DyM . .

lfrao,m ReS A
The Revi ew Scho ol of Acco unta ncy
WTel. No. 735-9 807 & 734-3 989

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Fina u.cia I Acco untin g •Ill J

JJAB ILITI BS

re a liabilit y at the amoun t that rt would rationa lly

I. Initial 11/ea.mrc'!'eu l of liahi!itieJ· -: The entity shall measu
d of the presen t obligat ion. It clarifie s that the amoun t that
pay at th e end o l th e accoun t mg pcnod to be relieve .
ion is the lowest of:
c nti ry wo uld rationa lly pay to be relieve d of an ohligal
,1 11
guidan ce
hilt-ill the obligat ion, measur ed in accord ance with
:i The rrcst· nt value of th e reso urces require d to
in the Standa rd .
obliga tio~ and
b. rhe a mo unt v. o uld rationa lly pay to cancel the
to pay to transfe ~ the obligat ion to a third party.
r . f he am,)Unt rhat the entity would have

ed ltJ fulfill 011 obligalio11 - an entity should take into

Meusurir,,: tl,e prest!11I l'llluf! of the remur cel requir
ronsid crntion the fo llowin g e lement ~:
The t•xprclcd outflow s of resourc es
;-i _

b. The time val ue of money

c . The risk I.hat the actual outflow s of rcsuurc
es might ultimat ely differ from those expect ed

es and their effects s.ball be taken into accoun t by

Expec ted outflo w.,· of resour ces - lhe range of oulcom
s. Estima ting the presen t value involve s :
estima ting the expect ed presen t value of the outflow
:1.Identif ying each possib le outcom e
of the outflow s ofreso urces for that outcom e
b. Mak ing an unbias ed estima te ofih.: amoun t and timing
and
c. Determ in ing the presen t value of these outflow s,
of each outcom e
d. Makin g an unbias ed estima te ofth~ probab iliry
the
averag e of the presen t values of the outflow s for
The expect ed prese nt value is the probab ility-w eighted
possib le outcom es.

The relevan t future outflow s are those that affet;I the

anwunt that the entiry would rationa lly pay to be relieve d
nt to the
r the obligat ion is to be fulfille d by a direct payme
of the presen t obliga tion. These depend on whethe
counte rparty or to undert ake a service .

a . Obliga tion fulfdle d by makiu g {'ayme nls to the

counJerparty - if the obligat ion will be fulfilled by making
payme nts to the counte rpart)', such as a payme nt in a lawsui t, the relevan t outflow s include
I . Payme nts to the counte rpany and
of an in-hou se legal departm ent attribu table to
2. Associ ated costs, such as externa l legal fees or the costs
that obl-igation
.
b. Obliga tion fulfill ed by undertakiJ1g a service
- if the obligat ion will be fulfille d by underta king a service
tflows for such pbligat ions are the amoun ts that the cntiry
s uch as decom missio ning a plant, tht: r.:-levanl ou
to undert ake a service on its behalf This would depead
would rationa lly pay a con~c tor al the furure elate
, as follows ;
on whethe r there is a market price for such a service
t is the pric.: that the entity estima tes a contrac tor would
l . If there is a market for a .!>ervice, the- amoun
the entity' s behalf. and
charge at that future date lo ,mdert ake the service on
2. If there is no market for the service , the enrity estima tes the amoun t it would charge anothe r party at that
should include costs the entity expect s to incur a nd
future date to undert ake the service . The estima te
for the other party.
the margin it would require to undert ake the service
ment in
is no c hange lo the subseq uent measu rement require
2. Subse quent Measu remen t of Liabil ilics - ll1crc al the end of each accoun ting
the amuun t of a liabilit y
that the entity shall review and if necess ary uJjusl that date.
lly pay to be relieve d of the presen t obligat ion a l
reporti ng period to the amoun t that it would rationa rell ec l any change s in
a liability , the remeas uremen t should
When an entity remeas ures the <.:arryi11g 11 rnounl of
es timates of:
a . the expect ed outflow s of r..:sourc:ec.
b . market assessm ent of the time value of money
ultimat el y differ from those ex pected
c . the risk that the actual ootllow s of reso urces might
v resulti ng from passag e of time ore recog11i:;rtd
Howev er, £·hange s i11 lhe carryin g um,iun t of rile 1/uhili~
as a borrow ing cost in profit or Ion .

3. Curren t and Non-curre111 Clas.~ificar/011

uny uf the fo llow i11g :
Liabili ties are classif ied as curren t when ,: sa11 sf1es
opernti ng cycle
a. It is ex pected to be set.tied in the entity 's 11onm1I
b. It is held primar ily for ,he purpos~ of l•i::ing tmdeJ
RcS, I / Fi11m1d11/ Acco1111ti11g mu/ Reportin,; P11,:e 2 o( 6
l' . It b due 10 be ,ell lcd wi thin twel ve month s alh-r lite hal unct shee t date; or
d. l'hl' 1'11l1l) dnl'' m,t have an un cn11Jitin11al right 1\1 defer sdtlemcnt nfthc liability For al least twelve monU1~.
;Il ler the bL1lanct· ~heet dal e, ·

l'\ ,,th' Uli'l:111 liab il111 ,·, :i rl' li11hi li1ics 11u1 cla~s if1cd as current The se include th e followin g: non-c urrent
p11rtiN1 nl long trrm , capit al lease li ability, non -current deferred la x li uhl lity, long term obligatfons lo company
of)ice r.--. long tl'rm d0 lerrcd n:venue.

•I Short term dcht that /,\ e,·pccted to be rc011r111ccd

i\n entit y c lussifi es it s fin :mcial liabilities as current when they are due lo be scul ed within twelve months 011er
the hulancc sheet date, even it ,
" The original term wa s for J period longer than twelve months; and
b. rit e inlt!ntion is suppo1i cd hy :in agrt'e rn cnt to refinnncc, or reschedule payments, on a long-term basis is
completed allcr the balance sheet dale and com~l etcd before Lhe fin anc ia l statements arc authorized for
b suc.
I f :in cnli1 y e.xpcc1 ~. and h:is the di scretion, to refin ance or roll over an ob li gation for al least twelve months
Jltc r th e ba lance sheet J..1tc under an existin g loan facility, it classifies the obligation as non-current, even if it
IV()u ld otherw ise be due within a sho11cr period However. when refinancing or rolling oyer the obligation is
n() t at the disc retion of the entity, the potential tu refinance is not cons idered and the obligation is classified as
current.

S Breach o f an undertaking : When an entity breaches nn undertaking under a long-term loan agreement on or
before the bal ance sheet date with the effect that th e liability becomes payable on demand , Lhe liability is
classifi ed as current, even if the lender had agreed, afler the balance sheet date and be.fore the authorization of
fi nancial statements for iss ue , not 10 demand pay ment ns a consequence of the breach, The liability is classified
a current because, al the balance ~h~et date, the entity docs not have an unconditional right to .defer its
se ttlement fo r at least twelve months c:1 flcr that date.
h. Pro 11isiun - An ex isting li.abili~y of uncertain ti111ing or uncertain amount·. The liability does ex ist on balanc e
sheet date but the amount is indefinite or the date the obligation is due and i~ some cases the payee cannot be
determined. It is the equivalent of estimated lic:1bility or a loss conringency Lhat is acc rued because it is bolh
probabl e and measurable.
a. Recognition of provision - the fo llowin g conditions must be met :
D The enterpri se has a present obligati on. legal or constructive, as a result of a past event.
w It is probable Llrnl an out now of resources embodying economic benefits will be required Lo settle tire
obligation . ·
□ The amount of the ob ligation cnn be meas ured reliabl y.
b . Mea.,·ureme111 of the prm1isio11 - The Standard requires that ·'the amount recogni zed as a provi sion shall be
the best estimate of the eKpenditure req uired to sett.le the present ob ligation at the end of the accounting
reporti ng period". This can be viewed as the amount that an entity would rationally pay t.o be relieved of
the present obl igat ion. lt clarifies that the ;:\mount that an entity would rationally pay to be relie ved or an
obi igation is the lowest of
I. rhe present value of the reso urces required to fulfil the ob ligation. measured in accordance with the
guidance in tbe standard .\
?. . The amount that the entity would have lo pay lo cancel the obligation, and
3. The,c:1 moun1 that the entity would have to pay to transfer the obligation lo a third party.
Measuring the present value of the rc~ourccs required to fulfil an obligation: the accoWlting stand ard
clari fies Lhat the prese nt 'value of the reso urces req uired to fulfil an obligation shall be estimated Lakin~ into
accou nt the following clements
(;1) The ex pected outfl ows of resources
( b) The time va luco fmom~y. and __ . .. _
le) The risk that th e nc tual outn ows ul reso urces 1111 gltt ulti111a1ely d1tfcr lrom those expected

