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    MOTC INTERNAL AUDIT SECTION

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    Page 1 of 8 | FAR Handouts No.20 REAL EXCELLENCE KARIN: MBTAGO. OPA CURRENT LIABILITIES KARIM G. ABITAGO, CPA LIABILITIES Liabiities are present obligations of an entity arising from past transactions or events, the settlement of which is expected to result in an outfiow from the entity of resources embodying economic benefits. Essential Characteristics of Liabilities: (1) Liabilities are PRESENT OBLIGATION. (2) Liabilties arise from PAST TRANSACTIONS OR EVENTS. 3) The settlement of the liabilty REQUIRES AN OUTFLOW of resources embodying economic benefits. Settlement may be in the form of: (a) payment of cash; (b) transfer of non-cash assets; (c) provision of future services. This characteristic is the main reason why STOCK DIVIDENDS PAYABLE is NOT a LIABILITY but rather presented within EQUITY. MEASUREMENT i Tata Subsequent] ano FairValos | Ttorost Exper EASES CATION Measurement Measurement pene Changes is based on Franca Lite at Yes FarVawe | FarVoive Far Value No (Presertedin | Nominal Rate Financia, | through Pro Proto oss) tases rtoss. Francal | Fair Value minus Lbities | Fat Vahwminus | noted Cost Yes No ocive Rate Amortized Cost ee Uaaly, Erecive Best Estate of | Best Estimate of Cash | Yost measured Rate the bat NONE PINANCIAL ABILITIES: ‘Cash Outflow: ‘Outflow ‘at present valve: (3 is measured at prsenvane | FINANCIAL STATEMENTS CLASSIFICATION An item of lability is classified as current labillyifit met any ofthe following criteria set by PAS 1 (1) The entity expects to settle the liability within the entity's normal operating cycle (2) The entity holds the libilty prmariy for the purpose of trading (3) The liablity is due to be settied within twelve months after the reporting perio. (4) The entity does not have an unconditional right to defer settlement ofthe iablty for atleast twelve months after the reporting period, NOTE: If an item did not meet any of the criteria above, itis classified as a non-current liability. Examples of current liabltes: ¥ Trade and other payables * ¥ Financial liabilities held for trading % Current portion of long-term debt ¥ Short-term borrowing ¥ Current provisions % Current fax liability ¥ Financial liabilities held for trading ¥ Bank overdraft ¥ Credit balances in accounts receivable ¥ _Unearned income realizable within 12 months ® ¥ Accrued expenses ¥ Long-term debt currently maturing ¥ Refundable deposits ¥ Payroll taxes payable" ¥ Value-added Taxes (VAT) payable (Output VAT less Input VAT) ¥ Escrow liability ® Note: Non-trade payables are classified as current lablities if are due for settlement within twelve months after the Teporting period or held primarily for the purpose of being traded REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience reocpareview.ph Smoot oa ctosy Oar nN ee Page 2 of & | FAR Handouts No 20 REAL EXCELLENCE weCURRENT LIABILITIES REFINANCING OF CURRENTLY MATURING OBLIGATION GENERAL RULE: A currently maturing obligation is presented as CURRENT LIABILITY EXCEPTIONS: (The lability is presented as NON-CURRENT LIABILITY if it met any of the following conditions) (1) The company has the prerogative/option/unconditional right to refinance the liability. (2)__ If there is no right but refinancing was completed on or before the balance sheet date Refinancing may be done thru extension of maturity date or through issuance of bonds the proceeds of which is used to settle the currently maturing obligation. BREACH OF CONTRACTS GENERAL RULE: If the company breached a covenant or contract, the long-term obligation BECOMES IMMEDIATELY DEMANDABLE, thus presented as a CURRENT LIABILITY EXCEPTIONS: (The liability is stl presented a NON-CURRENT LIABILITY under the following conditions) (1) Ifthe creditor agreed to give the debtor a grace period for atleast 12 months after the balance sheet date AND (2) The said grace period was provide on or before the balance sheet date. ‘TRADE AND OTHER PAYABLES? The frequently asked question regarding trade accounts payable is its adjusted balance. As a guide in computing such please see the below template: SOLUTION GUIDE Unadjusted balance x ‘Add: Post-date checks and unreleased checks (Please see FAR 03 ~ Cash and Cash Equivalents for