Republic of the Philippines

President Ramon Magsaysay State University

College of Accountancy and Business Administration
(Formerly Ramon Magsaysay Technological) University
Iba, Zambales, Philippines
Tel/Fax No.: (047)-1683
811

College/Department College of Accountancy and Business Administration

Course Code AE 16

Course Title Intermediate Accounting II

Place of the Course in the Program Major subject

Semester & Academic Year First Semester AY 2020-2021

Introduction
This module covers the financial accounting standards relative to the recognition, measurement and
presentation of liabilities in the financial statements.

Intended Learning Outcomes

After learning this chapter, the students should be able to:
1. State the recognition criteria for liabilities
2. Classify liabilities as current and noncurrent
3. Know the measurement of current and noncurrent liabilities

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 LIABILITIES

Liabilities – are present obligations of an entity arising from past transactions or events, the settlement of
which is expected to result in an outflow from the entity of resources embodying economic benefits.

Essential characteristics:

1. As the present obligation of a particular entity (must be identified but the payee is not
necessarily be identified)
May be: Legal obligation- (legally enforceable) consequence of binding contract or
statutory requirement
Constructive obligation- normal business practice, custom and a desire to
maintain good business relations or act in an equitable manner
2. Arises from a past event (liability is not recognized until it is incurred)
3. Settlement of liability requires an outflow of resources embodying economic benefits Ex:
Payment of money, transfer of noncash asset, performance of service, etc.
• Cash dividend declaration is a crystallization of the definitive concept of an accounting
liability
• Share dividend payable is classified as part of equity rather than an accounting liability

Examples of Liabilities:

1. Accounts payable to suppliers for the purchase of goods

2. Amounts withheld from employees for taxes and for contributions to the social security system
3. Accruals of wages, interest, royalties, taxes, product warranties and profit-sharing plans
4. Cash dividends declared but not paid
5. Deposits from customers and advances from officers
6. Debt obligations for borrowed funds – notes, mortgages and bonds payable
7. Income tax revenue
8. Unearned revenue (payment is already collected but service not yet rendered)

Measurement of current liabilities:

Conceptually, all liabilities are initially measured at present value and subsequently measured at
amortized cost.

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 In practice, current liabilities or short-term obligations are not discounted anymore but measured,
recorded and reported at their face amount. It is because the discount or the difference between
the face amount and the present value is usually not material and therefore ignored.

Measurement of noncurrent liabilities:

Non-current liabilities (ex. bonds payable and noninterest-bearing note payable) are initially
measured at present value and subsequently measured at amortized cost.
If the long term note payable is interest-bearing, it is initially and subsequently measured at face
amount. In this case, the face amount is equal to the present value of the note payable.

Current Liabilities

• Settles the liability within the entity’s operating cycle

• Holds liability for the purpose of trading (financial liabilities held for trading, bank overdraft,
dividends payable, income taxes, other nontrade payables and current portion of noncurrent
financial liabilities)
• Due to be settled within 12 months after the reporting period
• Does not have right to defer settlement of the liability for at least 12 months after the
reporting period

Operating costs that are part of working capital used in the entity’s normal operating cycle are
classified as current liabilities even if settled more than 12 months after reporting period.

When the entity’s normal operating cycle is not identified, it is assumed as 12 months.

Other current liabilities are not settled as part of the normal operating cycle but are due for settlement
within twelve months after the reporting period or held primarily for the purpose of trading. Examples of
such current liabilities are financial liabilities held for trading, bank overdraft, dividends payable, income
taxes, other nontrade payables and current portion of noncurrent financial liabilities.

