INTERMEDIATE ACCOUNTING

Chapter 1: Liabilities

Liability is a present obligation of the entity to transfer an economic resource as a result of

past events.

Obligation is a duty or responsibility that an entity has no practical ability to avoid

Recognition: relevant and faithful representation

Ex of financial liabilities:
a. Payables (notes, loans, bonds, and accrued payables)
b. Lease Liabilities
c. Held for trading liabilities and derivative liabilities
d. Redeemable preference shares issued
e. Security deposits and other returnable deposits

Ex of not financial liabilities:

a. Unearned revenue and warranty obligations
b. Taxes, SSS, Philhealth, and Pag-IBIG
c. Constructive Obligations

Financial liability
- Has a contractual obligation to pay cash

Equity instrument
- No obligation to pay cash or another financial asset

Financial liability/asset
> Variable number for a fixed amount
> Fixed number for a variable amount

Equity instrument
> Fixed number for a fixed amount

Subsequent measurement of financial liabilities:

● Amortised cost
● Held for trading~ P/L
● Designated at FVPL

Current Liabilities:
a. Expected to be settled in the entity's normal operating cycle
b. Held primarily for trading
c. Due to be settled within 12 months after the end of the reporting period
d. The entity does not have the right to defer settlement of the liability for atleast 12
months.
Trade payables- are obligations arising from purchases of inventory that are sold in the
ordinary course of business.

Trade payables are classified as current liabilities, expected to be settled within the normal
operatimg cycle or one year
Non-trade payables are classified as current liabilities only when expected to be settled
within one year.

Notes payable
- Are obligations supported by debtor promissory notes.

Initianl measurement:
Fair values less transaction costs

Fair values
- The price that would be received to sell an asset or oaid to transfer a liabilitiy in an
orderly transaction between market participants

Classification:
a. Short term payable
b. Long term payable that bears a reasonable interest rate
c. Long term payable that bearns no interest
d. Long term payable that hears an unreasonable interest rate

> Short term payable- within 1 year

>Long term payable- beyond 1 year

Interest payable= face amount × nominal rate

Interest expense= present value × effective interest rate

Bonds payable
- Are ling term debt instruments similar to notes and loans except that bonds are
usually offered to the public and sold many investors.

Debt instrument
- Is any contract that represents a right upon the holder to receive cash from the issuer
thereof or an obligation upon the issuer to pay cash to the holder thereof.

Bond indenture
- Is the contractual agreement betweenthe issuer and the bondholders.

Call provision
- The issuer' right to call the bonds before the scheduled maturity. Of the interest rate
declines, the issuer can call high- interest bonds and replace them eith low interest
bonds.

Redemption rights
 - The holder's right to redeem thr bonds before the schedules maturity. This optiom is
usually available if the issuer takes a stated action.

Sinking fund
- The issuer is required to establish for the protection of the bondholders

Financial ratios
- Issuer is rewuired to maintain

Restriction on dividends available to the issuer's shareholders

- Required to appropriate a portion of itd retained earnings for the protection of the
bondholders

Restriction on incurrence of additionsl obligations

- Issues may be restricted from issuimg new bonds unless the currently issued bonds
are settled first or restricted from issuimg new bonds in excess of a percentage

Appointment of independent trustee

- Whose qualificationd are stated in the bond indenture

Authorized amount of bonds that can be issued

Types of bonds
1. Term bonds- bonds that matre on a single date
2. Serial bonds- bonds in which the principal matures in installments
3. Extendible and Retractable bonds- bonds thst have more than one maturity date
permittimg investord to choose the maturity dates that meet their needs.
Extendible bonds- bonds that give holders the right to extend the initial maturity to a
later date
Retractable bonds- bonds that give holders the right to shorten the initial maturity to
an earlier date
4. Registered bonds- bonds issued in the name of the holder. Interests are paid
direclty to the holder.
5. Coupon (Bearer) Bonds- bonds that can be freely transferred and have a
detachable coupon for each interest payment
6. Zero coupon bonds ( Strip bonds or Deep discount bonds)- bonds that do not
pay periodic interest. Both the principal and compounded interests are due only at
maturity date. Sold at deep discount.
7. Income bonds- bonds that lay interest only if the issuer earns profit
8. Participating bonds- bonds that participate in excedd earnings of the issuer as
defined in the indenture
9. Indexed bonds- bonds that lay interest that is indexed to a measure of general
purchasing power.
10. Inflation- linked bonds- bonds whose principal and interest payment are adjusted in
response to inflation
11. Mortgage bonds- bonds secured by real property
12. Collateral trust bonds- bonds secured by the issuer securities which are held by a
trustee.
 13. Asset- backed bonds- bonds collateralized by a pool of assets such as credit catd
receivables and car loans
14. Subordinated bonds- bonds that have a higher yield than secured bonds but a
lower priority during liquidation
15. Debenture bonds- bonds not secured by any collateral
16. Junk bonds- high risk, high yield bonds typically issued to financr leveraged buyouts
and mergers.
17. Callable bonds- bonds that the issuer can redeem prior to maturity date.
18. Convertible bonds- bonds that the holder can exchange for the issuers shares of
stocks
19. Corporate bonds- bonds issued by a corporation.
20. Government bonds- bonds issued by a government
21. International bonds- bonds issued by a foreign entity in a domestic market
a. Eurobonds- bonds dominated in a currency others than the currency of the
market in which thry are offered. Eg. German company issues US dollar to
Japan
b. Foreign bonds- bonds dominated in a currency others than the currency of
the market in which thry are offered. Eg. German company issues yen in
Japan
> Kangaroo bonds or >Matilda bonds- Australia
> Maple bonds- Canadian
> Matador bonds- Euro issued in Spain
> Bulldog bonds- British
c. Global bonds- bonds that are issued in several countries at the same time.

Discount:
Carrying amount is less than Face amount

Effective interest rate is higher than Nominal Interest rate

Interest expense is greater than Interest paid

Premium:
Carrying amount is greater than Face amount

Effective interest rate is lower than Nominal Interest rate

Interest expense is less than Interest paid