further details) xx Debit balances in AP (if the unadjusted balance is @ net amount) x Less: Unrecorded purchase retuns and allowances (9) Discounts forfeited (under net method) (00) Effect of Freight terms xx) Adjusted balance xx In relation to freight terms, please see the following guide (Please see FAR 05 — Inventories for further details) % Ifthe goods were in transit to the entity and the freight term is, ¥ FOB Shipping Point — Accounts payable and purchases should be increased ¥ FOB Destination — Ignore, purchases and accounts payable should be increased upon arrival of the goods. + In relation to freight cost, its effect on accounts payable depends on the freight terms as well and are summarized below: of ints Pavable? ¥ FOB Shipping Point, Freight Collect No effect, ¥ FOB Shipping Point, Freight Prepaid Increase ¥ FOB Destination, Freight Prepaid No effect ¥ FOB Destination, Freight Collect Decrease UNEARNED INCOME ® Deferred revenue or unearned revenue is income already received but not yet earned. Uneamed income may come from: = Goods (Advances from customers) ‘+ Services (Uneamed income from service contracts, unearned subscription revenue) ‘+ Use of entity's resources (Uneamed interest income, unearned rental income) © Giftcerificates Deferred revenue may be realizable within one year or in more than one year from the end of reporting period. If the deferred revenue is realizable within one year, itis classified as current liability. Typical examples of current deferred revenue are unearned interest income, unearned rental income and unearned subscription revenue. |f the deferred revenue is realizable in more than one year, itis classified as noncurrent liability. Typical examples of noncurrent deferred revenue are unearned revenue from long-term service contracts and long-term leasehold advances. In relation to unearned income, the frequently asked questions are (1) Earned portion (income); (2) Ending balance of unearned income, To answer such question, use the T-account in relation to unearned income: Unearned income Eamed portion xx Beginning Balance xx Cash receipts xx End, Balance xx For uneamed income from gift certificates, please use the modified T-account Gift Certificates Payable . Redemption (whether from prior year or current year sales) »« Povcnats Baa oe Expited portion «x Cash receipts from Sales _xx End. Balance xx REO CPA REVIEW PHILIPPINES: Effectiveness. Efficiency. Convenience www. reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW © (074) 565.6774 @ 0016 40.0861 © suoport@reocpareview.ph MAY 2021 CPA REVIEW SEASON. Page 3 of 8| FAR Handouts No 20 REAL EXCELLENCE CURRENT LILES REFUNDABLE DEPOSITS © Refundable deposits consist of cash or property received from customers but which are refundable after compliance with certain conditions, ‘The frequently asked question regarding refundable deposits would be its ending balance at balance sheet date. Use the following T-account as a guide in answering such questions: Liabilty for Deposits Deposits retumed or applied x« Beginning Balance x Deposits cancelled Xx Cash receipts xx Deposits expired Xx End. Balance xx PAYROLL TAXES PAYABLE “! Under our law, the entity as an employer is required to withhold from the salaries of each employee the following (a) Income tax payable by the employee (b) Employee's contribution to the Social Security System or SSS {c) _ Employee's contribution for Phithealth (@)__ Employee's contribution to the Pag-ibig Fund Such amounts withheld from the salaries of the employees shall be recognized as "payroll taxes payable" unti remitted by the entity to the appropriate government authority. In addition to the amounts withheld fram the salaries of the employees, the entity is required by law to make a contribution for SSS ESCROW LIABILITY ® Escrow is the use of a third party, which holds an asset or funds before they are transferred from one party to another. The third party holds the funds until both parties have fulfiled their contractual requirements, The frequently asked question regarding escrow liability is its ending balance. To help in solving such, please use the following T-account Escrow Liability Cash transfers or payments xx] Beginning Balance xx Interest and other charges paid xx Cash receipts x« Interest income ox T End. Balance x REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW © 074)605674 @ 0016 8400661 © sunport@reocpareview ph MAY 2021 CPA REVIEW SEASON. Page 4 of 8 | FAR Handouts No 20 , REAL EXCELLENCE KARIM G. ABITAGO, CPA ‘CURRENT LIABILITIES, DISCUSSION EXERCISES ‘STRAIGHT PROBLEMS 7. DAVAO COMPANY had the following accounts taken from the balance sheet as of December 31, 2019: Gash in bank (net of bank overdraft of P20,000) 500,000 Trade accounts receivable (net of credit balance on ! ‘ABC ING. amounting to P10,000) 200,00 Trade accounts payable (net of debit balances in supplier's Lge accounts of P15,000) 385,000 Accrued electric and power bils 40,000 Property dividends payable (at fair value) 150,000 Share dividends payable 430,000 Cash dividends payable (payable after 14 months) 420,000 Mortgage payable 250,000 £8% Serial bonds payable ~with 5 equal annual payments, issued July 4 this year 500,000 Trade notes payable (16 months left before maturity) 160,000 Financial liabilities held for trading Uneamed rent inoome Deferred income from service contracts Accrued taxes payable 40% 5 year loans payable (October 1, 2018) Deferred tax liability — expected reversal is early next year Estimated premiums lability Contested BIR tax assessment - possible obligation Taxes withheld from employees Loan of LANAO INC. guaranteed by DAVAO — possible that DAVAO willbe liable 42% Notes Payable ~ maturing on October 31, 2020 10% Notes Payable — maturing on December 31, 2020 8% Loans Payable ~ maturing on July 1, 2021 16% Notes payable ~maturing on April 1, 2021 x Bonds payable 2\000,000 Additional information: bob ae * RE The cash in bank comprises 2 bank accounts in 2 different banks. In relation to the 12% Notes payable, the entity entered into a refinancing agreement with BPIDO Bank to refinance 75% of the notes on December 18, 2019. The whole 10% notes payable was refinanced on January 7, 2020, FOREVERMORE INC. has the discretion to roll over the liabilty for at least 12 months from December 31, 2019. The bank loan agreement on the 8% loans payable requires DAVAO to maintain a current ratio of 3:1. If the current ratio falls down below 3:1, the loan becomes automatically payable on demand. Unfortunately, DAVAO's current ratio on December 31, 2018 is 2:1. However, On January 2, 2020, the bank agreed not to collect the loan unti after 13 months from December 31 The term of the 15% notes payable give the holder a right to demand immediate payment ifthe entity falls to make monthly interest payment within 10 days of the date the payment is due. On December 31, 2019, DAVAO is three months behind in paying its required interest payment. On December 31, 2019, the bank agreed to give DAVAO a 180 day grace period to pay the outstanding balance, The bonds payable are 5-year 12% bonds issued March 31, 2015. Interest is payable semi-annually on March 31 and September 30. Except for the 15% notes payable and bonds payable, all interests are payable annuelly. There were no interest accruals made on any interest bearing liabillty as of year-end QUIREMENT. How much is the total current liabilities to be presented on the balance sheet as of December 31, 20197 ACCOUNTS PAYABLE ee ne balance in BICOL ING’s accounts payable account at December 31, 2019 was P&10,000 before any year-end adi (a) justments relating to the following ‘Checks drawn but not yet released to payees amounted to P15,000 while checks drawn and released to payees but were post-dated amounted to P35,000. (o) On December 27, 2019, one of the suppliers of BICOL INC. allowed the later to retum for fll erect goeds shipped and billed at P30,000 on December 15, 2019. BICOL shipped the retumed goods on December 31 2016 but the credit memo was received and recorded only on January 6, 2020. (@) Goods purchased and shipped FOB shipping point, freight prepaid from a vendor on December 29, 2049 was stllin transit as of year-end. The freight cost was P5,000. The invoice cost of P6S,000 of the goods was recorded only when it arrived on January 7, 2020. (@) Goods shipped FOB shipping point on December 20, 2019 from a vendor to BICOL, were lost transit. The ihvoice cost was P45,000. On January 5, 2020, BICOL filed a P32,500 claim against the common carrier REO CPA REVIEW PHILIPPINES ‘ Effectiveness. Efficiency. Convenience www.reocpareview ph REAL EXCELLENCE ONLINE CPA REVIEW © (074) 6656774 @ 0016640 0561 © supporeeocnaseview.en MAY 2021 CPA REVIEW SEASON Page 5 of 8 | FAR Handouts No.20 ) REAL Sune NCE “Siac (©) Goods shipped FOB destination, freight prepaid on December 21, 2019, from a vendor to BICOL, were received on January 6, 2020. The invoice cost was P35,000 and the freight cost is P7,000. () Goods with invoice cost of P25,000 were received in January 5, 2020 and included in the count as “goods in transit’. Since the invoice was received in advance, it was recorded as purchases. It was found out that the ‘goods were shipped under FOB Destination REQUIREMENT: How much is the amount to be reported as accounts payable on December 31, 2019 Statement of Financial Position? UNEARNED INCOME 3. QUEZON INC. sells subscriptions to @ specialized directory that is published semi-annually and shipped to subscribers on May 15 and November 15. Subscriptions received after the April 30 and October 30 cut-off dates are held for the next publication, Cash from subscribers is received evenly during the year and is credited to deferred revenues from subscriptions. Data relating to 2019 are as follows: Uneamned revenue — January 1, 2019 3,300,000 Receipts from subscriptions during 2019 18,000,000 REQUIREMENTS: (1) How much of the current year cash collections were recognized las revenue as of the end of the year? (2) What amount should be reported as unearned income from subscription on December 31, 20197 4. PANGASINAN CORP. sells appliance service contracts agreeing to repair appliances for two-year period. The past experience is that, of the total amount spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% is incurred evenly during the second contract year. Receipts from service contract sales are 300,000 for 2018 and P400,000 for 2019. Receipts from contracts are credited to uneamed service revenue. All sales are made evenly during the year. REQUIREMENTS: (1) What amount should be recognized as revenue from service contracts for the years 2018, 2019 and 2020? (2) What amount should be reported as unearned service revenue on December 31, 2018, December 31, 2019 and December 31, 20207 5. CAVITE DEPARTMENT STORES sells gift certificates redeemable only when merchandise is purchased. Upon redemption, the entity recognizes the unearned revenue as realized. Information for the current year is as follows: Gift certificates payable, January 1 360,000 Gift certificates sold 800,000 Gift certificates redeemed 730,000 Gift certificates expected not to be redeemed 60,000 Cost of goods sold 70% REQUIREMENT: Compute the unearned revenue on December 31 REFUNDABLE DEPOSITS 6 LAGUNA COMPANY sells products with reusable, expensive containers, The customer is charged a deposit for each container delivered and receives a refund for each container returned within two years after the year of delivery ‘The entty provided the following information for 2019: ‘Containers held by customers on January 1, 2019 from deliveries in 2017 75,000 2018 245.000 280,000 Containers delivered in 2019 380,000 Containers returned in 2019 from deliveries in: 2017 45,000 2018 125,000 2019 143,000 313,000 REQUIREMENT: Compute the liability for containers deposit on December 31, 2019. ACCRUED EXPENSES 7 BATANGAS RETAIL STORES INC. is curently operating various retail stores in Batangas. The following information was gathered in order for the company to prepare its year-end accrual on various expenses. + BATANGAS pays its salespeople a salary plus a commission. Salaries are being paid twice a month on the &'" day and 20" day of the month. The cut-off dates are every 13" day and 28" day of the month. Information regarding the six salespeople are as follows: No. of Years Employed Dally Sala Abraham 10 2000 Isaac 9 4/800 David 8 11400 Samuel 8 1/200 Mary 3 900 Sarah 075 800 * _GATANGAS also pays its salespeople commission based on a percentage of the enlty’s total gross sales Commissions are paid annually 5 days after year-end and varies by length of employment of the Salesperson. Each salesperson starts with a commission of 1.0%, which is increased by an additional O69: REO CPA REVIEW PHILIPPINES. Effectiveness. Efficiency. Convenience waww.re0epareview.ph REAL EXCELLENCE ONLINE CPA REVIEW © 074) 6056774 @ 0916 840.0661 @ supportareocareviewsh MAY 2021 CPA REVIEW SEASON Page 6 of 8 | FAR Handouts