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    Chapter 1 - Current Liabilities PDF

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    Maria Angelica

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    © All Rights Reserved
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    ai Cet iis 1 aor mse sat na Chapter 1 SOF EARNINGS FER SHARE. ns iets fovea. a Current Liabilities RETROSPECTIVE ADNSTMNT os 722 OM 7 Relat standards: LTE Eran an Sane PAS I Prenton of Financial Statements Convertible preference shares, 74 PAS32 Pa erence Pocaaton Convertible Bon. = 783 PERS 9: Fence iatrumonts Options, warrants and ther equivalents. “782 {CoMTACTS HAT MAY ESETLED INDROIUBY SHARES OR CASH 75 Presnravon ea LOS PERSIA ne ‘Mucrets PorenmA Many SARS Test fr dition : Cconmmceeny asuane sane PANTY PAD SHARES nnn (QUPTERIS: SUMMA on PROBLEMS, earning Octet State the recognition criteria for abilities 2 dently he drain of Branca ably 5. State the intl and subsequent measurements of financial and ‘onfinancil habits. (Classify abilities as current and noncuren Labi Lablity bs “a present obligation of the entity to transfer an ‘economic resource as 2 result of past event” naa me) ‘The definition of Hiabity has the following tree aspects =. Obligation by Transfer of n economic resource © ssent cbligatin ae a raul of pst evens ation [An obligation is “a duty or responsibilty that an entity has racial abity 1 avd.” Cayetano) An obligations eter: ‘. Lepl oblgetion ~ an obligation that routs fom 2 contract, legislation, or other operation of law; oF b. Constructize obgetion ~ an obligation that reslts from an ‘entity's actions (eg. past practice or published policies) that gl 2 Chapt create valid expecation on others thatthe entity will acept and discharge certain responsibil ‘An obligation is always owed to another party. However, Wis mot necessary thatthe identity of shat party is known, for ‘©ample an obligation for environmental damages may be owed tothesocety at large ‘One party's obligation normally corresponds to another arty right For example, a buyer's obligation to pay an sccounts payable of #100 normally corresponds 10 the sellers right 10 collect an acoounts receivable of P100, However, this accounting symmetry is not maintained at all times because the Stonderds| sometimes contain different zecogition and measurement ‘equirements forthe lisility of one party and the corespending | set of the other party. For example, direct origination cos result to different measurements of the lender’ loan receivable and the borrower's loan payable, Similarly, « seller may be required to recognize a warranty obligation but the buyer would ‘ot recognize a corresponding asset for that warranty There canbe instances where the existence of an obligation {s uncertain. Until that uncertainty is esolved (for example, by &| ‘court raling), itis uncertain whether a abilty exists “Transfer of an economie resource Te by ete igo tb palo male transfer of an economic resource to another party and future economic benefits that the obligation may cause to be transfered. Thus the obligations potential to cause a transfer of cconomic benefit nv not he cetsn or even likly, for example, the transfer may be required only if a specified uncertain fture event occurs. What is important is that the obligation already ‘its and that, in atleast ene cecumstane, it would require the entity to transfer an economic resource Consequently, libility can exist even ifthe probability of 4 transfer of an ecanomic resource is low, although that low probability affects decisions on whether the Uablity is to be tL ore titer 3 recognized, how it is measured, what information is to be provided about the liability, and how that information is provided. aap renew 49 'An obligation to wansfer an economic resource may be an obligation to: 1. pay eas, deliver goods, or render services 1. exchange assets ith another party on ayfoombl tems; (transfer assets specified uncertain future event cuts ot 4, issue a financial instrument that obliges the entity to transfer an economic resource, Present obligation asa result of past events “The obligation mast bea present obligation that exists as a result of past events. A present obligation ext a a result of past events Pa {the entity has already obtained economic benefits oe taken an | action; and fi b, as a consequence the entity will or may have to transfer an ‘economic resource that it would not otherwise have had t0 transfer nat mee) Examples ae Entity A intends to acquire goods inthe ature Anais Entity A has no present obligation. A present obligation arises only when Enty {has ley purchased an reseed he goods and Bi as a consequence, Enity A will have fo pay forthe purchase Price [Esty 8 pete noe pose pant Inte cen ye anew |code pope pol oe as [No similar law eiste in poe yeas. 4 copied Analysis ‘The enactment of legislations notin itself sufficient to result an entity's present obligation, except when the entity as aba ten en action conteary to the provision of that law; and consequence, the entity mil hme fp fra penalty Accordingly ~ Entity B has no present obligation if its existing method of waste disposal doesnot violate the new lave. Similar, Enity 'B has no present cbligation fit can avoid penalty by changing its future method of waste disposal, + On the other hand, Entity B has a present obligation i ts previous waste disposal has alealy used damages, and a 8 ‘consequence Entity B hs pay fr thove damages D | Entity C enters into an imevocable commitment with e Party to acquire goodsin the future, on cred asp 4 roecanceable fare commitment gives ise to a preset Chlgatin only when econ onerous (burdens) Sample ifthe goods become stole bear he delivery but Enty Ccamot ate the orc wit pyig subttal penalty. Unless becomes bunersome, no preent clgaton orally ces mv aftr comaianen [Although not stated in the sales contract, Entity D has a publicly kown policy of providing fine repair sercs for he gol [sibs Sian Sp {PCs ae Analyse Entity D has a present constructive obligation to provide fee ‘pair services for the goods it has already sold because: Core ies 5 4 Entty Das tly iter en ation by creating. valid cxpectatons on the ctor tha wl provide fe ep serine j 1b tee coronene, Enity D mil hme to prove thee fre sevice ny E obtained «len Bom a barks Repeyment of he om dein 10-year dine Anas Entity € has a present obligation because it hassle receoed the loon proceeds and asa consequence, ha mak the repayment even though the bank cannot enforce the repayment until a future date Entity F has caused environmental damages. Although, no law exists penalizing such act, Entity F believes it hasan obligation to rectify the damages. However, the identity ofthe party fo whom | the obligation is owed canoe be ani yh re bo bc tn aly ade devegesccat crema tc ape ove Sry of poy whom te slaon awed ste peal avon gia | [Ent Gepayed NJ et Entity G has no. present obligation until after Me. Juan ‘has rendered services. Before then the contracts executory~ Enity G thas a combined right and obligation to exchange future salary for Mr, Juan's future services. 