MODULE 1
cycle determines the classification of the liability
OVERVIEW OF LIABILITIES
Lesson 1. Conceptual Overview of Liabilities
(Bazley, Nikolai, & Jones, 2010)
As defined in the Revised Conceptual Framework for
Financial Reporting, liabilities
are “present obligations of an entity to transfer an
economic resource as a result of past
events.”
The definition of liabilities involves three
characteristics, namely:
1. A liability involves a responsibility that will be settled
by the
probable future transfer or use of assets at a specified
determinable date, or the occurrence of a specific event
or on
demand.
2. The responsibility obligates the company so that it has
little or
no discretion to avoid the future sacrifice.
3. The transaction or event obligating the company has
already
happened.
There are two additional factors involving a liability.
First, the company does not need
to know the identity of the recipient before the time of
settlement. Secondly, a legally
enforceable claim is not a prerequisite for an obligation
to qualify as a liability, as in the case
of refinancing agreements and liabilities liquidated thru
conversion into ordinary or preferred shares.
We notice that the definition of liabilities involves the
present, the future and the past.
It is a present responsibility to sacrifice assets in the
future because of a transaction or other
events that has already happened.
Special accounting treatment for contingencies,
however, is necessary to distinguish it from the common
liabilities because of its uncertainty as to whether the
obligation really exists. Discussion of contingencies will
be taken in the succeeding modules.
Lesson 2. Nature and Definition of Current
Liabilities
Liabilities are generally classified as either current or
long-term (non-current)
liabilities.
Current liabilities are obligations of the company that it
expects to liquidate by using
existing current assets or creating other current liabilities
within one year or the normal
operating cycle whichever is longer. The usual criterion
is one year. However, for certain
companies, where the operating cycle – from cash to
inventory to receivables and back to
cash- is longer than a year, the length of the operating
(Bazley, et. al. 2010).
Philippine Accounting Standards (PAS) 1, paragraph
69, provides that an entity shall
classify a liability as current when:
1. The entity expects to settle the liability within the
operating cycle
2. The entity holds the liability primarily for the purpose
of trading.
3. The liability is due to be settled within twelve months
after the reporting period.
4. The entity does not have an unconditional right to
defer settlement of the liability
for at least twelve months after the reporting period.
Liabilities that are settled as part of the company’s
normal operating cycle (e.g., trade
payables and some accruals for employee and other
operating costs) are presented as
current even if they are expected to be settled beyond
twelve months after the reporting
period (Millan, 2019).
Financial liabilities held for trading are those that are
incurred with an intention to
repurchase them in the near future.
Lesson 3. Classification of Current Liabilities
(Bazley, et. al. 2010)
The first section of liabilities in the statement of
financial position shows the current
classification of liabilities. We may classify the primary
types of current liabilities into three
groups. Many current liabilities are easily identifiable
and have contractual amount. Some
current liabilities, though identifiable, have amounts that
depends on operations. Others require that amounts must
be estimated.
Current liabilities having a contractual amount
The short-term liabilities in this group result from the
terms or from the existence of
laws.
Examples of this type of current liabilities are:
1. Trade accounts payable
2. Notes payable
3. Currently maturing portion of long-term debt
4. Dividends payable
5. Accrued items
6. Unearned items
7. Bank overdrafts
8. Income taxes payable
9. Advances and refundable deposits
Current liabilities whose amounts depend on operations
Several current liabilities and their amounts pertains to
operations. Included are
liabilities which relate to sales taxes, payrolls, corporate
income taxes and bonus agreements.
Companies are required by law to withhold from the pay
of each employee an amount
for anticipated income tax payments, social security
contributions and other payables to third
parties like union dues and group insurance premiums.
Since a company must pay these
taxes and voluntary withholdings within a few months, it
classifies them as current liabilities.
Current liabilities requiring amounts to be estimated
A number of liabilities have amounts that a company
must estimate as of the balance
sheet date. Unlike other liabilities, provisions must
necessarily be estimated. Although some
other liabilities are also estimated, their uncertainty is
generally much less compared to
provisions.
