CHAPTER 1

LIABILITIES

Chidelyn Aguado, Marian andrage, Wincer Alonzaga, Chincel Ani

Learning OBJECTIVES
Explain the concept of liabilities
Describe the nature and type of current and non
current liabilities
Determine the measurement of current and non
current liabilities

Explain the issue of long-term debt falling due

within one year
Explain the issue of breach of
covenants attached to a long-term debt
Describe formulas in computing bonus to officers
and employees.
Definition of Liabilities
Liabilities are present obligations of an entity to
transfer an economic resource as a result of past
events.
Three Essential Characteristics

The liability is The settlement of The liability

the present the liability arises from past
obligation of requires an outflow transaction or
particular entity of resources event
embodying
economic benefits
 Examples of Liabilities
a. Accounts payable to suppliers for the purchase of goods
b. Amounts withheld from employees for taxes and
contributions to the Social Security System
c. Accruals for salaries, interest, rent, taxes ,product
warranties and profit sharing bonus
d. Cash dividends declared but not paid
e. Deposits and advances from customers
f. Debt obligations for borrowed funds- notes, mortgages and
bonds payable
g. Income tax payable
h. Unearned revenue
Measurement of Current Liabilities

Conceptually , all liabilities are initially

measured at present value and subsequent
measure at amortized cost.

However, in practice, current liabilities or

short-term obligations are not discounted
anymore but measured and reported at face
amount.
Measurement of Noncurrent Liabil
ities
Noncurrent liabilities , for example , bond
payable and non interest-bearing note
payable, are initially measured at present
value and subsequently measured at
amortized cost.
If the long-term note payable is interest-
bearing , it is initially and subsequently
measured at face amount.
In this case, the face amount is equal to the
 Current Liabilities
a. The entity expects to settle the liability within the
entity’s operating cycle.
b. The entity holds the liability primarily for the purpose
of trading
c. The liability is due to be settled within twelve months
after the reporting period
d. The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months
after the reporting period
 Noncurrent Liabilities
The term noncurrent liabilities is a residual definition.

a.Noncurrent portion of long-term debt

b.Finance lease liability
c.Deferred tax liability
d.Long-term obligation to officers
e.Long-term deferred revenue
 Long-term debt falling due within one year

A liability which is due to be settled within twelve months

after the
reporting period is classified as current, even if:
a. The original term was for a period longer than twelve
months
b. An agreement to refinance or to reschedule payment on a
long-term
basis is completed after the reporting period and before the
financial
However, if the refinancing on a long-term basis is completed
on or before the end of the reporting period, the refinancing
is an adjusting event and
therefore the obligation is classified as noncurrent
Moreover, if the entity has the discretion to refinance or roll
over an
obligation for at least twelve months after the reporting period
under an
existing loan facility, the obligation is classified as noncurrent
even if it
would otherwise be due within a shorter period.
If the entity has an unconditional right under the existing loan
facility to defer settlement of the liability for at least twelve
Covenants
Are often attached to borrowing agreements
which represent undertakings by the
borrower.

Are actually restrictions on the borrower as to

undertaking further borrowings, paying
dividends, maintaining specified level of
working capital and so forth.
 Breach of covenants
If certain conditions relating to the borrower's financial situation are
breached, the liability becomes payable on demand.
PAS 1, paragraph 74 provides that such liability is classified as
current even if the lender has agreed, after the reporting period and
before the statements are authorized for issue, not to demand
payment as a consequence of the breach.
However, the liability is classified as noncurrent if the lender has
agreed on or before the end of the reporting period to provide a
grace
Graceperiod
period isending
a periodatwithin
least which
twelvethemonths after
entire can thethe
rectify date.
breach and
during which the lender cannot demand immediate payments.
Estimated liabilities

• are obligations which exist at the end of reporting period

although their amount is not definite.
• are either current or non current in nature.
• include estimated liability for premium, award points,
warranties, gift certificates and bonus
Deferred revenue
If deferred revenue is realizable within one year, it is a current
liability.
Typical examples of current deferred revenue are unearned
interest income, unearned rental income, and unearned
subscription revenue.
If deferred revenue is realizable in more than one year, it is
classified as noncurrent liability.
Typical examples of noncurrent deferred revenue are under
Illustration
An entity sells equipment service contracts agreeing to service
equipment for a 2-year period.
Cash receipts from contracts are credited to unearned service
revenue and service contract costs are charged to service
contract expense.
Revenue from service contracts is recognized as earned over
the
Theservice
following transactions occur in the first year:
period of the contracts.
Cash receipts from service contracts sold
1,000,000
Service contract costs paid 500,000
Service contract revenue recognized 800,000
Journal entries for the first year
1.To record the cash receipts from service contracts sold:
Cash 1,000,000
Unearned service revenue 1,000,000
2.To record the service contracts cost paid:
Service contract expense 500,000
Cash 500,000
3.To record the service contract revenue recognized
Unearned service revenue 800,000
Service contract revenue 800,000
 Gifts certificates payable
1. When the gift certificates are sold
Cash xxxx
Gift certificates payable xxx
2. When the gift certificates are redeemed:
Gifts certificates payable xxx
Sales xxx
3. When the gift certificates expire or when the gift certificates
are not redeemed:
Gift certificates payable xxx
Forfeited gift certificates xxx
The Philippine Department of Trade and Industry ruled that gift certificates no
longer have an expiration period.
Bonus computation
1. Bonus is expressed as a certain percentage of income before bonus
and before tax
2.Bonus is expressed as a certain percentage of income after bonus but
before tax
3. Bonus is expressed as a certain percentage of income after bonus and
after
tax
4.Bonus is expressed as a certain percentage of income after tax but
before bonus
Illustration
Income before bonus and before tax 4,400,00
Bonus 10%
Income tax rate 30%
 