Expcctt<.I outflow of rcisourccs - the ran ge or ou lco1nes_and_their effec ts shall b~ taken into account b)
esti mati ng the expected present Vil lue ufthc 011tllow s. Es11mal111g the present va lue mvol ves
(a) Identi fy in g each poss ibl e ou1L·o~1e . . . _ .
(h) Making an unbi ased estim ate ol '. he arnou11L n11d li min g ol tlt i:: ou1tlows ol resources tor tJiat outcome
(c J f)ct cnnining the pres1:nl va lue t~I Lh t.Jsc 0~1tf!u w~ , and _
. .
( d) Mak rn gan ur1 ·
bi ascd estimate
• ol the probab illly of eac h outc111m:
. I c ·c Lil '' (11'ohab rlit}'-wc 1-~htcd. avc ra !:\e l1 1° th e preSl'lll
-1-11 • • , cted prest:n l va u 1•' ... _ ,
values l)f lh c uutll ow for 1he
c cx pe . Al1h gh the1\: lfHIY he many poss,htc out comes. the ll·•l{S docs 1101 prec lude' 1he USt' or
po~. :,1ble outc omes . . . otu . ,," .-,,,d pnihubili1il'S I ll 11n1vidl' u rca~l1nab le estim ate of tJ1e disinhu1i o11
h t ,sere c ou1et1111 ... ·· '
a l11111ted nun, er IJ 0
. . .
• wilk ·1r1d !lie ouu:uni es arc nu1n cru11s. r,111g1ng lro m txtrcrnely h1~h 1,,
. • I f , ( ( ti IC ran gt I<; ' ' . • • '
uf pll <;Slh e outCOI It.:: . _ . Jo •v n in to three d, ~c r..:t e ,>ulcomes of l11gh , avcnigc 11ncl tow .
·t 11 -1y n;irrow 11 rt: 111 '
c xtrc md y lo w_ th e entt y , ,

ReSA
hool of Accountancy
The Revi ew S3c5 -9807 & 734 - 3989
tr Tel . No, 7
 ReSA I ':'inmrc :ial ,1ccou11ti11~• mu/ Reporti111•
1
rtw CS(
tma lcs of o utflows shall incor )Or~,; .. . . . Page 3 of 6
omounl
' '" a u11h1ased way, a ll ovoilabl e i11fom10tiun oboul the
L11111 n i_: ,tnd prohabi lily o f tf ,, ·Ic:. vantI r.,ulurc '
- . k re outflo · . d h , le market prices, if
~u.: 11 pr,1: es :ire ava il Rhl e. ws an -e cons ,.slc nt with observab
The rc kv·u11 (iu 1ore o u1 flo ws are th ose th . t . I'" . h . .
pay lo be
. •
1elt t: vcd 1, f lh t: prc s•' nt bl" . . _ _a <I rect l e amount that the entity would rationall y
is to be fulfilled by a direct
,> <1.y 111t·n1 lo lh,. . ~ . ~ •gn tt on . I hesc Jc pe nd on whether the obligatio n
: . · countc, pany or to und enake a service.
\a1 O!Jl11..:m1on fulfilled by ma k'mg, payme nts to the co unter party, such as payment in lawsuit the relevant
._ . '
1·u t fl ows mclude

I . Payme nb h1 the rounterp arty, Jnd

an in- house legal departm ent
:2 . .l\ ssoc iafed costs, suc h as c.\tcmal lega l fees or the costs of
a llnbutub le to thc1t ob ligatio n .
iss ioning ofa plant, the relevant outflows
l b / 1._}b!i~ati "n rulfilled by und crtaf.. ing a servi ce s uch as decomm
are th e umo11nts lh al the entity wo :.ild rationall y pay a contract or at tJ1e future date
lo.- s uch oh hga tic,n~
depend wh ether there is a market price for such a
to 1111 dcrla ke the .~ervi..:e on its bcltalL T his wo uld.
, c rvicc
the entity estimale s a contract or
I. ir lherc is a ma rket for a se rvice, lhc.: am0unt Is the price that
service on the_entit y's behalf
would c harge at th e future <;late to undertak e the
the entity estimate s the amount it would charge another
If th ere is not a market fo r th e service,
date to undertak e the service. The estimate s shall include the costs the entity
party al 1he future
undertak e the service for the other party.
cxrccts lo inc ur a nd the margin it wuuld require to

explicitl y the discoun t rates should be the

Determ ining the Present Value - IA S :17 docs not state
many .-ntities use their current borrowi ng costs to discount the future
referenc ed risk-free rates. In practici::.
discount ed to their present value using rates
o utflo ws . IFR 5 requires that the expected outflows s hall he
th ::it re fl ect:
a. C urre nt marke t asscssm ~nts of the time value of money, and
the risks are taken into account by
b. Risks specific to the liability (but only if and to the extent that
). The risk adjustm ent measure s the amount, if
adj us r-ing the discoun t rate rather rhan by other methods
rationall y pay in excess of the expected present value of the outflows to be
a ny, tha t the entity would
re lieved of this risk. A risk adjustm ent can be included by:
a. Adjustin g estimate s of future outflows
value, or
b. Adjustin g the rate to discoun t the future outflows to the present
addfog a risk adjustm ent to the amount
c . Calcula ting the expected present vaJuc o f the outflows and
so cakulate d
a provisio n are summar ized below:
The other rcguire m~nt of the IAS 37 on the measure ment of
d many events' and circums tances shall be taken into
c. The n :fks and uncertai nties that inevitab /y yurrvun
best estimate of a provisio n. As risk variabil ity of outcome, a risk adjustm ent
accounl in reachin g the
d. either by adding a risk premium to the
may increase 1he amount al which a liability is measure
undisco unted expected cash flows or reducing the discount rate.
that "the amount ofprovisio n
d. Where the effect o_ftime value of money is material, the standar d requires
to settle the obligatio n ".
shall be the present value ofthe expendit ure expected lo be required
rates) 1ha1 rejlect(s ) current market assessm ents
e. The discoun t rate (or rates) shall be a pre-1_ax rate (or
of the tim e value of monc.y and the risks specific to 1he liability .
to settle an obligatio n shall be
f The probabl e 'future evenls that may aff(;ct the amount required
prov,J·io n where there is sufficien t ol?fecliv e evidence Iha! they will occ·ur.
reflected in 1he amount of a
reasona bly expected 10 occur before or
This mar include (uliire ,·hanges in technolo gy or laws that are
based on sufficien t objectiv e evidena .
at the d~le the liability is expcctr!d to be ·settled,
o,lassels shall nm be taken into account in rncas,uring a pr<Jl'isinn
g. Cains from the t>.xpected disposal

7. Common types of provisions madl~ by a seller to a buye r to make

a. Warran ty provisio n . a warrnnly (producl guarante e) is a promise
ance in a product. Warranties a nd guaran tees e ntail
good on a deficien cy of quantity , quality, or perfonn
addition al costs, somet ime called "alter costs" or " posc-sale -cos r" frequentl y are
future costs, th ese
to amount , clue ela te, a nd even custome r. a liability
significa nt. AlthougJ1 the future cos r is indefinit e ,1s
Comran ies sho uld recogniz e thi s liability in rhe accoun ts if chey ca n
is probable in mos t cases.
includes all th e cost that the compa ny wi ll
reasonab ly estimate it. T he cs lirnatcd amount of th e liability
correc tion of defects o r de fi cie ncies required und er
incur after sale and delive ry th al are incident in the
t.he warranty provision . Two types o f warranty .
rate pe rlonnm1 cc o bligation . lt is nothin g
I. A.u11ra11t·e-type warra11(p - cornpa11ies do no t record a sepa
the good or servi ce is free ti-om defec ts a l the_point of sa le_. T hese
more than a quality guarante e that
e go?ds_ ." re ~'.ov1ded o r services nrc_
types of obligatio ns should be ex pensed in cho period th
r,~cord u warranly hab,ht y. I he cswnatc d a n'.o u,'.l o t
pe rfomied . In add itio n, th e compan y should
that the compan y w ill 111cur a11c r the sa le dUl' 10 th e co1Tuc t1 un o f del t:c ls
liab ility includes all the costs
o r de ficien c ies required under the warran ty provisio 11s.