Examples of this type of current liabilities are premiums,
warranties, gift
certificates, award points and bonuses.
Lesson 4. Other Liability Classification Issues
(Millan, 2010)
An additional two liability classification issues are
discussed, in this lesson, long-term
debt falling due within one year and obligations payable
on demand.
Long-term debt falling due within one year
A long-term debt that is maturing within twelve months
after the reporting period is
classified as current, even if a refinancing agreement to
reschedule payment on a long-term
basis is completed after the reporting period but before
the financial statements are authorized
for issue.
However, the obligation is classified as non-current
under the following circumstances:
a. Refinancing on a long-term basis was completed on or
before the end of the
reporting period
b. The entity has the discretion to refinance or roll over
an obligation for at least
twelve months after the reporting period under an
existing loan facility.
Obligations payable on demand
As we noted earlier, generally the company reports the
currently maturing portion of
its long-term debt as a current liability. Also, a company
must report the entire amount of a long-term obligation
as a current liability if the company is in violation of a
long-term agreement (covenants) at the balance sheet
date, and the violation makes the liability callable by the
creditor within one year or the operating cycle, if longer,
from the balance sheet date.
This also includes situations in which debt is not yet
callable but will be callable within
the year if an existing violation is not corrected within a
specified grace period.
Lesson 5. Financial Statement Presentation of
Current Liabilities (Bazley, et. al. 2010)
The guidelines on financial statement suggest that a
company should arrange its current
liabilities in a way that will highlight their liquidity
characteristics and their effect on its financial
flexibility. Most companies report their current liabilities
at the top of its Liabilities section.
Items within the current liability section may be listed
(1)in the order of their average length of
maturity, (2) according to amount (largest to smallest),
or (3) in the order of liquidation
preference- that is, in the order of their legal claims
against the assets.
As a minimum requirement, the face of the statement
of financial position shall include
the following line item for current liabilities,
according to PAS 1, paragraph 54:
a. Trade and other payables
b. Current provisions
c. Short-term borrowings
d. Current portion of a long-term debt
e. Current tax liability
A company includes any major issue affecting its current
liabilities in a notes to its financial statements. This
presentation is made so that the notes and other
supplemental information about current liabilities meet
the requirement of full disclosure.
Lesson 6. Measurement of Current Liabilities
(Bazley, et. al. 2010)
Conceptually, liabilities should record and report on its
statement of financial position
at the present value of the future payments they will
require. In practice, however, most
Current liabilities are measured, recorded, and reported
at their maturity or face amount. The difference between
the maturity amount and the present value of the
maturity amount is usually not material because of the
short time period involved (usually one year or less.
Although a slight overstatement of liabilities result from
reporting current liabilities at their maturity amounts,
this overstatement is justified on the basis of cost/benefit
and materiality constraints.
MODULE 2
PROVISIONS, CONTINGENT
LIABILITIES AND CONTINGENT
ASSETS
Lesson 1. Premium Liability/Obligation
Many companies offer premiums such as novelty items,
like mugs, small appliances, hand towels and the like to
promote their products and encourage sales. Other
companies
offer cash rebates and loyalty points for redemption.
All of these offers are intended to increase the
company’s sales. Matching principle dictates that the
company matches the related costs as expenses against
revenues in the period of sale. Also, at the end of the
accounting period, the company reports any outstanding
offers that it expects to be redeemed or claimed within
next year or operating cycle, if longer, as a current
liability(Bazley et. al. 2010).
Accounting procedures for the acquisition of premiums
and recognition of premium liability
are as follows (Valix, Peralta & Valix, 2019):
1. Premiums are purchased
Premiums xx
Cash (or Accounts Payable) xx
2. Redemption from the customers and distribution of
premiums
Premiums Expense xx
Premiums (or Inventory of Premiums) xx
3. End of year recording of estimated liability for
outstanding premiums
Premiums expense xx
Estimated premium liability or xx
(Estimated premium claims outstanding)
Example : Premium Liability
Assume that on October 1, 2020, Melany Foods
Corporation began offering to customers a dish towel in
return for 3 can labels. The cost of each premium dish
towel is P20.00. Based on past experience, the company
estimates that only 60% of the labels will be redeemed.