No.2 REAL KARIM G. ABITAGO, CPA EXCELLENCE ‘CURRENT LIABILITIES for each full year of employment to a maximum of 5.0%. The total gross sales for 2019 amounted to 3,200, 000. * Anelectric bill was received by BATANGAS on January 20, 2020 amounting to P60,000 covering the period December 17, 2019 through January 16, 2020 * _AP100,000 advertising bill was received January 7, 2020, comprising costs of P65,000 for advertisements in December 2019 issues, and P35,000 for advertisements in January 2020 issues of the newspaper. © The store lease calls for fixed rent of P200,000 per month, payable at the beginning of the month, and an additional rent equal to 5% of gross sales over P1,200,000 per calendar year, payable on January 31 of the following year. REQUIREMENT: How much is the total amount of accrued expense to be reported on the December 31, 2019 Statement of Financial Position? PAYROLL TAXES PAYABLE 8. _ RIZAL COMPANY paid employees at the end of each month, The payroll for December revealed the following: Office staff Officers Sales staff Gross payroll 154,000 310,000 200,000 Income tax 24,000 63,000 42,000 sss 8,000 9,000 8,600 Phitheatth 4,500 10,000 6,000 Pagibig 4,000 5,000 4,500 The employer's contributions in relation to the December payroll are as follows: Office staft Officers. Sales staff sss 40,000 5,000 71,000 Philhealth 6,000 11,000 8,000 Pagibig 5,000 7,000 6,000 REQUIREMENT: In the financial statements for the month of December, what amount should be reported respectively as payroll tax liability and payroll tax expense? ESCROW LIABILITY 9. On the first day of each month, MINDORO INC. receives from MARINDUQUE CORP. an escrow deposit of 500,000 for real estate taxes. The entity records the P500,000 in an escrow account. MARINDUQUE's 2019 real estate tax is P4,000,000, payable in equal installments on the first day of each calendar quarter. On January 1, 2019, the balance in the escrow account was P600,000. REQUIREMENT: On September 30, 2019, what amount should be reported as an escrow liability? REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www.feocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW © (074) 665 6774 @ 0916 840 0661 © suppor@reocpareview.ph MAY 2021 CPA REVIEW SEASON Page 7 of 8 | FAR Handouts No.20 REAL EXCELLENCE CURRENT LIABILITIES MULTIPLE CHOICE (THEORIES) 1, Which of the following is not an essential characteristic for a lability to exist? ‘A. The liability arises from an obligating event. B. The settiement of the liability requires an outfiow of resources embodying economic benefits, C. The identification of the payee is a requirement. D. None from the choices 2. Which of the following is a liability item rather than equity item? Redeemable Preference Stocks Dividends Cash Dividends Shares Payable Payable A No Yes Yes B. Yes Yes Yes ic Yes No Yes D No No Yes 3. S1i_ Financial liabilities are classified as financial liabilties at fair value through profit or loss (FVPL), financial liabilities at fair value through other comprehensive income (OCI) or financial liabilities at amortized cost, 2: Transaction costs are expensed immediately if the financial liability is designated initially as at fair value through proft or loss. ‘83: Financial liabilities at amortized cost present gains on losses on changes in fair value within profit or loss. A True, false, false D. False, true, false B. False, true, true E True, true, true C. True, true, false 4, An entity shall measure initially a financial liability designated at fair value through profit loss at A Fair valve C. Fair value plus transaction costs B. Face amount D. Fair value minus transaction costs 5. Which of the following statements is not true regarding the presentation of current labilties in accordance with IFRS? ‘A. The noncurrent liabilities follow the current liabilities, 5 Current iabilties are generally recorded at face amount. C. Current liabilities should not be offset against the assets used for liquidation. D. Current labilties may be listed in the order of maturity, in descending order of magnitude or in the order of liquidity preference. 