Financial liabilities held for trading are financial liabilities that are incurred with an intention to repurchase
them in the near term. (ex. Quoted debt instrument)

Noncurrent Liabilities

- A residual definition

Examples: noncurrent portion of long-term debt, finance lease liability, deferred tax liability, long-term
obligation to entity officers, long-term deferred revenue

Long-term debt falling due within one year

A liability which is due to be settled within twelve months after the reporting period is classified as
current, even if:

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 • The original term was for a period longer than twelve months
• An 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

However, if the refinancing on a long-term basis is completed on/or before the end of the
reporting period, the refinancing is an adjusting event and therefore the obligation is
classified as noncurrent, also if the entity has the discretion to refinance, etc.
Covenants
- attached to borrowing agreements which represent undertakings by the borrower -
restrictions on the borrower as to undertake further borrowings, etc.

Breach of covenants – if conditions relating to the borrower’s financial situation are breached, the
liability becomes payable on demand.

It is classified as current even if the lender has agreed, after the reporting period and before the
statements are authorized for issue, not to demand payments as a consequence of the breach.

It is 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.

Classified as noncurrent if the lender has agreed on or before the end of the reporting period to
provide a grace period ending at least 12 months after that date

Grace period – a period within which the entity can rectify the breach and during which the lender cannot
demand immediate repayment

Presentation of Current liabilities:

The face of the statement of financial positional shall include the following line items for current liabilities

1. Trade and other payables (lie item for accounts payable, notes payable, accrued interest on note
payable, dividends payable and accrued expenses. Though, no objection can be raised if the
trade accounts and notes payable are separately presented)
2. Current provisions
3. Short-term borrowing
4. Current portion of long-term debt
5. Current tax liability

Estimated liabilities

- Obligations which exist at the end of reporting period although their amount is not definite, also
the due date and the exact payee, but the existence of the estimated liabilities is valid and
unquestioned.
- Either classified as current or noncurrent

Ex. Estimated liability for premium, award points, warranties, gift certificates and bonus

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Deferred Revenue

- Deferred revenue or unearned revenue is income already received but not yet earned.
- If the deferred revenue is realizable within one year, it is current liability
- Realizable in more than one year, classified as noncurrent liability

Gift certificates payable

1. When the gift certificates are sold:
Cash xx
Gift certificates payable xx
2. When the gift certificates are redeemed Gift certificates payable xx
Sales xx
3. When the gift certificates expire or when gift certificates are not redeemed
Gift certificates payable xx
Forfeited gift certificates xx

ILLUSTRATION:

John Department Store sells gift certificates redeemable only when merchandise is purchased. These gift
certificates have no expiration date. Upon redemption or expiration, the entity recognizes the unearned
revenue as realized.
The entity provided the following information for the current year:

Unearned revenue, January 1 650,000

Gift certificates sold 2,250,000 Gift
certificates redeemed 1,950,000
Gift certificates expected not to be redeemed 100,000
Cost of goods sold 60%
Compute for unearned revenue for December 31.
Solution:

Unearned Revenue
Redeemed, gift certificates xx Unearned Revenue, beg xx
Gift certificates expected not to be redeemed xx Sold, gift certificates xx
Unearned Revenue, end xx

Bonus Computation

Case 1 – Bonus is expressed as a certain percent of income before bonus and before tax B=
Income x Bonus rate

Case 2 – Bonus is expressed as a certain percent of income after bonus but before tax
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B= Bonus rate(Income-B)

Case 3 - Bonus is expressed as a certain percent of income after bonus and after tax
B= Bonus rate(Income-B-T)

Case 4 - Bonus is expressed as a certain percent of income after tax but before bonus
B=Bonus rate (Income-T)
Refundable deposits

- Consist of cash or property received from customers but which are refundable after compliance
with certain conditions
- Container’s deposit account is usually classified as current liability

ILLUSTRATION:

Win Company operates a retail grocery store that is required by law to collect refundable deposits of P5
on soda cans.
The entity provided the following information for the current year:
Liability for refundable deposit – January 1 150,000
Cans of soda sold 100,000
Soda cans returned 110,000