During 2020, the company purchased 60,000 dish
towels. In 2020, the company sold 30,000 cans of its
product, at P180.00 per can. From these sales, 10,500
can labels were returned for redemption in 2020. The
company records the following entries in 2020 to match
expenses against revenues and to record its current
liabilities:
1. Purchase of 60,000 dish towels
Premiums 1,200,000
Cash 1,200,000
2. Sale of 30,000 cans at P180.00
Cash (or Accounts Receivable) 5,400,000
Sales 5,400,000
3. Redemption of 10,500 can labels
Premiums Expense 70,000
Premiums 70,000
4. End-of-year recording of estimated liability for
outstanding premium offers
Premiums expense 50,000
Estimated premium liability 50,000
The company computes the year-end adjustment to
premium expense as follows:
Total cans sold in 2020 30,000
Multiply by estimated percentage of redemption 60%
Total labels estimated for redemption 18,000
Less: Labels redeemed during 2020 10,500
Estimated number of labels for future redemption 7,500
Premiums expense for estimated future redemptions
[(7,500 ÷ 3) x P20] P50,000
The company reports Premium Expense as a selling
expense on its 2020 income statement. Premiums shall
be shown as a current asset and the estimated premium
liability as a current liability on its December 31, 2020
balance sheet.
Notice that premiums expense was computed based on
the gross purchase cost of the premiums. In case the
company will recover a portion of the purchase cost by
requiring cash payment from the redeeming customers,
then premium expense will be recorded at the net cost
that is, deducting the cash payment from the customers
from the total purchase cost.
In addition, it is important to note that premium expense
is unaffected by the actual premium
distribution, since it is recorded as a deduction from the
estimated liability for premium.
Moreover, premium expense for the year consists not
only for the actual redemption but also
of the future estimated liability for premium.
Lesson 2. Product warranties and guarantees
(Valix, et. al. 2019)
Another example of a provision is warranty liability.
Many companies, especially those selling consumer
goods makes promises in the form of free repair service,
replacement of defective products within a specified
period of time. These offers are often made by
companies to boost sales.
Applying the matching principle, then, any costs of
making good on such guarantees should be recorded as
expenses in the same accounting period the products are
sold. Also, it is in the period of sale that the company
becomes obligated to make good on a guarantee, so it is
just proper that it recognizes a liability in the period of
sale.
Accounting for warranty
There are two methods of accounting for warranty costs:
a. Accrual method
b. Expense as incurred method
 Accrual method
Under this method, a company recognizes the
estimated warranty expense and the
estimated warranty liability for future performance in the
period of sale. Accounting procedures for recording
warranty costs and estimated warranty liability:
1. Record sales of the product
Cash (or Accounts Receivable) xx
Sales xx
2. Recognition of warranty expense for the period
Warranty Expense xx
 Estimated warranty liability xx
3. Payment of warranty costs
Estimated warranty liability xx
Cash (or other asset) xx
Example: Warranty Liability
Assume that Sebastian Appliances sells 100 units of
refrigerators at P24,000 each by the end of December
31, 2020. Each unit carries a warranty for one year.
Experience from the past has shown that warranty costs
will average P2,000 per unit or a total of P200,000. The
corporation spent P90,000 in 2020 and P115,000 in the
succeeding year, to fulfil the
warranty agreements for the 100 units sold in 2020. The
company records these transactions in a series of journal
entries as follows:
1. Sale of 100 units of refrigerators, 2020
Cash (or Accounts Receivable) 2,400,000
Sales 2,400,000
2. Recognition of warranty expense
Warranty Expense 200,000
Estimated warranty liability 200,000
3. Payment of warranty costs, 2020
Estimated warranty liability 90,000
Cash (or other assets) 90,000
4. Payment of warranty costs, 2021
Estimated warranty liability 110,000
Warranty expense 5,000
Cash (or other assets) 115,000
The company reports the Warranty expense as an
operating expense in its 2020 income statement, in the
amount of P205,000. In its 2020 statement of financial
position the amount of P110,000 (P200,000 accrued
minus P90,000 paid)will be shown as current liability.
