuer has the right to calt ~revdect ata set date fat a set date ~ greclarsitied 0s financial — | = ae elisified at equity liability becouse when the nstramient because the right holder exercisos its right to 1 call is atthe discretion of redeem, the issuer is ‘mancatorily obligated to pay theissuer and therefore has. for the redemption price, ‘no obligation to pay tsnless it ‘chooses to call on the shares, TPRIC 2 Memibers" Shares in Co-gperative Entities and Simi Instruments addresses the classification of members’ shares in ‘cooperatives IFRIC 2 uses the same principles as thase of PAS 32, Members’ shares in cooperative entities and similar Instruments anc equity ifs ‘The entity has an unconditional right to refuse redemption ol the members’ shares, or b Redemption is unconditionally prohibited by law or relevan regulation.R Guapier 1 Ulustration: Financial abilities ‘The records of an entity show the following: ‘Actounls payable = [2000 [S85 conaributions payable | gap Utilities payable 7 | 7,000 | Cash dividends payable 009 | | Besniedinterestespense/ 6000 | Toney dividends payable | 73000 ‘Advaners fremeustomers | "1,000 | Shate divielends payable | 3,000 Requirement: Determine the financial liabilities to be the notes © Solution: ‘Accounts payable 2.000 Uities payable 7,000 ‘Acenued interest expense (Interest payable) 6.000 bligation to deliver» variable numberof own shares ‘worth a fixed amount of cash 10,000 clin aden pyaie ‘so Finance lease liability 35,000 Bonds payable 120,000 Discount on bends payable, (15,000) Security deposit * "2,000 Tener able preference shares issued 14,000 otal financial liabilities — Uneamed rent 9,000 | Lease liability 3000 ‘Warranty obligations | 5,000 | Bonds payable 20,000 | Tncome taxes payable Discount an bond pajable | ¢15,000) Preference shares fssved | 10,000 | Security deposit = 2.000 Camsiructive obligation | 11,000 | Redeemable preforences | |_ shares issued 14.000 Obligation to deliver a) Unearned interest on i variable number of own | receivables 3.000 shares worth a fixed amount of cash 10,000 Current Listes B Recognition of financial liabilities ‘A Ginancial lity is recognized only. sehen AheBAlity Becomes & ‘party to dhe contractual provisiais OF the instrament. Classification of Financial Liabilities All financial liabilities are classified as subsequently eneasured at amortized cost, except for the following: a. Financial liabilities at fair value through profit oF loss (FVPL} and derivative liabilities ~ subsequently measured at fair valiie (og.designatedorhelé fortrading, T.-L! b. Finandal liabilities that arise when a,transfer of a financial asset does not qualify for derecognition — subsequently rmeacured on a basis that reflects the righte and obligations that the entity has retained. ¢ Financial guarantee contracts and Commitments to provide a loan at a below-market interest rate ~ subsequently messured at the higher of: i, the amaunt of the loss allowance (I2month expected credit losses}; and. ii, the amount initially recognized less, when appropriate, the cumulative amount of income recognized in, accordance with the principles of PFRS 15, d, Contingent consideration recognized by an acquirer in a business combination — subsequently measured at fair value through profit or oss Reclassifieation of financial liabilities “after” initist recognition is prokibited. Measurement of Financial Liabilities ‘ital meas rement ' j Financial liabilities are initially measured at fair value minus transaction costs, except EVPL. 2 Financial Wabilities classified 5 FVPL are initially measured at fair value. The transaction costs are expensed ‘imedintely,Chapter 1 4 KOK b ett mensremnenit ra Sandal Mobiles casio ab amortend ‘cost are subsequently messured at amortized cost, WL‘ Financial lisbilities classified as eld for trading are subsequently measured at fair value ‘with changes in fair values recognized in profit or loss, > Financial abilities designated at FVPL are suibsoquonitly measured at fair value with changes in fair values recognized as follows: a. The amount of change in the fair value of the financial Tiability that is attributable to changes in the credit risk of that lability is presented in other comprehensive inconte, and 3, ‘The nemaining:amount-of change én thé tt Gale of the liability is presented in raft or Loss: Measurement of Non-financial liabilities ‘Nen-fionncillabilies ae initially mepsured at the BeSEESttmate of the amounts needed to settle those obligations or the measurement basis required by other applicable standant, egg, deferred tax Habilities are measured under PAS 12 Income ‘Toxes, Examples of non-finaneial liabilities: 3 Obligations arising, from statutory requirements (@.g,, income tax payable) b, Warrenty obligations Unearned or deferred revenues Commedity contracts that either camiot be settled in cash or ‘which are expected to be settled by commedity exchange an Subsequently, non-financial liabilities are alsa measured at the best estimate of the amounts needed to settle the obligations ‘adjusted for any changes on the expecied settlement amounts Adjustments are treated as changes in accounting estimates and ate accounted for prospectively, Some nen-fitancial liabilities ane Subsequently measured in accordance with the requirements of Current Lites 35 other standards (eg, deferred tax liabilities are measured in accordance with PAS 12), Financial statement presentation Liabilities ore presented as either (a) cusrent-or (b) noncurrent on the face of a classified statement of financial position ~AeBesefnd Statement-af-finariclalposition is one that shows cuissent and ‘moncurront distinctions When an entity presents on unciesiid statement” of financiat position (based on liquidity), disclosires.of liabilities due Within ane year and duo beyond one year shauld-névertheless be made in the mates Current liabititios ‘Current fahiities are Hobiliies that are: & Expectect tobe settled in the entity’ normal operating cycle; b, Held primarily fonteadieg: © Due to be setled withineizemdiiths after the end of the reporting period: or The entity does not have the right at the end of the reporting Period to defer settlement of the liability. for-ntleast.twelve months after the reporting period. All other liabilities are classified as noncurrent. “The operating cyele of an entity is the time between the ‘acquisition of assets for processing end their salization in ensh or cash equivalents. When the entity's normal operating cycle is not Clearly identifiable, itis assumed to be 12 montis.” (ras 1.) Lisbilities that are settled as part of the entity's normal Operating cycle (eg, wade payables and some accruals for employee and other operating costs) are presented as current, con ifthey ate expected to be settled beyond 12 months after the end of the ceporting period, Liabilities that do mot form part of the entity's normal operating cycle (ég, non-operating abilities} are presented asa Cuapics 1 de pee eurrent only when they are expected to be settled within 12 months after the end of the reporting period. Examples of current liabilities: a. Financial assets measured at FVPL (he, designated or held for trading) b. Current portion of long-term notes, bonds, loans, and lease liabitities : © Trade accounts and notes payables id. Nowtrade payables due within 12 months after the end of the reporting period ©. Unearned income expected to be eared within 12 months after the end of the reporting period. Bank overdrafts Trade and non-trade payables Trade payables are obligations arising from purchases of inventory that ate sold in the ordinary course of business. Other payables are classified as non-trade, Fora