Current Liabilities Chapter 1 Current Liabilities Related standards: PAS 1: Presentation of Financial Statements PAS 32: Financial Instruments: Presentation PERS 9: Firiancial Instruments Learning Objectives 1, State the recognition criteria for liabilities. Identify the characteristics of a financial liability. Classify liabilities as current and noncurrent. State the initial and subsequent measurements of financial and non-financial liabilities. PENe ity is “a present obligation of the entity to transfer an economic resource as a result of past events.” (Conceptual Framework 426) The definition of liability has the following three aspects: a. Obligation b. Transfer of an economic resource c. Present obligation as a result of past events Obligation An obligation is “a duty or responsibility that an entity has no Practical ability to avoid.” (Conceptual Framework 429) An obligation is either: a. Legal obligation - an obligation that results from a contract, legislation, or other operation of law; or b. Constructive obligation — an obligation that results from an entity's actions (e.g,, past practice or published policies) that =e Scanned with CamScanner4 Chapter 1 create a valid expectation on others that the entity will accept and discharge certain responsibilities. An obligation is always owed to another party. However, it is not necessary that the identity of that party is known, for example, an obligation for environmental damages may be owed to the society at large. One party's obligation normally corresponds to another party's right. For examplé-a buyer's obligation to pay an accounts payable of 100 normally corresponds tothe seller’s right to collect an accounts receivable of #100. However, this accounting symmetry is not maintained at all times because the Standards 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 receivable and the borrower's loan payable. Similarly, a seller may be required to recognize a warranty obligation but the buyer would not recognize a corresponding asset for that warranty. There can be instances where the existence of an obligation js 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 economic benefits need not be certain, or even likely, for example, the transfer may be required only if a specified uncertain future event 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 a transfer of an economic resource is low, although that low probability affects decisions on whether the liability is to Scanned with CamScannerCurrent Liabilities 3 recognized, how it is measured, what information is to be provided about the liability, and how that information is provided. (Conceptual Framework 437 & 4.38) An obligation to transfer an economic resource may be an obligation to: a. pay cash, deliver goods, or render services; b. exchange assets with another party on unfavorable terms; c. transfer assets if a specified uncertain future event occurs; or d. issue a financial instrument that obliges the entity to transfer an economic resource. Present obligation as a result of past events The obligation must be a present obligation that exists as a result of past events. A present obligation exists as a result of past events if , a. the entity has already obtained economic benefits or taken an action; and b. asa consequence, the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer. (Conceptual Framework 4.43) esata os Entity A intends to acquire goods in the future, ; Analysis: Entity A has no present obligation. A present obligation arises only when Entity A: a: has already purchased and received the goods; and b. as a consequence, Entity A will have to pay for the purchase price, [ste B operates a nuclear Power plant. In the current year, anew | law was enacted penalizing the improper disposal of toxic waste. | No similar law existed in prior years, Scanned with CamScannerChapter i Analysis: The enactment of legislation is not in itself sufficient to result in an entity's present obligation, except when the entity: a. has already taken an action contrary to the provisions of that law; and b. asa consequence, the entity will have to pay for a penalty. Accordingly: - Entity B has no present obligation if its existing method of waste disposal does not violate the new law. Similarly, Entity B has no present obligation if it can avoid penalty by changing its future method of waste disposal. - On the other hand, Entity B’has a present obligation if its “previous waste disposal has already caused damages, and as a consequence, Entity B has to pay for those damages. | Entity C enters into an irrevocable commitment with another] | party to acquire goods in the future, on credit, | Analysis: A non-cancellable future commitment gives rise to a present obligation only when it becomes onerous (i,, burdensome), for example, if the goods become obsolete before the delivery but Entity C cannot cancel the contract without paying a substantial * penalty. Unless it becomes burdensome, no present obligation normally arises from a future commitment, Although not stated in the sales contract, Entity D has a publicly- known policy of providing free repair services for the goods it sells. Entity D has consistently honored this implied policy in the eee! Analysis: Entity D has a present constructive obligation to provide free repair services for the goods it has already sold because: Scanned with CamScannerCurrent Liabilities 5 a. Entity D has already taken an action by creating valid expectations on the customers that it will provide free repair . services; and pb. as a consequence, Entity D will have to provide those free services. a Entity E obtained a loan from a bank. Repayment of the loan is due in 10-years’ time. a Analysis: > Entity E has a present obligation because it has already received the loan proceeds, and as a consequence, has to make the repayment, even — though the bank cannot enforce the repayment until a future date. Entity F has caused environmental damages. Although, no law exists penalizing such act, Entity F believes it has an obligation to rectify the damages. However, the identity of the party to whom_ the obligation is owed cannot be specifically identified. Analysis: 2% Entity F has a present obligation because it has already caused the damages, and as a consequence, has to rectify the damages, even if the identity of the party to whoni the obligation is owed is not specifically known, [ Entity G employed Mr. Juan. Analysis: Entity G has no present obligation to pay salary until after Mr. Juan ha’ rendered service. Before then, the ‘contract is executory — Entity G has a combined right and obligation to exchange future salary for Mr. Juan's future service. 3 j Scanned with CamScanner6 Chapter 1 es renee ete Sater Executory contracts ‘An executory contract “is a contract that is equally unperformed - neither party has fulfilled any of its obligations, or both parties have partially fulfilled their obligations to an equal extent” (Conceptal Framework 4.56) An executoryecontract establishes a combined right ang obligation to exchange economic resources, which arg interdependent and inseparable. Thus, the two constitute a single asset or liability. The entity has an asset if the terms of the contract are favorable; a liability if the terms are unfavourable. However, whether such an asset or liability is included in the financial statements depends on the recognition criteria and the selecteq measurement basis, including any assessment of whether the contract is onerous. The contract ceases to be executory when one party performs its obligation. If the entity performs first, the entity's combined right and obligation changes to an asset. If the other - party performs first, the entity's combined right and obligation changes to a liability. j Continuing the previous example: - Entity G neither recognizes an asset nor a liability upon entering the employment contract with Mr. Juan because, at that point, the contract is executory. IfMr. Juan renders service, the contract ceases to be executory, and Entity G’s combined right and obligation changes to a liability - an obligation to pay Mr. Juan’s salary (eg,, salaries payable). : If Entity G pays Mr. Juan's salary in advance, Entity G's combined right and obligation changes to an asset - a right to receive the service or a right to be reimbursed if the service is not received (e.g., advances to employees). Scanned with CamScannerCurrent Liabilities 7 Recognition criteria An item is recognized if: a. itmeets the definition of a liability; and b. recognizing it would provide useful information, ie, relevant and faithfully represented information. Both the criteria above must be met before an item is recognized. Accordingly, items that meet the definition of a liability but do not provide useful information are not recognized, and vice versa. However, even if a liability is not recognized, information about it may still need to be disclosed in the notes. In stich cases, the item is referred to as unrecognized liability. Relevance Recognition may not provide relevant information if, for example: a. itis uncertain whether a liability exists; or b. a liability exists, but the probability of an outflow of economic benefits is low. (Conceptual Framework 5.12) Existence uncertainty or low probability of an outflow of economic benefits may result in, but does not automatically lead to, the non-recognition of a liability. Other factors should be considered. Faithful representation A liability must be measured for it to be recognized. Often, measurement requires estimation and thus subject to measurement uncertainty. The use of reasonable