If the warranty period covers a period of more than one
year, a portion of the estimated warranty liability shall
be reported as current liability and the remainder as
noncurrent liability.
In the preceding journal entry, year 2021, the actual
warranty costs are P5,000 more than what is estimated.
The entry debited Warranty expense for 2021 because it
resulted in a change in accounting estimate, which shall
be treated currently and prospectively, if necessary.
Expense as incurred approach (Valix, et. al. 2019)
Under the “expense as incurred approach”, the
company records the warranty costs as an expense in the
period when it actually makes the payments for repairs.
Since the company does not estimate and recognize the
warranty costs during the period of sale, it does not
record a liability for the future warranty costs. While this
method is conceptually unsound because it violates the
matching principle, it is justified for accounting
under three conditions:
1. From a cost/benefit standpoint, when the warranty
period is
relatively short,
2. When it is not possible for the company to make a
reliable estimate
of the warranty obligation at the time of sale, and
3. When its results are not materially different from the
accrual approach.
The actual warranty costs incurred is simply recorded by
debiting warranty expense and
crediting cash at the time it is incurred.
Lesson 3. Other provisions (Valix, et. al. 2019)
Provisions are defined as an existing liability of
uncertain timing or uncertain amount.
The liability does exist on balance sheet date but the
amount is indefinite or the date when the obligation is
due is indefinite, and in some cases, the payee cannot be
identified or determined. It is the equivalent of an
estimated liability or a loss contingency that is accrued
because it is both measurable and probable.
Recognition of provision
The following conditions must be met:
a. The enterprise has a present obligation, legal or
constructive, as a result of past event;
b. It is probable that an outflow of resources embodying
economic benefits will be required to settle the
obligation; and
c. The amount of obligation can be measured reliably.
Measurement of the provision
Provisions are measured at the best estimate of the
expenditure required to settle the present obligation at
the end of the reporting period. The best estimate refers
to the amount that the entity would rationally pay to
settle the obligation at the end of reporting period or to
transfer it to a third party at that date.
When the provision consists of a single obligation, the
best estimate is normally the most likely outcome. When
the provision involves a large population of items, the
best estimate is by weighing of all possible outcomes by
their respective probabilities. Midpoint of the range is
used when there is a continuous range of possible
outcomes and each point in the range is as likely as any
other.
Examples of provisions
1. Warranties
2. Environmental contamination
3. Decommissioning or abandonment costs
4. Court case
5. Guarantees
Reimbursements (Millan, 2019)
Where some or all of the expenditure required to
settle a provision is expected to be reimbursed by
another party, the reimbursement shall be recognized
when, and only when, it
is virtually certain that reimbursement will be received
when the entity settles the obligation.
The reimbursement shall be treated as a separate asset
and not be offset with the
provision. The amount recognized for the reimbursement
shall not exceed the amount of
provision. However, in the statement of comprehensive
income, the expense relating to the
provision may be presented net of the amount
recognized for a reimbursement.
Lesson 4. Contingencies
Contingency is defined as “an existing condition, or a set
of circumstances involving uncertainty as to a possible
gain (a “gain contingency”) or loss (a “loss
contingency”) that will be resolved when a future event
occurs or fails to occur (Bazley, et. al. 2010).
Contingent liability and contingent asset defined
Contingent liability is a possible obligation that arises
from past event and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of
the entity. It is a present obligation that arises from past
event but is not recognized because it is not probable
that an outflow of resources of economic benefits will be
required to settle the obligation or the amount of the
obligat ion
cannot be measured reliably (Valix, et. al. 2019).