ReSA
The Review School of Accoun tancy
•Tel. No. 735-98 07 & 734-39 89
 ReS,,-1 1 Fi~<m<-·ial ,;frco11nti11 • untl Re }(Jr/ill • p 11 •e 4 · r,
0
Sa11icc-type warra11ty A wamtnl y is somclimcs suld separa tely from the product . In most cases
wrvice-ly pc \Hirranty provid es the cus101m:r n service beyond fi xi ng, defects existed at th e time 0 ;-
salc. Cor'.1pnnit·s ., huuld . recognize n scp;iratc performan ce nbligalion (Unearned Warranty
Revenue ) lrorn tile sal e ul th 1c warrant y rnnlract th en recognize the reve nue on a straight-line basis
11ver the peri od the ~crvkc -lypc is in cffcci.
b. Co usi deralion Paya ble - companies ofte n make pay ments (provide consideration) to their customers as
p::111 of a revenue ana ngcment Consideration paid or payable may indicate discounts, volume rebates,
free products, or servi ces. Companies offer prerniurn s, coupons offers, and rebates to stimulate sales.
Clllllpan ics should charge the costs \lf premiums nnd co upon s to expense in the period of the sa le that
hC'noli1 s from the plan .

..: . Lcg1:1I Provi~ion - entities must cnns iJcr th e following faclors, among others. in d,etermining whether to
record a liability with respec t to pendin g or Lhrcutened litigalion and actual or possible claims and
assess ment s.
I . T he time period in which the underlying cause of aci-ion occurred
1
The probability to make a rcasonnble estimate of the ainounl of loss
J . Enviroumcntal Provision estimate lo cleun up c.>:isting toxi c waste. restoration of land and lhe
eventual decommissioning of an asset
~- Oncrou~ Contract - the un avoi dable costs or meeting the contract exceeds the economic benefits
ex pected to be received
8. Reimhurseme11ts - where some or all of the c,xpenditurc required to scltlc a provision is expected to be
rei mbursed by m1other party, the reimbursem ent 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. The amount recognized for tJie reimbursement shall oot exceed the amount of provision.
The reimbursement receivilble shall nol be offset with the provision . However, in the statement of
co mprehensive income, the expense relating lo a provision may be pres~nred net of the amount recognized for
a re imbursement. if th ey relate to the same eve11t and are recognized in the same perlod.
9. Co11ti11ge11cies:
3. Contingent liabilit~y is a pns.\'/hle obligalion !hat arises from past event and whose e.'<isteoce will be
cnnfinned only by the occurrence or nonoccun-ence 6f one or more uncertain future events not wholly
within !he control of the enterprise. It is a l2.{_esent obligation thal ari ses from past event but is not
recognized because it is not probable that an outflow o,f resources embodying ecoryomic benefits will be
req uired to settle the obligation or the amount of the obligation cannot he measured reliably .
b. Co ntingent asset - is a possihle as~et lbal arrses from past event and whose exi stence will be confinned
only by the occurrence or noDoccurrence of one or more uncertain future events not wholly within the
control of the enterprise.
Accow1ting for contingent liabilities and contingent assets
Contingent Liabilities Contingent Assets
Vi rtuall y certain (therefore. nol contingent) Provide Recognize
Probabl e Provide Disclose by note
Poss ible Disclose by note No disclosure
Remote No disclosure No disclosure

Degrees of probabiliLv - PAS 37 recognizes lour degrees of probability for contingencies but it gives no
guidance as to the meaning of the terms . One possible interpretation could be:
Virtually certain probabilily above 95 %
Probable probability above 50%, and up to 95 ry;,
Po~s ible probability of 5% and up to 50%
Remote probability below 5%

Debt Jostrumcnts(Bomls Pa yable)

I. Initi a l measure ment =- the fair value of the instrument iss ueJ T_he fair valuo of the instrument issued is equal to
. , ds r.r
1hc procte . 11 0111
th e issue of the dchl in strument exc luding• any proceeds
.
for accrued
•
interest
•
(1f the
· • ·
·
1ns(Tumen ts h"Cre i·-sued between interes t dittcs) le ss any tra11sac11on costs rncurrcd . Bond iss ue cost 1s rn111 u 11 )
J . • . '

, f , , · ig amount of the liabilil y and should therefore be added to the bond discount or deducted lrom
part o t11e carryrr . • 1f , · fl' . · · , , ,
any premium . I1e II· 1c·urrence of ,s," uc cost would rne;:in a rc co111puml1011 ( t11e y1e 11l ore ecllve 1ntt:rcs t ralt.: on
· 'l'
the iss uance of the debt instruments.
. c1 · , t . - .1 - v tr:1ns11c111111 cu~I incurrl·d shuuld be ,unortized using tht' effec ti ve intaest
2 _, i\ ny prcrniurn or 1scou11 " 11u •111 ,
nicthod u f arnorti7.at11>n .
' n· . tJs arc iss uct.1 w/ sharc/s tocl, warrants . . . . .·
When on · . / ./ /·I 1 ·/,ah/e st,1< ·k u •,11'r u11/.1' /., 1w1.,·rd ,·r,·, I un 1., s1w11cc (I/ en, 111po 11t1d / ,nuilL i,tl
7 •1 · , . . , nf 11 hom wit I O t l ' ' l''f
1 r'll' /,l ,\l.l tlfll L • . . . I . o n ·, ·di· /roni /.1·.1·11, · 111 ,n ,·urd, 111ce 11•1th thl' 11 c 11• stunJords ial ,m
.. , t · tin1 t r 'I.f l/I res s11l1ttt11f,:, t " (Ir . I . ,, ., I
trI 1·tr111n"n .I " •. , · ,
1 (wurru nt.,! r t!/'l' <',11' /J/S tli l' res 1c/11al ,11111,11111 uj tli,·jm r 1·t1 II L' ({ 1r u , ,,,s
.. I 'fir 1n tli L' <'</IJl/ )i L,1mpr1 11c11 , I 1· h 1· t, J., J
int/tu recog nt , , I · j .·t in ' ' 1h ,· ,J/11 ,1 1111/ ser •1 1rt1rcl1· d,·t er'lllin l'il / Pr In· w 1 11, · I u n , ~
I.IS / / 11'/111/, , r.1// t I I t l Ill ,-.,
0/ t/1'' im, tr11111c 111.v
C// fllfJOll l!ni

ReSA
h Re v iew SchoC'I of Accountancy
T fie.T el. N o . 735- 9807 & 73 4 - 3989
 ---·,
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R.eSA I Fi,,ancial Ac_cmmtim: and Reporli11g Page 5 of 6
-1 . Issue of a convertible debt instnunents
i 'lusslfv the instrument nr itf c , . , . . . . . .
·· ' · · o mpLmenl parts, on If/Illa/ recogmtwn as a financial l,ab,ftty, a finan cial ass el or
<111 l!(flllf1, 1m·tr11mt'11J in ac-·
1 or,I<JnC:f' w11
· I·1 t I11' .1--11 I•s tance of the .:onrractual
. " . • , , · arrangemenr and t I1e d <!jd//llons
,.n ' o,,r a
f inancial halnl,tv. afin,mcial asset u,1,;' equir,1 instmm enr" .
11'.l! equity componenl
represents 1he t esidu;,, 0111011111 vf the fair value of the i11strume11/ as a whole (proceeds)
<~fer cA•ducting the amou111 sepurately determined.for the /iubiliry (the present value of expected cash flows).
nll! s11m of the carrying amounts assigned to the liability and equity components on initial recognition is always
e,1ual to. the _fiiir value that would be ascribed to the instrument as a whole. No gain or loss is recognize from
initial recognition of the componrnls of the instrumem

S. Con version of a convertible houd:

The amortized cost/carrying 'talue of the debt, whil:h , is equal lo the face value of the instrument less any
unamortized bond issue cost.:; and un '.11nortized bond discount or plus unamortized premium is dcrecognized as n
liability will be recogn ize as an equity. lhe equity component ut the time of issue (of the compound
instruments) remains in equity (although it may be transferred from one line item within equity to another). No
gain or loss is recognize un the conversion of debt Lo equity.