During the current year, the entity leased space and received a P25,000 deposit to be applied against rent
at the expiration of the lease in 5 years. The lessor appropriately classified the lease as an operating
lease.
Compute for the current liability for deposit on December 31.
Solution:
Liability for refundable deposit – January 1 150,000
Deposits made (100,000 x 5) 500,000
Total 650,000
Deposits refunded (110,000 x 5) (550,000)
Balance – December 31 100,000

Suggested Readings
Intermediate Accounting Vol. 2 2020 Edition by Conrado T. Valix
Resource and Additional Resources
Intermediate Accounting Vol. 2 2020 Edition by Conrado T. Valix
Intermediate Accounting Vol. 2 2020 Edition by Zeus Millan

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ASSESSMENT: (Show your computation that supports your answer).

1. Eleysia Company recorded purchases at gross amount but decided to change to recording purchases
net of purchase discounts. Discounts available on purchases recorded from October 1, 2019 to
September 30, 2020 totaled P20, 000. Of this amount, P2,000 is still available in the accounts
payable. The balances in the accounts as of and for the year ended September 20, 2020 before
conversion are:
Purchases 1,000,000
Purchase discount taken 8,000
Accounts payable 300,000
What amount should be reported as accounts payable on September 30, 2020?
A. 282,000
B. 288,000 C. 292,000
D. 298,000

2. Lyle Company is preparing financial statements for the year ended December 31, 2019. Accounts
payable amounted to P360,000 before any necessary year-end adjustment related to the following:
• On December 31, 2019, Lyle has a P50,000 debit balance in accounts payable to Ross, a
supplier, resulting from a P50,000 advance payment for goods to be manufactured.
•Checks in the amount of P100,000 were written to vendors and recorded on December
20, 2019. The checks were mailed on January 5, 2020?
What amount should be recorded as accounts payable on December 31, 2019?
A. 210,000
B. 310,000 C. 410,000
D. 510,000

3. Fay Company pays outside salesperson fixed monthly salaries and commissions on sales. Sales
commissions are computed and paid on a monthly basis in the month following the month of sale,
and the fixed salaries are treated as advances against commissions. However, if the fixed salaries for
salespersons exceed their sales commissions earned for a month, such excess is not charged backed
to them. Pertinent data for the month of March for three salespersons are as follows: Salesperson
Fixed salary Net sales Commission
A 10,000 200,000 4%
B 14,000 400,000 6%
C 18,000 600,000 6%

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 What amount should be accrued for sales commissions on March 31?
A. 26,000
B. 28,000
C. 68,000
D. 70,000

4. Jasmine Company sells appliance service contracts agreeing to repair appliances for a two-year
period. The past experience is that, of the total amount spend for repairs on service contracts,40% is
incurred evenly during the first contract year and 60% evenly during the second contract year.
Receipts from service contract sales for 2019 and 2020 are 500,000 and 600,000, respectively.
Receipts from contracts are credited to unearned service contract revenue. All sales are made
evenly during the year. What amount should be reported as unearned service contract revenue on
December 31,2020?
A. 360,000
B. 470,000
C. 480,000
D. 630,000

5. Janelle Video sells one and two-year mail order subscriptions for video of the month business.
Subscription are collected in advance and credited to sales. An analysis of the recorded sales activity
revealed the following:
2018 2019
Sales 420,000 500,000
Cancellations 20,000 30,000
Subscription expiration:
2018 120,000
2019 155,000 130,000
2020 125,000 200,000
2020 140,000

On December 31, 2019, what is the unearned subscription revenue?