6 hep Executory contracts ‘An exextory contact “sa contract that is equally unpeformed — neither party has fulfilled any of its obligations or both parties hhave partially fullled thoir cbligatons to an equal extent.” (Geom) ‘An executory contrac! establishes a combined right and. obligation to exchange ecnomic resources, which are ‘interdependent and inseparable. Thus, the two constitute a single ascet or ibility. Te entity has an ase if the terms ofthe contrat are fieorabie: a lability ifthe terms are unfrourtle, However, whether such an asset or lability is inchuded in the financial Statements depends on the recogrition criteria and the selected ‘measurement basis, inuding any aseessment of whether the contracts onerous The contract ceases to be executory when one party performs is obligation. IF the entity performs fits. the entity's ‘combined right and obligation changes to an asset. Ifthe other arty pesforms firs, the entity's combined right and obligation changes toil. Continuing the previous example ~ Entity G neither reagnlzes an asset nor a ibility upon ‘entering the employment contract with Mr. Juan because, at that point the contract exeatory = If Mr. Joan renders services, the contract ceases to be ‘xecutory, and Entity G's combined right and obligation changes to Hability ~an obligation to pay Mr. Juan’ salary (eg, salaries payable), ~ Ie Entity G pays Me. Juan's salary in advance, Entity G's ‘combined right and obligation changes to an asset —aeght 0 ceive the services or aright tobe reimbursed if the services are not recsved (eg, advances to employees) Core shi z Recognition criteria Anitem is recognized i 4 itmoes the definition of a Habit, and recognizing it would provide useful informatio, Le, relent and etl represented information, Both the criteria above must be met before an item is recognized. Accordingly, jtems that meet the definition of 3 lability bat do not provide useful information are not recognized, and vice versa. However, even if a liability ie not recognized, {information about it may stl need tobe dlscosed inthe notes. In such cases, the item is refered to a8 arecogmized lily. Relevance Recognition may not provide relevant information if fr example: 4 itisuncertain whether a ability exists; or a liaility exists, but the probability of an outflow of economic benefits is lov. (mat ame) Existence uncertainty or low probability ofan outflow of ‘economic benefits may result in but does not automatically lead to, the non-recogrition of a ibility. Other factors should be considered Faithfid representation A liability must be measured for it $9 be recognized. Often, measurement. requires estimation and thus subject to ‘measurement uncertainty. The use of reasonable estimates isan secential part of financial reporting nl dors not necessary ‘undermine the usefulness of information. Even a high level of ‘measurement uncertainty does wot necessarily preclude an ‘timate from providing useful information ifthe estimate Is sleasly and accurately described and explained. However, an ‘exceptionally high measurement uncertainty can affect he faithful representation of ably Financial and Non-financial abilities Financial iit ~is any ability tats A contractual obligation to deliver cash ot another financial ‘asset to another entity, b. A contractual obligation to exchange financial asts or financial liabilities with another enty under conditions that are potentially unfavorable to the ent ot © A contract that will or may be sted in the entity's own ‘equity instruments and is not classified asthe entity's own, equity instrament [Non financially isa Babi other than a fnancal ability xamples of financial abilities | Payables, such as accounts, note, Joans, bonds and accrued payables Lease abilities Hel for trading abilities ahd derivative Hinblties Reclemable preference shares ised, Security deposits and other returnable deposits ‘The following are not financial abilities 1 Uneamed revenues and warranty obligations that are to be settled though future delivery of goods or provision of Taxes, SSS, Phihealth and Pag IBIG payables © Constructive obligations Home () and (€) are mot nancial Habilitie because they {lo wot aie from contacts Commodity conrcts that cannot be settled net in cash or ‘other financial instrument but only through commodity exchange (eg. coffee beans, gold bullion, ol and the lie) are not financial Commodity contracs that can be settled net in cash or other financial instrument are fnancial instruments. Such ore sities 9 ‘commodity contract is 2 financial asset to the party to whom | ‘conditions are potentially favorable, and a franc lily tothe part to whom conditions are potentially unfavorable Presentation of financial instruments “The isuerclasiies «nancial instrument, oF its component parts 28 financial est, a financial liabiity or an equity instrument in ‘sccordance with te substance ofthe contract (ater than is legal form) and the definitions of a financial asset, «nancial Labi and an equity instrament > Equity instrument is "any contract that evidences residual Interest in the assets of an entity after deducting all of is liabilities" rass239) “This definition reflects the basic accounting equation Assets ~Lalities = Equity.” When determining whether 2 financial instrument is 3 financial liability or an equity instrument, the overriding ‘consideration i whether the instrament meets the definition ofa Financial ibility. Eu instrament The entity asa contractual |> The ent has no obignion| obligation to pay cash or | to pay ashor another another financial asset orto | nancial asset orto exchange financial ‘exchange financial Instruments under instruments under (potsnaiyuntarerabia potently unfevoreble ‘condition condition ‘contracts mot an equity instrument merely because itis tobe sett in the entity's own equity instruments. The following guidance applies when a contract requires settlement in the ‘enttys own equity instruments: 10 chapters Financial ability guy astrament The contact requires the elvery* of) a variable umber ofthe ents own, uty instruments in ‘exchange fora fixed amount ‘of cash or anather financial asset or() aie numberof