6. Retirement of bonds prio1 to maturity

a. Non-convertible bonds = the carrying value of the bonds - retirement price exclu,ding any accrued interest
should be recognized m the profit or loss as an ordinary item .

b. Convertible bonds = the redemption price and any trdJlsaction costs are allocated to the liabiLity and equity
components at the date of transaction. The mctho~ used in allocating the consideration paid and transaction
costs to the separnte components is consistent with that used in the original allocation to the separate
components of the proceeds rrccived when the convertible instrument was issued .

Operating Lease:
I. The periodic rental is to be recognized as an expense (lessee) & as a revenue (lessor)
2. Any lease bonus should be amo1tized over the lease tenn and recognized as additional rent expense (lessee) or
rent income (lessor).
3. When the periodic rental is unequal and/or has a provision for a rent holiday (rent-free) the total cash rental
throughout the lease contract tenn be determined & amortized on straight line basis over the tenn of the lease, ·
unless another systematic and rational basi5 is more appropriate. Any difference between amount charged and
amount paid should be acljusted to prepayments or accruals (lessee), receivables or deferred revenue (lessor).
4. Any additional rental that is contingent on the re~·enue of the lessee or any other factors , should be recognized
as expense (lessee) & income (lessor).
5_ Any leasehold improvements should ht.> depreciated over the remaining lease term/remaining extended lease
term or the life of the improvement, wnichever is shorter.
6. Any security deposit that is refundable or lo be used upon or prior to the expiration of the lease contract be
··recognized as an asset (lessee), as a liability (lessor).
7. Expenses related to the lease asset are normally borne by the lessor.
8. Any direct cost related to the lease contract may be spread over the life of the lease or charged when incurred.
9. The lessor will continue lo recognize th1: leased assets. They are normally classified as non-current assets held
for hiring out under operating lea5es. They will h" depreciatec! in the normal way.

Finance Lease - Lessee <Recognitiou 11ud Measurement)

I. The lessee should recognize the leased asset and the obligation to make lease payments as assets and liabilities
in the balance sheet
2. Al the inception of the lease the amounl.S will be equal the lower of:
a. the fair value of the leased prnperty at t~e inception, and
b. the present value of the minimum lease payments, which includes the following.
I. periodic rentals excluding executory costs
2. any payment required under a bargain option or any guaranteed residual value made by the lessee or 11
party related to the lessee.
c. the discount rate to be used is the i1~plicit rate in the lease but when it is impracticable 10 detem1ine use the
lessee's borrowing rate.
3. The lease payments will be split bet\\-cen a finance charge and a repayment of the liability.
4 . The leased asset should be depreciated; over ll1e economic useful life of the asset if there is reasonable certainty
that the lessee will obtain ownership at the end of the lease term (I. when transfer of title or 2. when the
bargain option criterion is met), over the lease l'erm or useful life whichever is shorter ( 3. when the leosc term is
for the major part of the ernnomic life uf the asset or 4. the present value or minimum payments amounts to
substantially all of the fair value is mel). ,
Finance Lease - Les..'IOr (Recognition and Measurement)
I. The lessor should recogni7e the lease 11s o n..--ceivable. The carrying v11lue will be rhc les5or' s net invesnncm in
the lease which is equal lo the following :
a. the present value of the minimum le11sc payments receivable, plus

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The Review School of Accountancy
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 RrSA / Fi11a11cia/ 1kcou11tim: a11d Reporting Page 6 o( 6
h. the present va lue l'r any unguarantel·d residual va lue accruing lo the les~or (e .g. the residual value of the
leased asset when it is repossessed al the end of the lease).
In rruc1icc, the lessor·s net investrn cnl in rhe lease will be the same as 1hc lessee's liability.
The lease rece ipt s will he ~p lit belween finance lncomc and repayment of the pr incipaJ

.-\ l'Olll'racl uf lease may lead to a financ<' lease if any of the following criteria is met:
a. Th..: le.:rs,· transfer,,· owm.:rship of1hi.: rissel to the lessee by the end of the lease Jenn ;
t, Th,: Jessel' has the C>plion 10 purchase the asset al a price. which is expected lo be sufficien!ly lower !han the/air
,·ulr, e 0 1 1he date th e ortion hccomcs exercisable sue/, 1h01. al 1he inception of the lease, it is reasonahly cerlaln
thot th ,• option will h<' cxerc 1Yc' d ;
The l.:ngth is for rlw mnfor part a/ the economic !Uc u( th,: a:1se1 e1·e11 if title is no / /ram.fe rred The leng th of
lease .~hould include ar~1· se,·ondury r.:ntuf. A secont!111:1, rental g ives /he lessee an option for renewal.
J .-Ir the lflL'eption of the leuse. the presef11 value of the minimum lease paymenlY amounts to at leas! substantially
t1II o( the fair value of the leased asset; and
..:. Th e leased ass<'ls are <~( a spe,:iali::eJ nature such tlw1 nnlv the lessee can use them withoul major modifications
heing m ade.

ludi\'ators of situations that individually or in combimition could nlso lead to a lease being classified as a ·finance lease:
, 1. ~( the le.uee can caned the lease. the lessoi· :S loss es associated with the cancellation are borne /Jy the lessee.
h. 0 ain.1· ur losses fro m the jl11ctuation in the fair va/11e of the residual accrue lo the lessee (for l!Xumple, in lhe
fo rm o( a rent rebatu l:'q11al ing most ,if the sales proceeds al the end of 1he lease). arid
Th i: lessee h<1s rhea/ii/it_,. to co ntinue the lease fur a secondary period at a rent that Is s ubslantial/y lo wer than
market rent .
.\ fon111actw·er or Dealer Lessors
I. Finance lease s can be arrnnged with a third party, such as a bank , or they can be provided by the supp(jer of the
goods. Ir the supplier ( manufacturer or dealer) also provides 1he finance, then there are two transactions:
.1 . a sale on normal tenns.. and
b. the provision of finance , giving ri se to finan cial income . This is recognized the normal way .

Th e sa les !Jroceeds will be measured al the lower of

a. fa ir value ( i.e. the normal sa les price), and
b. the prese nt value of the minimum lease payments discounted at commercial rate of interest.