estimates is an essential part of financial reporting and does not necessarily undermine the usefulness of information. Even a high level of measurement uncertainty does mot necessarily preclude an estimate from providing useful information if the estimate is clearly and accurately described and explained. However, an exceptionally high measurement uncertainty can affect the faithful Tepresentation of a liability. Scanned with CamScanner8 Chapter EY Financial and Non-financial liabilities Financial liability is any liability that is: a. A contractual obligation to deliver cash or another financig, asset to another entity; b. A contractual obligation to exchange financial assets o financial liabilities with another entity under conditions tha are potentially unfavorable to the entity; or c. A contract that will or may be settled in the entity’s ow, instruments and is not classified as the entity's ow, equity instrument. Z Non-financial liability ~ is a liability other than a financial liability, Examples of financial liabilities a. Payables, such as accounts, notes, loans, bonds and accrueg payables . Lease liabilities Held for trading liabilities and derivative liabilities . Redeemable preference shares issued Security deposits and other returnable deposits eae s The following are not financial liabilities: a. Unearned revenues and warranty obligations that are to be settled through future delivery of goods or provision of services: b. Taxes, SSS, Philhealth, and Pag-IBIG payables c. Constructive obligations Items (b) and! (c) are not financial liabilities because they do not arise from contracts. Commodity contracts that cannot be settled net in cash of other financial instrument but only through commodity exchange (eg,, coffee beans, gold bullion, oil; and the like) are not financial instruments. Commodity contracts that can be settled net in cash of other financial instrument are financial instruments. Such # — Scanned with CamScannerCurrent Liabilities 9 commodity contract is a financial asset to the party to whom conditions are potentially favorable, and a financial liability to the party to whom conditions are potentially unfavorable. Presentation of financial instruments ‘The issuer classifies a financial instrument, or its component parts, as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contract (rather than its legal form) and the definitions of a financial asset, a financial liability and an equity instrument. > Equity instrument — is “any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.” (PAS 32.11) This definition reflects the basic accounting equation “Assets — Liabilities = Equity.” When determining whether a financial instrument is a financial liability or an equity instrument, the overriding consideration is whether the instrument meets the definition of a financial liability. Financial liability Equity instrument > The entity has a contractual | > The entity has no obligation obligation to pay cash or to pay cash or another another financial asset or to financial asset or to exchange financial exchange financial instruments under ‘instruments under potentially unfavorable potentially unfavorable condition. condition. A contract is not an equity instrument merely because it is ‘o be settled in the entity's own equity instruments. The following Buidance applies when a contract requires settlement in the entity's own equity instruments; Scanned with CamScanner10 se Financial liability Equity instrument > The contract requires the > The contract requires the delivery* of: delivery (receipt) of a fixed a) avariable number of the number of the entity’s own entity's own equity equity instruments in instruments in exchange for 2 exchange for a fixed amount fixed amount of cash or of cash or another financial another financial asset; Or asset. b) a fixed number of the entity’s own equity instruments in > Example: a share option that exchange for a variable gives the holder the right to amount of cash or another buy 1,000 shares of the issuer financial asset. for P10 per share. > Examples: a) Variable number for a fixed amount: © acontract to deliver as many shares as are equal to 100,000. 2 b) Fixed ntimber for a variable amount: © acontract to deliver 1,000 shares in exchange for an amount of cash equal to the valu® of 100 grams of gold. * A contract to receive (rather than to deliver) is a financial asset. & Notes: Financial asset/Financial liability | Equity instrument A > Variable number for a fixed amount. Fixed number for a variable amount. > > Fixed number for a fixed amount. Scanned with CamScanner11 Current Liabilities ‘An essential feature of an equity instrument is the absence of a contractual obligation to pay cash or another financial asset. This is true even if the holder of the instrument is entitled to pro rata share in dividends or of the net assets of the entity in case of liquidation. Legal form is also irrelevant when determining if a financial instrument is a financial liability or an equity instrument. Some instruments are in the form of shares of stocks but the issuer classifies them as financial liabilities if they meet the definition of a financial liability. Redeemable preference shares Callable preference shares = are preferred stocks which are preferred stocks which the holder has the right to the issuer has the right to call redeem at a set date. ata set date. - are classified as financial liability because when the holder exercises its right to tedeem, the issuer is mandatorily obligated to pay for the redemption price. are classified as equity instrument because the right to call is at the discretion of the issuer and therefore has no obligation to pay unless it chooses to call on the shares. IFRIC 2 Members’ Shares in Co-operative Entities and Similar Instruments addresses the classification of members’ shares in cooperatives. IFRIC 2 uses the same principles as those of PAS 32. Members’. shares in cooperative entities and similar instruments are equity if: a. The entity has an unconditional right to refuse redemption of the members’ shares, or b. Redemption is unconditionally prohibited by law or relevant regulation. Scanned with CamScanner2 Chapter} pee reg cca Illustration: Financial liabilities . The records of an entity show the following: [Accounts payable _ | Utilities payable _|_7,000 | Cash a Advan: omnia [1.00 | Share dividends payable | 3.93 Tacas ean tert 9,000 | Lease liability 35,000 Warranty obligations | 5,000 Bonds payee et tat. Income taxes payable | 2,000 | Discount on bonds payable | (15,000), | Preference shares issued | 10,000 | Security deposit 2,000 Constructive obligation | 11,000 | Redeemable preferences shares issued. |. 14,000, | Obligation to delivera | | Unearned interest on variable number of own receivables 3,009 shares worth afixed | amount ofcash___|_10,000 hed Requirement: Determine the financial liabilities to be disclosed in the notes. Solution: * Accounts payable 2,000 Utilities payable 7,000 Accrued interest expense (Interest payable) 6,000 Obligation to deliver a variable number of own shares worth a fixed amount of cash 10,000 Cash dividends payable - 4,000 Finance lease liability 35,000 Bonds payable 120,000 | Discount on bonds payable (15,000) | Security deposit 3,000 Redeemable preference shares issued Total financial liabilities | 185,000, Scanned with CamScannerCurrent Liabilities 13 Recognition of financial liabilities A financial liability is recognized only when the entity becomes a party to the contractual provisions of the instrument. Classification of Financial Liabilities All financial liabilities are classified as subsequently measured at amortized cost, except for the following: a. Financial liabilities at fair value through profit or os (FVPL) and derivative liabilities - subsequently measured at fair value (e.g, designated or held for trading). b. Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition - subsequently measured-on a basis that reflects the rights and obligations that the entity has retained. c. Financial guarantee contracts and Commitments to provide a loan at a below-market interest rate ~ subsequently measured at the higher of: i, the amount of the loss allowance (12-month expected credit losses); and ii. the amount initially recognized less, when appropriate, the cumulative amount of income recognized. in accordance with the principles of PERS 15. d. Contingent consideration recognized by an acquirer in a business combination - subsequently measured at fair value through profit or loss. Reclassification of financial liabilities” after initial recognition is prohibited. Measurement of Financial Liabilities Initial measurement Financial liabilities are initially measured at fair value. minus transaction costs, except FVPL. Financial liabilities classified as FVPL are initially measured at fair value. The transaction costs are expensed immediately. Scanned with CamScanner4 Chapter} 2 , Subsequent measurement > Financial liabilities classified as amortized cost an subsequently measured at amortized cost. > Financial liabilities classified as held for trading an subsequently measured at fair value with changes in faiy values recognized in profit or loss. > Financial liabilities designated at FVPL are subsequently measured at fair value with changes in fair values recognized as follows: a. The amount of change in the fair value of the financialy liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, and b. The remaining amount of change in the fair value of they liability is presented in profit or loss. Measurement of Non-financial liabilities Non-financial liabilities are initially