FINANCIAL LIABILITIES – ACCOUNTS PAYABLE

CURRENT LIABILITIES

I. Definition of a Liability

1. Present obligation of the entity to transfer an economic resource as a result of a past

event
2. An obligation is a duty or responsibility that an entity has no practical ability to avoid

II. Based on IAS 1, an entity shall classify a liability as current when:

(a) It expects to settle the liability in its normal operating cycle

(b) It holds the liability primarily for the purpose of trading
(c) The liability is due to be settled within twelve months after the reporting period
(d) The entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period

II. All other assets and all other liabilities that do not meet the four criteria above shall be classified
as noncurrent

III. Examples of current liabilities are:

a. Accounts payable and Accrued Expenses

b. Currently due provisions
c. Borrowings that where originally short-term and currently maturing long-term
obligations.
d. Income tax liability

IV. Refinancing – Taking out a new loan to pay off existing loan/s. This also refers to modifying
the terms of an existing loan. Consider the following:

a. An existing “current” obligation refinanced on a long-term basis on or before the balance

sheet date shall be classified as noncurrent while refinancing after the balance sheet date
regardless if it occurs before the issuance of the financial statements shall be classified
as current.

b. If the entity/borrower has the discretion to refinance the obligation based on the original
contract with the lender this loan shall be classified as noncurrent even if it is currently
due.

V. Breach of a Loan Covenant – Terms and conditions within the loan contract is violated by the
borrower with the effect the loan becomes payable on demand

a. The liability is current, if the lender has agreed not to demand payment as result of the
breach after the end of the reporting period and before the authorization of the financial
statements for issue.
 b. However, the liability is classified as non-current if the lender agreed by the end of
the reporting period to provide a period of grace ending at least 12 months after the end
of the reporting period, within which the entity can rectify the breach and during which the
lender cannot demand immediate repayment.

SAMPLE PROBLEMS:

Problem 1: Fabella Company’s accounts payable on December 31, 2023, totaled P2,000,000
before any necessary year-end adjustments relating to the following transactions:
Dec 31
Inventory 300K
AP 300k

Jan 5
1. Goods shipped FOB shipping point on December 31, 2023, from a vendor to Fabella
Loss 300K
Inventory 300K
were lost in transit. The invoice cost of P300,000 was not recorded by Fabella. On
Dec. 31
January 5, 2024, Fabella notified the vendor of the lost shipment.
Cash 50
Bank overdraft 150
AP 200
2. On December 31, 2023, Fabella wrote and recorded checks to creditors for P200,000
Jan 5
AP 200 causing an overdraft of P150,000. The checks were mailed on January 5, 2024.
Cash 50 if na deliver yung checks, ang worth naman ng AP na irerecord is yung worth ng bank overdraft na 150
Bank overdraft 150

Dec 31 no entry 3. Goods shipped FOB destination on December 31, 2023, from a vendor to Fabella
Jan 5
Inventory
AP
400K
400k
were received and recorded on January 5, 2024. The invoice cost was P400,000

1. What amount should Fabella report as total accounts payable on December 31, 2023?
2,000,000
+300,000
2. Prepare necessary adjustments to accounts payable. +200,000(undelivered
checks)
=2,500,000

Problem 2: Martin Company regularly buys sweaters from Bertans Company under FOB shipping
point terms and is allowed trade discount of 20% and 10% from the list selling price. Martin made
a purchase on March 20 and received an invoice. The list price was P4,000,000, a freight charge
of P100,000 and payment terms of net 30 days.

1. At what amount should Martin record the purchase as accounts payable using gross
method? 2,880,000 + 100,000

2. At what amount should Martin record the purchase as accounts payable using net
method? 2,880,000 + 100,000

Problem 3: On August 1, Mike Company recorded purchases of inventory of P800,000 and

P1,000,000 under credit terms of 2/15, net 30. The payment due on the P800,000 purchase was
remitted on August 16. The payment due on the P1,000,000 purchase was remitted on August
29.

1. At what amount should Mike Company record the purchase as accounts payable using
gross method? 1,784,000 800K x 98% +1M
since gross method, ang record mo lang na AP is yung actually na nabawasan lang ng cash discount

2. At what amount should Mike Company record the purchase as accounts payable using
net method?
1,764,000 1.8M x 98% since net method, lahat ng AP nya is bawas na ng cash discount kaya ganyan
3. Prepare necessary adjustments to accounts payable.