COLLEGE OF COMMERCE BACHELOR OF SCIENCE IN ACCOUNTANCY MODULE 1 PACKET AE16 — INTERMEDIATE ACCOUNTING 2 MODULE 1 GENERAL LIABILITIES: ‘Welcome to Module 1 In this module, we will go back to the conceptual framework in accounting that specifically discusses the liabilities in general. We will review the recognition, measurement and presentation of iabiities. During the discussion, you will provide your appreciation of the different theoretical concepts that are related to liabilities 2s well asthe distinction between current and noncurrent liabilities. At the end of this module, you will be required to respond to questions that are designed to test your understanding of the fundamental principles on liablities and their application in the recognition, measurement and presentation to the financial statements. LEARNING OUTCOMES: By the end of this module, the students will be able to: 41. Identify the components of the liabilities in the statement of financial position 2. Distinguish current versus noncurrent liabilities 3. Understand the primary responsibilty of the management in ensuring the proper preparation and sufficiency of disclosure are complied with in the financial statements 4. Identify the general features of the financial statements and the representation of each feature 5. Discuss the application of the concepts and accounting treatment for general liabilties through ‘scenario build up and problem solving. ASSESSMENT PLAN: 1. Graded recitation through interactive participation in a question and answer format during discussion 2. Problem solving games (points awarded to the first 5 students who can submit the correct answer and/or solution) 3. Individual Submission and discussion of homework or learning tasks through research online 4. Summative examinations in various evaluationfest formats. Crone)COLLEGE OF COMMERCE BACHELOR OF SCIENCE IN ACCOUNTANCY LEARNING PLAN/SCHEDULE OF ACTIVITIES ‘ACTIVITY DESCRIPTION TIME TO COMPLETE. Lecture Discussion fication of liabilities | 2 hours Lecture Discussion hour Lecture Discussion 30 minutes Lecture Discussion | What are Covenants & Accounting. 2 hours Implication of Breach of Covenant Lecture Discussion _| Deferred and Uneamed Revenues. 30 minutes Problem Solving _| Illustrative cases on recognition, Thour classification, measurement and presentation of liabilities Review ‘Quick Reviews and Summarizations | T hour Quiz Summative Quizzes for Module 3 T hour PRINTED REFERENCES 4. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Conceptual framework and accounting standards. 2019 edition. Manila : GIC Enterprises & Co., Inc. FIL 657.0218 V173c 2019 2. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume one. 2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 1 3. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume two. 2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 2 4. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume three. 2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 3 5. Cabrera, M.E. B. & Cabrera, G. A. B. (2019). Financial accounting and reporting fundamentals. 2019-2020 edition. FIL 657.48 C117 2018 6. Millan, Zeus Vernon B. Intermediate Financial Accounting Il. Baguio City: Bandolin Enterprise 2016 Web and Other Learning Resources |. https:/www.coursera.org/course/whartonaccounting ‘www accountingverse.com/accounting-basics/fundamental-accounting-concepts. htm! www futureaccountant.com/accounting-process/ ‘www. accountingcoach. .com/accounting-basics/explanation www accounting-basics-for-students. com/basic-accounting-concepts. htm! http:/www.swleamning, com/accounting/murray/ppt02.PPT ‘gpvec.unl.edufbcpms/files/Financial/accounting2. ppt NOORON aCOLLEGE OF COMMERCE BACHELOR OF SCIENCE IN ACCOUNTANCY 8. http:/www,picpa.com.phifrsc. htm!?article=Philippine%20F inancial%20Reportin, nt 8 RSC&main menu=PFRSs COUSE CONTENT DISCUSSION DEFINITION OF LIABILITIES 11. Present obligation > Entity has no practical ability to avoid. > Entity liable MUST be identified. > Payee not required to be identified. > Legal binding contract or statutory requirement e.g. AP for goods and services, Taxes, Loans with Banks, etc. > Constructive - normal business practice, custom and desire to maintain good business relations or act in an equitable manner. 