1 The cost of sales is the cost (carrying value) of the asset sold , less the prese nt -.:alue of any uoguaranteed
resi dual value. A ll direct selling cost will be charged when the sa le is made.
Sale and Leasehack Transactions - :
Under a sale and lease back transaction an enterprise sel ls one of its own assets and immediately leases 1he asset
bac k. The buyer and lessor is normally a bank. These arrangements are common ways of raising finance whilst
retaining the use of the related assets. There arc two key questions to ask when assessing the substance of these
transactions:
I. Is the new lease a finance lease or an operating lease'?
., If the new .lease is an operating lease, was the original sale at fair value or not?
ff 1he leaseback is a finance lease !hen 1he deal is recugnized as a sec~1red loan rat ha than a sale.
f(rhe leaseback is an op eratini lease then /h ere has bel!n a genuine sale which will be recognized in the income
~tatement. However, problems can arise if !he .w le proceeds are above or below fa ir valut:!.
Sale and Leaseback - finance lease :
I . Reco rd the sa le of the non-current asset in a nom1al manner. any ga in should be deferred and amortize ove r th e
lease term , any loss shou ld be recogni zed outright.
2. Recognized a leased asset and leased liability equal to the present value of minimum lease payments (sa les
pri ce).
Sa le a nd Leaseback - Operating Lease:: . .
Before the sa le, the company will recogni ze a no1H·ttrren1 ~ssct. lfowewr, the company will not reco_gnrze an asset
if it is leased back under an opcrn ting lease . Therefore a di sposa l has taken place, and any related prot,t o~ loss musl
be recogni zed . The operating lease will be accou~tcd for in the normal way. How~ver, when the sa les pnce 1s more 11

t han IIl C f;arr· va IUe ,·or. the n~sse

, ·
l, then the lessor -
will reco up their costs by charging an above market-rate rent. _ If !he
sales price is less than the tair va lue, then the lessee will he cumrensated through a below market-rate renl. fhesc
, o n dt'spusal s should be reeogni7.ed over lhe life of the related lease.
r a in s or Iosses • · . . • - Jh t 1· .
-,•. / ( I I e saI ,·s pnce · excei.:d•-• tli",., J<r.l 11·,. 111 ark et 1·alli<'· 1/i.: (sc /1111·'.!, 111·1c l.' - · carr,v111
• ·
~ vo/u .,;J ~a111 shuul
. - .
e t1ccn11nl l!c. . ,, 1
1
• u. · , fo fl o w s. De 1·cm,:·d l:,•ai n ~ ~ale~- rricc - lair vc1l ue: Rea l1 1-cd gul n (1.,d11n on di sposa l) '= fair va lue - ..:arry1ng
vaiue oJ'n s~e t disposed nf

/J th e soles p r1.c1· is· I,,..,I mv ii1' ·)11 Ir m

urkl't v11l11L' th e 1,·,:/1/11 -s ('r icl' , c·11rrl ·i11g value) r,a111 1.1· rl!cngmz l!d 1111tngh1.
' • •

. I I • .,. ,1 v /u , 1/ie (l'clli11's f'r h ·,· - ,·arrving vahtc!loss is recow 1i::ed immcJiott'ZI',
, f ,·1· r-1r il·•,: 1s he m (/1/'lll <lf "Lk u. t '--.
Ir·1.IC/< 1 • · · · , - I I .. ; ·- · I
• 1/, ol'<' sin,·<' 1/i crc un· 110 (t1111rl! ht'nc/ 1t 10 u[/sl:'I I It' O.I.\ nn , 1,, p, 11i1 •
,f /i I . ' r ·ntlll l' ore l // mar ,:t I u (
1' ' 11 , 11 1111 ' · I
, 11 , . • I /' . I
. , • 1/J c /l th e· /us., fl /I t!i.,pnsu/ 11 ·1I/ (;II'.: rise /1 1 lh c• /11/ttrt' n· 11c: If.I u
·k .1 111
mm '
ur,· /, e ( J11 ' . ,. .
II <111 ' .1·•, , ' .· '1,, /111ure re111,J/s '
. I I ..
cheap rentals . in tl11s r ·,i{1· / 11 ' , 11 i ' ,111 11 • dcfrn:,I ollll -1morti:,·d ,11 ·,·r the life"' tlll' lea.it'.
'

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The Review School of Accountancy
til'Tel. No , 7 3 5-9807 & 734-3 989
 ReSA
The Review School of Accountan cy
•Tel. No. 735-9807 • 734-3989

.-..!G
[ INANCIA.L ACCOUNTIN G lY REPOl>1·_
, "· _ _ __ _ _ _ __ --
C.c..c....Uc::...;;_b-=-er=---=1:.c.·1a,1"'-----:::::Cc:...=£-=-s"'--per=u:.:.·1=1.tyii...:::G:..:..-"-M=a"'°cu~r'...!ic::::0--==.la

Provisions & Other Current Liabilities

Paige Candy Compan y offers a coffee mug as a premium for every ten 50-ccnt candy bar wrappers presented by
ClL~lome rs together with P 1.00 . The purchase pric.: of each mug 10 the company is 90 cents; in addition it costs
6 0 c1: nts to mail each mug. The results of th1: premium plan for the yeors 2017 and 2018 are as follows (assume
a ll purchases and sales arc for n 1.~h): ·
2017 2018
Coffee mugs purchased 720,000 800,000
Candy bars sold 5,600,000 6,750,000
\Vrappcrs redeemed 2,800,000 4 ,200,000
2017 wrappers expected to be redeemed i11 2() J 8 2,000,000
20 18 wrappers expected to be redeemed in 2019 .1...~l~OO,OOO lCl 'ti

D
U 111~~1ian I . l-low much is the premium expeme for year 2017 and 2018 respectively? ~dftffi~ dl
n P140.000 and PI00,000
b. P 140,000 and P245,000
c. P240,000 and Pl35,000
-1. P240 000 and P245 000
,l)(ltH I
1~ ~0. Cfi~
'lO~IJ- ff GO
. ~'cCli. 0~1}
·l Vi~O ~DO
llt, l ~o~
f, qM. Cfi ~
>' ' ' ~ 10 -; 10
~ .or y .c.;
2. What is the amount of premium liability as of the December 3J , 2017 and 2018 respect1velx?
0 11cst1 0 11 7.tlD. OO ()
a_ PIOO,OOOand P135,000 ~. Pl35,000andP 168,000 upeLltd ?-:StJGt
A b. PI00.000 and Pl 12,000
2
d. Pl35 000 and P240 000 0H 'lDO.Ooo-,. 0,5 = ICC.COO ( ~~~ ~~c;
• • 20,,a 11 0. 000,. o_i; : 1,<:. .000
2. During 2016, Vans Co. introduc.:d a new line of machines that carry a three-year warranty against
manufacturer's defecL~. Based on industrf experience, wammly costs are estimated .at 2% of sales in the year of
sale. 4% in the year after sale, and 6% in th~ second year after sale . Sales and actual warranty expenditures for
the flrst three-year period were as follows:
. ·101 ~ ~00.0U;c I', / :: l'H Gr,
Sales ActuaI Warranty Expen d1tures {llt\lO l [ !jO~r,)
2016 P 600,000 P 9,000
2017 1,500,000 45,000
2018 2 JOO 000 135,000
P4,.200.000 Pl89,000

What amount should Vans report as a liability at rJet.:ember 31 , 2018? ~': 1 !l{:i)
D a. none c. P204,000 ( , , 5. ~H)
~- P3 l 5,000
b. P 15,000 ➔ 1, ooc
The
3. Warranty4U provides extended service contracts on electronic equipment sold through major retailers.
standard contract is for three years. During Iha: current year, Warranty4U provided 21 ,000 such warranty
contracts at an average price of I,>8 I each. Related to these contracts, the company spent P200,000 servicing the
contracts during the current year and expects to spend P 1,050,000 more in the future . What is the net profit' that
the company will recogniz.e in tJ1e current year related to these contracts? 21000 X 01 : I 'I 01 0O0
a. Pl50,J33 c. P 451,000 CI Ltll<ll {100. 00 0)
b. P367,000 d. Pl,501,000 v,ov1s1on (105 0.00 0)
4'5 1 ooc
4 . Star Company has recently launched a new model 01- consumer car. rts cars are sold with a three-year warranty
for manufacturing defects. Past experience of similar models indicates that about I 0% of the cars sold are with
some defects, of which 4% are minor defecL~, 3% are normal defects and 3% are major defects. For' the year
coded December 31 , 2017, the company sold 10,000 units of the new model. The following infonnation relates
to the estimate of costs of defects associated with the new model :

Cost of re~air/unil Probab.ili.!Y Minor defects Normal defects Major defects

High 30% Pl,500 P4,000 P7,000
Medium 60% 1,200 3.000 5,000
Low 10% 1,000 1,500 2,000

What amount of provision should lhc company recogn,zed for the year ended Dece1i1ber 3 I) 20 17?
D a. None m111or
l, . Pl.~90,000

