INTERMEDIATE ACCOUNTING 2 – LIABILITIES

Liability – a present obligation of an enterprise arising from past event, CONTINGENT

PROVISION
the settlement of which is expected to result in an outflow from the LIABILITIES
enterprise of resources embodying economic benefits, (IASB’s DEFINITION
Conceptual Framework for Financial Reporting). Liabilities which are uncertain as Either:
to timing or amounts a) a possible obligation that
NOTE!!! Liabilities arise only from past events or transactions. arises from past events and
whose existence will be
Essential Characteristics: confirmed only by the occurence
or non-occurence of one or more
1. Present Obligation future events not wholly within
the control of the enterprise
2. Past Event
b) a present obligation that
3. Probable outflow of resources embodying economic benefits arises from past events but is not
recognized because:
Obligation – is a duty or responsibility to act or perform in a certain way  Probable only, not
which may be legally enforceable as a consequence of a binding measurable
contract or statutory requirement;  Measurable only not
probable
Obligating event – is one that results in an enterprise because having
no realistic alternative to settling that obligation. RECOGNITION
Recognized as a liability on the Not recognized as a liability on
Classification of Obligating Event: face of the statement of financial the face of the statement of
position. financial position.
1. Legal Obligation – is one derives from a contract. FINANCIAL STATEMENT PRESENTATION
(Ex: Accounts payable, withholding taxes payable and VAT Presented separately in the Unless remote, disclosed in the
payable) statement of financial position notes to financial statements
2. Constructive Obligation – is one derives from an enterprise’s under liabilities
actions whereby an established pattern of past practice,
published policies of a sufficiently specific current statement, Obligations involving uncertainties:
the enterprise has indicated to other parties that it will accept
certain resposibilities, and as a result, the enterprise has STATUS RECORDED AS:
Probable (more than 50%)
created a valid expectation on the part of those parties that it
 Reliably measurable Expense/Loss xx
will discharge those responsibilities. Liability xx
(Ex: Provision for clean up costs)  Not reliably
measurable Disclosure
Settlement of a Present Obligation: Reasonably Possible (50%) Disclosure
a) Payment of cash Remote (less than 50%) Ignore
b) Transfer of other assets
c) Provision of services
d) Replacement of an obligation with another obligation Liabilities are initially measured:
e) Conversion of the obligation to equity
1. At amount established in exchanges (amount tobe paid or
f) Condonation by creditor (in some exceptional cases
amount discounted).
Recognition of Liabilities: 2. By estimates of a definitive character when the amount of the
liability cannot be measured more precisely (provisions).
1. It is probable that an outflow of resources embodying o General Liability
economic benefits will result from the settlement of a present  Probable (there is probability of outflow)
obligation  Measurable – realiably measurable (sure amount)
2. The amount at which settlement will take place can be – reasonably estimated (estimation)
measured reliably. o Specific Liability
o General Liability
o Specific Liability