2. Obligation isto transfer an economic resource > Pay cash, transfer noncash asset or provide service at some future time > Compare and contrast Cash and Share/ Stock Dividend 1. Cash Dividend requires the payment of CASH which is an economic resource that will be paid to stockholders as of record date, hence, A LIABILITY. 3. Obligation is to transfer an economic resource > Compare and contrast Cash and Share/ Stock Dividend 1. Share/Stock Dividend will require the issuance of own shares of the entity, hence NOT A ABILITY. 2. Share/Stock Dividend Payable is classified as part of EQUITY rather than an accounting liability. 4, Arises from past event or transaction > Not recognized until incurred > Past event is the obligating event > The entity has not realistic alternative but to settle the obligation created by the event. 5. Arises from past event or transactionCOLLEGE OF COMMERCE BACHELOR OF SCIENCE IN ACCOUNTANCY > Examples of obligating event: 1. Acquisition of goods gives rise to ap. Obligating event is the acquisition of goods. 2. Receipt of a bank loan results in an obligation to repay the loan. © Obligating event is the receipt of cash from bank as a consequence of a bank loan. (MEASUREMENT OF LIABILITIES IN GENERAL Initial Measurement - At present value Subsequent Measurement — At amortized Cost (MEASUREMENT OF CURRENT LIABILITIES O_Not discounted anymore . Measured, recorded and reported at their face amount or face value The discount or difference between the face value and present value is usually not material because of its short-term payment. Payable within 12 months after the balance sheet date hence the present value Is very minimal ‘to be amortized over 12 months. (MEASUREMENT OF NON CURRENT LIABILITIES. Initial measurement ~ At present value Subsequent measurement - At amortized cost Q_Interest-bearing note ‘Initial Measurement — At Face Value ‘V Subsequent Measurement - At Face Value Therefore, the face value and present value is the same for interest bearing note. Non interest-bearing note ‘Initial Measurement — At Present Value v Subsequent Measurement ~ At Amortized Cost ‘¥ Amortized cost is amortizing the discount over the term of payment of the note e.g. bonds Payable, ete. CLASSIFICATION OF LIABILITIES AS CURRENTCOLLEGE OF COMMERCE BACHELOR OF SCIENCE IN ACCOUNTANCY a. Expects the settlement within the entity’s operating cycle. b. Entity holds the liability primarily for the purpose of trading. The liability is due to be settled within 12 months after the reporting period. 4d. Entity does not have an unconditional right to defer settlement of the liability for at least 12 ‘months after the reporting period. ‘e. When normal operating cycle is not clearly identifiable, its duration is assumed to be 12 months. EXCEPTIONS 1. Long-term debt falling due within one year or which is due to be settled within 12 months after the reporting period is classified as CURRENT, even if a. The original term was for a period longer than 12 months. b, Agreement to refinance or to reschedule payment on a long-term basis is completed AFTER the reporting period and BEFORE the financial statements are authorized for Issue, 2. Liabilities are classified as CURRENT even if settled more than 12 months after the reporting period such as: v Trade payables and accruals for employee and other operating costs are part of the working capital used in the entity’s normal operating cycle. Examples of Current Liabilities: > Financial Liabilities Held For Trading ‘¥ Incurred with an intention to repurchase these