On the other hand, a contingent asset is a possible asset
that arises from past event and whose existence will be
confirmed only by the occurrence or non-occurrence of
one or more uncertain future events not wholly within
the control of the entity (Valix, et. al. 2019).
Degrees of probability
PAS 37 recognizes four degrees of probability for
contingencies but it gives no guidance to the meaning of
the terms. One interpretation could be:
Virtually -certain probability above 95%
Probable -probability above 50% and up to 95%
Possible -probability of 5% up to 50%
Remote -probability below 5%
Accounting for contingent liabilities and contingent
assets
Differentiate provisions from contingent liability
(Millan, 2019)
A provision is a liability of an uncertain timing or
uncertain amount that meets all of
the following conditions: present obligation, probable
outflow of economic resources and can
be reliably estimated.
A contingent liability, on the other hand, is only a
possible obligation whose existence will be confirmed
only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of
an entity; or a present obligation but it is not probable
that it will cause an economic outflow in its settlement
and its amount cannot be reliably estimated.
MODULE 3
BONDS PAYABLE AND OTHER
CONCEPTS
Contingent Contingent
Liabilities Assets
Virtually certain Provide Recognize
Probable Provide Disclose by note
Possible Disclose Disclose by note No disclosure
Remote No disclosure No disclosure
Lesson 1. Reasons for issuance of Long-term
Liabilities (Bazley, et. al. 2010)
A company classifies an item as a long-term liability if it
is not to be repaid within one
year or the normal operating cycle, whichever is longer.
When additional funds are needed
by the entity to finance its operations, it may resort to
external sources to satisfy their needs.
There are four basic reasons why a company may resort
to debt financing rather than issuance of other type of
securities.
Debt financing offers the opportunity for leverage
Trading on equity or leverage refers to a company’s use
of borrowed funds. Earnings in excess of interest
charges increases earnings per share. However, if the
return on borrowed funds falls below the effective
interest rate, earnings per share will deteriorate rapidly.
The voting privilege is not shared
By issuing debt instruments, which does not provide
voting rights, ownership interests
are not diluted. Corporate shareholders maintain their
equity interests in the firm.
Debt financing offers an income tax advantage
Interest payments on outstanding debts are deductible as
interest expenses for income tax purposes while
dividend payments on shares issued and in the hands of
shareholders are not.
Debt financing may be the only available source of
financing As in the case of small- and medium sized
companies, some investors may find it too
risky to invest in equity or capital stock investments.
Debt securities issued by a company may appear less
risky because interest payment is required to be paid on
every interest payment date. In addition, some types of
debts are backed up or secured by a lien against some
company assets.
Lesson 2. Bonds Payable and Other concepts
(Bazley, et. al. 2010)
The most common form of corporate debt is by issuing
bonds. Since bonds are issued in specified
denominations, say P1,000 or P5,000 bonds, it breaks
down a large obligation into manageable parts. There are
several key terms about bonds:
Bond - a type of note in which a company agrees to pay
the holder the face value at maturity date and pay
interest periodically at a specified
rate on the face value
Face value – or par value is the amount of money that
the issuer agrees to pay at maturity
Maturity date - the date on which the issuer of the
bond agrees to pay the face value to the holder
Contract rate - also called stated rate, or nominal rate is
the rate at which the issuer of the bond agrees to pay
interest each period until maturity
Bond certificate – a legal document that specifies the
face value, the annual interest rate, the maturity date and
other characteristics of the bond issue
Bond indenture – is a document (contract) that defines
the rights of the bondholders
Lesson 3. Recording the Issuance of Bonds
(Bazley, et. al. 2010)
Three alternatives are possible for a company selling
bonds:
a. Bonds sold at par – the yield (effective rate) is equal
to the contract rate, buyer of the bonds pay the face
value of the bonds
b. Bonds sold at a discount – yield is more than the
contract rate, buyer of the bonds pay less than the face
value of the bonds
c. Bonds sold at a premium – yield is less than the
contract rate, buyer of the bonds pay more than the face
value of the bonds
When the bonds has an effective rate either
lower or higher than the contract rate, the interest
expense recorded by the issuer each period is different
from the interest paid. When bonds are sold at a
premium, the interest expense is less than the interest
paid. When the bonds are sold at a discount, the interest
expense is more than the interest paid. The difference
between the interest expense and the interest payment is
the discount or premium amortization.