the entity own equlty Inatraments in exchange fr a ‘variable amount of Brample 2) Var amber fra fixed pont to deliver as many shares a ar equal to the Value ofa fed amount feat, sy P1000: os fed numberof uit of commodity, ay 50 ame ofgold 1) aed number fora sarihle anoint = acontrac to deliver 1,000 ‘vn equity instruments in fexchange for an amount of ‘ach equal tothe value of 10 grams of pod > Tienes ‘airy pe ene oto Say tae sooner seit bare fea » ale apa tat gerber aight preendpecriy Sehnert vo ore iiti u [An essenal feature ofan uty instrament is the absence cof a contractual obligation t pay cash or another Financial asset ‘This is true even ifthe holder ofthe instrument i entitle to pro ‘a share in dividends r ofthe nt assets ofthe entity in cast of liquidation, Legal form is slo ierslevant when determining if a financial instrument is fancial lisbity oF an equity instrument Some instruments are inthe form of shares of stocks but the fsuer| ‘lasifis them as financial lailies iF they meet the definition of ‘fnanesl ily. “Redeemable preference shares_| _Callable preference shares are prefered stodks which | are prefered rocks which (he holder haste right 0 ‘the sera the ight tall redeem a st date ata set date = are cdasied as financial | - Tiailty because wen he holder everisesits right to | toll satthe disereton of redeem, the fesuer i ‘he issuer and thereon has ‘mandatory obligated to pay | no obligation to pay unless it forthe redemption price Vanable umber 3 > Ped nite for arial Acct (i an rs alan [ayes > Fd amber ard IFRIC2 Members’ Shares in Co-operative Entities and Siar Instruments addresses the clasfcation of members’ shares in ‘cooperatives. IFRIC 2 uses the same principles as those of PAS 32 Members! shares in cooperative entities end similar Instruments are equity if I The erty as an unconditional right fo me redemption of the members’ shares, Redemption is unconditionally profited by law or relevant regulation. 2 ee ‘Mlustration: Financial Uabilities ‘The following are taken from the records of ABC Co. a of year- end. 200 | 355 entation pyabie | 6000 "000 | Cash dividends payable | 4,000 | ean Per ded py) —7.00- 7 lvidends payable | 3000 00 | ‘Wrtanty cligations | 5000 | Bonde payable | izn00| Tneome tes payable | 2.00 | Drennan bond payable | 5,00) Preference shares ued | 1000 | Security depost___| 2.0 Conatrucsve obtigtion | 11,000 | Redeemable prefeences | sak storeienued—|_14000 ‘Ohana ‘Uneemed intrston ‘aribl umber of own receabee ss00| ares wortha feed | amountotcash | 10000 seaton Requirement: Determine the financial Habltes tobe disclosed in| henotes Soltion: Accounts payable 2.000 Unies payee 7000 Accrued interest expense 000 ‘Obligation wo deliver avaible umber of ow shares ‘worth fixed amount of ech no00 (Cash dividends payable ‘4000 ‘inane lease Hab 35000 Bones payatie 120000 Discount on bonds payable (15000) Seaury deposit 2000 [Redeemable preference shares issued 4000 Total nancial Habits ‘aso ot ais 8 ‘Recognition of financial liabilities ‘Afinancial ability is recognized only when the entity becomes a party tothe contractual provisions ofthe instrument Classification of Financial Liabilities I financial lables are classified as subsequently measured at amortized cost excep for the following: ‘Financial lables at fir value through proft or loss (FVPL) and derivative liabilities ~ subsequently measured a fair value (eg, designated or eld for wading), , Financial lables tat arise when a transfer of @ nancial fsset does not qualify for dereogrition — subsequently ‘measured on basis that reflects the rights and obligations tha the entity ha retained. Financial guarantee contracts and Commitments to provide a Joan ata belovemarke intrest rate ~ subsequently measured at the higher of: {the amount ofthe loss allowance (I2-month expected credit losses); and the amount inital recognized less, when appropri, the cumulative amount of income recognized in accordance with the principles of PFRS 15. 4. Contingent consideration recognized by an acquirer in a ‘business combination - subsequently measured at fair value through profit or los, Reclassification of financial liabilities after ital recognition is prohibited. Measurement of Financial Liabilities Inia! mexsrement Financial liabilities are intially measured at fair value minus transaction costs, except financial abilities at FVPL. whose transaction coss ae expensed immediatly, i uptert ore iis 15 ‘Subsequent measurement > Financial Hablities cassifed as amortized cost ate subsequently measured at amortied cost, > Financial llabilies casifed as held for trading are subsequently measured at fale value with changes in fair values recognized in profit or Toss. > Financial lables designated at FVPL are subsequently ‘measured at fir vale with changes in fair values recognized asfollows: 4. The amount of change in the fair value of the Bnancia liability that is attributable to changes in the credit risk of that lability is presented in other comprehensive income, and . The remaining amount of change in the fair value of the liability is presented in profit or los, Measurement of Non-financial liabilities Non-financial liabilities ae initially measured atthe best estimate fof the amounts needed to settle those obligations or the ‘measurement bass required by other applicable standard, eg, deferred tax liabilies are measured under PAS 12 Income Tes, Examples of non-financial ible: 8. Obligations arising from statutory requirements (eg, income tax payable) b, Warranty obligations ‘Uneamed or deferred revenues Commadity contracts that either canmot be settled in cash or fehich are expected Lobe atta Ly timely eachrge Subsequently, non-financial abilities ar leo measured at the Dest estimate ofthe amounts need to ste the obligations adjusted for any changes on the expected settlement amounts ‘Adjustments are treated as changes in accounting estimates and are accounted for prospectively. Some non-financial ables ae Subsequently measured in accordance with the requirements of other standards (eg, deferred tax liabilities are measured in ‘accordance with PAS 12), Financial statement presentation abilities are presente a either (a) current or (b)noncurent on ‘the face ofa classified statement of financil poston. A clasfied statement of financial postion is one that shows current and roncurrent distinctions. When an entity presents an uncasifiet statement of financial positon (based on qty), dsclomures of liabilities de ‘within one year and due beyond one year should nevertheless be ‘made the notes, ‘Current iabities Garren ies are ibltes hat ate: Expected tobe sete inthe entity's normal operating cycle, 1. Held primarily for trading: Due to be sted within 12 months ater the reporting period; 44. The entity does not have an unconditional right to defer settlement of the lability for at least twelve months ater the reporting period Aller lables are lasified as noneurret. “The operating cycle ofan entity isthe time between the scquistion of assets for processing and ther reslizaton in cach or ‘ash equivalents. When the entity’ normal operating eye is not leaely identifiable, ti assumes tobe 12 months.” 