Classification of Liabilities for Financial Statement Presentation

A liability is classified as current if

Liabilities Current
a. It is expected to be settled within
Liabilities
the entity’s normal operating
cycle;
b. It is expected to be settled within
12 months;
c. It is held for trading, or
d. The entity has no unconditional
right to defer payment for at least
12 months from the reporting
date.

Noncurrent liabilities are items

a. Other than current liabilities
Non-Current b. Specifically required by a particular
Liabilities standard to be classified in this
category.
 Examples of Current Liabilities

Trade payables Accounts payable

Accrual of cost or expenses
Customer’s credit balances
Bank overdraft
Dividends payable (except share dividends)
Income tax payable
Current portion of long-term
financial liabilities
Short-term notes payables
Liability under trust receipts
Deposits and advances
Deferred or unearned revenue
Provisions expected to be settled
within twelve months
 Examples of Non-Current Liabilities

Noncurrent portion of long term debt

Deferred revenue-noncurrent portion
Finance lease liability
Deferred tax liability
Long-term obligations to company officers
Long term notes payable
Bonds payable
Liability under finance leases not due within 12 months
 Current Liabilities in the Statement of Financial Position

Under PAS 1, as a minimum, the face of the SFP should include the
following line items for current liabilities:
1. Trade and other payables*
2. Current provisions
3. Short-term borrowing
4. Current portion of long-term debt
5. Current tax liability
*Line items for accounts payable, notes payable, accrued interest on
notes payable, dividends payable and accrued expenses.
Additional items shall be presented on the face of the SFP when such
presentation is relevant to an understanding of the entity’s financial
position.
 Classification of Long-Term Debt Falling Due Within One Year
Original term of a To be settled on maturity date Current
period longer than
twelve (12) months The debtor has the discretion
to refinance for a period of at Noncurrent
least 12 months from the
reporting date

To be refinanced AFTER the

Current (qualify for
reporting date or for a period
disclosure as non-
less than 12 months from the
adjusting events
reporting date

To be refinanced ON OR
BEFORE the reporting date
for a period of at least 12 Noncurrent
months from the reporting
date
 Breach of provision of loan arrangement

Presence of breach Required to be settled within Current

of covenant/s 12 months

To A grace period was granted

Current (qualify for
AFTER the reporting date or
disclosure as non-
for a period less than 12
adjusting events
months from reporting date

To A grace period was granted

ON OR BEFORE the
reporting date for a period of Noncurrent
at least 12 months from the
reporting date.
 TRADE ACCOUNTS PAYABLE
Characteristics
Description Present obligations that are not supported by formal
promises to pay by the debtor. These obligations normally
arise from acquisitions of inventories to be used in the
normal operating cycle of the entity.
Recognition When the entity becomes a party to the contract and the
control of goods are transferred to the buyer.
Measurement Fair value, which is normally the invoice price of goods
acquired and may or may not be affected by related freight
and cash discounts.
Presentation Normally included in the current liabilities section under the
heading “Trade and other payables”
 INITIAL MEASUREMENT: TRADE ACCOUNTS
PAYABLE

List or quoted price P xxxx

Less: Trade discounts, rebates and other similar items xxxx
Initial measurement (gross method of recording purchases) xxxx
Less: Purchase discount (whether discount is taken or not) xxxx
Initial measurement (net method of recording purchases P xxxx
 Effects of Freight charges in Accounts Payable
Freight should be Freight to be paid Effects on Accounts
paid by: or paid by: Payable
a. FOB Shipping Buyer Seller Addition to A/P
point, freight prepaid
b. FOB Shipping Buyer Buyer No effect
point, freight collect
c. FOB Destination, Seller Seller No effect
freight prepaid
d. FOB Destination, Seller Buyer Reduction to A/P
freight collect
EXAMPLE:
On June 1, 2021, Angelica sold merchandise with a list price of P5,000,000 to
Ramon. Angelica allowed trade discounts of 20% and 10%. Credit terms were 5/10, n/30.
and the sale were made FOB shipping point. Angelica prepaid P200,000 of delivery cost for
Ramon as an accommodation.
Required: Using the data above, answer the following:
1. What amount shall be recognized as Accounts Payable assuming Ramon records
purchases using:
a) Gross method b) Net method
2. How much will be remitted by Ramon to Angelica if payments are made under the
following independent situations:
a) June 11, 2021 b) June 16, 2021
3. Prepare journal entries for No. 1 and No. 2 above.
 BONUS PAYABLE