The company records the face value of bonds issued thru
a Bonds Payable account, and it records any premium or
discount in a separate account titled Discount on Bonds
Payable or Premium on Bonds Payable. To illustrate,
assume the company sells bonds with
a face value of P5,000,000 at 102. It records the sales as
follows:
Cash (P5,000,000 x 1.02) 5,100,000
Bonds Payable 5,000,000
Premium on Bonds Payable 100,000
Premium on Bonds Payable is an adjunct account and is
added to the Bonds Payable
account, whereas the Discount on Bonds Payable is a
contra account and is subtracted from
the Bonds Payable account. The book value or carrying
value of the bond issue at any time
is the face value of the bonds plus any unamortized
premium or minus any unamortized discount. Thus, in
the example given, the book value on the issue date is
P5,100,000.
Bonds are often sold after their authorization date and
between interest payment dates. In such instances, the
company must pay interest only for the period of time
the bonds are outstanding. The company also will collect
from the investors both the selling price and the interest
accrued on the bonds from the interest payment date
prior to the date of sale. This procedure reduces the
record keeping for the interest payment. This interest
amount collected is credited to Interest Expense and is
computed by multiplying the face value by the stated
interest rate for the fraction of the year from the interest
payment date prior to the date of sale.
Lesson 4. Initial and Subsequent Measurement
of Bonds Payable (Valix, et. al. 2019).
PFRS 9, paragraph 5.1.1 provides that bonds payable not
designated at fair value through profit or loss shall be
measured initially at fair value minus transaction costs
that are directly attributable to the issue of bonds
payable.
Bond issue costs shall be deducted from the fair value or
issue price of bonds in measuring initially the bonds
payable, except that if the bonds are designated and are
accounted for at fair value through profit or loss, the
bond issue costs are treated as expense immediately.
After initial recognition, bonds payable shall be
measured either at amortized cost using the effective
interest method or at fair value through profit or loss.
Lesson 5. Amortizing Discounts and Premiums
When a company pays the interest on the bonds, this
payment is based on the stated rate. However, to
properly report the interest cost on the bonds, the Interest
Expense on the income statement must show an amount
based on the effective interest rate and the book value of
the bonds. There are three approaches in amortizing
bond discount or bond premium, namely; straight line,
bonds outstanding and the effective interest method
(Bazley, et. al. 2010).
PFRS 9 requires the use of the effective interest method
in amortizing discount, premium and bond issue costs
(Valix, e.t al. 2019).
Straight line Method
When using the straight line method, the
discount or premium is amortized to interest
expense in equal amounts each period during the life of
the bonds(Bazley, et. al. 2010).The
periodic amortization is computed by simply dividing
the amount of bond premium or bond
discount by the life of the bonds. Life of the bonds is the
period commencing on the date of
sale up to maturity date (Valix, et. al. 2019).
Bonds outstanding Method
This method of amortization is applicable to serial bonds
whether issued at a discount or premium. Serial bonds
are those with a series of maturity dates. Bond discount
or bond premium amortization is computed by
multiplying the amount of the premium or the discount
by fractions developed from the diminishing balance of
the bonds (Valix, et. al. 2019).
Effective Interest Method
Under the effective interest method, the effective interest
expense is determined by multiplying the effective rate
by the carrying amount of the bonds. The carrying
amount of the bonds changes every year as the amount
of premium or discount is amortized periodically.
The effective interest is then compared with the nominal
interest and the difference is the
premium or discount amortization (Valix, et. al. 2019).