518) bile that ar ated ao part of the entity's normal operating cele (eg, trade payables and some accruals for employee and other operating cess) are presented as current ‘even ifthey are expected to be seted Beyond 12 months ater the ‘porting period. Tiailites that do not form part of the entity's normal ‘petting cycle (eg, non-operating liabilities) are presented as ; 16 cuaptert current only when they are expected to be sete within 12 :months after the reporting period. Examples of current bites: 2 nan assets measured at FVPL (ie designated or held for tears) 1. Cument portion of longterm notes, bod, lans and lease libs «Trade account and notes payables 4. Other nontade payables de within 12 months afer end of reporting period €. Uneamed income expected to be eared within 12 months ater the end ofthe reporting peri 4 Bankeoyerdats ‘Trade and nondrade payables “Trade payables are obligations arising from purchases of inventory that are to be sold in the ordinary course of busines. Other payables are lasted as no-iae. Fora trading or manufacturing entity, trade and non-rade payables that are currently due are normally aggregated and presented as one line item under the heading “Trade and other payables” “The reason for the trade and non trade distinctions i the feng when cashing pyables as cue nonce > Trude payables are classified as current liabite when they are ‘expected to be sete within the normal operating cycle ot ‘oe year, whichever i ger. > On the other hand, nom tds payable are sified current lables only when they are expected to bested with one year. Financial insutions need not classify thee payables as nie or non-traie because thie statement of financial postion is presented bused on lui, Le, no current and noncuerent or tits y distinction. However, payables expected to be settled within one ‘year and beyond one year are disclosed inthe notes. amples of yates ‘Accounts payable ~ obligations ot supported by formal promises ta pay bythe debt. + Notes pay ~ obligations supported by promissory notes by the debtor. Lams payable usually sed to connote bank loans ‘Bods payable - obligations isnied by the debtor supported by promises to pay made under seal, + Liabilities under trust receipts, eg. before the coresponding lability to the banks pai, the goods are released to the buyer Jn trust for the bank which advanced the money for Importation of goods ‘+ Other payables arising from sources other than purchases and ‘orronrings such a8 dividends payable, taxes payable, rmitonces pay and aceuelexpenss ‘Mlustration 1: Curent abilities ABCC, has the following ables as of December 31, 2x |. Trade accounts payable, nto st linia apples conte Ps rete ond cho LIB) a nt send ceo 000 00.000 1, Crit balance in customers dccouns 2000 {Financia ality designated at FV. sao 4. Bonds payable (matunngin 0 il aml inert Prom 1.000000 12%, Syeurnotepevable issued on October 1.2001 100000, Deferred x abit 5000 {& Unvared rent 1 Contingent liabity Reserve for contingencies Repro How much isthe total cucen ibis? Statin: y 18 ape Cur ibis 9 ‘Trade accounts payable gos of debi blanc, unmdesed 311000 «Acre expenses 5000 heck an posited heck EK SK AK 28 Tel eae ites Pas 000 3 Advances from cusomers (Cra. nce accounts) 2.000 6: Fine lability designated ot FUP 0000 Ne: fe) «4. Current portion of tors payable as 7" One revense ia to unared even ent ta fred Interest payable onthe note in‘e roam xiPkx¥a) 8.00 eine tt eae a arr eee ee 2 Uneared ent — 4000 face .yeer soppy ema wherty Ey Asal tive gods woth Toa erent ites Pon wey aan Ty Walon Dea | Cah sa Nt 300 | Una revenue ooo + Defoe tx Ube re auaye preted a: nonce when ela roan “ aoe ety presenta ated spement fine pstan °F Contig tity ot mga ut rather dius oly in the (7 Reeve fr cmtingencs isan appropriation of rene camings and has prose ines Iustration 2 Current abilities ABC Co. has thefllowing lables as of December 31,2. 4 Trade accounts payable, ing cnt of a reve on ensign 0 200000 Hold for rang final Habits 0900 « Defered reverie 200 4 Bankoverdraf, 1000 Income tax payable 0000 1 Accrued expenses 000 Share dividend payable 12.000 Advance from afiiatespuyabiein Stns afer yearend 250 |. Loan of XY, In guaranteed by ABC itis posible ‘hat ABC wil be el lable forthe guarantee $5000 Requirement: How much the total cure ible? Stun: {Trade accounts payable, ne fost of gods recived ‘en consignment a0 1408) 290.000 by Had for aang financial lables 50,000 ‘cBankoverdrat, 114000 «Income tx peyable sam The parton of the advance colton appible to 20 Is ‘ried fo neared revere, which crvent aby the portion ppb 0 22 an 253 re ete deer ever ech i “Share dient payable tock idnde pay at 2 tty bot rather an aun egy sun fe, eset sate fo she The ara on the lun snot recognize a aby Renan at probable (se, ils pose ony Hat ABC wl be el lable oe he Refinancing agreement ‘Along-term obligation that is maturing within 12 month after the Teorting pedis ced ws cwrn, ef «rang agreement to reschedule payments on a long-term basis 1s completed after the reporting period but before the financial Sotements are authorized for issue However the obligation is classified as noncurent i Wie entity expects, and has the disertion, to refinance it on long term basis under an esting Toa faility, Ifthe refinancing is ot atthe discretion of the enity (fe cxample, there is no arrangement for refinancing), the financial liability is curen. > Refinancing refers tothe replacement ofan existing debt with a _ new one but with diferent terms, eg. an extended maturity 2» copter date or a revised payment schedule, Refinancing normally entalls a fe or penaly. A refinancing where the debtor is under financial distess is called “troubled debt restructuting.” > Loon facility cers oa crit ine. ‘fn jatos dcton reece il er an ction dr nein | ‘cc dein! y wring ep he en Fo an ‘Nek pum ets pinay atta osu ion rin ‘gues the estes hae no de Taw cet mea aiendnanee 4.3 epetan wee te hen 6 ne eh ‘rp ops nc in re ‘stration: Refinancing Fact patios ‘ABC Co. has» 10%, #1,000,00 loan payable as of December 31, 20x that is maturing on July 1, 20x. Interest on the Toon is due every July 1 and December 