6. Which of the following is not a current liability? Financial liabilities held for trading, Aloan obligation where the entity has an unconditional right to defer settlement of the liability for 6 months atter the end of reporting period, Deferred tax liability expected to reverse within 6 months Accrued operating expenses expected to be paid after 1 year c. D. 7. Which of the following is a current liability? I Hi o> Current portion of a long-term debt A long-term debt that is immediately demandable but the creator agreed to provide before yeer-end a grace period of 12 months lil. long-term debt that is currently maturing was refinanced after-year end. 'V.__ A breach of covenant on one of the company’s long-term debt where the creditor, after year-end, agreed to provide a grace period of 7 months. A I,lland I D. Aiilandiv B. landiv E tlandiv Cc. tanditl 8 A retall store received cash and issued gift certificates that are redeemable in merchandise, How would the seferred revenue account be affected by the redemption and non-redemption of certificates, respectively? A B ics D. Redemption of certificates No effect, No effect, Decrease Decrease Non-redemption of certificates No effect. Decrease No effect, Decrease 9. Which of the following increases the balance of the accounts payable? (1) Post-dated checks issued to suppliers, (2) Goods in transit from a supplier shipped FOB Destination A tonly ©. tand2 B 2only D. Neither 1 nor 2 REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience wwnw.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW © (074) 6656774 @ 0916 840 0861 @ ‘Support@reocpareview.ph MAY 2021 CPA REVIEW SEASON Page 8 of 8 | FAR Handouts No.20 BEAL NCE ‘init CURRENT LIABILITIES 10. Which of the following liabilities that are not part of the normal operating cycle of an entity should be classified as noncurrent? A. Bank overdrafts B. Financial liabilities classified as held for trading ©. Current portion of noncurrent financial labiities D. Financial liabilties that provide financing but are not due for settlement within twelve months after the reporting period --- END OF HANDOUTS — REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience winw reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW. © (074) 665.6774 @ 0916 8400661 @ support@recepareviewph MAY 2021 CPA REVIEW SEASON Page 1 of 4| FAR Handouts No.21 REAL NOTES PAYABLE EXCELLENCE rasa OABAGO oR NOTES PAYABLE KARIM G. ABITAGO, CPA NOTES PAYABLE : ; Notes payable are liabilities evidenced by a written document known as “promissory note”. A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. CLASSIFICATION & MEASUREMENT ¥ ia Fees [Fa vas rs pense CLASSIFICATION [ac tna | enn el | rarest ta nn Franca ves okose ‘farvibe, | Fa Vate Fai Vato ne | reset | ‘pot le finan — | muir Frere) CiStmes oe ean iabines a | Fat Valve minus | rorzna Cost Yes no | etecve ate Amortized Cost | Tansa For notes payable at amortized cost, the word “fair value", for initial measurement purposes, depends on Ws further Sub Classification and summarized as follows: INITIAL MEASUREMENT interest Beating | << Face Value Face Value, unless SHORT TERM Non-interest | ———> giscounting is material is Bearing should be measured at Present Value With reasonable interest rate > Face Value With unreasonable Present Value |__interestrate Pere esto |e Present Value Bearing _ FREQUENTLY ASKED QUESTIONS (1) The intial and subsequent measurement of notes payable (please refer to the discussion above) (2) For financial assets at amortized cost, the subsequent measurement can be determined through the use of ‘amortization table (3) _ Interest expense for the year + For FVPL liabilities — interest expense is based on NOMINAL RATE +, __ For FAC liabilities ~ interest expense is based on EFFECTIVE RATE (4) Current and non-current portion of notes payable Teor nor fle generally applies only for long-term notes payable with series of payments of principal For ong- ieim notes payable with lump-sum payment of principal, the WHOLE carrying amount is classified ac curse Vabilty if itis due currently (LONG-TERM DEBT CURRENTLY MATURING) * For notes payable measured at face value ~ the payment within 12 months is classified as the current portion, * For notes payable measured at present value — the payment within 12 months less effective interest is classified as the current portion DEBT RESTRUCTURING sieuteeucturing is a situation where the creditor, for economic or legal reasons related to the debtors fancial

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