11orn1ctl
d . PJ ,04) ,000
400
~O D
50{\000
1i 1r o a 15 <1 0 PO O ) W l~ OC O
r;~ol~s,,
b. Pl ,44:'i,000
illOJ or :io o ~ 1tJ'o ; q4 5_06O
5. A propcny developer constructs C(1m111crriul housing units on o hilly area II has complied with a ll the
regulatory requirements for construction of real eslat.cs on hilly areas, including developing lhc necessary
bunkers and contours lO prevent soil crosiou . On October 30, 2017, some of the support bw1kers and contours
collapsed afler an unusual heavy min. This caused ex1ensive damages to houses at the foothill . The owners of
those damngcd houses have conuncnced legal pro!.:ecdings against the company for damages. However. t.hc
developer di.~putes the claim because ll believes it has complied with the regulntions a nd taken the necessary

3614'
Page I of.I
 ReSA / Fina11cial Accounting &: Repon.ing Pmvi.Jloru 1J11d Otlru Cu"UII LJabUitia
steps to prevent soil erosion. The lawyers of the developer are of the opinion that it is possible the developer
may have to pay damages, based on settlement of s imi lar court cases in the past. The lawyers estimate that the
case may onJy be concluded in 2 years ' time, considering any appeal to 11 higher court. if necessa.J)•. The
estimate of the possible outcomes, excluding legal costs, with the associated probabilities are as follows :
Possible outcome Estimated outflows Probability
High P20,000,000 10%
Medium --...__ I 0 ,000,000 50%
Low , 5,000,000 40%
Legal fees and other costs to defend the cas estimated at P 1,000,000. The current one-year and two-year
risk-free rates ofintere.st are 4% and 5% respect v. The risk acrusnnent for errors in estimates of outflows is
l0% as there are significant uncertainties in the estimates of possib outcomes and their related outflows. The
developer is currently negotiating with the plaintiffs for an out-of-court settlement for P8,000,000. The
plaintiffs have not decided on this offer but their responses have been generally positive. The developer
D estimates that there is a 50% the out of court settlement will materialize within a year. . ., ,,
Whatamount ofprovisionsb ouJdthecomp any recognize? 'J'1 oulo fr ourl . 'iM1 /. IOXl - 0 ~. , _: S't' 1' " 6 )A VE'" 5
q 1q 23J
,
c. P90888'>8
1O
a noni.:: , , " lourf ICl'f) 1/ IOx/ -OIJ
.1 - 57Ei CfH ~
b. P8 ,862,070 d. P9.748.277 Y2 l ov r f 1~m ,_ /. J{I 1' I. 05 ; qq 77 32'i - nvf
<t.,•/6H 1
6. Carmela Company is estimating a liability for claims in a legal dispute that is expected to be settled in a year's
~ - It estimates the following range of possible outcomes with their associated probabilities:
-~ .
Range Estimated outcome Probability
High P2 ,000,000 25% 500 0 00
Medium 1,200,000 35% 420 000
Low 600,000 40% 1110 . 000
"" ow
11, .
The current one-year treasury bills yield a return of 1%- An ad justment of 5% ts 0considered appropnate for the
riskthattheac tualoutcomew illbedifferen tfromlheestim atedoutcome . 4 ns~ a dj \O ll ~r • 1t1 lftOst £1m d1t 1lt
Ouestion I: What amount of provision should the company recognize assuming the risk adjustment in the 't amcunt
measurement of provision is by adjusting the discount rate used to discount the future outflows to the present t ro 1
l
value? qf l O q'j = Vif.
a. Pl,115,385 c. Pl,160,000 11~ 0. 0CO,. 1.0;i·' :c- ll ll 'j'>)q
b. Pl,117,534 cL Pl,171,150
Oueslion l: What amount of provision should the company recognize assumi ng the risk adjustment in the
measurement of provision is by calculating the expected present value of the future outflows and adding a risk
adjustment premium? - lttiO. 001)
D a. Pl , 115,385 c. Pl,160,000 .x 1. O't-1
b. Pl ,117,534 ;i. Pl,171 , 150

7. Eastern Company has obligation to restore land at the end of its ground-movin g actjvities. The provis.ion is
increased every year by the portion of the Land that has been damaged. On December 31 , 20.17. the vaJue of the
expected future amounts required to restore the portion of the land damaged to date is estimated. The following
information is provided: Balance as of January 1, 2017 (present vaJue of the estimated future reconstructing
costs), P3,000,000; Present value of estimatec;I future reconstructing cost on December 31. 2017 for damages
incurred to date, P3 ,670,000; Applicable discount rate, 9%. What amount of additional provision the company
bas recogniz.ed during 20 l 7 in relation to the damage on the land? 30 00 . iO O '1f'i O.00 0
a. none .s;. P400,000 f. q-J 1Cr =\ O. 000
b. P210,ooo d. P67o,ooo 2.~o.ooo _
40 0 000
8. Brand Company, an oil production company, has a widely published environm en~y in which it
undertakes to clean up all contamination that it causes. On October 31 , 2018 , a contamination on a laoo occurs
whilst transporting oil to a particular country. Based on past incidences of such contamination , a third party
contractor is willing to undertake the cleaning up on behalf of Brand Company. It estimates that the cleaning up
work would take about two ye~ to complete and it provides the following price quotation (based on current
prices); Year I, P20,000,000 and Year 2, PIS,000,000. Due to general inflation and other price increases..
Brand Company estimates that the contractor prices would increase by 4% by the end of year I and another
4.5% at the end of year 2. Payments will be made at end of each year. The current one-year and two-year ris k-
free rates are J¾ and 5.5% respectively and a 3% _adjustment is required for the risks that the actual outflows be
different from the estimate. What is the amount of provision for decontaminati on should Brand Company
recognized on October 3 l, 2018? Y1
C a. none c. P34,909,547
b. P34 ,43 l ,836 d. P35 ,464, 791

9. On January I, 2019 Cheese Company acquired and installed an oil rig. The was acquired at its fa ir value 1·
0
P20,000,000 and the company incurred a total P2 ,000,000 to install and prepare the asset for its intended use ..
The estimated useful life of the rig is 10 years and after which the company has an obligation to dismantle
immediately. Initial estimate of the cash outflow to dismantle the rig is P500,000. The discount rate is 10%.

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•Tel. No. 735-9807 • 734-3989
 ReSA I f111ancl11 I A
crnunt/ng & Reponing Provhlom and Other Curre11t Llabl/ltle.,
0 1
n '.1"uary I, 2021 Cheese Company revised tho estimate to dismantle the rig to P700,000. What is the
carrying value of the oil rig immediately oiler the revised estimate was accounted for? 1/11\ ~ 71 IC\1111.
a. P17,600,000 c. Pl7.754,216 '/. Qfl O
b. P17,660,9l6 d. P17,847,516 -~ l~1S u1i(i
'LOO .IJOO X I IQ ff H·~ I
IO . Wt'stcm Company recently moved its operations to new premises. The non-cancellable lea,;e 'c'oifif:1~t,;f~r the
old premises still has another three years remaining, and Weslem is not allowed to sub-lease the vacant building
in terms of its rental contract On December 3 I , 2017 , the present value of rental payments still due for the old
premises is P908,000; the cost 10 cancel the contract is estimated to be P775,000 . What amount of provision
C should the company recognize on December 31 , 2017?
a. none ~- P775,000
b. Pl33,000 d. P908,000