3. {Case No discretion On February 1, 2x2, ABC Co, entered into a refinancing ‘agreement with a bank to refinance the loan ona lng term basi Both parties are financially capable of honoring the agreements provisions. ABC's financial statements were authorized for issue fon March 15,2012, ‘Question: Howe much i presented ae current the lan in ABC's 20x yearend francilstatements? Anse: P000,000, te refinancing agrement isnot at te discretion 9F ABC. The currently maturing ablgation is presented as curent Uiabty. The renancing agreement disclosed inthe motes ws a n= adjusting event afer he eporting prod. re ites 2 (Case 2 With discretion On February 1, 202 ABC Co. entered into a refinancing, agreement witha bank to refinance the lon on a long-term bass Both parts are financially capable of honoring the agreements provisions. ABC has the disretion to refinance ot rollover the loan for atleast twelve months from December 31,2041 under an ‘esting loan faclty. ABC's financial statements were authorized forlssue on March 15,2032 ‘Questo: How much is presente as current lisilty in relation to ‘theloan in ABC's 20x year-end financial statement? Anser: None, the efiancing aronment a the discretion of ABC, The aan pyle pests as noncurrent, Case 3 Refinancing completed as of end of reporting period (On December 1, 20x1, ABC Co. entered into a refinancing agreement with a bank to refinance de loan ona long tem basis, ‘The refinancing. and oll over transaction was completed om December 31,20. (Question: How much i presented as current liability in relation to the loan in ABC's 20x year-end financial statements? Ansar: Nome, the rfancing is completed as ofthe end of reporting vio. Te om pogo presented as nomcurrent “Case & With dincrstion —faarnt payable Use theft poten above except that the Toon payable pays anual interes every Jly 1 On February 1, 20:2, ABC Co. entered into a refinancing, ‘agreement with bank to refinance the loan on a long-term bass ‘oth partes are financially capable of honoring the agreement's rovisions. ABC has the discretion to refinance of rollover the 2 apie cot ait 2 Joan for at least twelve months from December 3, 20) under existing loan facility. ABCs financial statements were authorized for ise on March 15,2082, Question: How much s presente as current ibility in ABC's 21 year-end financial statements? Ansr: 750,000 representing Whe ecru intrest om the lat (2M x 10% x 6/12). The acrued inter is presented as cwrentBecnse i is Aue within 12 moths fom the end of reporting period The principal of PIM $ presented a8 noncurrent because the refinancing is at the Aiseretion of ABC. Lables payable on demand Liabilities that are payable upon the demand of the lender are lassifod as curent. ‘A longterm obligation may become payable on demand ‘when a loan provision is breached. Such an obligation is classed as current even ifthe lnder agreed after the reporting period but before the financial statements are authorized for issue not to demand payment. This is becaise the entity does not have an ‘unconditional ight to defer setlement of the ibility a8 of the end ofthe reporting period, “However the lability is noncurent if the lender provides the enity by the end of the reporting period (eg. on or before December 3) a grace period ending atleast twelve months after the reporting period within wich the enity can rectify the breach and during which the lender cannot demand immediate ‘repayment Musteation: On January 1, 20<1, ABC Ce. took a 3-year, 100000 lan fom 2 bank. The loan agreement requires ABC to maintain 2 curtent ratio of 21. Ifthe current ratio falls below 21, the loan becomes payable on demand. As of December 31, 20x1, ABC's currént ratio 1a. (Case 1: Obligation payable on demand Despite the breach of loan agreement on December 31, 20x (Le, fall of cuneat rato below 2:1, there is no indication thatthe bank will demand payment over the next 12 months. Question: How much is presente as curent Habit in ABC's 2x1 year-end financial statements? Answer: P1000,00. The Loox pyle on demand. Only sf an ‘enceabl promi revivel fom He bank om o Before the ef the ‘poring pra not 0 demand pane for a st 12 mnths ro he cdf reporting period at the oan asf as nonce “Case 2: Grace period received after year-end (On January 5, 202, the bank agreed not o collet the loan in 20:2 and gave ABC 12 months to rectly the breach of loan agreement (Question: How much is presented as curren ability in ABC's 20x1 yearend financial statement? Answer: P1000000. The lan s presented a eure despite the recip of he grace period because Hh race period wns recvied after the end of reporting peri. (Case 3: Grace period received by year-nd On December 31, 20x, the bank agreed not to collect the loan in Ws? sn gave ARC 19 month to. rectify the beach of loan Pee ee) Question: How much is presente as current abilty in ABC's 201 year-end financial sateen? ‘Answer: None, te lon is presente as noncurent becuse the grace period as recived by the of th porting pero. Renter ig Genera le: caren maturing oigtion presi caret rapton: Te igaton is oncaret FRainance cere ono bf te bale sh dae 1 Refinance aes pace afer th lane sect date bt foe he FS ‘eather for ls) and fa he dcrton he ently cra ‘esting on ay Genera rn ian tats paix deans pressed caren scepon Te otignionnoncorat ilthe lnder end x efoe e lance she date not cll iin the ex 2 months Aditi ne Te flowing are diclsed only a nrc events esning he ‘se tty il lb rnd aa Renan fer nest i for wh Be ty Bs >The lndor agreed after the tance set date nto coliet a blgton hat spyabon demand 40 The quite si provson othe standards egg he prsinton of Tobie so elher Cire noncarct be uc ok eft Mg ratios In prac. Iiglty raion re oemally pain’ a import “sclnues epecly for franca ateent led th repuaioy Dis na thee used to dui oars Acting you are at gute sae Tiny scorer pacar outline ‘Trade accounts payable ‘Accounts payable from purchases of inventory are recognized ‘when ownership over the goods is transferred to the buyer. The amount recognized excludes trade discounts. Cash discounts are Inchided if the enmity uses the gross method of recording purchases: they are excluded i the entity uses the met method. IMysteation 1: Accounts payable On December 31, 20x1, ABC Co. has ‘accounts payable of 11,000,000 before possible adjustment forthe ellowing: erent aie B {Goods in transit fom a vendor to ABC on December 31,201 ith an invoice cos of 50,000 purchased FOB shipping point was ot yet recorded '. Goods shipped FOB shipping pent from a vendor to ABC was lost in transit. The invoice cost of 20,000 was not yet corded. «Goods shipped FOB shipping point from a vendor to ABC on December 3, 20e1 amounting to P8000 was recorded and Included in the year-end physical count as “goods in transit.” 