INTERMEDIATE

ACCOUNTING
2

Chapter 3: The Accounting Equation (FAR

by: Millan)
 Chapter 1
Current Liabilities
Learning Objectives
1. State the recognition criteria of liabilities.
2. Classify liabilities as current and noncurrent.
 Definition of Liability

It is present obligation of an entity arising from

past transaction or event, the settlement of
which is expected to result in an outflow from
the entity of resources embodying economic
benefits. (Conceptual Framework for Financial
Reporting)
 Current Liabilities (PAS 1, paragraph 69)
a. The entity expecs to settle liability within
the entity's operating cycle.
b. The entity holds the liability primarily for
the purpose of trading.
c. The liability is due to be settled within
twelve months after the reporting period.
d. The entity does not have an unconditional
right to defer settlement of the liability for at
least twelve months after the reporting
period.
 Examples of Current Liabilities
a. Financial assets measured at Fair Value through
Profit or Loss (FVPL)
b. Current portion of long-term notes, bonds, loans,
and lease liabilities
c. Trade accounts and notes payables
d. Other non-trade payables due within 12 months
after end of reporting periond
e. Unearned income expected to be earned within
12 months after the end of the reporting period
f. Bank overdrafts
 Noncurrent Liabilities
This term is a residual definition.
All liabilities not classified as current are classified as
noncurrent liabilities. These include:

a. Noncurrent portion of long-term debt

b. Finance lease liability
c. Deferred tax liability
d. Long-term obligation to entity officer
e. Long-term deferred revenue
 Recognition of liabilities
• An item is recognized as a liability when:
1. It meets the definition of a liability;
2. It is probable that an outflow of resources
embodying economic benefits will result from
its settlement; and
3. The settlement amount can be measured
reliably.

Chapter 3: The Accounting Equation (FAR

by: Millan)
 Illustration: Current liabilities
ABC Co. has the following liabilities as of December 31, 20x1.
a. Trade accounts payable, net of debit balance in supplier's account of
P5,000, net of unreleased checks of P4,000, and a net of postdated checks of
P2,000. P300,000
b. Credit balance in customer's acct. 2,000
c. Fin. liab. designated at FVPL 50,000
d. Bonds payable (maturing in 10 equal annual installmets of P100,000)
1,000,000
e. 12%, 5-year note payable issued on October 1, 20x1
100,000
f. Deferred tax liability 5,000
g. Unearned rent 4,000
h. Contingent liability 10,000
i. Reserve for contingencies 25,000
How much is the total current liabilities?
a. Trade A/P gross of debit bal. , unreleased
check, and PDC (300K+5K+4K+2K) P311,000
b. Advances from customers 2,000
c. Fin. liab. designated at FVPL 50,000
d. Current portion of B/P 100,000
e. I/P on the note (100K X 12% X 3/12) 3,000
g. Unearned rent 4,000
Total CL P470,000

C
Notes:
-Deferred tax liabilities are always presented as
noncurrent when an entity presents a classified
statement of financial position.
-Contingent liab. is not recognized but rather
discolsed only in the notes
-Reserve for contingencies is an appropriation of
RE and thus, presented in equity.
 Refinancing Agreement
A long-term obligation that is maturing w/in 12 mos. 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 but before
the FS are authorized for issue.
However, the obligation is classified as noncurrent if the
entity expects, and has the discretion, to refinance it on a
long term basis under an existing loan facility.
If the refinancing is not at the discretion of the entity, the
financial liability is current.
 Illustration: Refinancing
ABC. Co. has a 10%,P1,000,000 loan payable as of Dec. 31, 20x1 that
is maturing on July 1, 20x2. Interest on the loan is due every July 1
and December 31.

Case 1: No discretion

On February 1, 20x2, ABC Co. entered into a refinancing agreement

with a bank to refinance the loan on a long-term basis. Both parties
are finacially capable of honoring the agreement's provisions. ABC's
F/S were authorized for issue on March 15, 20x2. How much is
presented as current liability in relation to the loan in ABC's 20x1
year-end FS?
 ILLUSTRATION: Refinancing
ABC. Co. has a 10%,P1,000,000 loan payable as of Dec. 31, 20x1 that is maturing
on July 1, 20x2. Interest on the loan is due every July 1 and December 31.

Case 1: With discretion

On Feb. 1, 20x2, ABC Co. entered into a refinancing agreement w/ a bank to

refinance the loan on a long-term basis. Both parties are financially capable of
honoring the agreement's provisions. ABC has the discretion to refinance or roll
over the loan for atleast 12 mos. from Dec. 31, 20x1 under an existing facility.
ABC's F/S were authorized for issue on March 15, 20x2. How much is presented
as current liab. in relation to the loan ABC's 20x1 year-end FS?
 ILLUSTRATION: Refinancing

BC. Co. has a 10%,P1,000,000 loan payable as of Dec. 31, 20x1 that is
maturing on July 1, 20x2. Interest on the loan is due every July 1 and
December 31.

Case 1: Refinancing completed as of end of reporting

On December 1, 20x1, ABC Co. entered into a refinancing agreement

with a bank to refinan3ce the loan on a long-term basis. The
refinancing and roll over transactions was completed on December
31. 20x1. How much is presented as current liab. in relation to the
loan ABC's 20x1 year-end FS?
 Trade accounts payable
These are obligations arising from purchases of inventory
that are to be sold in the ordinary course of business.

Accounts payable from purchases of inventory are

recognized when ownership over the goods is transferred to
the buyer.
Goods includible in the inventory?
As a rule, all goods to which the entity has title shall be
included in the inventory, regardless of location.
The phrase “passing of title” is a legal language which means
“the point of time at which ownership changes”.
Who is the owner of goods in transit?
FOB destination - ownership of goods
purchased is transferred only upon receipt of
the goods by the buyer at the point of
destination. Thus, the goods in transit are still
the property of the seller.
Accordingly, the seller shall legally be
responsible for freight charges and other
expenses up to the point of destination.