I l. M Company is in the business 1elecommu11ica1ion. II i,5 given a concession by the government to operate the
business for IO years. In 2017, it sets up its telccommuaication network facilities. The agreement with the
government requires the company to decommission the network facilities at the end of the concession period .
Based on the current technology,' the cost of decommissioniug at the end of year IO is estimated at
Pl50,000,000. Because of the changes in the technology in decommissioning work, it is reasonably probable
that the cost of decommissioning would bt: reduced by the end of the concession period. The company
estimates that there is a 30% chance tJ1e cost will be P90,000,000, a 40% chance the cost will be PI00,000,000
and a 30% chance the cost will he Pl 10,000,000 . The residual value of the facilities is negligible and no gain or
loss is expected from their disposal alter IO years. The current risk-free rate of interest is 5%. For the risk
specific to the' liability, i.e. the variability of the possible cash flows, an additional JO% on the expected cash
outtlows is considered a reasonable estimate. What amount provision should the company include in the cost of
the telecommunication network? qo l ,o-,_ ::
H
a. none c. P 70,910,000 100 i 40T :: ~o
Ji. P67.530.458 d. Pl 10,000,000 IIO " ¼O-, :. 21. -ro
I0OJ( II0)(I0S :::b15?O4H
12. Molder Company has guaranteed a loan of P300 ,000 granted to Miller Company. After the balance sheet date
of Molder Company but before the directors approved the financial statements, Molder Company receives
notice that Miller Company is in liquidation . What proper accounting should Molder Company account for the
guarantee, assuming the creditor of Miller Company will invoke the guarantee?
a. The amount of the guarantee is not accounted fo; in Molder's books.
i b. The amount of P300,000 should be recognized as a provision.
c. The P300,000 be recognized as a liability with necessary disclosure in the notes to financial statemenl5.
d. The contingent liability should he disclosed by way of note to the financial statements.

13 . A company gives each of Its 50 employees (assume they were all employed continuously through 2016 and
2017) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and
may be taken starting January I of the next year. The employees work 8 hours per day. In 2016, they made
P40 per hour and in 2017 they made P45 per hour. During 2017, they took an average of 9 days of vacation
each. The company' s policy is to record the liability 1existing at the egd of each ,>:eac_aL.the ~ ge rate for that
C _year. What amount of vacation liability would be reflected on the 2016 and 20 17 balance sheets, respectively?
a. Pl92,000;P264,000 ~ - Pl92,000;P270,000 'Z01', 50 :qz,:S~ il40cclq2000
b. P2l6,000; P264,000 d. P216,000; P270,000 '2.0 11 QClflH<\1 (\ 10 1'1 u,1use d1TI 20 H
'50i< (12- q)x'l,J<~ '15 :: 5 1H l 00
~qr nt il1n 2on sox 1V'o.ni<15 :-z1 , ooo
14 . Vargas Company has 35 employees who work 8-hour days and are paid hourly. On January I, 2016, the - -·- -
company began a program of granting its employees IO days of paid vacatio;;- eacfi year. Vacation days earned ZlO OOO
in 2016 may first be taken on January I , 2017. Information relative to these employees is as follows :
Hourly Vacation Days Earned Vacation Days Used
~ Wages by Each Employee bv Each Emplovee
2016 P45 .00 10 0
2017 46.00 IO 8
2018 47 .00 IO 10

~ a s has chosen to accrue the liahility for compensated absences !!t the current rates. oJ:.Eay in effect when the
~<JE1_Pensated time 1s earned .

Queslion I What is the amount of the accrued liability for compensated absences that should be reported in
Vargas 's statement of financial position forthe year i:ndcd December 31, 2017? ova it o bit 2~ t!Dl)\ 20 1~ 1 ditll\
0 a. Pl28,800 c. Pl54 ,560 US fll _!_dm1 9 / 2x9 i< 3'5 l< ' 'ls ~ 25'200
12 daqs <--- 2011 IOdal.\.S
-b. Pl54,000 d. Pl57,920 llil ll H d
10 I Q 1 3 5 ~ f ~~ ~ 12~~ 0 0
Question 2: What is the amount of the accrued liability for compensated absences tha1 should be reported in 15'4·000
Vargas' s statement of financial position for the year ended December 3 1, 20 18':'
a. Pl26,000 ,. Pl57,360 ~or~ u1111s, d 12 ,10 4\
C b. Pl54,S60 d. Pl57,920 101 <o 11,lc) ' l

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The Review School of Accountancy · llll 5
VTel. No. 735-9807 a 734-3989 201'i, \0 (\O l\5
IO )~n.?)S ~ [)=f c 111fi OO

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 e:x1sting \iab\\i\\\ of untirt~in tim\nq Dr amoun1 .
trndi\\01\S tr\US\ ~t me\'.
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amount 1owcst of:
1. PV o~ rt$O\lrt~ rtQtHrtd to fulfill Dblioation
2, OTl\OUf\\ VVOUIQYIO'JHo9a4 to C,Ol'llf.\ HH ou11gotion
j_ ctmo\lnt WOUid \'10\JQ, +o pay to trnnsfe.r ot>tiqalion to a 3rd partq .

f On\l 1ocrrn50 in prov1s1011 ouo to ,assaqe of tlmt sno11 ~t e,Mrq~d to finance. cost
or add\\ion to provision.

OOHOUS contract
Lt T1H un~vo1ctakl\t co5t of mee,tinq tM obliQQ\ion ~rorn HH tontn.tv~ ixc.udM
tlH Uwt fi\s ntti~td fromtvi~ c-omract.
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ReSA
The Review School of Accountancy
eTel. No. 735-9807 /734-3989

Pinonclal ,-ft·•·"u11ting an</ Reportu,g C Uberita and C Espenilla/G. Macariola

Liabil.ities - Long-term

I. O n December 3 1, 2018 , Extract Company issued a P40,000,000 5-year of PI par value each at an issue price of
P0.90 per unit. The bond carries a coupon interest rate of 6% and interest is payable on December 31 each
year. Costs o f issuing the bond, which included underwriting fees, totaled P2,000,000. The prevailing market
rat e o f interest for similar risk class bonds on December 31, 2018 was I 0%. l . rz. 2 /

Question I : What is the initial carrying value of the bond on December 31 , 2018 assuming Extract Company
has the policy lo measure the bond JI. fair value to profit or loss? ~Q ,000.0001 'lO : %000-000 f Vrl
a. P34,000,000 c P38,000,000 + ('l. lJUIJ. UOO)
h P36,000,000 d. P40,000,000 ?IJ &Oil. 000 AC
Question 2: What is the initial carrying value of the bond on December 3 I , 2018 assuming Extract Company
has the policy to measure the bond at amortized cost model?
a P34,000,000 c. P38,000,000
A b. P36,000,000 d. P40,000,000

2. Downing Company issues P5,000,000, 6%, 5-year bonds dated January I , 2016 on January I, 2016. The bonds
pay interest semiannually on June 30 and December 3 I . The bonds are issued to yield 5%. What are the
proceeds from the bond issue? Tcrm Pioli cl

2 _5% 3.0% 5.0% 6 .0%

Present value of a srngle sum for 5 periods .88385 .86261 .78353 .74726
D Present value of a single swn for IC periods .78120 .74409 .61391 .55839
Present value ofan annuity fo,· 5 periods 4 .64583 4 .5797 I 4 .32948 4 .2 1236
Present value of an annuity for IO periods 8.75206 8.53020 7.72173 7 .36009
a. PS,000,000 c. P5,2 I 7,308 pn n{.lp01 5M i 0.l'o\1 -:: 1'\0 ~00 G
b. P5,216,494 ,d'. P5,218,809 1muesl 15o~;. ~.1sio" ~ l'lil1~ oq
3.
I
On J~ l)' _.!.,_LOJ.§. Glamorous Corporation issued 11% bonds in the .face amount of P2,000,000 that mature on 51113~0'!
June 30, 2020. The bonds were · issued to yield10¾, and interest is payable every January I and July I .
Glamorous Corporation uses the effective interest method of amortizing bond premium or discount. The
following are the present value factors :
PV Prinuva1 2M x 0. C.l l ::: \ 151½01)0
PV of 5% for an ordinary annuity of PI after 8 periods 6.46) lnttrt "l! 110K y. i, ,4(.. 3 = llb . <\ ~O
PV of 5% after 8 interest periods .677
i olit.J .ci;o
What is the carrying value of the debt instruments as of December 3 I, 2016? \. 0.5
C a. P2,043 ,640 ( II O. COO )
c. P2,058, 176
b . P2 ,05 I,086 d . P2,064,930 'l Oi;«s \1~