trading or manufacturing entity, trade and non-trade payables that are currently due are normally aggregated and Presented as one line item under the heading “Trade and otker payables.” ‘The reason for the trade and non-trade distinctions is the differing rules when classifying payables as current or noncurrent, % Tinde puynbles are classified as current ligilities when they are expected to be settled within the normal operating cycle ot ome year, achiever is longer > On the other hand, non-tfade payables are classified as current liabilities only when they are expected to be setiled within one year. Financial inslitutions need not dlassily their payzbles as trade or non-trade because their statement of financial position is Presented based om liquidity, ie, no current and non-current [Gurren inher w ee Gistinction. However, payables expected to be settled. within ene year and beyond ene year are disclosed in the notes, Examples of payables + Accounts payable — obligations not supporiéd by formal ° Promises to pay by the debtor. * Notes payable - obligations supported by promissory netes by the debtor, “Loans payable - usually used to-connote bank loans. Horids paycble ~ obligations issued by the debtor supported by Promises to pay made under seal. + Liabilities under trust receipts, eg., before the corresponding liability to the bank is paid, the goods are released to the buyer in trust for the bank which advanced the money for the Umnportation of the goods. ‘Other payables atising: from sources other than purchases and bborrawings, such as dividends payable, taxes payable, remitlances payable, ancl accrued expenses. lustration 1: Current libili Entity A has the following account balances.on December 31, 20%? Ay Teode accounts payable, net 5,000 debit balance in sweppior account. PAOM0 vmevesiad checks draws and PEO poshdated checks drawn, or300;000 * b. Credit balance in customers’ accounts: “000 © Financial linbilty designated at FVPL. sa900 d Bonds payable (maturing in 10 equal annual installa of roo. 7,800,000 © 12%, S-year note payable issued on October 1, 20x1 100,000 f. Deferred tax tisbility 5,000 4& Uneared rent 4,000 Fh. Contingont lability ‘ ‘10.000 i, Reserve for contingencies 25,000 Requirement: How mich is the total current libilities?chapter Solution: sa Trade accounts payable grows of debit ble sree! ¥312,000 + eck und pasedated check (300K + 5K + 4K + 2K). sh Rawences from customers (Cr, bal.in customers accouns) 2.000 ‘¢ Financial liability designated at FVPL sn4000 ‘d. Currant portion of bards payable 00,000 cvrnierest payable on the note in “e ¢P70000% 1254312) 3.000 ig Uneared rent 4.000 ‘Total current liiites Feo00 ots ‘= Deford tax Wabiities are ahoays presented os monet When 2° ‘mntity presents a claselfid statement of nancial position. © Contingent tiablity 58 not recognized but rather disclosed only in the wes. cr Reserve for contingencies i an approprintion of retained earnings and ‘thus, presented in eauty. Mlustration 2: Current liabilities ‘ABC Co, has the following, liabilities as-af December 31, 20x1. “Trade accounts payable, icloing costal unsold goods eexived on coelgaenent of PIO 500.000 “Held for trading financial Liabilities 50,009 ‘¢, Deferred revenue 70.000 sibankoverdraft 10.000 _galnzome tax payable 0,000 “Accrued expenses 5000 ig. Share dividend payable 2" 12,000 fh. Advances rom affiistes payable in 15 monthsatter yearend 23/00 4. Loan of XYZ. Inc. guaranteed by ABC itis possible: that ABC will beheld liable forthe guarantee 4, 45000 Requirement: Hoe much isthe total current liabilities? Curent debi 9 Seren aitiag Selution: a. Trade accounts payable, net of cost of unsold goods uceived on consignment (00:00 1000) 290.000 b, Held for trading financial abilities 30,000 Bank overdraft 10.900 aL tncome tax payable 50.000 Accrued expenses soo “Total eurront Lites “05.000 noter © "Deferred=tevenue” and “Unearned revenue” both refer to income already collected but not yet eamed. Although these terms are often used interchangeably, “Deferred revenue” can be ‘used to refer to the long-term partion of unearned income. For example, On Dec. 31, 200, Entity A receives P300,000. on a 3.yesr supply contract, whereby Entity A undertakes to deliver each year to the customer goods worth 100,000, The sentry isas follows: ‘The partion of the edvanced collection applicable to 20xd Is credited to unearned revenue, which is @ current Tiabilitys the portions epplicable to 20:2 and 2053 are credited to deferred revenue, which is a noncurrent liability. + Share dividends payable (stock dididends™payable) is not a ‘ability but rather an adjunct equity account (ie. presented a addition to share capital, The guarantee om the loan is bt recognized as Uability because it is mot-probuble (ie. it is posstble only) that ABC will be held liable for the guarantee.ft eee en Refinancing agreement ‘Alongeterm obligation that is maturing within 12 months after the period is classified a3 current, gen if a refinancing to reschedule payments on a longrterm basis is ‘completed after the reporting period and before the financial statements are authorized for issue, However, the obligation is classified as nomcurrent if the entity has the right, atthe end of the reporting period, to roll over the obligation for at least twelve months after the reporting period sader an existing loan facility. Without such right, the entity does ‘not consider the potential to refinance the obligation and classifies the obligation as current. ‘An entity's right to defer setlement anust have substance and mus! exist af the end of the reporting yoriad. IF the right to defer settlement is subject to compliance with specified conditions, the right edats at the end of the reporting period only if the entity complies with those conditions at the end of the reporting period, even ifthe lender does nat test compliance until a fater date. “Classification ofa lability is unaffected by the likelthood ‘that the entity will exercise Ils sight to defer settlement of the ‘ability for at least twelve months after the reporting period. If a lability meets the criteria for classification as non-curnent it is Refiuncing refers to the replacement of an existing debt with 2 new one but with diferent teers, eg, an extended maturity date or a fevised payment schedule. A refinancing wherein the debtor is under financial distress i called “roubled debt restructuring.” > Lown fatty ers tom cre ine Stren Cabos ” Mlustration; Refinanci act pattern ™ ‘On December 31, 20h, ABC Co, has a F1,000,000 foan payable that 'S maturing on July 1, 20x2. ABC's 20h financial statements were ‘authorized for issue-on March 15, 20%2, Case Li No right to defer settlement On February 1, 200, ABC Ca. enter intg a refinancing agreement ‘with a bunk to refinance the Ioan on 3 fong-term basis, Both parties are financially capable of honoring the agreement's provisions. The ctiginal oan contract does not state any refinancing option. Analy: Te loan is presented as a carentTiablity in ABC Cavs Dee: 31, 20K] statement of financial position despite the refinancing on Feb. 1, 20x2 because, as of Dec. 31, 2087, ABC Ca. does not have a right to defer/postpane the setloment, The refinancing agreement is disclosed in the hI notes as a non-adjusting event after the reporting, period, ‘Case 2: With right to defor settlement 7 (On February 1, 20k2, ABC Co. enters into: # refinancing agreement: ‘yrith the bank te rall ever the loan for another four years. ABC Ca. hhas the option fo roll over the loan under the existing: loan contract and, as of December 31, 2x1, ABC Co. has complied with all the conditions for the tollover. [Analysis The loan is presented