Lesson 6. Compound Financial instruments
A company may issue bonds that allow creditors to
ultimately become stockholders by attaching share
warrants to the bonds or including a conversion feature
in the bond indenture (Bazley, et. al. 2010). A compound
financial instrument is a financial instrument that, from
the issuer’s perspective, contains both a liability and an
equity component. These components are treated
separately. In other words, one component of the
financial instrument meets the definition of a financial
liability and another component meets the definition of
an equity instrument (Valix, et. al. 2019)
PAS 32, paragraph 11, defines a financial instrument as
any contract that gives rise
to both a financial asset of one entity and a financial
liability or equity instrument of another
entity.
Bonds issued with detachable share warrants
(Bazley, et. al. 2010)
When a company issues with detachable share warrants,
these warrants represent rights that enable the security
holder to acquire a specified number of ordinary shares
at a given price within a certain time period. This
issuance requires splitting the proceeds from issue in
accordance with the new standards, that on initial
recognition, the equity component (warrants) represents
the residual amount of the fair value (proceeds) of the
instruments as a whole after deducting the amount
separately determined for the liability (bonds).
The bonds are assigned an amount equal to the “market
value of the bonds without warrants “, regardless of the
market value of the warrants. The residual amount or the
remainder of the issue price shall then be allocated to the
warrants.
Convertible bonds (Valix, et. al. 2019)
The issuance of convertible bonds shall be accounted for
as partly liability and partly
equity. Therefore, the issue price of the convertible
bonds shall be allocated between the
bonds payable and the conversion privilege. The bonds
are assigned an amount equal to
the market value of the bonds without the conversion
privilege. The residual amount or remainder of the issue
price shall then be allocated to the conversion privilege
or equity component.
In the absence of market value of the bonds without
conversion privilege, the amount allocated to the bonds
is equal to the present value of the principal bond
liability plus the present value of future interest
payments using the effective or market interest rate for
similar bonds without conversion privilege.
Conversion of bonds
The amortized cost/carrying value of the debt, which is
equal to the face value of the instrument less any
unamortized bond issue costs and unamortized bond
discount or plus any unamortized bond premium
derecognized as a liability will be recognized as an
equity. The
equity component at the time of issue remains in equity,
although it may be transferred from
one line item within equity to another. No gain or loss is
recognized from the initial recognition
of the components of the instrument.
Lesson 7.Derecognition of a financial liability
(Millan, 2019)
A financial liability is derecognized when it is
extinguished, that is, when the obligation
is discharged or cancelled or expires. Derecognition also
calls for the removal of a previously recognized asset or
liability from the entity’s statement of financial position.
It can be done through various methods, namely:
a. Repayment in cash
b. Transfer of non-cash assets or rendering of services
c. Issuance of equity securities
d. Replacement of existing obligation with a new
obligation
e. Waiver or cancellation of the creditor
f. Expiration of period, such as in the case of warranties
(Millan, 2019 Edition)
Lesson 8. Financial Statement Presentation of
Long-term Liabilities
Discount on bonds payable and premium on bonds
payable are reported as adjustments to the bond liability
account.
The discount on bonds payable is a deduction from the
bonds payable and the premium on bonds payable is and
addition to the bonds payable account.
The treatment is on the theory that the discount
represents an amount that the issuer cannot borrow
because of interest differences, and the premium
represents an amount in excess of face amount that the
issuer is able to borrow.
The discount on bonds payable and the premium on
bonds payable shall not be considered separate from the
bonds payable account. Both accounts shall be treated
consistently as valuation accounts of the bond liability.
Notice the following presentation in the statement of
financial position.
Noncurrent liabilities
Bonds payable xx
Discount on bonds payable (xx) xx
And
Noncurrent liabilities
Bonds payable xx
Premium on bonds payable xx xx

MICAH MAE G. MARQUEZ

BSAIS 2A
MODULES 1-3 PRELIM
ACCTG 4
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