measured at the best estimate of the amounts needed to settle those obligations or thew measurement basis required by other applicable standard, eg, deferred tax liabilities are measured under PAS 12 Income Taxes. Examples of non-financial liabilities: a. Obligations arising from statutory requirements (e.g., income tax payable) b. Warranty obligations c. Unearned or deferred revenues d. Commodity contracts that either cannot be settled in cash or which are expected to be settled by commodity exchange Subsequently, non-financial liabilities are also measured at the best estimate of the amounts needed to settle the obligations, adjusted for any changes on the expected settlement amounts Adjustments are treated as changes in accounting estimates and are accounted for prospectively. Some non-financial liabilities are subsequently measured in accordance with the requirements of) Scanned with CamScannerCurrent Liabilities 15 other standards (e.g., deferred tax ‘liabilities are measured in accordance with PAS 12). Financial statement presentation Liabilities are presented as either (a) current or (b) noncurrent on the face of a classified statement of financial position. A classified statement of financial position is one that shows current and noncurrent distinctions. When an entity presents an unclassified statement of financial position (based on liquidity), disclosures of liabilities due within one year and-due beyond one year should nevertheless be made in the notes. Current liabilities Current liabilities are liabilities that are: a. Expected to be settled in the entity’s normal operating cycle; b. Held primarily for trading; c. Due to be settled within 12 months after the end of the reporting period; or d. The entity does not have the right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period. All other liabilities are classified as noncurrent. “The operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be 12 months.” (PAS 1.68) Liabilities that are settled as part of the entity’s normal operating cycle (eg. trade payables and some accruals for employee and other operating costs) are presented as current, even if they are expected to be settled beyond 12 months after the end of the reporting period. Liabilities that do not form part of the entity’s normal operating cycle (e.g, non-operating liabilities) are presented as Scanned with CamScanneres cae 6 Chapter 1 = —_hepiery current 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 (i.e., designated or held foy trading) b. Current portion of long-term notes, bonds, loans, and lease liabilities Trade accounts and notes payables 4. Non-trade payables due within 12 months after the end of the ° reporting period * e. Unearned income expected to be earned within 12 months after the end of the reporting period. f. Bank overdrafts Trade and non-trade payables Trade payables are obligations arising from purchases of inventory, that are sold in the ordinary course of business. Other payables, are classified as non-trade, For a trading or manufacturing entity, trade and non-tradey payables that are currently due are normally aggregated and presented as one line item under the heading “Trade and other payables.” The reason for the trade and non-trade distinctions is the differing rules when classifying payables as current or noncurrent, > Trade payables are classified as current liabilities when they are expected to be settled within the normal operating cycle oy ‘one year, whichever is longer. » On the other hand, non-trade payables are classified as curret! liabilities only when they are expected to be settled within omy year. Financial institutions need not classify their payables # trade or non-trade because their statement of financial position presented based on liquidity, i.e, no current and non-curre™ Scanned with CamScannerCurrent Liabilities 17 distinction. However, payables expected to be settled within one year and beyond one year are disclosed in the notes. Examples of payables e Accounts payable - obligations not supported by formal promises to pay by the debtor. : « Notes payable - obligations supported by promissory notes by the debtor. + Loans payable — usually used to connote bank loans. « Bonds payable — obligations issued by the debtor supported by promises to pay made under seal. * Liabilities under trust receipts, e.g,, 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 importation of the goods. © Other payables arising from sources other than purchases and borrowings, such as dividends payable, taxes payable, remittances payable, and accrued expenses. Illustration 1: Current liabilities Entity A has the following account balances on December 31, 20x1: a. Trade accounts payable, net of P5,000 debit balance in supplier's account, P4,000 unreleased checks drawn, and P2,000 postdated checks drawn. 300,000 b. Credit balance in customers’ accounts 2,000 c. Financial liability designated at FVPL a 50,000 \ d. Bonds payable (maturing in 10 equal annual installments of | - P400,000) 1,000,000 €. 12%, 5-year note payable issued on October 1, 20x1 100,000 f. Deferred tax liability : 5,000 g. Uneamed rent 4,000 h. Contingent liability 10,000 i. Reserve for contingencies 25,000 Requirement: How much is the total current liabilities? Scanned with CamScanner18 Chapter 1 Seen pen a Solution: a. Trade accounts payable grass of debit balance, unreleased 311,000 check, and postdated check (300K + 5K + 4K + 2K). b, Advances from customers (Cr. bal. in customers’ accounts) 2,000 ¢. Financial liability designated at FVPL 50,000 . Current portion of bonds payable 100,000 - Interest payable on the note in ‘e’ (P100,000 x 12% x 3/12) 3,000 g- Uneamed rent . 4,000 Total current liabilities 470,000 ‘& Notes: © Deferred tax liabilities are always presented as noncurrent when an entity presents a classified statement of financial position. © Contingent liability is not recognized but rather disclosed only in the notes. © Reserve for contingencies is an appropriation of retained earnings and, thus, presented in equity. Illustration 2: Current liabilities ABC Co. has the following liabilities as of December 31, 20x1. a. Trade accounts payable, including cost of unsold goods received on consignment of P10,000 300,000) b. Held for trading financial liabilities 50,000 c. Deferred revenue 20,000 d. Bank overdraft 10,00) e. Income tax payable 50,000 £, Accrued expenses 5,000 8; Share dividend payable 12,000’ h, Advances from affiliates payable in 15 months after year-end 23,000) i, Loan of XYZ, Inc. guaranteed by ABC ~ it is possible that ABC will be held liable for the guarantee 45,000, Requirement; How much is the total current liabilities? Scanned with CamScannerCurrent Liabilities 9 Solution: a. Trade accounts payable, net of cost of unsold goods received on consignment (300,000 ~ 10,000) 290,000 b, Held for trading financial liabilities 50,000 . Bank overdraft 10,000 . Income tax payable 50,000 e. Accrued expenses 5,000 Total current liabilities “405,000 & Notes: ® “Deferred revenue” and “Unearned revenue” both refer to income already collected but not yet earned. Although these terms are often used interchangeably, “Deferred revenue” can be used to refer to the long-term portion of unearned income. For example, On Dec. 31, 20x0, Entity A receives 300,000 _ on a 3-year supply contract, wheteby Entity A undertakes to deliver each year to the customer goods worth 100,000. The entry is as follows: Dec.3i, | Cash 300,000 Zen ‘Unearned revenue 100,000 * Deferred revenue 200,000 The portion of the advanced collection applicable to 20x1 is credited to unearned revenue, which is a current liability; the portions applicable to 20x2 and 20x3 are credited to deferred revenue, which is a noncurrent liability. % Share dividends payable (stock dividends payable) is not a liability but rather an adjunct equity account (i.e., presented as addition to share capital). ‘+ The guarantee on the loan is not recognized as liability because it is not probable (i.e,, it is possible only) that ABC will be held liable for the guarantee. Scanned with CamScanner\ Chapter 7 Refinancing agreement A long-term obligation that is maturing within 12 months after the reporting period is classified as current, even_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. However, the obligation is classified as noncurrent if the entity kas the right, at the end of the reporting period, to roll over the obligation for at least twelve months after the reporting period under 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 settlement must have substance and must exist at the end of the reporting period. If the right to ‘defer settlement is subject to compliance with specified conditions, the right exists at the end of the reporting period only if the entity complies with those conditions at the end of the reporting period, even if the lender does not test compliance until a later date. “Classification of a liability is unaffected by the likelihood that the entity will exercise its right to defer settlement of the ability for at least twelve months after the reporting period. If a liability meets the criteria for classification as non-current, it is classified as non-current even if management intends or expects the entity to settle the liability within twelve months after the reporting period, or even if the entity settles the liability between the end of the reporting period and the date the financial statements are authorized for issue. However, in either of those circumstances, the entity may need to disclose information about the timing of settlement to enable users of its financial