asa noncarrent liability in ABC Cot Dee, 31, 20x1 stetoment of financial position because ABC Co. has #h right, of Dec, 31, 203, to roll over the obligation for at lest hela rath after the reporting perio! under Ue existing foan agreement. Case 3-With right to defer settlement ~tnterest payable Thee facts ae the same in Case 2. In addition, 10% interest on th Joan is due annually every July 1.ge i ol anys The 7000000 principal on the fous 1 presented st Aral at (20 dleeusion In Case above}: However, the 50,000, etext interest payable onthe Soan is presented as xrent- Gav Refinancing completed as of end of reporting period. ee Meember i Md, ABC Co, esters into a refinancing agreement Oi de batt roll over the foan fer another four years. The rollover etd in December 20. Analysis The loan is noxcurrent becouse the rollover on a long-term Danis is campleted sof the end of reporting peried. Thercfore, the loan does not meet the definition of a current liability as of De. 31, 2081 LLisbiitias payable on demand ‘A tisbilty that is payable upon the demand of the lender is ‘lastifed 3s eurrent even if'the lender agreed after the end of the reporting period but before the fineneial statements are “authorized for issue not to demand repayment, This is because the ‘entity doee mot hace the vigh! at she end of the reporting porto defer settlement of the lst However, a liability that is payable on demand is classified 9 noncurrent if the lender provides the entity by the end of the reporting period (e.g. on. of before December 31) » grace period ending ot least twelve months after the reporting period within which the entity can rectify a breach of loan eavenant and during which the lender canssot demand immediate repayment. Mlustration: : On January 1, 20x}, ABC Co. took a 2-year, 1,000,000 loan from a bank, The foan agreement requires ABC to maintain.a current ratio of 21, H the current cali falls below 2:1, the loan becomes payable on demand. As of December 31, 2h, ABC's current ratio is 18:1 Case 1: Obligation payable on demand Despite the breach of the loan covenant (Le. fall of current ratio below 2:1), there is no indication.on December 31, 20x that the bank \will demand repayment over the next 12 months. Sowieniames ‘Question: How much is presented as current Tiability in ABC's Thel yearend financial statements? Ansutr: 1,000,000, Te toon is payable on demand. Only if am enforceable promise fe reci fram the Bune om oF before the cd ofthe reporting Feri not 19 demand payonent for at least 12 months from the end of reporting period thal the low s classed as non crret ‘Gases Grace period received after year-end On January 5, 2022, the bark agreed not to collect he Loan in 2082 vd give ABC 12 months to setiy the breath of loan covenant Question: How much is presented a5 current Tiability in ABC's 20xt yearend financial statements? “Answer: PI,000,000, The ioam i presented os earrent becmuse the grace pried mas receined after the end af reparting peri. : Case: Grace periad received by year-end (On December 31, 2021, the bank agreed not to colleet the Loan in 22. and. gove ABC 12 months to rectify he breach of loan covenant Question: How much is presented as eurnent Hiability in ABC's 20xt ‘year-end financial statements? “Answer: None, the logn is prevented as noncurrent because the grace perios us receive by the end of the reporting period.i Rewnir Komentar malting slp peso 2 cement rae chaucet on igen base sar he ban it om prio Te cligaton is oncrent i oe oy fan he ight of blanc shee dle, rollover the ‘Sigetn cs lngron basi ude netting oan ly or © Geto on a ong bess opted or joe ta Blanca seetdon. General rate: AM obligation that is payable om demand 1s presented as current. Exception: The ligatoivancrent ine lender ogre an or bfore the balance sheet date rot tele! within the net #2 rnonths Nonadjusting events bees + | The cocurence of the following after the reporting period, but ‘before the financial statements aro authorized for issue, are disclosed only as nat-adjusting events (meantng, thy classification ‘of the liability as at the reporting date is not affected) 3. Refinancing on a longterm basis of a liability classified as ‘current, . b. Rectification of @ breach of a long-term Ioan jement classified as current. cre © The granting by the lender of a period of grace to rectify a ‘breach of a long-term loan arrangement classified as current Settlement ofa liability classified as nor-current 2 The ste strict provision ofthe standards regarding the presenation ot aes 8 lher cure of cent is doe fo tel ete cn ly ct hxc, Muity raion are usually regarded as moras Sees expecially fr franca! statements fled with rgulatry eeacs ind these usec to obtain loans. Accordingly, if you are nan gute sure if 9 “lly cumentarnencurent We rferto classy camer Ge Curse Libis 25 Serene ‘Trade aceounts payable Accounts payable arising from the purchase of inventory is recognized when ownership over the gaods is transferred to the buyer. The amount rceognized excludes trade discounts. Cash discounts are included if the entity uses the gross method of recording purchases; they are excluded if the entity uses the net melita, Ulustration 1: Accounts payable On December 31, 2x1, ABC Co. has accounts payable of 1,000,000 before possible adjustment far the following: 37 Goods in trensit from a vendor t ABC on December 31, 201 with an invoice cost of 90,000 purchased FOB shipping point ‘were nok yet rovorded, b. Goods shipped FOO shipping point from a vendor to ABC were Jost in transit. The invoice eost of 271000 was not yet recorded, & Goods shipped FOB shipping point fram a vendor to ABC on December 31, 20:1 amounting to 78000 were recorded and included in the year-end inventory count as “goods in transit” 4. Goods im transit from a vendor to ABC on December 31, 20x1 with an invoice cost of £10,000 purchased FOB destination were nol yet recorded, The goods were received in January 20%. ‘© Goads with invoice cost of P15,000 were recorded and included fn the yearend inventary cout as "goods in transit” It wa {found oust that the goods were shipped fram a vendor under FOB destination. Requirement: Compute for the adjusted accounts payable on December 31, 20%. Solution: Unadjusted accounts payable 1,000,000 4. FOR shipping point act yet recorded 50,000 'b. FOR shipping point lost in transit, not yet recorded 20,000 +. FOR destination inspproprlately recorded 15,000 Adjusted accounts payable 7.055.000 apoi shan + ! ve wt" re property ned in ecu payee ben he Te ate Fou mange pre Te oe pax boned AR Fe a ana ABC bln py rhe pods even ey et rant Thea n tarsi ae propel ec fom ant pap ee aan ae TOS domrnon comes pays wl ded oly Tee odes rote Illustration 2: Accounts payable On December 31, 20xl, ABC Co. has accounts payable of 1,000,000 before possible adjustment for the following: ‘a. Checks drawn for F12,000 were nat yot released to payees; checks deaven for P5,000 were released to-payces but were postdated, b. On December 28, 20x1, a vendor authorized ABC Co. to retieen for full credit goods costing £25,000. ABC Co. returned the goods on December 31, 20x] but recorded the related credit memo only on January 3,202 &. Goods shipped FOB shipping point, freight prepaid fram a vendor ‘on December 28, 20%] was recorded at the invoice cost of P14,000 fon the shipment date. The related freight of ®3,000 was not recorded. @. Goods shipped FOB destination. freight collect from a vendor were received and recorded on December 29, 20:1 at the invoice cost of 140,000. The rolated freight of P5,000 was recorded as an expense. Requirement: Compute for the adjusted accounts payable on December 31, 201. Solution: Unadjusted accounts