Chapter 1 – Current Liabilities, Provision and Contingencies

 INTERMEDIATE ACCOUNTING 2 – LIABILITIES

SPECIFIC LIABILITY DATE OF RECOGNITION CURRENT LIABILITIES DEFINITION

Trade Payables Payable within the entity’s
Loans Upon approval normal operating cycle; even
Dividends if they are not due for
 Cash Upon declaration settlement within 12 mos.
 Property Upon declaration Non-trade Payables Due for settlement within 12
 Scrip Upon declaration mos. From the end of
 Share (Not a liability) accounting period.
 Liquidating Upon declaration Accounts Payable Liabilities arising from the
Accrued Liability End of reporting period purchase of goods,
(Rent, utilities, interest, wages) (recognize expenses only materials, supplies, services
when incurred on an open charge-account
Agency Obligation (SSS, Pag-Ibig, basis (credit term, generally
Philhealth) 30-120 days, no interest)
 Share of employer End of reporting period Short-term Notes Payable
 Share of employee Upon withholding Acceptances Payable
 Income tax payable End of reporting period Liabilities under Trust Receipts
Purchase of Merchandise Upon passing of title by the Deposits and Advances Advances are normally
seller contract to render
Estimated liability goods/services.
 Premiums End of reporting period Current Portion of Long-term Debt
 Warranties Upon sale of merchandise Accrued Liabilities Obligations for expenses
 Gift certificates incurred on or before the end
 Income Method End of reporting period of the reporting period but
 Liability Method Upon issuance payable at a later date.
 Tickets Similar to Gift Certificate Income Tax Payable
 Bonus(Compensation) End of reporting period Dividends Payable
 Deposits on returnable Credit Balances in Customers
containers End of reporting period Accounts
 Advances from Deferred Revenue Are amounts collected in
 Income Method End of reporting period advance that have not yet
 Liability Method Upon receipt of cash been earned and recorded
 Asset restoration as revenues pending
satisfaction of performance
Classification of Liabilities: obligations
Provisions expected to be settled
1. Current Liabilities within 12 mos.
2. Noncurrent Liabilities
ACCOUNTS PAYABLE
Recognition of Current liabilities:
Two methods of recording purchase
a) It expects to settle the liability in its normal operating cycle; transaction:
b) It holds the liability primarily for the purpose of trading;
Gross method Net method
c) The liability is due to be settled within 12 months after the
To record purchases
reporting period;
Purchases Puchases
d) It does not have an unconditional right to defer settlement of Freight-in Freight-in
the liability for atleast 12 months after the reporting period; Accounts Payable Accounts Payable
To record payment within discount period
Recognition of Noncurrent liabilities: Accounts Payable Accounts Payable
Purchase Discount Cash
a) Agreement to refinance is completed on or before the Cash
reporting date To record payment beyond discount period
b) The entity has the discretion to refinance or roll over an Accounts Payable Accounts Payable
obligation for more than 12 months after the reporting date Cash Purchase Discounts Lost
under an existing loan facility Cash
Chapter 1 – Current Liabilities, Provision and Contingencies
 INTERMEDIATE ACCOUNTING 2 – LIABILITIES

FORMULAS: PROFORMA ENTRIES:

Cash paid x Cash collected x GIFT CERTIFICATES

Prepaid expense, beg x Unearned income, beg x Income method Liability Method
Accrued expense, end x Accrued income, end x To record issuance
Prepaid expense, end (x) Unearned income, end (x) Cash Cash
Accrued expense, beg (x) Accrued income, beg (x) Gift Certficate Payable Sales
EXPENSE x INCOME x To record redemption
Gift Certificate Payable
NO ENTRY
Sales
Advances from Gift Certificate Payable, beg x To record year-end adjustments
customers, beg x Gift Cert. Payable Sales
Cash receipts GC Issued during the period x Gift Cert. Forfeited Gift Cert. Payable
during the period x Gift Cert. Forfeited
Advances earned (x) GC Redeemed (x)
Cancelled (x) GC Forfeited (x) BONUS
ADVANCES FROM GIFT CERTIFICATE If paid: If unpaid:
CUSTOMERS, END x PAYABLE, END x Bonus Bonus
Cash Bonus Payable

BONUS (EXAMPLE ONLY) PREMIUMS

Given: NIBBBT = $ 5,000,000 Asset method Expense Method
Bonus = 5% of Net Income Income tax rate = 30% To record purchase of premiums
NIBBBT ( Net Income Before NIBBAT (Net Income Before Premiums Inventory Premium Expense
Bonus Before Tax) Bonus After Tax) Cash/AP Cash
B = 5% x 5,000,000 B = 5% (5,000,000 – T) To record redemption of proof of purchase
= 250,0000 B = 5% [5,000,000 – 30% Premiums Expense Premiums Expense
(5,000,000 – B)] Cash Cash
T = 30% (5,000,000 – 250,000) T = 30% (5,000,000 – B) distribution cost distribution cost
NIABBT (Net Income after Bonus NIABAT (Net Income after Bonus Cash Cash
before Tax) after Tax) Premium Expense Premium Expense
B = 5% (5,000,000 – B) B = 5%[5,000,000 – B – 30% Premium inventory cash remittance
(5,000,000 – B)] To record year-end adjustments
T = 30% (5,000,000 –B) T = 30% (5,000,000 –B) Premium Expense Sales
Premium Payable Gift Cert. Payable
FOR CHECKING: Gift Cert. Forfeited
NIBBAT NIABBT NIABAT
NIBBBT NIBBBT NIBBBT WARRANTIES
Less: Tax Less: Bonus Less: Bonus Warranties expense Warranties payable
NIBBAT NIABBT Tax Warranties payable Cash
Multiply by Multiply by Multiply by To record adjustment of estimate
Bonus rate Bonus rate Bonus rate Actual > Estimate Actual < Estimate
BONUS BONUS BONUS Warranties expense Warranties payable
Warranties payable Warranties expense
Warranties Payable, beg
Warranties during the period
Actual expenditure
WARRANTIES PAYABLE, END

Chapter 1 – Current Liabilities, Provision and Contingencies