4. At the beginning of2016, WaJlace Corporation issued 10% honds with a face value of P900,000 . These bond s
mature in the fi ve years, and interest is paid semiannually on June JO and December 31 . The bonds were sold
for P833,760 to yield 12%. Wallace uses a calendar-year reporting period . Using the effective-interes t method
of amorti~tion, whal amoun t o f interest ex pense should be re ported for 2016? ( Round your answer 10 th e
nearest peso ) 1/ 1 /11,
C a. P 99,750
ia i1l (,Q i YI .Of, -=- 5001. 5. uO
.K- PI00,353 1,J;c /1' <t~ ~ i¥
b. Pl00,050 d . PI0J,248 l )I 0. 01, :. ,cin.
Jq
1001 i; 3.
J. On January I, 20 17, Monl.crt.-y Company issues 100 million unsecured bonds at an issue price 95 cents per uni1.
Transaction costs, that include underwriting fee, umount to P500,000 . The bond pay interesr of 4% at the end or
the first year and thereafter interest payment increases ar I% per year. The bond mature on December 3 I, 202 I
arc redeem ab le at the nominal value of PI each. Al the date of issue, Monterey Company has a c~edit rat ing of
" ABB" and its market interest rate is 7.09% . But due to the imputa1ion of the transaction cost, the effec ti ve ra te
of the de bt is 7.2 1%. What is the amortized cost of the debt as of December 31 , 20 IQ? .H qHJ? ~,o
a. P97 ,3 J3,462 ll/1>1111 / PI00,491 ,4 39 1ss11l p11te q5 000.000 ~5~ 0111 )
b. P99,.329,76J 11h1/ ,~ 1.1 . PIU0,736,871 Tc ( •s-oo.ooo) 361
:)ij on.oe,c
"~~'l'!H O 101~
~11500.000 Page I of~ · 1. 0111
~ 1- Ol li n,
to o oGu )
(4 0C0-000) - \CJDu~ \ .••\LS
7°f10¼'\i
 lic&L.tl!Ymdal .-kq 1uaria&: ond 8cpciai,w.- . l,hthllltlc,,·-1,ua,Nerm
0_ l 'ti Januof)' 1. .rn I(', , lr nlkr l 'nmpu11y issut><l 11:i Ill\ .,, 4-)'cur 1:unvortlhlo dohl lnllln11non1 wllh o foco nmount of
Pc-,111JO,tlOO thr PS.~00,000. l11tcl\·s1 is flll)'llhle ovrry Docomber .l l of onch yonr. Tho doll!. hm1J1J111011t hi
l'\'ll\~' 1i il•h,1 11\tu 50,0llO cmlint,ry :-lum.:s with II pnr vnluo of PIOO. Whoo the dobt. tn~1r11monl11 wore laRuo(l , lho
jll'l'\':1 iling 111nt'kct nitc ,,r intnt•sl fo r s.imilur debt wilhoul conversion option Is I0%. 16 0 NII 1) 4 lq 4 1~

P\' l,r 10% for 1u, ,mli11:lry tm1u1i1 y uf PI a Iler •• puriods

1-' V of IU-t" uHtir ,I i11trro,~1 pcriNls
:1 . 169865 1111OO OOO
.68JO IJ
< I ll Uit t) 'Jib o ti 'b'l

r v ~ 1·1j'>ll) I(, no 1n s
\\'11111 i~ tlw anH1rti , cd ~,,,$1 ,,fth,~Jd11 u.~ uf December J I.20187 · l'l I~' I 11 ~ l'fQ I H2
D ti . P5,hl0 ,(,1o l' \1('1 1/lll t, c. P5,7Ql ,7l'i rv ~11 )•1jtl 11U1 / 1t 5~ £\01\ 0V
b. P~.701 ,5 7S CH,' l!ll!) lt· ,ii . P\ 890.<>09

On January I, 201 5. Shl'\.'<ldn Company issued its IO'Vi,, 4-ycnr convertible debt instrument with a foce amount
or P3.000,000 for PJ.500,000. lnicrc!lt is pnynble every Dccomhe.r JI of ooch yenr. The debt instrument 18
convertible into J0.000 l1rdinruy sluws with o par vnluc of PI 00. Tho debt instrument is convertible Into equity
t'1w n thl' time of is.~111· until maturity. When thtl debt ins1rume111£ were issued. Lho prevolling murkct· roto of
intcn•s1 ti.,r similar debt without con;crsion option is 8%. ( ib~NII ~.IL\<tJ1 1 ·1
a~oo.oro
P\' til' 81''b for an ordill:ll)' unnuity of 1'1 oiler 4 periods J .J 12 1268 f:~\llf'I) ? 0 I l 1 ?>
PV of S~o nftor 4 interest periods .7)50298
On De~--ember J 1. 2017, Sh~dder Company converted nil the debt lnscrumcnls by issuing J0,000 ordinary
sl111n-s. (II ~ l l>it; 1\ '1 %, 'L':i
\\I hot is the carrying vnluc of the compound instruments ns of December 3 1. 2017? •) OIr, ~ 10 ~ q q 5
,n. PJ.356,829 e. PJ,455,899 CVll f Cf.l 'H 5C.0Z'l ?Oi l ~ 055 S"jij
A b. P3.408 ,269 d. P3 ,500.000 1>111 vc1111 t \ ~ooo.ono l .. ~ o I 11 1;
!;QiO /UIH on C.OOVQ\'5\0n : 0 9P m.ctlttd upon C,IJOYW\00 = 15fi Q/•JCJ n '5 ~4, 1 ~
S. On Jnnunry I. 2015. Foilh Co111pnny issued its 8%, 5-year convertible debt instrument with u fuce amount of
PS,000,000 for P7,700,000. Interest is payable every December 31 of euch year. The debt instrument is
convertible into 50,000 ordinary shares with n par value of PIOO. When the debt instruments were issued , the
prevailing market rate of interest for similar debt without conversion option is I0%.

On December 31. 2017. all the convertible debt iuslrumenls were retired for PS,000.000. The prevailing rate of

D
interest on a similar debt mstrument as of December 31 , 2017 is 9% without the conversion opi-ion .
Question I: What is the crurying value of the debt instruments as of December 3 I 2017? ~ oct eos
.,
a. P?,393.47.>
b. P?,492,820
c. P?,602,102
,d'.' P?,722.J 14
' -, 1 00 ouo
< vGrW

EQIHll:J

tV @\1.h 11ll 711'1.~ lq

011estio112: Oo the date of retirement., what amount of the payments represents thtl equity ~omponent '?
a. Pl36,878 C. P165,760 f,p(11\'t 1r l\l lt, tl\ ;1 . 0'l . ? ,,-,1l11110
,,b. Pl40.729 d. PJOS.760 1111. r,40,r l-15q1 ~ I It 5~'> 1
eoooo.ouo - ·1'b'JqH1 , 1~012'1
Question]: What amount of gain or loss t.hat should be reportcd in the profit or loss on the rel"ircmenl of 1.hc
convertible debt instruments? ·
)I . Pl36,957 C. Pl65,797 VmJm e,1)1 1<J5ll 2'1 I
A b. Pl38,420 d. P305,760 tV of BP 117.BfU
1% G'5~ lO½
Question 4: Whal amount of gain or loss that should be reported directly in the shareholders' equity on the
retirement of the convertible debt instrnment?
a. Pl36,957 z. I' 165,797
C b. Pl38,420 d. P305.760
ton~. Priv. 1, rir. c; '7 G,
SP 3615
tqi<,V)
Page 2 of 2

ReSA
The Review School of Accountancy
eTel. No. 735-9807 & 734-3989
 ASSET LIAB
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fVHL IQnmd 1qnoted

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cv of cornpouodf(o .inst. uinvQJ\ed xx

l~S~: Par VQ\llt of shores 1~$Ued (M)

sr mdi~ed upon t0n~Hsron ,.~

raHrnmon~ of eionds 9rior to moturihJ 4oH

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) P/L
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rtpo,-u d direcJ\4 to rQui~.
retirtmtnt of Eq111t4 1~
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