payable 1,000,000 4 Unreleased checks and postdated checks 22K +5k) 17,000 ' Purchase rehirn (25,000) geste Beadle ante stance: 3.000 L 7 0. on behalf of the seller rele pen may the seller 5.000), 3 emeittiiie Notes: Tho freight in “c" is ineluded in accounts payable becsuse ABC Co, has to reimburse the seller for the freight secormmodation. The freight in “d isexcluded from accounts payable because the seller has to reimburse ABC Co. for the freight accommodation. Unearned income : : neared income represents advanced collection of income that is rot yet earned, Prior to earning, uneamed income ls classified 25 Tiability. Example: advances received from customers for the future delivery of goods ar rendering of services. Mlustration 1: Uneamed revenue ‘The records of an entity show the following: 4 Uneared revenue, faniuary 1, 2001 1,000,000, + Advances received during 20x1 10,000,000 + Advances applied to orders. shipped in 201 8,000,000 + Advances pertaining to orders cancelled in 201 300,000 Requirements: Compute far the current liability assuming: a. the advance payments received are non-refundable and 1b. the advance payments received are refundable, i Solutions: Requirement (a): Advances are non-refundable Unearied income 1,000,000" Jan. 1, 201 10,000,000 Advances received Advances cared 8,000,000 Orders cancelledt 300,000, Dee. 31, 201 2,700,000 | Anstver to requirement (n); 2,700,000 Requirement (b): Adowices are refundable Unearned income = Dec. SE, 20 fore previous sauton) 2,700,000 “Liability for refundable deposits (Orders cancelled) 300,000 Total current liability for advances received 3,000,000)f ui ity, ‘The advances pertaining tothe eancelied orders rua a5 He potas unnamed inonnebut 25 Usk or rfid dss Illustration 2: Deferred revenue [ABC Co.sells service contracts that caver a 2-year period. The sale price of exch contract is P7,000. ABC sold 1,000 contracts eventy ‘uoughout 201. ABC's past experience shows that: of the total spent for repairs on service contracts, 40% is incurred | evenly inthe first year of the contract and 60% in the second year, Reqaitenents Compute for approximations of the fellowing: a. Carrent and noncurrent partions of the deferred reverué as of Dee. 31, 20X1. b, Revenue in 20:2, Suton ecouse the contracts are sold evenly, the total receipts of PIM ‘am x1cco are averaged or simply foisted by tiv crn +2» SK), ‘a The first half (ie, PSO0K) is assumed to have been sold at the beginning of 20x]. This will be earned from jar 1, 20x1 ta Dec, (J, 2022 because the contract covers a two-year period. b, The second half ig assumed to have been sold at the end of 20x1. ‘This will be earned. from Jart. 1, 20x2 to Det. 31, 20%3, eee Pevrtngeseamed ah Ae ge ‘First half (1M ®2) 9,000 20n000 __On.NOR . Second half (IM+2) ago [ssezon sean Earned portions ia sou — sow oman ‘The shaded amounts pertain to the portions-camed during the et evcimed during the yea, i (BOOK OOK camed in yr. of emt and (500K xs» 3K earned inc y. of contrat) ‘Requirement (a): Current and Noncurrent portions — Dec, 31, 20x1 Cumewt portion (earned portion in 22) « Gonk + 200K) 500,000 ‘Noncurrent portion (esmed portion i 2083) 300,000 Total (21H hess exe potion in 2085 of 200,000 800,000 cgi ea | Requirement (b: Service revenue ~ 202 | Service reverie in. 20x2 nak» 207%) 500,000 Illustration 3: Unearned subscription ‘An entity sells monthly issues for a magazine, Subscriptions jeceived after the November 1 cut-off date are held for publication |, ithe following year. Information on subscriptions is as follows: ‘Unearned reves — January 1, 20% 3,000,000 ‘Receipts from subscriptions dusing 201 (made evenly) 24,000,000 Requirements: . a. How much is the uneamed revenue balance on Dee. H, 20x17 |b. How much is the revenue from subscriptions during 20x17 Soltis Requirernent (a): Unieared revenue ~ Dee. 31 Subscribers after the Nov. 1 cutoff date will not recelve any magazine during the year. Accordingly, the related receipts {represent the unearned revenue balance as of December 31, 20%1: |} Unenred revenue, Dec. 31, 202 = (2an4 x2112) = 4,000,000 Requirement (b): Subscriptions revenue ~ 20x1 > Suliscriptions reveme, 20x4 = 3M + enon = 23,000,000 OR | Subscriptions revemwe = “2B tequeeze) Dec, 31 fas computa) Gift certificates A gift cenificate (also known as gift card) is a prepaid card usually issued by a retailer or a restaurant which the cardholder can use to Purchase goods or services. Examples: SM GiftCard/GiftPass, Lazada Gift Certificate, Amazon Gift Card, and Vikings Lucury Buffet Gift Voucher.Per cettificates is addressed under ae oo ‘with Customers (par. BAS to BAM, The ce summarize below ack when gilt certificates are res are surnm\ kabiity 1s recog ae tract liability is derccognized and revenue jg ae ee pltiedtcaks are redeemed (used). oe the gift certificates sold that are not exercised (referred . temas PFRS 15 provides apiece valiant ig Proportounte method: Ifthe entity expects that a portion the gift cettficales sold. will nat be redeeméd, the entity recognizes the expected breakage amount e5 revenue in rortion to the pattern of rights exercised by the customer. Remote mad: the entity does not expect that a portion the gift certificates sold will not be redeemed, the entity pee the expected breakage amount as revenue when the likelihood of redemption becomes remote. 4 Mlustration 1: Gift certificates | | ‘An entity sells gift centificates as part of its sales promotion. ‘During the year, the entity cells gift certificates worth PIO0,000, of which ?72,000 were redeemed. Case 1: Proportionate method Based on the entity's past experience, 10% of gift certificates sold are never redeemed. Requirement; Provide the journal entries: Guerent Cinbiitie at \e-Altemativly, "Uneared reverie” lie ot the *Gattcardisbity” account, 5 "Contac Liab” aeseunt may be used in Alterativey, "Me “GUE Cr Renn” of sia account may be Use & Froportionate recognition of breakage revenue Breakage revenue is recognized. the value of aetual redemptions. Gift certificates sola ‘on a pro-rata basis in proportion to 100,000 Multiply by: 10% ‘otal expected breakage 20,00 Gifteertificates sald 100,000 Loss: Total expected breakage (10,000) Gi certificates sold met of expected breabge 30,000 Gilt certificates redeemed Divide by: Gill certificates sold net of breakage Pereentage of actunl pedeiptions Total expected breakage ‘Multiply by: Peceritoge of actual redemption ‘Amount of expected breakage recognized as revenue Bay Lameyed teva fr experts eae 9 Afleratly the Giftcard ability Revenue lt “Brows Revenne” necouné may be used Case: Remote method |e entity expects that all the gift certificates sold will be Solution: (sedeeinet, Dm | Cash ] 100,000 Gin card iatlity o | 100,008 Accounting: ts rend he ale eine The entity makes the first two entries above. As to the breakage, Date ete 72,000 s2,00 ‘the entity recognizes revenue only when the likelihood of rec fhe oempton fi cies redemption becomes remote, for example, when the certificates are not redeemed after a long period of time.- Shay ee ee ee a gs Traditional accounting, esaton HESS alee that expire one year alter iss, 201 Financial statements: se 2 ee : san eniy se at cates is shown below: ecient mca retin a ee inenred revere. 