statements to understand the impact of the liability on the entity's financial position.” ras 1724) > Refinancing refers to the replacement of an existing debt with a new one but with different terms, e.g., an extended maturity date or 4 revised payment schedule. A refinancing wherein the debtor is under financial distress is called “troubled debt restructuring.” > — Loan facility refers to a credit line. Scanned with CamScanner21 Current Liabilities Illustration: Refinancing Fact pattern On December 31, 20x1, ABC Co. has a P1,000,000 loan payable that ze is maturing on July 1, 20x2. ABC’s 20x1 financial statements were authorized for issue on March 15, 20x2. . Case 1: No right to defer settlement On February 1, 20x2, ABC Co. enters into a refinancing agreement with a bank to refinance the loan on a long-term basis. Both parties are financially capable of honoring the agreement's provisions. The original loan contract does not state any refinancing option. Analysis: The loan is presented as a current liability in ABC Co.’s Dec. 31, 20x1 statement of financial position despite the refinancing on Feb. 1, 20x2 because, as of Dec. 31, 20x1, ABC Co. does not have a right to defer/postpone the settlement. The refinancing agreement is disclosed in the 20x1 notes as a non-adjusting event after the reporting period. Case 2: With right to defer settlement On February 1, 20x2, ABC Co. enters into a refinancing agreement with the bank to roll over the loan for another four years. ABC Co. has the option to roll over the loan under the existing loan contract and,:as of December 31, 20x1, ABC Co. has complied with all the conditions for the rollover. Analysis: The loan is presented as a noncurrent liability in ABC Co’s Dec. 31, 20x1 statement of financial position because ABC Co. has the right, as of Dec. 31, 20x1, to roll over the obligation for at least twelve months after the reporting period under the existing loan agreement. Case 3: With right to defer settlement — interest payable ‘The facts are the same as in Case 2. In addition, 10% interest on the : Joan is due annually every July 1. Scanned with CamScanneree ee. Chapter} 1] Analysis: The 11,000,000 principal on the loan is presented a, noncurrent (see discussion in Case 2 above). However, the 50,000 (1, , x 10% x 6/12) interest payable on the loan is presented as current. Case 4: Refinancing completed as of end of reporting period On December 1, 20x1, ABC Co. enters into a refinancing agreemen, withahe bank to roll over the loan for another four years. The rollovey is corhpleted in December 20x1. Analysis: The loan is ndncurrent because the rollover on a long-term basis is completed as of the end of reporting period. Therefore, the loan» does not meet the definition of a current liability as of Dec. 31, 20x1. Liabilities payable on demand A liability that is payable upon the demand of the lender is) classified as current even if the lender agreed after the end of the, reporting period but before the financial statements arey) authorized for issue not to demand repayment. This is because the. __ entity does not have the right at'the end of the reporting period to defer settlement of the liability. : | However, a liability that is payable on demand is classified as noncurrent if the lender provides the entity by the end of thew reporting period (e.g., on or before December 31) a grace period ending at least twelve months after the reporting period within which the entity can rectify a breach of loan covenant and during which the lender cannot demand immediate repayment. Illustration: | On January 1, 20x1, ABC Co. took a 3-year, P1,000,000 loan from 4 bank. The loan agreement requires ABC to maintain a current ratio 0! 2:1. If the current ratio falls below 2:1, the loan becomes payable 0" demand. As of December 31, 20x1, ABC’s current ratio is 1.8:1. Case 1: Obligation payable on demand Despite the breach of the loan covenant (i.e., fall of current ratide below 2:1), there is nol indication on December 31, 20x1 that the bank will demand repayment over the next 12 months. Scanned with CamScanner: 2B Current Liabili Question: How much is presented as current liability in ABC’s 20x1 year-end financial statements? Ansiver: P1,000,000. The loan is payable on demand. Only if an enforceable promise is received from the bank on or before the end of the reporting period not to demand payment for at least 12 months from the end of reporting period that the loan is classified as noncurrent. Case 2: Grace period received after year-end On January 5, 20x2, the bank agreed not to collect the loan in 20x2 and gave ABC 12 months to rectify the breach of loan covenant. Question: How much is presented as current liability in ABC’s 20x1 year-end financial statements? : Answer: P1,000,000. The loan is presented as current because the grace period was received after the end of reporting period. Case 3: Grace period received by year-end On December 31, 20x1, the bank agreed not to collect the loan in 20x2 and gave ABC 12 months to rectify the breach of loan covenant. Question: How much is presented as current liability in ABC’s 20x1 year-end financial statements? Answer: None, the loan is presented as noncurrent because the grace period ‘was received by the end of the reporting period. Scanned with CamScanner1 Remember the following. General rule: A currently maturing obligation is presented as current even if the obligation is refinanced on a long-term basis after the balance sheet date. Exceptions: The obligation is woncurrent if: = the entity has the right, as of the balance sheet date, to roll over the obligation on a long-term basis under an existing loan facility; or © the rollover on a long-term basis is completed on or before the balance| sheet date. General rule: An obligation that is payable on demand is presented as current. Exception: The obligation is noncurrent ifthe lender agreed on or before the balance sheet date not to collect within the next 12 months. eS Non-adjusting events ‘The occurrence of the following after the reporting period, but before the financial statements are authorized for issue, are disclosed only as non-adjusting events (meaning, the classification of the liability as at the reporting date is not affected): a. Refinancing on a long-term basis of a liability classified ay current. b. Rectification of a breach of a‘Jong-term loan. arrangement classified as current. c. The granting by the lender of a period of grace to rectify a breach of a long-term loan arrangement classified as current. d. Settlement of a liability classified as non-current. (Pas 1.76) 4© The quite strict provision of the standards regarding the presentation of liabilities as either current or noncurrent is due to their effect on liquidity’ ratios. In practice, liquidity ratios are usually regarded as important disclosures especially fot financial statements filed with regulatory bodiesjy and those used to obtain loans. Accordingly, if you are not quite sure ife liability is current or noncurrent, it is safer to classify it as current. ©8 Scanned with CamScanner25 Trade accounts payable Accounts payable arising from the purchase of inventory. is recognized when ownership over the goods is transferred to the buyer. The amount recognized 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 method. Illustration 1: Accounts payable On December 31, 20x1, ABC Co. has accounts payable of 1,000,000 before possible adjustment for the following: a. Goods in transit from a vendor to ABC on December 31, 20x1 with an invoice cost of P50,000 purchased FOB shipping point were not yet recorded. b. Goods shipped FOB shipping point from a vendor to ABC were lost in transit. The invoice cost of P20,000 was not yet recorded. ¢. Goods shipped FOB shipping point from a vendor to ABC on December 31, 20x1 amounting to P8,000 were recorded and included in the year-end inventory count as “goods in transit.” d. Goods in transit from a vendor to ABC on December 31, 20x1 with an invoice cost of P10,000 purchased FOB destination were not yet recorded. The goods were received in January 20x2. . Goods with invoice cost of 715,000 were recorded and included in the year-end inventory count as “goods in transit.” It was found out that the goods were shipped froma vendor under FOB destination. Requirement: Compute for the adjusted accounts payable on December 31, 20x1. Solution: Unadjusted accounts payable 1,000,000 a. FOB shipping point not yet recorded 50,000 b. FOB shipping point lost in transit, not yet recorded 20,000 e. FOB destination inappropriately recorded (15,000) Adjusted accounts payable 1,055,000 tO Scanned with CamScannerOe ea ¥ Notes: © The goods in transit in “b” are properly included in accounts payable because th goods are purchased FOB shipping point. Title to the goods is transferred to ABc ‘upon shipment. Therefore, ABC is lable to pay for the goods even if they are lo, in transit. ' © The goods in transit in “a” are properly excluded from accounts payable becauy the goods are purchased FOB destination. Accounts payable will be recorded onl when the goods are received. = , Illustration 2: Accounts payable On December 31, 20x1, ABC Co. has accounts payable 1,000,000 before possible adjustment for the following: i ‘a. Checks drawn for P12,000 were not yet released to payees; check drawn for P5,000 were released to payees but were postdated. b. On December 28, 20x1, a vendor authorized ABC Co. to return for full credit goods costing P25,000. ABC Co. returned the goods on December 31, 20x1 but recorded the related credit memo only on January 3, 20%2. ¢. Goods shipped FOB shipping point, freight