C
Who is the owner of goods in transit?
FOB shipping point - ownership is transferred
upon shipment of the goods and therefore, the
goods in transit are the property of the buyer.

Accordingly, the buyer shall legally be

responsible for freight charges and other
expenses from the poing of shipment to the
point of destination.
 Freight terms
• Freight collect - means that the freight charge
on the goods shipped is not yet paid. The
common carrier shall collect the same from
the buyer. Thus, the freight charge is actually
paid by the buyer.
• Freight prepaid - means that the freight
charge on the goods shipped is already paid by
the seller.
• The terms “FOB destination” and ''FOB
shipping point” determine ownership of the
goods in transit and the party who is supposed
to pay the freight charge and other expenses
from the point of shipment to the point of
destination.
• The terms “freight collect” and “freight
prepaid” determine the party who actually
paid the freight charge but not the party who
is supposed to legally pay the freight charge
 Illustration: Accounts Payable
On Dec. 31, 20x1, ABC Co. has accounts payable of P1,00,000 before
possible adjustment of the following:
a. Goods in transit from a vendor to ABC on Dec. 31, 20x1 with an
invoice cost of P50,000 purchased FOB shipping point was not yet
recorded.
b. Goods shipped FOB shipping point from a vendor to ABC was lost
in transit. The invoice cost of P20,000 was not yet recorded.
c. Goods shipped FOB shipping point from a vendor to ABC on Dec.
31, 20x1 amounting to P8,000 was recorded and included in the year-
end physical count as “goods in transit”.
 continuation...
d. Goods in transit from a vendor to ABC on Dec. 31,
20x1 with an invoice cost of P10,000 purchased FOB
destination was not yet recorded. The goods were
received on January 20x2.
e. Goods with invoice cost P15,000 was recorded and
included in the year-end physical count as “goods in
transit.” It was found out that the goods were shipped
from a 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 poing lost in transit
not yet recorded 20,000
e. FOB destination inappropriately
recorded (15,000)
Adjusted accounts payable 1,055,000

C
 Accounts payable
• On December 13, 20x1, ABC Co. has accounts payable of P1,000,000 before
possible adjustment for the following:
a. Checks drawn but not yet released to payees amounting to P12,000, while
checks drawn and released to payees but were postdated amounted to
P5,000.
b. On December 28,20x1, a vendor authorized ABC to return for full credit
goods shipped and billed at P25,000 on December 14, 20x1. ABC shipped
the returned goods on December 13, 20x1 but the CM was received and
recorded only on January 3, 20x2.
c. Goods shipped FOB shipping poing, freight prepaid from a vendor on
December 28, 20x1 was recorded at invoice cost at shipment date. The
invoice cost is P14,000 while the freight cost is P3,000.
d. Goods shipped FOB destination, freight collect were received on December
29,20x1. The invoice cost of P40,000 was credited to accounts payable on
date of receipt and the related freight of P5,000 was debited to an expense
account.
SOLUTION:
• Unadjusted accountrs payable 1,000,000
a. Unreleased checks and PDC(12K + 5K) 17,000
b. Purchase return (25,000)
c. Unrecorded freight on FOB SH, freight prepaid
3,000
d. Freight shouldered on behalf of the seller
(5,000)
Adjusted accounts payable 990,000
Unearned Income
It represents advanced collection of income that
is not yet earned. Prior to earning, unearned
income is classified as liability. Examples:
a. Advances received for future delivery of
goods or rendering of services.

b. Proceeds from sale of gift certificates

redeemable in goods or services.
Chapter 3: The Accounting Equation (FAR
by: Millan)
Illustration: Unearned revenue -sale of
goods
ABC Co. requires advance payments for custom-built guitar effects, gadgets, and
racks. The records of ABC Co. 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
8,000,00
Advances pertaining to orders cancelled in 20x1
300,000
Compute for the current liability assuming:
a. Advance payments received are non-refundable and
b. Advance payments received are refundable

Chapter 3: The Accounting Equation (FAR

by: Millan)
Requirement (a) Advances are non-
refundable

Chapter 3: The Accounting Equation (FAR

by: Millan)
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

Chapter 3: The Accounting Equation (FAR

by: Millan)
 Illustration: Deferred revenue -sale of
services
ABC Co. sells service contracts that cover a 2-year period. The sales
price of each contract is P1,000. ABC sold 1,000 contracts evenly
throughtout 20x1 . ABC's past experience shows that of the total
pesos spent for repairs on service contracts, 40% is incurred evenly
during the first contract year and 60% evenly during the second
contract year.

Requirements:
a. How much are the current and noncurrent portions of the deferred
revenue to be presented in ABC's 20x1 statement of financial
position?
b. How much is the service revenue recognized in 20x2?

Chapter 3: The Accounting Equation (FAR

by: Millan)
Chapter 3: The Accounting Equation (FAR
by: Millan)
Requirement (a): Current and
Noncurrent portion - Dec. 31 20x1
• Current portion (earned portion in 20x2)
(300,000 + 200,000) 500,000
• Noncurrent portion ( earned portion in 20x3)
300,000
Total 800,000

Requirement (b) Service Revenue - 20x2

Service revenue ing 20x2 (300k + 200K) 500,000

Chapter 3: The Accounting Equation (FAR

by: Millan)
OPEN FORUM
🞂QUESTIONS????
🞂REACTIONS!!!!!
END

Chapter 3: The Accounting Equation (FAR

by: Millan)