1, 20x) Peo.cog Unsere reverie 225,000 cc sald dong 2081 tera MAID 4 Gi acne fates redeerned in 20% ( 0m |stetement of profit or Tse Prin yor a. tel hasexpte) 4 % ‘Reena (i+ ry 4,075,000 Giteareates sold and redeerned in 20x Tra COtberincome omessuay 300.000 | ically, 10% of gift certificates sold are never redeemed. : 1575,000 a Talons account SS a ((—Prasis_|__Teaditional accounting vecopnitim of breakage revenue under PFRS 16. Under de old accounting, the Seo eifoas TamG | eave rete treegricd in ul as an aed not vena) To 0 On Gkcmdisiy 102900 | “Uscamed reverse __1cz0a| | aguany for doposte received Redon ed emprain eft sal yrersce Linkility for deposits received represents eash receipts that are held in Giteand liability 600/000 Deeerins sevenien ei trust for other parties, Examples include: Revere woot aa 8. Deposit liabiitis of banks and other entities performing similar income function eH Hele ff cn ere 3. Depots sci for returnable containers, such a bolls, cases Gitar iabiiny 675.000 eaan crates, (rays, boxes, and similar items that contain the goods Reven 75000 | Sales 1c : * sold but must be returned to the seller ‘upon consumption of the goods. Security deposits received from lessees 4. Deposits received from escrow agreements & Deposits for future subscription of the entity's own equit ‘mstrument to the extent that the deposits are repayable ia cash. sieeard Habilty 100,000 P Gen imry 75000 ror Revenue a xu0s)_79%6 7500 | Over income ists 10% tonto ‘Arai, te amon may be bron FEO Bretge Ren ‘e730 + (IM x 90%) = $e actual redemptions Liability es of Dec. 31, 20x Mlustration 1: Deposits far returnable cont ABC Co. requires deposits from customers for the eantsinér of Beods sold, The customers are a refunded for the deposits received Hee: caay 73200 “aon by Pinimteein pron. eoooce| 1200080 Suk [sain espe prone. sons0o) LOA SA51, 2002 from deliveries in: pr contanesen Dement 20,000 wo ong 90,000 80,000 ements Compute for the lidbility for deposits on retumable eer as ofDecember 3, 2033. ae Liability for deposits: ignored Deposits from 2041 Refims from 20x iguored | 45000 Deposits from 2002 fons res 2 25,000 | 90,000 Deposits in 20x3 Retumsin 3th 46000 | end. 64,000 ‘The Ol deposits (and soturns) ase dgnoved’ because they have already ‘pied, ane honey, do not alec the Palance of the lability an Dec, 31, 2083, The lwwredseons 20s] deposit are regarded. as proceeds from the retirement af the lunrtumed rantuners. The ditferencebetween tis armeun! and theearrying amount of the unread corte is mcognieed a gainer lus on asset retieme nt. Illustration 2: Security deposit from a lease On January 1. 20x, ABC Co, received a 100,000 seeurity deposit from a tenant in conjunction with a 10-year lease. ABC will retum ‘he security deposit to the tenant at the end of the lease term, net Of costs of any damages to the leased. Property. The discount rate sk Requiremmt: Provide the entries in 2x4, Sobstiong, Cosh, SS depot cancer ete, Current Libis 35 ee: | Interest expense GAH x05) 3855 aia |__Seoutity deposit 3885 Diy 1 cifference ie iseaneed in dala Ilene Acwuring FATT ‘Theo security depoat ls conaied as somcurrent Fahility seach year-end fn the fist # years of the teste, an cosltiod an current lity only on Desersiny 31, ‘28, a year before tse dae to bw renee te he ena Milustration 3: Deposits held under escrow agrcement ABC Co. maintains escrow accounts and pays insurance premiums for its customers. Escrow funds’ are kept In interes! bearing accounts, Interest, less a 10% service fee, is credited to the customer's account and used to reduce future escrow payments, Information on escrow accounts is shown below: Escrow accounts liability; January 1, 20et 20000) Escrow payments received during 20%] 1,500,000 Insuranee premiums paid during 20x1 00,000 Interest on escrow funds during 201 100,000 Requirement: Compute for the current lability for escrow accounts 160) December 31, 201 Solutions Liability for exerow accounts 200,000 Jan. 1, 2081 11500,000 Escrow payments received Premiums paid 300,000 | 90,000 _ Int. net of 10% fee aco x9, ‘Dee, 31, 20%1 _7,290,000 Deposit for future subscription of shares of stocks ‘Deposits meceived for future subscription of the entity’s shares of Stocks are classified as either liability or equity as follows: 4. If repayable in cash at any time prior to the issuance of the subscribed shares, the deposits are classified as. liability. b, If not repayable in cash, the deposits are classified as equity, preferably presented under contributed capital.aa pense ities for expenses already incurteg y peat epee ae payable, utilities payable, and the Ta ns dpe its December 31, 20x] year-end finang, An 8 ered the following information: | ee pent tity css OF FBO.000 eas recy | Te and paid on ae ed on January 2, a P2000 advertising bill was receiv wary 2, 202. OY ard bling, PIB OO. pertain advertisoments jy Pe enter Ost and #5000 pertain tO advertisements ig 2. . «esa eectve Dsember 16, 0x0, requises monthly rental ZerLont00 poyable one month after Uke commencement ofthe ease andevery month thereafter. In addition, rent equal to 5% ‘af net sales over P1,000,000 per year is payable on January 31 | ofthe flowing year » Total cash sales and collections on accounts amounted to f 1,000,000. Accounts receivable has a net increase of 200,000, Commissions of 15% af sales are paid on the same day cashis._| received from customers, Reguirosets Compute for the accrued liabilities on Dec. 31, 20x1. Slt: Utlity expense for December 21 ae Aireiing cscs in December 2 a jc fom December 16 0:31, 201 (100K + 2) ct Seager (nahin se oa __ xm Acered fables _ ei i Corrent Liabiities -* Total sales is cernputed as follows: Accor receivable Beg, bal 0 Total sates cash ‘Tota collections som edit Joqueeze _ 1.200006 | 1,000,000. cash & credit soles [__200,000" Net increase ‘Additional commission expense is computed as follows: Total commission expense (1.2 tial ales 15%), 180,000 ‘Commission expense paid (tht caheceetons LS) 350,000) Aditionat camimission expense 30,000 Dividends payable ‘The lability to pay dividend is recognized when the dividend is appropriately authorized and is no longer at the discretion of the entity. which a. the date when the declaration of the dividend (eg. by the board of directors) by the shareholders) Pproval is required: or 'b. the date when the divtdend is declared (e.g., by the board of Sirectors) if further approval is not requived. omc Dividends declared by banks are sul the Bongko Sentral ng Pilipinas (BSP), ‘Only cash ond property dividends are recognized as ities, Stock dividends are not liabilities; ‘share dividends distributable’ (stack dividends payable’) is presented in equity as an addition to share capital. ibject to the approval of Liability for remittable collections Liabilities may also arise from amounts collected on behalf of third parties. Examples: & Taxes withheld b. SSS. premiums, Philhealth, ‘Pag-IBIG and similar contributions © Output value added taxes (VAT) Collections made by an agent or broker on behalf of & principal a.c Tyg obligation (arising Rom anes bgation (arising from actin aa) ics, 'S that ‘on on others that the entity wilt x eg a pmsiies) “a sieve cassfied as FVPL or amortized cost i a a arc Labs profit. peal nies ave nially measured at fair value ming Pectin costs, except FVPL Uailities. in which “the ranachon casts are expensed immediately. Fe tay is bodied as current if (a) tis expected to be ‘piled within the normal operating cycle; (b) it Is hed primarily forthe purpose of trading; (c) it is to be settled ‘within | yer, or (the entity does wot have ans watcordétional ght to defer setement of the ibility for at least twelve ‘months after the reporting perica, ‘A carently maturing obligation is presented as current, Only ‘on the following instances would a currently maturing obligation is presented a5 moncurtent; (1) refinancing is completed as of the end of reporting period, (2) refinancing after the ened of reparting period but before authorization of and (3) grave period is received as of end of reporting period ta rectify Breach of loan covenarit ending at least twelve months after theend of reporting period, + Deere tax liabilities are always presented as nomcurrent ‘hen 0 entity presents a classified statement of financial ‘Position. Share (stock) dividends _ ity, Le, an addit Payable are not Tiabilities but rather financial statements fr fsgue is atthe diseretion of the entity || Mentesherecapi Current Liabilities PROBLEMS PROBLEM 1: TRUE OR FALSE 1, A liability exists only if the party to whom the obligation is ‘owed is specifically identified. 