prepaid from a vendor on December 28, 20x1 was recorded at the invoice cost of P14,00)y on the shipment date. The related freight of P3,000 was no! recorded. d. Goods shipped FOB destination, freight collect from a vendor were received and recorded on December 29, 20x1 at the invoice cost of 40,000. The related freight of P5,000 was recorded as an expense. Requirement: Compute for the adjusted accounts payable om December 31, 20x1. Solution: Unadjusted accounts payable 1,000,000) a. Unreleased checks and postdated checks (12K +5K) 17,000 b, Purchase return (25,000) Freight shouldered by the seller on behalf of ABC Co. 3,000 . Freight shouldered by ABC Co. on behalf of the seller (5,000), Adjusted accounts payable 990,000), —— Scanned with CamScanner27 Current Liabilities & Notes: @ The freight in “c” is included in accounts payable because ABC Co. has to reimburse the seller for the freight accommodation. © The freight in “d” is excluded from accounts payable because the seller has to reimburse ABC Co. for the freight accommodation. Unearned income Unearned income represents advanced collection of income that is not yet earned. Prior to earning, unearned income is classified as liability. Example: advances received from customers for the future delivery of goods or rendering of services. Illustration 1: Unearned revenue The records of an entity show the following: © Unearned revenue, January 1, 20x1 1,000,000 « Advances received during 20x1 10,000,000 ++ Advances applied to orders shipped in 20x1 8,000,000 © Advances pertaining to orders cancelled in 20x1 300,000 Requirements: Compute for the current liability assuming: a. the advance payments received are non-refundable and b._ the advance payments received are refundable. Solutions: Requirement (a): Advances are non-refundable Unearned income 1,000,000 Jan. 1, 20x1 Advances earned 8,000,000 10,000,000 Advances received Orders cancelled 300,000 Dee, 31, 20x1 2,700,000 Answer to requirement (a): 2,700,000 Requirement (b): Advances are refundable - Unearned income - Dec. 31, 20x1 (see previous solution) 2,700,000 Liability for refundable deposits (Orders cancelled) 300,000, Total current liability for advances received 3,000,000 J Scanned with CamScannerChapter Se | ‘The advances pertaining to the cancelled orders remain as liability, not as uneamed income but as liability for refundable deposits. . Mlustration 2: Deferred revenue ABC Co. sells service contracts that cover a 2-year period. The sa, price of each contract is P1,000. ABC sold 1,000 contracts event throughout 20x1. ABC's past experience shows that, of the tot, pesos spent for repairs on service contracts, 40% is incurre evenly in the first year of the contract and 60% in the second year, Requirements: Compute for approximations of the following: a. Current and noncurrent portions of the deferred revenue as 0, Dec. 31, 20x1. . b, Revenue in 20x2. Solution: - Because the contracts are sold evenly, the total receipts of P1Ny (1,000 x 1,000) are averaged or simply divided by two (1M+2=500K). a. The first half (i.e., P500K) is assumed to have been sold at th beginning of 20x1. This will be earned from Jan. 1, 20x1 to Det 31, 20x2 because the contract covers a two-year period. b. The second half is assumed to have been sold at the end of 20x1 This will be earned from Jan. 1, 20x2 to Dec. 31, 20x3. - 20xt_20x2_—-20x3__—‘Totall 40% % Neate =. First half (1M+2) 500,000 200,000 300,000 Second half (IM+2) 500,000 200,000 __ 300,000 - Earned portions 200,000 __500,000__ 300,000 _ 1,000,001, The shaded amounts pertain to the portions eamed during the year, ie., (500K x 40%" 200K eamed in 1* yr. of contract) and (500K x 60% = 300K earned in 24 yr. of contract) Requirement (a): Current and Noncurrent portions — Dec. 31, 20x1 Current portion (earned portion in 20x2) - (300K + 200K) 500, Noncurrent portion (earned portion in 20x3) __ 300,008 Total (PIM les} earned portion in 20x1 of F200,000) 800,08 \ Scanned with CamScanner29 Current Liabilities Requirement (b): Service revenue — 20x2 Service revenue in 20x2 (300K + 200K) Illustration 3: Unearned subscription An entity sells monthly issues for a magazine. Subscriptions received after the November 1 cut-off date are held for publication in the following year. Information on subscriptions is as follows: Uneamed revenue — January 1, 20x1 3,000,000 Receipts from subscriptions during 20x1 (made evenly) . 24,000,000 Requirements: a. How much is the unearned revenue balance on Dec. 31, 20x1? b. How much is the revenue from subscriptions during 20x1? Solutions: Requirement (a): Unearned revenue — Dec. 31 Subscribers after the Nov. 1 cutoff date will not receive any magazine during the year. Accordingly, the related receipts represent the unearned revenue balance as of December 31, 20x1: > Unearned revenue, Dec. 31, 20x1-= (24M x 2/12) = 4,000,000 Requirement (b): Subscriptions revenue — 20x1 > Subscriptions revenue, 20x1 = 3M + (24M x 10/12) = 23,0000,000 OR Unearned revenue Subscriptions revenue - 3,000,000 Jan. 1 201 (squeeze) 23,000,000 | 24,000,000 _ Receipts during 20x1 Dec. 31 (as computed) 000,000 Gift certificates A gift certificate (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 Luxury Buffet Gift Voucher. Scanned with CamScanner 500,000 iChapter} —— erin ‘The accounting for gift certificates is addressed unde; PERS 15 Revenue from Contracts with Customers (par. B44 to B47). The accounting procedures are summarized below: a A contract liability is recognized when gift certificates are sold. b. The contract liability. is derecognized and revenue is recognized when the gift certificates are redeemed (used). c. As to the gift certificates sold that are not exercised (referred to as ‘breakage’), PFRS 15 provides the following: i. Proportionate method: If the entity expects that a portion of the gift certificates sold will not be redeemed, the entity recognizes the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer. ii. Remote method: If the entity does not expect that a portion , of the gift certificates sold will not be redeemed, the entity recognizes the expected breakage amount as revenue when j the likelihood of redemption becomes remote. Ilustration 1: Gift certificates An entity sells gift certificates as part of its sales promotion, During the year, the entity sells gift certificates worth P100,000, of} which P72,000 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: Solution: : Date | Cash. 100,000 Gift card liability @ 100,000) 10 record the sale of gift certificates Date | Gift card liability i 72,000 Revenue ® on 72,00, 410 record the redemption of gift certificates Scanned with CamScanner31 Current Liabilities ww Altematively, “Unearned revenue” or “Contract liability” account may be used in lieu of the “Gift card liability” account, ©) Altematively, the “Gift Card Revenue” of similar account may be used. Proportionate recognition of breakage revenue Breakage revenue is recognized on a pro-rata basis in proportion to the value of actual redemptions. Gift certificates sold 100,000 Multiply by: 10% Total expected breakage 10,000 Gift certificates sold 100,000 Less: Total expected breakage (10,000) Gift certificates sold net of expected breakage 90,000 Gift certificates redeemed 72,000 Divide by: Gift certificates sold net of breakage 90,000, Percentage of actual redemptions 80% Total expected breakage 10,000 ‘Multiply by: Percentage of actual redemption 80% Amount of expected breakage recognized as revenue 8,000 Date | Gift card liability 8,000 Revenue © _ 8,000 to record the revenue from expected breakage ©» Alternatively, the “Breakage Revenue” account may be used. Case 2: Remote method The entity expects that all the gift certificates sold will be tedeemed. Accounting: : The entity makes the first two entries above. As to the breakage, the entity recognizes revenue only when the likelihood of redemption becomes remote, for example, when the certificates are not tedeemed after a long period of time. Scanned with CamScannerv Chapter) Mustration 2: PERS 15 vs, Traditional accounting An entity sells gift certificates that expire one year after issuance, Information on gift certificates is shown below: Gift card liability (Unearned revenue, Jan. 1, 20x1 600,00, Gift certificates sold during 0x1 1,000,60)9 Prior year gift certificates redeemed in 20x1 (the P200K 400,00) tolance from Jan. 1, 2x1 has expired) Gift certificates sold and redeemed in 20x1 675,00) Historically, 10% of gift certificates sold are never redeemed. PFRS 15 Traditional accounting Sale of gift certificates Cash 1,000,000 Cash 1,000,000 Gift card liability 1,000,000 Uneamed revenue 1,000,000, Redemption and expiration of sift cards sold in prior year Gift card liability. 