A. 340,000
B. 465,000
C. 470,000
D. 495,000
6. Merill Company offers three payment plans on its twelve-month contracts. Information on three
plans and the number of children enrolled in each plan for the September 1, 2019 to August 31,2020
contract year follows:
Initial payment per Monthly fee per Number of children
child child Plan
A 50,000 - 15
Plan B 20,000 3,000 12
Plan C 5,000 9

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The entity received P990,000 of initial payments on September 1 ,2019 and P324,000 of monthly fees
during the period September 1,2019 to December 31,2019. On December 31,2019, what amount should
be reported as deferred revenue?
A. 330,000
B. 438,000
C. 660,000
D. 990,000

7. Janine Company sells products in reusable containers. The customer is charged a deposit for each
container delivered and receives a refund for each container returned within two years after the year
of delivery. The entity accounts for the containers not returned within the time limit as being retired
by sale at the deposit amount. Information for 2019 is as follows:
Container deposits on December 31, 2018 from deliveries in:
2017 150,000
2018 430,000
2019 580,000
Deposit for container delivered in 2019 780,000
Deposit for containers returned in 2019 from deliveries in:
2017 90,000
2018 250,000
2019 286,000
2020 626,000

On December 31, 2019, what amount should be reported liability for deposits on returnable
containers?
A. 494,000
B. 584,000
C. 674,000
D. 734,000
8. Ashwood Company reported accounts payable on December 31, 2019 at P900,000 before any
necessary year-end adjustments relating to the following:
• Goods were in transit from a vendor to the Ashwood on December 31, 2019. The invoice cost
was in P50,000, and the goods were shipped FOB shipping point on December 29, 2019. The
goods were received on January 4, 2020.
• Goods shipped FOB shipping point on December 20, 2019 from a vendor to Ashwood were lost
in transit. The invoice cost was P25,000. On January 5, 2020, Ashwood filed a P25,000 claim
against the common carrier.
• Goods shipped FOB destination on December 21, 2p19 from a vendor to Ashwood were received
on January 6, 2020. The invoice cost was P15,000.
What amount should be reported as accounts payable on December 31, 2019?
A. 925,000
B. 940,000
C. 950,000

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 D. 975,000
9. After three profitable years, Clarisse company decided to offer a bonus to the branch manager of
25% of income over P2, 000,000 earned by the branch. The income for the branch was P3,500,000
before tax and before bonus for the current year. The bonus is computed on income in excess of
P2,000,000 after deducting the bonus but before deducting tax. What is the bonus for the current
year? a. 300,000
b. 375,000
c. 400,000
d. 700,000

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 Accounts payable 2,000 SSS contributions payable 6,000
Utilities payable 7,000 Cash dividends payable 4,000
Accrued interest expense 6,000 Property dividends payable 7,000
Advances from customers 1,000 Share dividends payable 3,000
Unearned rent 9,000 Lease liability 35,000
Warranty obligations 5,000 Bonds payable 120,000
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 deliver a variable Unearned interest on
number of own shares worth a fixed receivables 3,000
amount of cash 10,000

10. How much is the total financial liabilities to be disclosed in the notes?
A. 172,000 B. 185,000 C. 192,000
D. 225,000

11. Princess Company sells gift certificates redeemable only when merchandise is purchased. The
certificates have no expiration date. Upon redemption, the entity recognizes the unearned revenue
as realized. Data for 2019 are as follows:

Unearned revenue, January 1 1,500,000 Gift

certificates sold 5,000,000 Gift
certificates redeemed 4,000,000
Gift certificates expected not be redeemed 300,000
Cost of goods sold 60%
On December 31, 2019, what amount should be reported as unearned revenue? a.
2,500,000
b. 2,200,00
c. 1,000,000
d. 0

12. GL Department Store sells gift certificates, redeemable for store merchandise that expires one year
after their issuance. GL has the following information pertaining to its gift certificates sales and
redemptions:

Unearned at December 31, 2019 P 600,000

2020 sales 2,000,000
2020 redemptions of prior-year sales 200,000
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2020 redemptions of current-year sales 1,400,000

GL’s experience indicates that 10% of gift certificates sold will not be redeemed.
In its December 31, 2020 balance sheet, what amount should Gallery report as unearned revenue?
A. 400,000
B. 600,000
C. 800,000
D. 1,000,000

-end-

Prepared by:

Kathleen A. Ebuen, CPA

Instructor

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