2 Legal obligations arise only fram law. 3. Allong:term debt that is maturing within 12 months from the ‘end of the reporting, period is a current lability. Financial abilities other than FVPL liabilities are initially ‘measured at fair value plus transaction costs. Amortized cost financial liabilities are subsequently measured at the present value of the ¢ash outflows from the instrument. Financial liabilities may be subsequently reclassified between the amortized cost and fair value measurement categories. ‘Trade payables and other liabilities that are part of an entity's working capital may be presented as current liabilities even if they are expected to be settled beyond one year. ‘According to PAS 1, a currently maturing debt that the entity's ‘management intends to refinance is presented as noncurrent. ‘According to PPRS 15, if an entity expects that a portion af gift certificates cold will not be redeemed, the entity recognizes the expected breakage amount as reverme in proportion 0 the patter of rights exereised by customers, Unearned revenue is reverue that is eamed but not yet collected 10. PROBLEM 2: MULTIPLE CHOICE - THEORY Low of the following is not one of the aspects of the definition of a Hability under the Conceptual Framework? 8, Obligation bb. Transfer of an economic resoutce ¢. Present obligation as a result of past events 4, Probable autilow of economic benefits 2 Which of the following would most likely not give rise to a Habit?Gh ee 5. ‘An. irrevocable purchase commitment burdensome, by Famingaf taxable incomes ‘Signing an employment contrac S Seir of produc with implied warranty. becomes, sty A enters into an ‘exccutory contract. Entity A. a et cn cores ae Which of the following statements is correct? a. If Entity A performs its obligation first, Entity A. shall recognize an asset. bb, If Entity A performs its obligation first, Entity A shall recognize. liability. _ cI the counterparty performs its obligation first, Entity 4 shall recognize an asset. d. Entity A should recognize a combined asset and liability upon signing the contract. According to PERS 9, when should an entity recognize a financial liability? a When the instrument imposes probable outflows of ‘economic benefits that can be measured reliably. When the entity becomes @ party to the contractual provisions of the instrument, Upon entering into the contract even if the contract is still executory. ‘Any of these as.a matter of an accounting policy chaice, b © ‘Which of the flowing liabilities is a financial liability? a. Advances from customers b. A constructive obligation © Callable preference shares issued 4d. An obligation to deliver a variable number of own shares Worth a fixed amount of cash, 5 Caren abies Et 6 According to PFRS 9, financial liabilities are classified as a. FVPLor amortized cost. © FVPL or FVOCI, b. FVPL, FVOClor amortized cost. d_ none of these Financial liabilities that are classified as amortized cost are subsequently measured at a. fair value with changes in fair value recognized in profit or loss, fair value with changes in fair value recognized in other ‘comprehensive income, ‘parily (a) and partly (b) depending on the change in the instrument's credit'isk, the present value ofthe remaining cash flows of the instrument, discounted at the original effective interest rate, b According to PAS 1, which of the following statements is correct regarding the refinancing of lang-term obligations? a. A cuttently maturing obligation is classified as current even if a refinancing agreement to reschedule payments fon a long-term basis is completed after the reporting. Period and before the financial statements are authorized for issue, A currently maturing obligation is classified as current if a refinancing agreement to reschedule payments on a long- term basis is completed after the reporting period and before the financial statements are authorized for issue. A currently maturing obligation is always classified as a ‘current Hability, without exception. A-currently maturing obligation is classified as neneurrent if the entity expects (o refinance it on a long-term basts, Which of the following isa trade payable? Income tax payable 1. Note payable issued in exchange for inventories Dividend payable d, Short-term bank loanGes ee Which of the following is incorrect regarding the BeCOUng ae git certificates under PERS 15? ; ‘ 2 The eniity recognizes a contract lability when it sts gig certificates. bk. The entity derecognizes the contract Tiabili recognizes revenue when customers tse gift certificates The eniity recognizes revenue for the full amount of expected breakage. If the entity expects that a portion of the gift certificates, sold will not be redeemed, the entity recognizes the ‘expected breakage amount as reverie in proportion to the pattern of rights exercised by the customer. PROBLEM 3: MULTIPLE CHOICE- COMPUTATIONAL, 1._The account balances of Boast Ci 14,000 | Phitieatth cont payable | _ fers ——[ ti cance soe Learned perenne. ends payable | 60) Hata 30,800 | Lease ably 70%] | Warranty obligation 10,000 | Tons payable Biscounton notes receivable Jncome taxes payable { ‘Obligation tadeliver a fised | Risa umber of oven shares worth) 100,000 | Redeemable Ps | shares ised = fixed amountof cash | = \ ‘Ordinary charesissued | 20/000 | Constractive obligation | 22,00) How much is Boast Co’'s total financial liabilities? a. 426,000 ‘b, 438,000 ©. 444,000 538,000 ‘2 Proud Co¥s records on Dee. 31, 20x] show the following account balances: Trade accounts payable fet of Fifi debit tutance in supplier's account and F.C onreoased checks drawn) Deferred tax Hability tospected i reverse inh?) 10%, 4-year note payable issued on Aug. 1, 20x) | i 1 Current Linbilities = ‘onda payable fristaring in Sequal annual nstallnents of 400,000) 2,000,000 Reserve for contingencies: 5,000 eld foe trading financial Tiobitities ‘100,000 Incorne tax payable 100,800 ‘Accrued expenses 10,000 Stack dividends payable 24,000 How much is the total current liabilities? 8, 1,120,000 b.1.210.000 «1,220,000, 1,238,000 3, Keeper Co. has the following lisbilities on December 31, 20x1: + Trade and other payables 2,000,000 Note payable (assed 3 yrs ag maturingen Dee 3,203) 6,000,000 + Serial bonds paysble (next anal principal instalment of 200,00 duc Jay 120-2) 5,600,000 ‘On Febriary 28, 2022, Keeper Co, entered into a non-cancelable agement with the lender to refinance the note payable on a long- term basis, on seadily determinable terms that have not yet been implemented. Keeper Co/s 2st financial statements were authorized for issue on March 31, 20x2. What amount of current abilities shoutd Keeper Co. report in its 20x1 statement of financial position? a. 2,000,000 b.2,800/000 —.8,800,000 13,600,000. 4 Pam, Ine. has 1,000,000 hotes payable due on june 15, 20x6. ‘On December 31, 20x5, Pam signed an agreoment to roll aver the 1,000,000 note on a long-term basis. Under the agreement, the amount that can be rolled-over cannot exceed 80% of the: alu of the collateral Pam was providing. As of December 31, 20K5, the value of the collateral ‘was F1,200,000 and was not expected to fall below thi Is amount during 20x6. In its December 31, 20x5, balance sheet, Pam. should dlassify the notes payableas Short-term — Long-term Shortterms Long-term 1,000,000 +. 