14. Goods transit from a vendor to ABC on December 31, 2041 swith an invoice cost of 10,000 purchased FOB destination ‘was not yet recorded, The goods were recived in January 202. Goods with invoice cost of 15,000 was recorded and included in the year-end physical count as “goods in transit” He was found out thatthe goods were shipped from a vendor under FOB destination, Rejuirements Compute for the adjusted accounts payable on December 31, 20x1. Sotto ‘Unadjusted accounts payable 1,000,000 ‘FOB shipping point not yet recorded 50,000 FOR shipping point lost in transtnot yet recorded aan «FOB destination inappropriately recorded (5000 ‘Aajusted accounts payable 705,000 Nat Te gods i ast B" av prope inde in acct payable [tn the gone re prhwsnd FOR shipping ont Tie tthe goods Jetarleres to ABC pen shipment Therefore, ABC able pay for the gros cven they ae lst inant, “7 The podem rans "are propery ed om aunt payable ‘cree he goose prc FOR detain. Acoants py wll “Pe ceed ely when the gud are ress | 26 Coupee Ilustrtion 2: Accounts payable On December 31, 20x, ABC Co, has accounts payable of 1,000,000 before posible adjustment forthe following, 8 Checks drawn but not yet released to payees amounted to 112,00, while checks drawn and released to payers but were postdated amounted to P00, . On December 28, 20x, a vendor authorized ABC to rete for full credit goods shipped and billed at P25,000 on, December 14, 20x. ABC shipped the returned goods on December 31, 20x but the credit memo was reeived and recorded only on January 3,202. © Goods shipped FOB shipping point, fight prepaid from a vendor on December 28, 20x was recorded a invoice cost at shipment date. The invoie cost is 14,000 vile the feight cost i 3,00. 4. Goods shipped FOB destination, freight collect were received ‘on December 29, 2031. The invoice cost of PA,000 was «edited to accounts payable on date of receipt andthe related freight of 5000 was debited to an expense account. Requirement: Compute for the adjusted. accounts payable on December 3,2, Sottion: Unadjusted accounts payable 21000,0 4 Unreleased checks and postated checks (12K ¢5K) 17,000 Purchase return (25,000) ‘© Uncorded freight on FOD SP, feight prepald su 4. Fright shouldered on behalf ofthe sll 6009, Adjusted accounts payable aa 0007 Ne °F Th fightin“ is inte in scents payable bets the goods were purchased FOS spring pt. Oven is tans bs ABC ‘pon shipment bt the llr showered de flght css. fag pad which are rapped ee by ABC Caen Listes 2 17 The fright nae exc rm acon pyle beau te gods were prcated FOB desination Ownerahip tantra ABC only "pon recs ofthe shipment bt ABC shouldered the ght cot fright cole) which are supped to be. pid by sll The Acomiedton forthe eight te a 2 rac from Scout a Unearned income Uneamed income represents advanced clletion of income that is fot yet armed, Prior to arming, unearned income is classified as ability. Examples Advances received for faturé delivery of goods or rendering of services 1, Proceeds fom sale of git certiicates redeemable in goods oF ‘Mluszation 1: Uncarned revenue sal of goods ABC Co. requires advance payments for custom-built guar fects, gadgets, and racks. The records of ABC Co. show the followings ‘Uneared revere, January 1 2x1 1,000,000 Advances received during 20x1 11000000 ‘Advances applied to orders shipped in 2041 ‘000,000 ‘Advances pertaining to orders cancelled in 2x1 300,000 Requirements Compote forthe current ability assuming: 4. the advance payments received aré non-refiodable and by the advance payments received are refundable Salton: Requirement (a) Adcanes are non-refundable Uncamed income 100000 Ja. 2,20 Advances cared 0000 | 10,000,000, Advances eeived Ondersearcelled 300000, Dee31,20° _—27m000 | ustration 2: Accounts payable ‘On December 31, 20x], ABC Co, has accounts payable of 1000000 before possble adjustment forthe following: Checks drawn but not yet released to payees amounted to ‘P1200, while checks drawn and released to payees but were ‘postdated amounted to P5000, . On December 28, 20x, a vendor authorized ABC to return for full credit goods shipped and billed at P2500 on December 14, 20<. ABC shipped the returned goods on December 31, 20x] but the credit memo was received and recorded only on Jesuary 3, 202 ‘© Goods shipped FOB shipping point, fight popid from 3 vendor on December 28 20x] was rece at invoice cst at shipment date. Th invoice cost is P4000 while the fright cost is 3,00. 44. Goods shipped FOB destination, freight collect were received ‘on December 29, 20x1, The invoice cost of 40,000. was ‘edited fo accounts payable on date of receipt and the related freight of P5000 was debited to an expense aecount Requirement: Compute for the adjusted accounts payable on December 31,201. Salto Unadjusted accounts payable 1,000.00 2 Unreleased checks and postdated checks (12K +5K) 17,000 Purchase return 2500) ‘¢ Unrecorded fight on FOD SF, fcghtprepald 300 4. Freight shouldered on behalf ofthe sller 600) ‘Aajusted accounts payable 320,000 Nees |The fightin “eis nha cuts payable bens he goods | were prince FOB siping pint Over stated te AB | Spon shipment bu he ater shnldeed the night ons Ge. igh i) which are sappned a ep by ABC tet ie 2 >The right ina" teed rom cont payable ee the gone were pursed FOE destin. Owe tansered 1 ABC only “pon ecto te spent But ABC shal deed fight cot fright eal) whch ae supposed to be. pid by sll The comet forte fight eae as 2 relon fom aeons pombe Uneamed income ‘Uneamed income represents advanced collection of income that not yet eared, Prior to earning, unearned income is classified as ability. Examples: a. Advances received for futur’ delivery of goods or rendering cof services 'b. Proceeds from sale of git certificates redeemable in goods of Itastration 1: Uncamed revenue sale of goods ABC Co. requires advance payments for custom-built guitar elfecs, gadgets, and racks. The records of ABC Co. show the following: Uneamed revenue, January 1, 20x 1000000 Advances received during 21 10.00.00 ‘Advances applied to orders shipped in 0x1 3000.00 ‘Advances pertaining to orders canceled in 0x1 300.00 Rouiremens “Compute for the current ably assuming: A. the aivance payments received at non-refindable and the aivance payments received are refundable Salton: Requirement (a) Adooies ee non-refundable acento 11000000" Jan 1201 Advancescared 000000 | 10,00,000 Advaneas eclved Onderscaneled ___ 300000, Dee 31,201 270000, ’ 2 Chapter Anse to epirement (a: 2,700,000 Requirement (Advances are rfdeble neared income - Dec 31,2 eye tin) ——_2.700000 Liability forrefundable deposits Orders cancelled) _ 300200 Total crrent ibility for advances rcrced 3000000 ‘The advances pertaining to the cancelled orders remain as eabitity, not as unearned income but as laity for roundable deposit. 