 
 
Case 1 Before bonus and tax

Income before bonus and before tax 4,400,00

Multiply by 10%
Bonus 440,000 

Case 2 After bonus but before tax

B= 0.10 (4,400,000– B)
B= 440,000– 0.10B
1.10B = 440,000
B= 440,000
Case 3 After bonus and tax
B= 0.10 (P 4,400,000 – B -T)
T= 0.30 (P 4,400,00 – B)
B= 0.10 [4,400,000 – B – 0.30 (4,400,000 – B)]
B= 0.10 (4,400,000 – B – 1,1,320,000+0.30B)
B= 440,000- 0.10B-132,000+ 0.3B
B+.10B-.03B = 440,000-132,000
1.07B=308,000
B=308,000/1.07
B=287,850
T=.30(4,400,000-287,850)
T=1,233,645
Case 4 After tax but before bonus
B= 0.10 (P 4,400,00 – T)
T= 0.30 (P 4,400,00 – B)
B= 0.10[(4,400,000– 0.30 (P4,400,000 – B)]
B= 0.10 (4,400,000 1,320,000+0.30B)
B= 440,000 – 132,000+ 0.03B
B-.03B=440,000-132,000
.97B= 308,000
B=308,000/.97
B=317,526
  Refundable deposits
Refundable deposits consist of cah and property received from
customers but which are refundable after compliance with
certain conditions
Illustration:
A deposit of 10,000 is required from the customer for returnable
containers. The
containers cost 8,000.
Cash 10,000
Containers deposit 10,000
The containers deposit account is usually classified as current liability.
If the customer returns the containers, the deposit is simply refunded.
However, if the customer fails to return the containers the deposit is
 PROBLEM 1-1
Accounts payable P 1,000,000
Deposits and advances P 250,000
from customer
Notes payable P 1,000,000
Credit balances in customers’
accounts P 200,000
Serial Bonds payable in semiannual P 1,000,000
install ment
Accrued interest on bonds payable P 150,000
Unearned rent income P 100,000

Total Current Liabilities P 3,700,000

 PROBLEM 1-2
Notes payable -Trade P 3,000,000
Notes payable –Bank loans P 2,000,000
Notes payable- Advances from officers P 500,000
Acconts payable- Trade P 4,000,000
Bank Overdraft P 300,000
Dividends payable P 1,000,000
Withholding tax payable P 100,000
Income Tax payable P 800,000
Estimated warranty liability P 600,000
Estimated damages payable P 700,000
Accrued Liabilties P 900,000
Estimated premium liability P 200,000

Total Current Liabilities P14,100,000

 PROBLEM 1-3

Employee income taxes withheld P 900,000

Cash Overdrafts P 1,300,000
Accounts receivable with credit balance P 750,000
Estimated warranty liability P 500,000
Estimated damages payable P 1,500,000
Accrued interest on Bonds Payable from Oct. 1
to Dec. 31, 2020 ( 5M x 12% x 3/12) P 150,000
Accounts payable P 3,000,000

Total Current Liabilities P8,100,000

 PROBLEM 1-4
1.Accounts payable (500,000 + 100,000) P 600,000
Accrued liabilities P 50,000
Note payable -refinance P 1,000,000
Note payable –due May 1,2021 P 800,000

Total Current Liabilities P2,450,000

2.Bonds payable –due Dec 31, 2022 P 2,000,000

 PROBLEM
9% note payable 1-5
matures on July 31, 2021 – CURRENT
LIABILITIY
*8% note payable matures on May 31, 2026 – NONCURRENT
LIABAILITY
*10% notes payable due on March 31, 2022, Company obtained a
waiver until June 2021- CURRENT LIABILITY
*11% note payable matures June 30, 2021 – CURRENT
LIABILITY
 PROBLEM 1-6
1. Current Liabilities
Accounts Payable 7,000,000
Notes Payable- Bank 12,000,000
Accrued Expenses 4,000,000
Non-current Liabilities:
Mortgage Payable 4,000,000
Notes Payable due 2022 3,000,000
Total Liabilities 30,000,000

2. The issuance of P4,000,000 share capital on January 31,2021 as

payment on notes payable to bank and the financing agreement on Feb,
15, 2021 with a financially capable commercial bank on April 1,2021
amounting P3,000,000.
 PROBLEM 1-8