Bonus is a gratuity given by entities to their employees as a gift

or compensation earned as reward upon achieving a goal such
as exceeding budgeted income during the year, meeting quotas,
and having a superior performance in a project or activity. The
primary purpose of this is to encourage performance from
officers and employees by directly associating their success to
company’s success.
 Bonus calculation 3. Net income after bonus and tax
B = BR x ( NY - B - T )
1. Net income before bonus and tax T = TR x ( NY - B )
B = NY x BR or
BR x [ NY x ( 1 – TR )]
2. Net income after bonus but before tax B = ---------------------------------
B = BR x ( NY - B ) 1 + [ BR x ( 1 – TR )]
or
NY 4. Net income after tax but before bonus
B = BR x ------------------ B = BR x ( NY - T )
100% + BR T = TR x ( NY - B )
or
WHERE:
BR [ NY x ( 1 – TR )]
NY = Net income before bonus and tax
B = -----------------------------------
B = Bonus
1 - BR + [ BR x ( 1 – TR )]
BR = Bonus rate
T = Tax
TR = Tax rate
Exercise Problem
Riel, present of the CPA Co., has an arrangement with the company
under which she receives 10% bonus each year. For the current year, the net
income before deducting even the provision for income taxes or the bonus is
P5,500,000. the bonus is deductible for tax purposes and the tax rate is 30%

Required: Determine the amount of bonus and the appropriate provision for
income tax for the year under the following independent scenarios.
1. Bonus is calculated based on net income before bonus and income
tax.
2. Bonus is calculated based on net income after bonus but before
income tax.
3. Bonus is calculated based on net income after bonus and income tax
4. Bonus is calculated based on net income after income tax but before
bonus.
 UNEARNED OR DEFERRED REVENUE

Unearned or Deferred Revenue

Earned revenue xxxx xxxx Beginning balance
Orders cancelled xxxx xxxx receipts for advances
Balance end xxxx
Total xxxx = xxxx

DEPOSITS RECEIVED
Deposits Received
Refund of deposit xxxx xxxx Beginning balance
Balance end xxxx xxxx receipts from deposits

Total xxxx = xxxx

Example Problem 1 - Delivery of Goods
Jordan Co. requires advance payments for its product. The records of Jordan show
the following:

Unearned revenue, January 1, 2021 P 500,000

Cash received from advances during 2021 2,500,000
Advances applied to orders shipped in 2021 1,800,000
Advances applicable to orders cancelled in 2021 200,000

Compute for the amount to be report as Unearned Revenue assuming the advance payments
received are non-refundable.
Example Problem 2 - Provision of Services
Scottie Company sells office equipment service contracts agreeing to service
equipment for a two-year period. Cash receipts from contracts are credited to unearned
service contract and service contract costs are charged to service contract expense as
incurred. Revenue from service contracts is recognized as earned over the lives of the
contracts. Additional information for the year ended December 31, 2021 is as follows:

Unearned service contract on January 1 P 200,000

Cash receipts from service contracts sold 440,000
Service contract revenue recognized 560,000
Service contract expense 280,000

Compute for the amount to be reported as unearned service contract revenue on December
31, 2021 by Scottie.
Example Problem 3 - Gift Certificates
Pippen Co. has just opened a coffee shop and decided to sell gift certificates as part
of its marketing and promotional strategy. The validity period for these certificates is six
(6) months. Transactions relating to the gift certificates during the year are shown below:

Sold gift certificates worth P15,000

Gift certificates worth P9,000 were redeemed
P1,000 gift certificates expired

Required: Compute for the amount of unearned revenue to be presented as current liability
related to these gift certificates sold.