in the near term. ‘J The issuer of the quoted debt instrument may buy back in the near term depending on the changes in fair value. ‘Example: Short term bonds callable within 3 months before its maturity date. CLASSIFICATION OF LIABILITIES AS NON CURRENT All liabilities not classified as current > Classifications ‘¥ Noncurrent portion of long-term debt Finance lease lability ¥ Deferred tax liabilityCOLLEGE OF COMMERCE BACHELOR OF SCIENCE IN ACCOUNTANCY Long-term obligation of officers Long-term deferred revenue Q__ When refinancing on a longer basis is completed ON or BEFORE THE END OF THE REPORTING PERIOD. > The refinancing is an adjusting event that will required classification to NON CURRENT. _ When the entity has the DISCRETION TO REFINANCE OR ROLL OVER AN OBLIGATION for at least 12 months after the reporting period under an existing loan facility even if itis due within a shorter period. When the entity has an UNCONDITIONAL RIGHT under the existing loan facility to DEFER SETTLEMENT of the liability for at least 12 months after the reporting period. NOTE: REFINANCING OR ROLLING OVER MUST BE AT THE DISCRETION OF TH ENTITY (DEBTOR) WHAT ARE COVENANTS? Q_Often attached to borrowing agreements which represent undertakings by the borrower. Refer to restrictions on the borrower as to undertaking further borrowings, paying dividends, maintaining specified level of working capital and so forth. HOW DOES BREACH OF COVENANTS AFFECT THE CLASSIFICATION OF A LIABILITY? 2. When certain conditions relating to the borrower's financial situation are breached, the liability becomes PAYABLE ON DEMAND. Breach of covenant makes a noncurrent liability to a CURRENT LIABILITY even if the lender has ‘agreed AFTER THE REPORTING PERIOD and BEFORE THE STATEMENTS ARE AUTHORIZED FOR ISSUE, not to demand payment as a consequence of the breach, ._Uability is classified as current because at the end of the reporting period, the entity DOES NOT HAVE AN UNCONDITIONAL RIGHT TO DEFER SETTLEMENT for at least 12 months after that date. EXCEPTION: ‘¥ CLASSIFIED AS NONCURRENT IF THE LENDER HAS AGREED ON OR BEFORE THE END OF mu PERIOD TO PROVIDE A PERIOD ENDING AT, |ONTHS ‘AFTER THAT DATE. GRACE PERIOD > Period within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.COLLEGE OF COMMERCE BACHELOR OF SCIENCE IN ACCOUNTANCY PRESENTATION OF CURRENT LIABILITIES 2. Minimum Line Items of Current Liabilities of the Statement of Financial Position a, Trade and other payables @ Accounts payable, notes payable, accrued interest on NP, dividends payable and accrued expenses b, Current provisions c. Short-term borrowings 4d. Current portion of long-term debt e. Current tax liability ESTIMATED LIABILITIES. Obligations which exist at the end of the reporting period although the amount due, ‘due date and exact payee cannot be definitely determinable or Identifiable. ©. May either be current or noncurrent in nature. 2. Examples: Estimated lability for premium, award points (miles), gift certificates and bonus. DEFERRED or UNEARNED REVENUES CLASSIFIED AS LIABILITIES Income already received but not yet earned. 2. May be realizable within 1 year or in more than 3 year after the end of the reporting period. 2 Gasification of deferred or unearned revenues Classified as Current liability If realizable WITHIN 1 YEAR ‘@ Examples: unearned interest income, unearned rental income, unearned airline ticket sales and unearned subscriptions revenues V Classified as Noncurrent liability if realizable MORE THAN 1 YEAR 6 Examples: unearned revenues from long-term service contracts, long- term leasehold advances _LUSTRATION 1 - Service Contracts ¥ Anentity sells equipment service contracts agreeing to service equipment for a 2-year period. ‘¥ Concepts application: Page 7 of 11COLLEGE OF COMMERCE BACHELOR OF SCIENCE IN ACCOUNTANCY © Cash receipts from contracts are credited to unearned service revenue. ‘© Service contract costs