200,000. ‘800,000, 40,000 940,000 4. 1,000,000 aee sent liabilities of P3,120,000 on Deg, 5, Poof Co. has se nominal for the following: bs 2d befor Pinorized capitalization Was fully Iued, Dating . pes Poof Co. filed an amended Articles of Incorporation, AMIR the ‘Securities and Exchange Comitnission increasing its authorized capitalization. Althaugh the Sec, approval was not yet received, Poof Co. started rece deposits for future subscription of its 17480,000 were collected and credited to * Per agreement with the subscribers, the deposits ate to by reimbursed immediately if in case the SEC rejects Poof Co's ome ion application for increased capitalization. Poot Co. expects ta _ receive the SEC's decision in April 20x2, Included in the total current abilities is a bank Joan of ‘P600,000 that is maturing on July 1, 202, On February 14, 2x2, Poof Co. entered into a refinancing agreement with the ‘bank to extend the repayment of the loan to July 1, 2085. The Original loan agreement provides for such renewal option, and es of Dec. 31, 20x1, Poof Co. has complied with all the conditions relating to the extension of the loan repayment, Poot Co's financial statements were authorized for issue on March 15, 2032. ‘How much is the adjusted total current liabilities on Dee. 31, 20x17 a, 2,520,000 3,000,000 ¢. 3,320,000 3,600,000 6 Shameless Co. had the following liabilities on December 3h, 2x1: ‘Accounts payable 730.000 Intetest payable 120,000 Long-term bank loan (maturing pet 1.2069) +4.000,000 In 20hd, Shameless Co. breached an agreement on the long-team bank Joan which rendered the loan repayable on demand ibscribed Capital However, on February 29, 20x2, Shameless Co. received from He | 1 Carre Lbs 5 bank a one-year grace period to rectify the breach and during which the bank promises not to demand immediate repayment, Shameless Co's 201 financial statements’ were authorized for fssue-on March 31, 20%2. In its 20x1 statement of financial position, what amount should Shameless Co. report as total current ‘iabilities? 2 4870,000 b.870,000 «750,000. 120,000 Anger Co’s accounts payable on December 31, 20x] had a balance of P2,300,000 before any possible adjustment for the following: Goods in transit purchased on credit for 25,000 under an FOB destination term were recorded and included in the inventory countan December 31, 20x1 a5 “goods in transit.” ‘Anger Co. checks, drawn for #32,000, wate found in the safe box during the Dec 31, 20%1 securities count. Goods purchased under an ‘FOR destination, freight collect’ term were received and recorded at the invoice cost of P0000 on Dec. 29, 2081. The cash payment for the related freight of P,000 was debited to the “Freight-out account Goads worth 790,000 revived an consignment from Dishonor Co. were recorded as an tnerease jn accounts payable. The goods Payable, Femusin unsold as of Dee, 31,20x1, ‘The balance of accounts payable in ‘purchased under an FOB shippi transit, Anger Co, corres, 9 cludes 64,000 cost of goods ing point term that were lost in recorded a corresponding claim against the How much is the adjusted balance a. 2,150,000, b. 2.214000 Ego Co. had the followi Ing account balances on Decemt 2081 before adjustments: = “ah {nwentory (pes physical court om Die. 31, 20x) + Accounts payable . ‘of accounts payable? €.2,240,000 — d. 2,304,000 a 1P800,000 960,000ff .. 3 cof 780,000 and pu an nwoice cst hace ‘ rat pre at cored and nce Inthe year gd * roa sii F cl oe Carré Litilities a goad in transit” eft = Et of 10000 ard pu | ona mt Ronda ori oo HOUR 3,282 Weng ce doiins was received. 10. Jim Company offers three payment plans on its 12-month contracts. Information on. the three plans and the mimber of children encolled in each plan for September 1, 2005 through August 31, 2006 contract year follows: b Monthly fees per No. of Pils chil children shipment damaged goods costing £20,000 on Teg, ra 500 = 6 Bp Co. a recorded the Tated credit meme, on Z oe. ae S ‘al. rd 8 50 cn Janvary & 31, 20d, Ege Co. recorded 2 60,000 check pay, On December 31, 20K), 9 8 dated January 7, 20x2, ‘pa sapplie. The dec wa Jim received all the initial payments on September 1, 2005 and How much are the adjusted balances of (1) Inventory ang | "2240 ef monthly fees curing the period September 1 through ‘on December 31, 20x17 December 31, 2005: In its December 31, 2005 balance sheet, what ae <. 800,000; 1,000,000 anvount should Jim report as deferred revenue? aon 1.010.000 a. 810,000; 1,010,000 vey, 2200 439 6600 4.9;900 9. Wooten Co. sells subscriptions for acoess to an online file sharing site. Subscriptions are collected in advance and 1. Motor Co, sells service. contracts: stedited to sales, An analysis of the recorded sales activiy that cover a 2-year period. ‘The sale price of each contract is 2,000. Motor Co. sold 1000 Sontracts evenly throughout 20x. Based om Motor Cos past revealed the following: ‘expetience, 40% of contracts sold are earned inthe firs yers of 2x1 20x? the contract and 60% in the second year Approximately, how Sales 44,000 1,000,000 ‘much are the current and noncurrent portions of the deferred Lesseancliations #0900 60,000 revenue on December 31, 201? Net sabes: 800,009 240,000. a. 1,366,667; 550,000 Subsexfptions expirationse 1b. 71,250,000: 630,000 201 240,000, mae 3310000 260,000 12. Cow Co. sells pitt cortificates that expite within a year. During. ss aoe sono Pu Gow Co. sold git centiicates worth P2nHC60, af wine ‘txt 230,000 P108,000 were redeemed. Cow Co. expects that 10% of the gift 500,000 840,000 ‘cettificates sold will not be redeemed. Under PERS 15, what - — amounts of (1) total revenue and (2) liability should be jokes Deze 3t, is fon reported in Cow Cos 201 financial statements? ‘lancet uneamed shoe ratio Posi @ 106,000-72,000 «120,000; 72,000 2309, nay 00 b. 128,000;72,000, ee i ©. 465,000, 4,280) <. 120,000, 80,000- jeates that expire one. yea 4 ani co 88 A ip ait corificates is Shown beloyg a a Inform eee redeemed in 0X1 co indieates that 545 OF gift certificates Mi a rd Under PERS 15, what amounts of ¢) Ba on er Tobiliysbeuld be wported fn Mimi Cavs event ci r pecpenaie <4. 930,000; 208,000 December 31 adjusting entry is: a Rentrevenue 10,000 Unearned rent revenue 10,000 ‘b. Uneamed tent reverme 24,000 Rent revenue 24,000 © Rent revere 14,000 Y Uneamed rent tevenue 14,000 4, Uneamed rent revenue 10,000 Rent revenue 70,000 ‘5. Enity D acquted a piece of land on April 1, 20xt. Purchase price was reduced by a credit for the real prop Aes ah ce tusngthe year. Entity D records real prop steach monthvend by Adjusting the prepaid tax or W Bea stunt as appropriate Oa May 1, sbei Entity D pil sea el irsaliments of 72,000 for the art axes, The entry to. tof tax 209 indudyg nt? We #eCord the payment ® ada “em Pope om expense af PAS 00. Current Lisvities = ‘debit to real property tax pay able of P43,000. 