600,000 ‘Unearned revenue 600,000 Revenue 600,000 | Sales 400,000} Other income 200,00) Redemption of gift cards sold in current year Gift card liability 675,000 ‘Unearned revenue 675,000 Revenue 675,000 | Sales 675,000) Breakage Gift card liability 75,000 Gift card liability 100,000 Revenue (Mx 10%) x 75% 75,000 Other income (1M x 10%) 100,000) (Alternatively, the amount may be broken-down into P400,000 “Gift Card Revenue” any '¥200,000 “Breakage Revenue.” © 675,000 + (IM x 90%) = 75% actual tedemptions % Liability as of Dec. 31, 20x1: }-—__—___Bs [Tenditional Accounting Gift ee aig} 00,000" beg, 600,000" be [Rein opin. prior yt. 600000 | 1000009 Sales [Reta dc expn-prory: 600000 | 1,000,000 ea) [Redemption current yt. 675,000 |Redemption-current yr. 675,000 Breakage __ 75.000 Breakage _ 100,000 end, 250,000 end. 225000 ey ——) Scanned with CamScannerCurrent Liabilities 33 20x1 Financial statements: PERS 16 ‘Traditional Accounting Statement offinancial position | Statement of financial position [Current liabilities |Current liabilities Gift card liability 250,000 | Uneamed revenue 225,000 Statement of profit or loss Statement of profit or loss Revenue (00K +675K+75K) 1,350,000 | ‘Reverie (400K + 675K) 1,075,000 Other income (200K + 100K) 300,000 1,375 The P25,000 difference between the reported amounts results from the proportionate recognition of breakage revenue under PFRS 16. Under the old accounting, the expected breakage is recognized in full (as gain and not revenue). Liability for deposits received 5 Liability for deposits received represents cash receipts that are held in trust for other parties. Examples include: a. Deposit liabilities of banks and other entities performing similar function b. Deposits received for returnable containers, such as bottles, cases, crates, trays, boxes, and similar items that contain the goods sold but must be returned to the seller upon consumption of the goods. : Security deposits received from lessees d. Deposits received from escrow agreements e. Deposits for future subscription of the entity's own equity instrument to the extent that the deposits are repayable in cash. 2 Illustration 1: Deposits for returnable containers ABC Co. requires deposits from Customers for the containers of goods sold. The customers are refunded for the deposits received when the containers are returned within two years from the date of sale of the related goods.. Deposits for containers not returned within the time limit are regarded as proceeds from retirement of the containers. Information for 20x3 is as follows: Scanned with CamScannerChapter] nnn Deposits for containers on December 31, 20x2 from deliveries in: 20x1 20,000 20x2 45,000 65,000 Deposits for containers delivered in 20x3: 90,000 Deposits for containers returned in 20x3 from deliveries in: 20x1 9,000 20x2 25,000 20x3 46,000 80,000 ” Requirement: Compute for the liability for deposits on returnable containers as of December 31, 20x3. Solution: Liability for deposits ignored _ Deposits from 20%1 Returns from 20x1 ignored | 45,000 Deposits from 20x2 Returns from 20x2 25,000 } 90,000 Deposits in 20x3 Returns in 20x3 46,000 end. 64,000 The 20x1 deposits (and returns) are ignored because they have already expired; and hence, do not affect the balance of the liability on Dec. 31, 20x3. The unredeemed 20x1 deposits are regarded as proceeds from the retirement of the unreturned containers. The difference between this amount and the carrying amount of the unreturned containers is recognized as gain or loss on asset retirement. Illustration 2: Security deposit from a lease On January 1, 20x1, ABC Co, received a P100,000 security deposit from a tenant in conjunction with a 10-year lease. ABC will return the 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 is 10%. Requirement: Provide the entries in 20x1. Solution: Jan. | Cash 100,000 1 Security deposit (100K x PV of 1 @10%, n=10) 38,554 20x11 “Day 1” difference* 61,446 Scanned with CamScannerCurrent Liabilities 35 Dec. | Interest expense (38,554 x 10%) 3,855 31 | Security deposit 3,855 20rd S=Day I” difference is discussed in detail in Intermediate Accounting Part TA. ‘The security deposit is classified as noncurrent liability at each year-end in the first 8 years of the lease, and classified 4s current liability only on December 31, 2039, a year before itis due to be returned to the tenant. Illustration 3: Deposits held under escrow agreement ABC Co, maintains escrow accounts and pays insurance premiums for its customers. Escrow funds aie kept in interest- 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, 20x1 200,000 Escrow payments received during 20x1 1,500,000 Insurance premiums paid during 20x1 500,000 Interest on escrow funds during 20x1 100,000 Requirement: Compute for the current liability for escrow accounts on December 31, 20x1. ¢ Solution: Liability for escrow accounts 200,000 Jan. 1, 20x1 1,500,000 Escrow payments received Premiums paid 500,000 90,000__ Int. net of 10% fee (100K x 90%) Dec. 31, 20x1 1,290,000 Deposit for future subscription of shares of stocks Deposits received for future subscription of the entity’s shares of stocks are classified as either liability or equity as follows: a. If repayable in cash at any time prior to the issuance of the subscribed shares, the deposits are classified as. liability. b. Ifnot repayable in cash, the deposits are classified as equity, preferably presented under contributed capital. Scanned with CamScanneron mun coer teria oe Accrued expenses Accrued expenses are liabilities for expenses already incurred but not yet paid (e.g,, salaries payable, utilities payable, and the like), Mlustration: An entity is preparing its December 31, 20x1 year-end financial statements and has gathered the following information: © The bill for December's utility costs of P30,000 was received and paid on January 10, 20x2. © A P20,000 advertising bill was received on January 2, 20x2. Of the total billing, P15,000 pertain to advertisements iny December 20x1 and P5,000 pertain to advertisements iny January 20%2. * A lease, effective December 16, 20x0, requires monthly rental of P100,000, payable one month after the commencement of they lease and every month thereafter. In addition, rent equal to 5%) of net sales over 1,000,000 per year is payable on January 31) of the following year. * ¢ Total cash sales and collections on accounts amounted to, P1,000,000. Accounts receivable has a net increase of P200,000. Commissions of 15% of sales are paid on the same day cash is received from customers. Requirement: Compute for the accrued liabilities on Dec. 31, 20x1. Solution; Utility expense for December 20x1 30,00) Advertising costs incurred in December 20x1 15,00 Rent expense from December 16 to 31, 20x1 (100K +2) 50,00 Contingent rent expense {(1.2M*—1M) x 5%] 10,000 Additional commission expense * __ 30,00! Total accrued liabilities 135,00, Scanned with CamScannerCurrent Liabilities 37 sTotal sales is computed as follows: Accounts receivable Beg. bal. 0 Total sales (cash & Total collections from credit ) squeeze _ 1,200,000 |_ 1,000,000 cash & credit sales 200,000_ Net increase Le » Additional commission expense is computed as follows: Total commission expense (1.2M total sales x 15%) 180,000 Commission expense paid (1M cash collections x 15%) 150,000) Additional commission expense 30,000 Dividends payable The liability to.pay dividend is recognized when the dividend is appropriately authorized and is no longer at the discretion of the entity, which is: a. the date when the declaration of the dividend (eg., by the board of directors) is approved by a relevant authority (e.g., by the shareholders) if such approval is required; or b. the date when the dividend is declared (e.g,, by the board of directors) if further approval is not required. (RIC 17) Dividends declared by banks are subject to the approval of the Bangko Sentral ng Pilipinas (BSP). : Only cash and property dividends are recognized as liabilities. Stock dividends are not liabilities; ‘share dividends distributable’ (‘stock dividends payable’) is presented in equity as an addition to share capital: Li for remittable collections Liabilities may also arise from amounts collected on behalf of third parties. Examples: a. Taxes withheld b. SSS premiums, Philhealth, Pag-IBIG and similar contributions c. Output value added taxes (VAT) d. Collections made by an agent or broker on behalf of a Principal ‘ Scanned with CamScanner‘An obligation is either (a) legal obligation (arising from contacts ot law) of (b) constructive obligation (arising from actions that create a valid expectation on others that the entity will accept| and discharge certain responsibilities). Financial liabilities include contractual obligations to deliver cash or to exchange financial instruments under conditions| that are potentially unfavorable. | Financial liabilities are classified as FVPL or amortized cost. | Reclassification of financial liabilities is prohibited. | Financial liabilities are initially measured at fair value minus transaction costs, except FVPL liabilities in which the| transaction costs are expensed immediately. A liability is classified as current if: (a) it is expected to be settled within the normal operating cycle; (b) it is held primarily for the purpose of trading; (c) it is to be settled * within 1 year; or (d) the entity does not have an unconditional right to defer settlement of the liability for at least twelve, months after the reporting period. | A currently maturing obligation is presented as current. Only | on the following instances would a currently maturing obligation is‘ presented as noncurrent: (1) refinancing is completed as of the end of reporting period, (2) refinancing after the end of reporting period but before authorization of financial statements for issue is at the discretion of the entity, and (3) grace period is received as of end of reporting period to rectify breach of loan covenant ending at least twelve months| after the end of reporting period. | Deferred tax liabilities are always presented as. noncurrent When an entity presents a classified statement of financial Position. Share (stock) dividends payable are not liabilities but rathe'| equity, i.e., an addition to share cay Scanned with CamScannerCurrent Liabilities 39 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 from law. 3. Along-term debt that is maturing within 12 months from the end of the reporting period is a current liability. 4, Financial liabilities other than FVPL liabilities are initially measured at fair value plus transaction costs. 