are charged to service contract expense, @ Revenue from service contracts is recognized as earned over the service period of the contracts. ‘¥ The following transactions occur in the first year: © Cash receipts from service contracts sold = P2,000,000 ‘© Service contract costs paid = PS00,000 ‘© Service Contract Revenue recognized P800,000. ‘Journal entries for the first year 1. To record the cash receipts from service contracts sold: cash 1,000,000 Unearned service revenue 3,000,000 2. To record the service contract costs paid: Service Contract Expense 500,000 Cash 500,000 3. To record the service contract revenue recognized Unearned service revenue 800,000 Service contract revenue 800.000 ILLUSTRATION 2~ Gift Certificate Payable Gift certificates are usually issued by department stores, malls and redeemable in merchandise. ‘The accounting procedures are: 1. When the gift certificates are sold: cash mo Gift Certificates Payable a The latter account is current liability 2. When the gift certificates are redeemed: Gift Certificates Payable ~COLLEGE OF COMMERCE BACHELOR OF SCIENCE IN ACCOUNTANCY Sales 0 3. When the gift certificates expire or when gift certificates are not redeemed: Gift Certificates Payable 1% Forfeited Gift Certificates wx ‘The Philippine DTI ruled that gift certificates no long have an expiration period ILLUSTRATION 3 ~ Bonus Computation ‘¥ Bonus is a compensation to key officers and employees for superior income reallzed during the year. ‘V Purpose is to motivate officers and employees by directly relating their well- being to the success of the entity. ‘¥ Compensation plan results in liability that must be measured and reported in the financial statements. \V The accounting treatment: ‘@ Percent of income BEFORE BONUS AND BEFORE TAX Example: Income before bonus & tax 4,400,000 Bonus 10% Income Tax Rate 30% Computation: Income before bonus & tax 4,400,000 ‘Multiply by —1% Bonus —440,000 Percent of income AFTER BONUS BUT BEFORE TAX Example: Income before bonus & tax 4,400,000 Bonus 10% Income Tax Rate 30% Computation: where B = BonusCOLLEGE OF COMMERCE BACHELOR OF SCIENCE IN ACCOUNTANCY 1) B= .10 (4,400,000 8) 2) B+.108 = 440,000 3) B= 440,000 -.108 4) 1.108 = 440,000 5) B= 440,000/ 1.1 6) B= 400,000 ® Percent of income AFTER BONUS and AFTER TAX Example: Income before bonus & tax 4,400,000 Bonus 10% Income Tax Rate 30% Computation: 3) B= .10 (4,400,000-B-7) 2) T= .30 (4,400,000 B) 3) B = .10[4,400,00 ~ B ~ .30 (4,400,000 8)] 4) B = 10 (4,400,000 ~ B - 1,320,000 +.308) 5) B = 440,000 - .108 -132,000+ 038, 6) B + .10B - .038 = 440,000 - 132,000 7) 1.078 = 308,000 8.) T = .30 (4,400,000 - 287,850) = 1,233,645 © Percent of income AFTER TAX but BEFORE BONUS Example: Income before bonis & tax 4,400,000 Bonus 10% Income Tax Rate 30% ‘Computation: 1) B=.10 (4,400,000-1) 2) T= 30 (4,400,000— 8) -10 [4,400,000 - .30 (4,400,000—B)] +10 (4,400,000 - 1,320,000 + .308) 5) B= 440,000~ 132,000+.038COLLEGE OF COMMERCE BACHELOR OF SCIENCE IN ACCOUNTANCY 6) B-.038 = 308,000 7) 978 = 308,000 8) B= 308,000 /.97 = 317,526 ILLUSTRATION 4— Refundable Deposits ¥ Consists of cash or property received from customers but which are refundable after compliance with certain conditions. ‘V Example is the customer deposit required for returnable containers like bottles, drums, tanks and barrels. ‘¥ Example: A deposit of P10,000 Is required from the customer for returnable containers. The container costs P8,000, ® Accounting entry Cash 110,000 Containers Deposit 10,000 The containers’ deposit account is usually classified as current liability. © Ifthe customer returns the containers, the deposit is simply refunded. Containers Deposit 10,000 cash 120,000 @ Ifthe customer fails to return the containers, the deposit is considered the sale price of the containers. The excess of deposit over the cost is considered gain. Containers Deposit 10,000 Sales 8,000 Gain 2,000 END OF MODULE 1