4 credit to:real property tax payable of 743,000, debit to prepaid real property tax of P48,000. PROBLEM 4: FOR CLASSROOM DISCUSSION Financial and Non-financial liabilities 1, Mid-Earth Co.'s liabilities a5 of December 31, 20X1 inchide the following: ‘Accounts payable P15,000 ‘Preference shares issued with mandatory redemption 100,000 ‘Unearmed income 7,000 ‘Utilities payable 16,000 Warranty obligation 7000 Deferred tax liability 2,000 PhilHealth contribution paysble 5,000 ‘Obligation to deliver a fixed number af own shares 13000 Worth a fixed amount of cath, Share dividends payable 3,000 Rent payable ‘9,000 Requirement: Compute for the total financial liabilities to be - ‘disclosed in Mid-Earth Co’s 20.0 notes to financial statements. Current and Noncurrent liabilities 2 Patience Cos liabilities as ‘of December 31, 20x1 inelude the following: Accounts payible "P500,000 Mi for trading financial abil ts 3,000,000 Note payable (FIM due in20e3} 2,800,000 Usearned revenue 300,000 Dividends payable 500,000 ‘Delerred tas liability 200,000 Requitement: Compute forthe total current Uabities,1a Liabilities payable on demang _ earn ues as of December 31, 20 sag 3 Tames Sethe Geen g-yeor loan'maturing on De ember 3, Go. nteds to refinance this liability qq alg, aga Febraary 2, 2032. Turmerie’s 20 ‘vere authorized for issue on March 31, 29,9. Jay fan tat is payable ON demand. Thre i gg + Peiilfon as of December 31, 20x] that the creditor i af within the next 12 months. | Se due an December 31, 20s9. Turmere rorya’ a Joan peovison accelerating the repayment gf this toan within the next 12 months. However, on Ja 12, 2h, the creditor granted Turmeric Co. a 12-month space period to rectify the breach, within which the ‘creditor will not demend immediate repayment. Requrment; Compute for the total current Liabilities” as. ef December 31, 2ncl. Accounts payable 4 Kind Co/s aédouints payable on Dec. 31, 20x1 had a balance of 1,200,000 before pessible adjustment for the following: + Goouls shipped to Kand under FOB destination on December 27, 20x1 were losin transit. Kind did not record. the invoice cost of 760,000, * Goods shipped to Kind under FOB shipping point on December 26, 20x1 were received and recorded at the invoice cost of 170,00 ‘on January 2, 2022, * Kind received notice of shipment of goods from a vendor of December St, 2h and recorded the invoice cost of t80,000 of meee was ue foand oat on January 6, 20x2, when the received, that ag destination term. ‘the shipment was made om 3 Requirement: Compute for able on Degerber 3), Pat Stet Balance of accounts pays! Greet Libis ‘Uneamed income 5. Ngckplex Co. sells one-year subscriptions for access to an igckpl Pt online streaming of movies and TV programs. information an subscriptions is a5 follows: 2x1 2d Subscriptions ‘900,000 2,800,000 Subscriptions expirations: 201 740,000 20x2, 160,000 2,690,000 203. 110,000 Requrirement: Compute for the amounts of subscriptions revenue and neared subscriptions to be teported in Ngegkplex Cavs 202 financial statements, Gift certificates 6 D g the year, Fine Ground Co, sold gift certificates worth 00,000, of which #216,000 were redeemed. Fine Ground Co. bas sold gift cards for many years and, based on its historical ata, 10% of the gift cards sold are never redeemed. Requirements: Provide the joumot entries using PFRS 15. ‘Accrued lial NV Co. has total current liabilities of 75,480,000 as. of December 31, 20x1 befare considering the following: December 20x1 utilities of P50,000 were paid on Jan. 7, 20x2, Cosh dividends of 290,000 were declared and paid in January 202, NV Co's 20x1 financial statements were authorized for issue om February 14, 20x2. Employee withholding taxes in 20x1 were understated by 20,000. Requirement: Compute for the correct balance of current liabilities.apter 2 a ue payable eg strats factors and prepare amortization tables ion fees gations supported by debtor aoe oe ae is similar to the oe sry frre edoamdbbiredil ning haa accu Initial meusurement Notes payable are initially recognized at fir value mim truco, > Fbirvate—ts “ihe price that would be received to sell an ase x paid to Frans lability nan orderly transaction between snathet participants tthe measurement date.” (P85 13Appa A) For measurement {nto the following: & Short-term payable 5 Long-term payable that bears a reasonable interest rale a Gin tet™ Payable thet bears no interest (noninterest bearing) Plirposes, notes payable are classified 4 Long tem payable tht bears am amrensonabte intevest if (helow-markey’ interest rate) Ang THEM” payable one that matures otthin 1.706 ie" Fapbeisone tat matures beyond I yee, \ ¢ : ‘Short-term payable The fait Value of a short-term payable may be equal to is face amount, However, if the transaction contains significant financing component, the fair value of the short-term payable.is equal to ils Present walue. Long-term payables ‘® The fair value of a long-term payeble that bears @ reasonable interest rate is equal to the face amount. An interest rate ig deemed ‘reasonable’ if it approximates the market rate at the transaction date. . ‘The fair value of a long-term term noninterest bearing pa ‘of the Future cach flows on ‘imputed interest rate, ‘The fair value of a fong-term payable that bears ant unreasonable interest rate is also equal to the present value of the future cash lows on the instrument discounted using. an imputed interest rate. Payable that bears no interest (long 'wable) is equal to the present value the instrument discounted using an Other terms for im, iputed rate of interest include effective cre tape, marl rate and yield rate. Effective interest rate is the fag that exactly discounts the Future cash payments af « financial "ability equal to its carrying amount, Cash price equivalent The fair value of a paysble may be measu; cash price equivalent of the noncash neasived in exchange for the payable. Gest price equivnent is the amount that would have been Paid if the transaction was settled Dutright on cash basis, as ‘SpPavec o installment basis or other deferred setemert red in relation to the asset (nioncash consideration) Example An entity Purchases a TY set on a €-month installment basis, The install ment price is 120,000. n » However, if the TV set is purchased “MINE in cash, the cst price would have been Pio Osc; sige at 100,000, the easy italy ste 720,000 difference ern, Fie 1 TY oo cash price) 8 athortiong ice oe expense using the effective nee tao foe PBOAD UNE a special cag Ane pues tr wormlly sls the Goods ‘or Panay ee eal of one month or with a 5.000 discon og Moxa (ie ought panel ash The inal measurement of the payable is, computed ag. fellows: ae ‘oma puch price witha credit period of ene monty icon wight pajoent ‘Cashpriceequtalent ofthe goods purchasedt Both the purchase prices of 250,000 (special credit) and PPONNON (noreol credit) constitute a financing transaction, ie, they inchude consideration for the credit period. To compute Kt the cask pri equtwlent of the goods, the 5,000 discount fe ‘outright payment is deducted from the normal selling price ol rani. initial recognition plus er minus the curl! ‘Notes Paysite 5 amortization using the effective interest method of any ifference between that initial amount and the maturity amount and, for Financial assets adjusted for any loss allowance,” (FFRS 8. Append A} The amortized cost is determined using the effective interest method. When a note payable is intially measured at present value 6 eazh price equivalent, the difference between that amount and the face amount is initially recognized as a discount (or premium, in the case of bonds payable) and subsequently amortized as interest expense using the effective interest method. ‘Effective interest method is o method of calculating the amortized. cost of a financial asset oF a financial liability and of allocating the interest income or interest expense over the relevant period, 2 Summary of itil and subsequent miastirements of nates Titi measurement Foie valoe minus Subs teanaacon cons. Their es ‘ae is teen a memreneat raion: H & Face amount;or | a, Expected >. Present wate gi |” settlement the transaction amountif the satire spit | at me ‘measurement is face amount. b. Amortized cost it the initial measurement is val. 2 Longsteem with [> Face amaumt | > Expected reasonable settlement interest rate amount