5, Amortized cost financial liabilities are subsequently measured at the present value of the cash outflows from the instrument. 6. Financial liabilities may be subsequently reclassified between the amortized cost and fair value measurement categories. 7. 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. 8. According to PAS 1, a currently maturing debt that the entity’s management intends to refinance is presented as noncurrent. 9. According to PFRS 15, if an entity expects that a portion of gift certificates sold will not be redeemed, the entity recognizes the expected breakage amount as revenue in proportion to the pattern of rights exercised by customers. 10. Unearned: revenue is revenue~that.is earned but not yet collected. PROBLEM 2: MULTIPLE CHOICE - THEORY 1. Which of the following is not one of the aspects of the definition of a liability under the Conceptual Framework? Obligation Transfer of an economic resource Present obligation as a result of past events Probable outflow of economic benefits Boop 2. Which of the following would most likely not give rise to a liability? Scanned with CamScanner 4ee ee eel a. An irrevocable purchase commitment — becomes | burdensome. | b. Earning of taxable income. | Signing an employment contract. d. Sale of product with implied warranty. 3. Entity A enters into an executory contract. Entity A | appropriately did not recognize any asset or liability from the ~~ contract. Which of the following statements is correct? a. If Entity A performs its obligation first, Entity A shall recognize an asset, b. If Entity A performs its obligation first, Entity A shall recognize a liability. c. If the counterparty performs its obligation first, Entity A shall recognize an asset. d. Entity’A should recognize a combined asset and liability upon signing the contract. 4. According to PFRS 9, when should an entity recognize a financial liability? ; a. When the instrument imposes probable outflows of economic benefits that can be measured reliably. b. When the entity becomes a party to the contractual provisions of the instrument. y ¢. Upon entering into the contract even if the contract is still 4 executory. / d. Any of these as a matter of an accounting policy choice. 5. Which of the following liabilities is a financial liability? . Advances from customers . A constructive obligation Callable preference shares issued |. An obligation to deliver a variable number of own shares worth a fixed amount of cash. aose Scanned with CamScannerCurrent Liabilities 41 6. According to PFRS 9, financial liabilities are classified as a. FVPL or amortized cost. c. FVPL or FVOCI. b. FVPL, FVOCI or amortized cost. d, none of these 7. 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. b. fair value with changes in fair value recognized in other comprehensive income. c. partly (a) and partly (b) depending on the change in the instrument's credit risk. d. the present value of the remaining cash flows of the instrument, discounted at the original effective interest rate. 8. According to PAS 1, which of the following statements is correct regarding the refinancing of long-term obligations? a. A currently maturing obligation is classified as current even 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. b. 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. c. A currently maturing obligation is always eee asa current liability, without exception. d. A currently maturing obligation is classified as noncurrent if the entity expects to refinance it on a long-term basis. 9. Which of the following is a trade payable? a. Income tax payable b. Note payable issued in exchange for inventories ¢. Dividend payable d. Short-term bank loan és Scanned with CamScannerF p 42 Chapte, 10. Which of the following is incorrect regarding the accountin, for gift certificates under PERS 15? a, The entity recognizes a contract liability when it sells Bi certificates. b. The entity derecognizes the contract liability ay, recognizes revenue when customers use gift certificates, c. The entity recognizes revenue for the full amount , expected breakage. d. If the entity expects that a portion of the gift certificate sold will not be redeemed, the entity recognizes tt) expected breakage amount as revenue in proportion to thi pattern of rights exercised by the customer. PROBLEM 3: MULTIPLE CHOICE - COMPUTATIONAL 1, The account balances of Boast Co. include the following: } Notes payable 14,000 | PhilHlealth cont. payable | 120% j Interest payable 12,000 | Cash dividends payable 80 Uneamed revenue 2,000 | Share dividends payable | 6,01 Rent payable 30,000 | Lease liability T7000 Warranty obligation 10,000 | Bonds payable | 240. Discount on notes reccivable| 6,000 | Premium on bonds payable 20.01 Income taxes payable | 4,000 | Security deposit 4,00 ‘Obligation to deliver a fixed | ruber of own shares wore) 100,00 | Redeemable preference 28,000 a fixed amount of cash ee (Ordinary shares issued 20,000 | Constructive obligation | _ 22,00) How much is Boast Co.’s total financial liabilities? a. 426,000 b. 438,000 cc. 444,000 d. 538,000 | 2. Proud Co's records on Dec. 31, 20x1 show the following | account balances: Trade accounts payable (net of P10,000 debit balance in supplier's. Account and P8,000 unreleased checks drawn) oa | Deferred tax liability (expected to reverse in 20x2) ~ 10,000 10%, 4-year note payable issued on Aug. 1, 20x1 240,000) Scanned with CamScannerCurrent Liabilities 43, Bonds payable (maturing in 5 equal annual installments of P400,000) 2,000,000 Reserve for contingencies 50,000 Held for trading financial liabilities 100,000 Income tax payable 100,000 Accrued expenses 10,000 Stock dividends payable 24,000 How much is the total current liabilities? a. 1,120,000 b. 1,210,000 —_c, 1,220,000 d. 1,238,000 3, Keeper Co. has the following liabilities on December 31, 20x1: + Trade and other payables 2,000,000 « Note payable (issued 3 yrs. ago, maturing on Dec. 31, 20x2) 6,000,000 Serial bonds payable (next annual principal installment of 800,000 due July 1,20x2) 5,600,000 On February 28, 20x2, Keeper Co. entered into a non-cancelable agreement with the lender to refinance the note payable on a long- term basis, on readily determinable terms that have not yet been implemented. Keeper Co.'s 20x1 financial statements. were authorized for issue on March 31, 20x2. What amount of current liabilities should Keeper Co. report in its 20x1. statement of financial position? a. 2,000,000 ‘b. 2,800,000 -c. 8,800,000 —_d. 13,600,000 4, Pam, Inc, has P1,000,000 notes payable due on June 15, 20x6. On December 31, 20x5, Pam signed an agreement to roll over the P1,000,000 note on a long-term basis. Under the agreement, the amount that can be rolled-over cannot exceed 80% of the value of the collateral Pam was providing. As of December 31, 20x5, the value of the collateral was P1,200,000 and was not expected to fall below this amount during 20x6. In its December 31, 20x5, balance sheet, Pam should classify the notes payable as Short-term — Long-term Short-term Long-term a0 1,000,000 c. 200,000 800,000 b. 40,000 960,000 . 1,000,000 0 (AICPA -adapted) di Scanned with CamScanner5. Poof Co. has total current liabilities of P3,120,000 on Dec. 31 20x1 before possible adjustment for the following: q * Poof Co.’s authorized capitalization was fully issued. Durin, the year, Poof Co. filed an amended Articles of Incorporation with the Securities and Exchange Commission (SEQ) increasing its authorized capitalization. Although the SEC, approval was not yet received, Poof Co. started receiving deposits for future subscription of its shares. A total 480,000 were collected and credited to “Subscribed Capital” Per agreement with the subscribers, the deposits are to bey reimbursed immediately if in case the SEC rejects Poof Co.'s, application for increased capitalization. Poof Co. expects tor receive the SEC’s decision in April 20x2. r Included in the total current liabilities is a bank loan ofp 600,000 that is maturing on July 1, 20x2. On February 14, 20x2, Poof Co. entered into a refinancing agreement with ther bank to extend the repayment of the loan to July 1, 20x5. The original loan agreement provides for such renewal option, andj as of Dec. 31, 20x1, Poof Co. has complied with all the conditions relating to the extension of the loan repayment. Poof Co's financial statements were authorized for issue ony March 15, 20x2. How much is the adjusted total current liabilities on Dec. 31, 20x!" a, 2,520,000 b.3,000,000 3,120,000 d. 3,600,000 6. Shameless Co. had the following liabilities on December 3), 20x1: ‘Accounts payable 750,000 Interest payable 120,000 Long-term bank loan (maturing April 1, 20x9) 4,000,000, In 20x1, Shameless Co, breached an agreement on the long-ter™» bank loan which .rendered the loan repayable on demand. However, on February 29, 20x2, Shameless Co. received from thé Scanned with CamScannerCurrent Liabilities 45 bank a one-year grace period to rectify the breach and during which the bank promises not to demand immediate repayment. Shameless Co.’s 20x1 financial statements were authorized for issue on March 31, 20x2. In its 20x1 statement of financial position, What amount should Shameless Co. report as total current liabilities? a. 4,870,000 b. 870,000 c. 750,000 d. 120,000 7. Anger Co.’s accounts payable on December 31, 20x1 had a balance of P2,300,000 before any possible adjustment for the following: a) Goods in transit purchased on credit for P23,000 under an FOB destination term were recorded and included in the inventory count on December 31, 20x1 as “goods in transit.” Anger Co. checks, drawn for P32,000, were found in the safe box during the Dec. 31, 20x1 securities count. c) Goods purchased under an ‘FOB destination, freight collect’ term were received and recorded at the invoice cost of P60,000 on Dec. 29, 20x1. The cash payment for the related freight of P5,000 was debited to the ‘Freight-out’ account. Goods worth 90,000 received. on.consignment from Dishonor Co. were recorded as an increase in accounts payable. The goods remain unsold as of Dec. 31, 20x1. The balance of accounts payable includes 64,000 cost of goods purchased under an FOB shipping point term that were lost in transit. Anger Co. recorded a corresponding claim against the carrier. b) d) e) How much is the adjusted balance of accounts payable? a. 2,150,000 b.2,214,000 ¢. 