ANSWER: D

Question 3

Accounts payable P650,000

Notes payable – trade 190,000
Notes payable – bank (see no.2) 300,000
Wages and salaries payable 15,000
Interest payable (see no. 1) 143,000
Mortgage note payable – 10% (with breach of 600,000
loan covenant)
Mortgage note payable – 12% (P220,000 – 40,000
P180,000)
Bonds payable, due 7/1/11 2,000,000
Total current liabilities, 12/31/10 P3,938,000

In accordance with the revised PAS 1 par.69, an entity shall

classify a liability as current when:
a) It expects to settle the liability in its normal operating
cycle;
b) It holds the liability primarily for the purpose of trading;
c) The liability is due to be settled within twelve months after
the reporting period; 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

An entity shall classify all other liabilities as non-current.

When an entity breaches an undertaking under a long-term loan
agreement on or before the end of the reporting period with the
effect that the liability becomes payable on demand, the liability
is classified as current, even if the lender has agreed, after the
reporting period and before the authorization of the financial
statements for issue not to demand payment as a consequence of
the breach. The liability is current, because at the end of the
reporting period, the entity does not have an unconditional right
to defer its settlement for at least twelve months after that
date. (PAS 1 par.74)

However, the liability is classified as non-current if the lender

agreed by the end of the reporting period to provide a period of
grace ending at least 12 months after the reporting period, within
which the entity can rectify the breach and during which the
lender cannot demand immediate repayment. (PAS 1 par.75)