NOTE: Under R.A. 10962, gift checks, also known as gift certificates or gift cards has no
expiration unless it is under loyalty, rewards, and promotional programs.
Example Problem 4 - Subscriptions
Erwing Company sells sports magazine subscriptions of one-to-four year periods.
Cash receipts from subscribers are credited to unearned revenue and this account had a
balance of P4,800,000 on December 31, 2021 before year-end adjustments. Outstanding
subscriptions on December 31, 2021 expire as follows:

During 2022 P 1,200,000

During 2023 1,000,000
During 2024 800,000
During 2025 400,000

Required: Compute the unearned revenue to be reported as current liability related to these
magazine subscriptions on December 31, 2021.
Example Problem 5 – Returnable Containers
Kevin Co sells its products in reusable containers. The customer is charged a
deposit when containers are delivered and received a refund when containers are returned
within one year after the year of delivery. Deposits for containers not returned within the
time limit are accounted as regarded as proceeds from sale of the containers. Information
for 2021 is as follows:
Container deposits on December 31, 2020, from deliveries in:
2019 P 75,000
2020 90,000 P165,000
Deposits for containers delivered in 2021 140,000
Deposits for containers returned in 2021 from deliveries in:
2019 P 50,000
2020 60,000
2021 70,000 180,000
Required: Determine the amount of liability for deposits on returnable containers on
December 31, 2021?
Other Examples of Deposits Received and Their Corresponding
Accounting Treatment
1. Security deposits received from lessee in a lease agreement
a) If the deposit is refundable, the amount shall be recognized as
liability and its classification as to eiher current or non-current will
be dependent on its settlement date.

b) If the deposit is non-refundable, the amount shall be recognized as

liability and will be recognized as income over the term of the
lease.
2. Deposits received from shareholders for future subscription
The deposit shall be presented as a line item in shareholders’ equity
PROVISION AND CONTINGENT LIABILITY
A provision is a liability of uncertain amount or uncertain timing. Actually,
provisions are estimated liability.

A provision is recognized when:

a. An entity has a present obligation (legal or constructive) as a result of
a past event;
b. It is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
c. A reliable estimated can be made of the amount of the obligation.

If these conditions are not met, no provision shall be recognized.

A contingent liability is:

a. A possible obligation that arises from past events and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity; or

b. A present obligation that arises from past events but is not recognized
because:
1. it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; or

2. the amount of the obligation cannot be measured with sufficient

reliability.
ESTIMATED LIABILITIES – AFTER SALES
TRANSACTIONS
Liabilities may also arise after recognition of revenue from
sale transactions. These liabilities may include, but not limited
to the following:
a. Premium liability
b. Rebates liability
c. Warranties liability
Example Problem 6 - Provision (Premiums)

During 2021, Charlie Co., sold 100,000 boxes of cake mix

under a new sales promotional program. Each box contains one
coupon. These coupon entitle the customer to a baking pan upon
remittance of ten coupons and P350. The entity pays P500 per pan
and P25 for handling and shipping. The entity estimated that 80%
of the coupons will be redeemed even though only 50,000 coupons
had been presented during 2021.

Required: Determine the amount of liability to be reported on

December 31. 2021
PROVISION – REBATES
Paul Co. offers a cash rebate of P10 on each P500 of baking pan sold during
2021. Customers must fill-up a rebate form and mail it to Paul. Paul will then
mail to customers the approved rebate form which can be used in future
purchases to Paul. Based on entity’s experience, only 20% of customers mail-
in the rebate form.

During 2021, 500,000 packages of baking pans are sold, and 85,000 rebates
form were mailed to customers.

Required: Determine the amount of liability to be reported on December 31,

2021.