2,240,000. 2,304,000 8. Ego Co. had the following account balances on December 31, 20x1 before adjustments: * Inventory (per physical count on Dec. 31, 20x1) 800,000 * Accounts payable 960,000 Scanned with CamScanner46 Additional information: a. Goods in transit, with an invoice cost of P80,000 and. purchase, FOB shipping point, were recorded and included in the year-eng physical count of inventory as “goods in transit.” b. Goods in transit, with an invoice cost of 10,000 and purchase; FOB destination, were recorded only on January 3, 20x2 when th shipment was received. c. go Co, retumed damaged: goods costing 20,000 on Dec. 2 axl. However, Ego Co. recorded the related credit memo onl on January 4, 20x2. 4. On December 31, 20x1, Ego Co. recorded a P60,000 check payable toa supplier. The check was dated January 7, 20x2. How much are the adjusted balances of (1) Inventory and (¥ Accotnts payable on December 31, 20x1? ‘a. 780,000; 1,000,000 - ¢.800,000; 1,000,000 b. 790,000; 1,010,000 d.. 810,000; 1,010,000 9, Wooten Co. sells subscriptions for access to an online fil sharing site. Subscriptions are collected in advance and credited to sales, An analysis of the recorded sales activityy revealed the following: 20x1 = -20x2 Sales 840,000 1,000,000 Less cancellations 40,000___60,000 Net sales 300,000 __ 940,000. Subscriptions expirations: 20x! 240,000 20:2 310,000 260,000 203 250,000 400,000 20x4 280,000, 800,000 940,000 In Wooten’s December 31, 20x2 statement of financial position, the balance of unearned subscription revenue should be a. 930,000. b. 870,000. 465,000. d. 280,000. (AICPA - adapted) Scanned with CamScannerCurrent Liabilities 47 10. Jim Company offers three payment plans on its 12-month contracts. Information on the three plans and the number of children enrolled in each plan for September 1, 2005 through August 31, 2006 contract year follows: Initial payment per Monthly fees per No. of Plan child child children "1 500 - 15 2 200 30 R #3 50 9 36 Jim received all the initial payments on September 1, 2005 and 3,240 of monthly fees during the period September 1 through December 31, 2005. In its December 31, 2005 balance sheet, what amount should Jim report as deferred revenue? a. 3,300 b, 4,380 c. 6,600 d. 9,900 caicray 11. Motor Co. sells service contracts that cover a 2-year period. The sale price of each contract is 2,000. Motor Co. sold 1,000 contracts evenly throughout 20x1. Based on Motor Co.’s past experience, 40% of contracts sold are earned in the first year of the contract and 60% in the second year. Approximately, how much are the current and noncurrent portions of the deferred revenue on December 31, 20x1? a. 1,366,667; 550,000 . 1,000,000; 600,000 b. 1,250,000; 630,000 d. 870,000; 430,000 12. Cow Co. sells gift certificates that expire within a year. During 20x1, Cow Co. sold gift certificates worth P200,000, of which P 108,000 were redeemed. Cow Co. expects that 10% of the gift certificates sold will not be redeemed. Under PERS 15, what amounts of (1) total revenue and (2) liability should be reported in Cow Co.'s 20x1 financial statements? a. 108,000;72,000 ¢. 120,000; 72,000 b. 128,000; 72,000 . 120,000; 80,000 Z Scanned with CamScanner48 ht 13. Mimi Co, sells gift certificates that expire one year afte issuance. Information on gift certificates is shown below: Gift card liabi Jan. 1, 20x1 P120,00), Gift certificates sold during 20x1 1,000,0y Prior year gift certificates redeemed in 20x1 112,09, Gift certificates sold and redeemed in 20x1 760,00 Mimi's past experience indicates that 5% of gift certificates solg are never redeemed. Under PFRS 15, what amounts of (1) tota, revenue and (2) liability should be reported in Mimi Co.’s 20x) financial statements? a. 760,000; 198,000 . 920,000; 200,000 b. 872,000; 190,000 4. 930,000; 208,000 14. An entity received cash of P24,000 on August 1 for one-years rent in advance and recorded the transaction on that day asa credit to unearned rent revenue for the full amount. The, December 31 adjusting entry is: a. Rent revenue « 10,000 Unearned rent revenue 10,000 b. Uneaed rent revenue 24,000 Rent revenue 24,000 c. Rent revenue 14,000 Unearned rent revenue 14,000 d. Uneamed rent revenue 10,000 Rent revenue 10,000 15. Entity D acquired a piece of land on April 1, 20x1. Th purchase price was reduced by a credit for the real property) taxes accrued during the year. Entity D records real proper!) taxes at each month-end by adjusting the prepaid tax or ta payable account as appropriate. On May 1, 20x1 Entity D paid the first of two equal installments of P72,000 for the annudy teal property taxes. The entry to record the payment of taxes on May 1, 20x1 includes , a. a debit to real property tax expense of P48,000. — Scanned with CamScanner49 b. adebit to real property tax payable of 48,000. ¢. acredit to real property tax payable of 48,000. d. 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 as of December 31, 20x1 include the following: Accounts payable 15,000 Preference shares issued with mandatory redemption 100,000 Unearned income 7,000 Utilities payable 16,000 Warranty obligation 7,000 Deferred tax liability 2,000 PhilHéalth contribution payable 5,000 Obligation to deliver a fixed number of own shares 12,000 worth a fixed amount of cash Share dividends payable 3,000 Rent payable 9,000 Requirement: Compute for the total financial liabilities to be disclosed in Mid-Earth Co.’s 20x1 notes to financial statements. Current and Noncurrent liabilities 2. Patience Co’s liabilities as of December 31, 20x1 include the following: 2 Accounts payable 500,000 Held for trading financial liabilities 1,000,000 Note payable (PIM due in 20x3) 2,800,000 Uneamed revenue 300,000 Dividends payable 800,000 Deferred tax liability 200,000 Requirement: Compute for the total current liabilities. Scanned with CamScannerOa Refinancing agreement & Liabilities payable on demand 3. Turmeric Co’s liabilities as of December 31, 20x1 (current year-end) include the following: © 10,000,000, 8-year loan maturing on December 31, 20x2 Turmeric Co. intends to refinance this liability on a long. term basis on February 2, 20x2. Turmeric’s 20x1 financial statements were authorized for issue on March 31, 20x2. ‘© 6,000,000 loan that is payable on demand. There is no) indication as of December 31, 20x1 that the creditor will) demand repayment within the next 12 months. © P14,000,000 loan due on December 31, 20x9. Turmeric breached a loan provision accelerating the repayment of this loan within the next 12 months. However, on January 12, 20x2, the creditor granted Turmeric Co. a 12-month grace period to rectify the breach, within which the creditor will not demand immediate repayment. Requirement: Compute for the total current liabilities as of December 31, 20x1. i Accounts payable 4, Kind Co's accounts payable on Dec. 31, 20x1 had a balance of P 1,200,000 before possible adjustment for the following: ¢ Goods shipped to Kind under FOB destination on December 2/, 20x1 were lost in transit. Kind did not record the invoice cost 760,000. * Goods shipped to Kind under FOB shipping point on December 28, 20x1 were received and recorded at the invoice cost of P70,000 on January 2,202, ° ; * Kind received notice of shipment of goods from a vendor ot December 30, 20x1 and recorded the invoice cost of 80,000 ot that date. It was later found out on January 6, 20x2, when: the) goods were received, that the shipment was made on an FOB) destination term, | | Requirement: Compute for the correct balance of accounts payablp on December 31, 20x1. | | ] Scanned with CamScannerCurrent Liabilities = Unearned income 5, Ngekplex Co. sells one-year subscriptions for access to an online streaming, of movies and TV programs. Information on subscriptions is as follows: 20x1 20x2 Subscriptions 900,000 2,800,000 Subscriptions expirations: 20x1 740,000 20x2 160,000 2,690,000 20x3 110,000 Requirement: Compute for the amounts of subscriptions revenue and unearned subscriptions to be reported in Ngegkplex Co.'s 20x2 financial statements. Gift certificates 6. During the year, Fine Ground Co. sold gift certificates worth P400,000, of which P216,000 were redeemed. Fine Ground Co. has sold gift cards for many years and, based on its historical data, 10% of the gift cards sold are never redeemed. Requirements: Provide the journal entries using PFRS 15. Accrued liabilities 7. NV Co. has total current liabilities of 5,480,000 as of December 31, 20x1 before considering the following: * December 20x! utilities of P50,000 were paid on Jan. 7, 20x2. * Cash dividends of P290,000 were declared and paid in January 20x2. NV Co.'s 20x1 financial statements were authorized for . issue on February 14, 20x2. * Employee withholding taxes in 20x1 were understated by 20,000. Requirement: Compute for the correct balance of current liabilities. 4d Scanned with CamScanner