5 Mlustration 2: Deferred revenue sale of services ‘ABC Co, sels service contract that cover a 2-year period. The Sales price ofeach contract is 1,000, ABC sold 1,000 contracts evenly throughout 20x1. ABC's pat experience shows that ofthe ‘ota pesos spent for replies on service contracts, 40% i incurred evenly during the fist contract year and 60% eveniy during the second contract year, Requirements 4 How much are the curent and nonoarrent portions of the Aefered revere to be presented in ABCs 20x statement of financial poston? How much the serice revenue recogni in 202? Solution i Because the contacts are sold evenly, the total receipts of PIM (aw rua are avemged or dated by t00. ‘*_ Revenue i earned over the 2-year period as follows The ist halfis assumed to have been sok! on January 1, 20x1 and wil be eared from January 1, 20x] to Desember 31,2002 iL The ond halfis assumed to have been sald on December 31, 2x1 and will be eamed from January 1, 22 10 December 3, 2083, ore ahes 2» “t —9e Tota Taxman oe = nt halt GN=2) Second half (M+ =a Famed portion os so — sas Theshodd amour porn pr rl arg te oo ‘Requirement (a: Current and Noneurret portions ~Dec. 31, 20:1 ‘The current and nomcurrent potions of the deferred revenue as of December 31, 2! are allows: ans hen om ie sb) Crret portion exe portion in 22) - NK +2006) 500.000 [Nowewmont portion (eed orton 25) 0,000 Total PIM ss eared portion in 201 of P200000) ‘00.00 Requirement (): Serice revenue — 202 Service reverse in 2002 C00 +20) 0000, (Observe that revenues are recognized over the pesods the services are rendered as indicated by the ncurtence of costs of repairs om service conzacs Mustration 3: Unearned subscription - Monthly ‘ABC Co. ses monthly subscriptions for an industry publication. Subscriptions received after the November 1 cutoff date are held for publcason in the following year. Receipts during 20x for subscriptions were made evenly. Information on subsrptions is show below: Unearned revenie January 1, 20x1 3.000000 Resets from subscriptions ding 20x 24000000, Requirements: 2. How much s the unearned revenue balance on December 31, 20x? Bow mich ite evemu eapion ring 27 0 Chapter Salton: ‘Reguiremen a: Uncared revenue - Dee. 31 ‘Subscriptions received after the Nov. 1 cutoff date wil receive none of the monthly publications forthe yest. Accordingly, these ‘epresent the unearned reverse Balance as of December 3,2 > Unearmed revenue, Dec. 31,281 = 24M x 2/12) = 4,00,000 Requirement (Subscriptions revenue ~2081 > Subscriptions revenue, 20e1=3M + Q4M x 10/12) ~2,0000,00 on. i Uneured evemae Suberptons seme 300000 Ja. 1 2a og 2,000,000 | 24,002000 Recipe during 20 Dee 31 seompasy 4000 IMlustration 32: Unearned subscription -Semlannal ‘ABC Co sll one-year subscriptions for an industry publication published semianually and shipped to sibscibers on May 1 and November 1. Subscriptions revived after April 1 and October 1 cutoff dates are held forthe next publication, Receipts during 20xl for subscriptions were made evenly. Information on subscriptions is show below: ‘Unearned revenue ~ January 1, 2x1 3,000,000 Receipts from subscriptions during 20x1 24,0000, Requirement: Compute for the uneamed revenue balance on DDecomber 31, 20x. Suton Analysis het kites 31 ABC Co. offers two (semiannl) publications for # subscription {ce withthe following shipment and cut-off dates. Shipment dates ‘Mayl Nov. > Cutoff dates Apa Oct 1 > Receipts from Jan. Ito April 1 wil recsve the 2 semianeia publications for the yea. Therefore, no unearned revenue will Arise fram these recep. > Receipts from April 1 to Oct. 1 will receive 1 of the 2 semi annual publications for the year. Therefore, 50% of these receipts are uneamed revenue. > Receipts fom Oct. 1 to Dec. 31 will receive none of semi annual publications for the year, Therefore, 100% of these receipis are uneamed revenue. ‘The balance of uneamed revenue at of December 31, 20x1 is computed as follows: Recep from Apri 1 © Ox. 1 (20430 ‘000000 Receipts rom Ox. 1 Dee 31 [ass 100 ‘000000, otal meared revenue - Dec. 31, 2081 2.00000 ‘The beginning balance of uncamed revenue is already ‘evened during the period. Thus, has no effect on the ending balance of unearned revenue IMiustration 4 Git certificates AUC Co, has just opened a novelty stone. ABC decided to sel gift ertfieates as part ofits sales promotion. Transaction relating to the git certificate daring the year are shan low 1 So gt certfiates worth 100,00. by Git cartisiates worth P80,000 were redeemed. © P1000 pit certicates expired 14 92,00 git certificates were estimated not tobe redeemed Requirement: Provide the journal entries ra 2 chapter Cen ites 3 = [on 7100000 named enone ‘Uneared revenue ft cerifates san eh bee a ieee) TB | Unesmed revenue git certicates 08 Pri yor it ciate eit aoe releed na rot Gers ld ad Gitta © | Uneamed reverse git cerifcaies 10000 rescmed 2D 7oa00 | 1000000 dung 20 ‘ther income iterates freed no Eiiemonean | Theamed revenue - git cetictes 20m roomed M18) (ter ncome textes oid 2000 pa 2000 ‘The uneumed revenue from git certificates ae of December 31, 20x is computed a follows! neared revenue Gift certificates 100,000. beg Redemptions soo Expiratons 100 ‘Amount estimated not tobe redetned ond. ‘so | lusration 5: Gift certificates ‘ABC Co, sells gif cotfiates that expire one year after their Issuance. Information om git certificates shown below ‘Uneamed revenue = iftcerifiates, Jan 1,20 P6000 Gite cetfiats sold during 20x1 1000000 Prior year gift cortiates redeemed i 20x 400,000 (Gilt cerifcates sold and redeemed in 201 700,000 ADC’ past experience indicates that 10% of gif ortifctes sold Will not be redeemed, Requirement: Compute or the unearned revenue on Dec. 31,20, Salton “The gilt eta sold in the pri or at grein the sin team thy filly ened in he cate yor oy omer expo), ‘ets haven fet on he ending bale o earned ere Liability for deposits received “atl for deposits rece represents cash receipts that ae eld | tras for other parties. Examples 1 Dept ibis of banks and other entities performing imilar fection ‘Deposits rece for returnable contains, suchas bottles, cases, crates, trays, Boxes, and similar items that contain the goods fold but must be returned to the seller spon consumption of the goods Security deposits received from lessees epost reo fom ecrw agreements Deposits for future subscription ofthe entity's ovm equity instrument to the extent that the deposits are repayable in cash, ‘Musration 1: Deposits fr returnable containers [ABC Co. requires deposits from customers forthe containers of| {ods sold. The customers are refunded fr the deposits received When the containers are retumed within ft years from the date Of se ofthe related goods, Deposits for containers not returned within the time limit are regarded as proceeds from retirement of ‘he containers. Information fr 203 a fllows Ey ae cor tits 5 Container deposits at December 3,202, rpm deliveries = [eam apn 2oxt 20000 shy] Seu deposit 10x tet 0} asst 2m 450006000 “Day 1 diferenee eu Deposits for containers delivered in 203 4,000 Te | rest expense on) os epost for containers tured in 23 from deliveries SE, [7 sewn epost 38s 2x1 9000 “yf atnae bdanneed name 2a 25000 20 46000_ 6,000 ‘Thespian abit at ech 9 Requirement: Compute for the liability for deposits on retumable containers as of December 31,203, Solution jae ees ‘ignored Deposits from 20x, Retums rom 2h fgnore | 45000. Deposits fom 2002 Retumsfrom2x2 25000 | 90,000 Depostsin 2003 Retna in203 6000 ond 400 ‘The cept (nd rts) ane gard base they have lend epi nd ence, notte! he al of he aby on Dec 51 208 The umeeemed 20 depot re read 8 cede fa the ‘eigement fhe user containers The deren beeen this sma ‘nthe caring an oth vied Sas pid an lustration 2 Security deposi from a lease (On january 1,20x1, ABC Co, received a 100,000 security deposit fom teal a onjuncton wth 2 10-year lense, ABC: ll eur the security deposit tothe tenant atthe end ofthe lease term, net ‘of costs of any damages tothe leased propery. The discount rate 10%. Requirement: Provide the entries in 20 Solution coo in the fit yen the asad eid arent bt ely 00 ‘Boer 3208 yet belo iti be eared the ea Iustration 3 Deposits held under escrow agreement ‘ABC. Co, maintains escrow accounts and pays insurance premiums for its customers. Escrow funda are kept in intrest- ‘bearing accounts Interest les a 10% service fee is credited tothe customer's account and used to reduce future escrow payments Information on escrow accounts shown below: "Escrow accounts Habit, Janay 1, 2081 200.0 Escrow payments received during 20x1 1.500000 Insurance premiums paid during 2st 500,000 Interest on ecrow funds during 208) 100.000 Rejuirements Compute for the current lability foe escrow accounts ‘on December 31, 20x1. Slaton 200000" Ja. 12d 1800s pment ev Intl exo nde met of Premios pid sngo0 10sec ee 00002505) Deg, 2081 | ingen Deposit for future subscription of shares of stocks Deposits received for future subscription of the entity’ shares of socks are clasifed as either ability or equity follows: F 36 Couper 2. Uf repayable i cash at any time prot to the issuance of the subsorbed shares, the deposits reclassified as Habit '. If not repayable in cash, the deposits are classified as equity, preferably presented under contributed capital. ‘Accrued expenses. ‘Accrued expenses are liable for expenses already incurred but not yet paid (salaries payable utilities payable, andthe lke), lusteation: ‘ABC Co. is preparing is December 3, 20x1 yearend financial Statements. The following information was gathered: ‘+ The bl for December's utility cont of F20,00 was received and paid on January 10, 202 ‘+ A.P25000 advertising bill was revived on January 22012. OF the total billing, P1500. pertain to advertisements in December 201 and 5,000 pertain to advertisements in January 202. + leas, elective December 15 2030, calls fora fixed rent of| 17100000 per month, payable one month after the commencement of the lease and every month thereafter, fn addition, rent equal 5% of net sales over 100,00 per year | payable on January 3 of the following yea. ‘© Total cash sales and collections on accounts amounted to 11,00000. Accounts recvivable hs 2 net increase of P2000 Commissions of 15% of sales are paid on the same day cah ie received from customers. Raguirmets Compute forthe accrved abilities an Pee. 4,201 Slaton Unity expense for Desember 201 smo Advertsing costs incurred in December 0x1 45000 ‘ent expense fom December 166 3,2 (0K +2) sooo ‘Contingent ent expense (12M =1M) 5) ‘00 ‘Additonal commision expen» nao Total accrue bilities 735.000 | Corot es a ‘Total slesis computes as follows eg bat OY Total ales en & “Tom cttons fen ‘celine 1200000 | 190)000 ci crit sale ZUMD, Neinceae + Additional commission expenses computed as follows: Total commission expense (12M wal sles x15) 13000 ‘Commision expense pald (IM cash lecson 155) 150,00) ‘Additional commission expene 0 Dividends payable ‘The lability to pay dividend is recognized when the dividend is appropriately authorized and is no longer atthe discretion ofthe entity, whichis a. the date when the declaration of the dividend (eg. by the ‘board of directors) is approved by the relevant authority (es by the sharcholders) if such approvals required; or the date when the dividend te declared (eg, by the board of slrector if futher approval isnot require. Dividends declared by banks ae subject othe approval of the as . Only cash and property dividends are recognized as Habits. Stock dividends are not liabilities; ‘share dividends Aistibutable’ (stock dividends payable’ is presented in equity as fn iiton to share capital Labi for remitable cotections abies may also arise fTom amounts ellected on behalf of tind ptes. Examples: “Tas withheld $85 premiums, Phithealth Pag (BIG and similar contributions © Output value added taxes (VAT) lections made by an agent of broker on behalf of « pal 46 Chapter (@) How much are the current and noncurrent portions of the Aeferred revenue to be presented in AFFLUENT's December 31, 20x1 statement of financial position? (©) How much s the service revene recognized in 202? 8 Kemp Company must determine the December 31,20, yest= ‘end accruals for advertising and rent expense. A PS0,000 advertising bill was received on January 7, 2002. compasing 35,000 for advertisements in December 20x issues of & ‘newspaper and PIS,000 for advertisements in Jansary 20:2. A store leas, effective October 16, 0x1, calls for fixed rent of 1120000 per month, payable one month from the effective date and monthly thereafter n addition, rent equal to 5% of fet sales over P6000 000 per calendar year i payable on January 31 of the following year. Net sles for 20x were 30,00, Requirement: How much are the acrued abilities inthe December 31, 20c statement of Financial position? (adopt PROBLEM &: MULTIPLE CHOICE - THEORY 1. According to the revised Coneptual Framework, 2 Uabiliy is recognired if a. the liablty exists by meeting all the aspects in the

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