Accounts Payable (4,000,000 + 100,000) 4,100,000

Accrued Expenses 1,500,000
Credit Balances in Customer’s Account 500,000
Estimated Liability for Coupons 600,000
Total Current Liabilities 6,700,000
 PROBLEM 1-9
Accounts Payable 1,900,000
Dividends Payable 500,000
Income Tax Payable 900,000
Notes Payable 600,000
Total Current Liabilities 3,900,000
 PROBLEM 1-10
14% of Notes Payable, due 2021 30,000
8% Notes Payablen maturing Dec. 31, 2021 100,000
Total Current Liabilities 130,000

PROBLEM 1-11
12% notes payable – refinanced on January 31, 2021 5,000,000

PROBLEM 1-12
Accounts Payable and Accrued Interest 1,000,000
Debentures Payable- current portion 500,000
Total Current Liabilities 1,500,000
 PROBLEM 1-13
The current liability is the entire amount of P750,000 because
the notes payable is due to be settled within one year
regardless of the issuance of bonds payable.
 PROBLEM 1-14
Note payable 2,000,000
Refinanced Dec 31, 2021-Non-current (1,200,000)
(80% x 1,500,000)

Note payable not refinance 800,000

 PROBLEM 1-15
Accounts payable 750,000
Short-term borrowings 400,000
Mortgaged payable-current 100,000
Bank loan payable-refinance 1,000,000

Total current liabilities 2,250,000

 PROBLEM 1-16
Unearned revenue,January 1 650,000
Gift certificate sold 2,250,000
Less:
Gift certificate redeemed 1,950,000
Gift certificate not to be redeemed 100,000

Unearned revenue, Dec 31 850,000

 PROBLEM 1-17
Unearned revenue, January 1,2020 750,000
Sales of gift certificate 2,500,000
Less:
Redemption prior year sales 250,000
Redemption current year sales 1,750,000

Unearned revenue, Dec 31 ,2020 1,250,000

 PROBLEM 1-18
1.First contract year (40%x 600,000) 240,000
Second contract year (60% x 600,000) 360,000
Total contracts sold in 2020 600,000

Contract revenue for 2020 (240,000 x ½) 120,000

2. Total contracts sold (1,000 x600) 600,000

Less:Contract earned in 2020 (240,000 x ½) (120,000)

Deferred service revenue –Dec. 31,2020 480,000

3.Remaining one-half of first contract year
(240,000 x 1/2) 120,000
First one-half of the second contract year
(360,000 x 1/2) 180,000
Total contract revenue in 2021 300,000

4. Remaining one-half of the second contract year

180,000
(360,000 x 1/2)
 PROBLEM 1-19
1. 500,000 x 40% x ½ = 100,000
2. Total contract sold in 2020 500,000
Contract revenue in 2020 (100,000)
Unearned contract revenue-Dec 31,2020 400,000
3.Remaining one-half of first contract year
(200,000 x 1/2) -2020 sales 100,000
First one-half of the second contract year
(300,000 x 1/2) – 2020 sales 150,000
First one-half of the second contract year
(240,000 x 1/2) -2021 120,000
Total contract revenue in 2021 370,000

4. Total contract sold in 2020 and 2021 1,100,000

Contract revenue in 2020 (100,000)
Contract revenue in 2021 (370,000)
Unearned contract revenue Dec 31,2021 630,000
 PROBLEM 1-20
Monthly Subscriptions 7,200,00/12 = 600,000

Subscriptions after Sept 30, cut off:

October 600,000
November 600,000
December 600,000
Total Deferred revenue 1,800,000
 PROBLEM 1-21
Unearned magazine subscription
revenue, January 1,2020 1,700,000
Cash receipt from customers 2,100,000
Magazine subscription revenue (1,500,000)
Total unearned revenue, Dec31 2,300,000
 PROBLEM 1-22
1. Subscription received from 2020 125,000
Subscription received from 2021 200,000
Subscription received from 2021 140,000
Total unearned revenue 465,000

2. Subscription revenue from 2021

155,000+130,000= 285,000
 PROBLEM 1-23
1. 2018 deliveries deposit as of Jan 1, 2020 75,000
Less: Returns of 2018 deliveries on 2020 45,000
Total- Expired and not refundable 30,000

Jan 1, 2020, container deposit 290,000

Containers deposit of 2020 390,000
Less: Containers returned in 2020 313,000
Containers not returned and expired 30,000
Container’s deposit, Dec 31,2020 337,000
 PROBLEM 1-24
Advances, Jan 1 1,180,000
Advances Received 1,840,000
Less:
Advances Applied 1,640,000
Advances Cancelled 500,000
Total Liabilities 880,000
 PROBLEM 1-25
1. Escrow accounts, Jan 1 700,000
Escrow Received 1,580,000
Interest on escrow funds 45,000
Less:
Real state taxes paid 1,720,000
Service fee 5,000
Escrow accounts liability, Dec31 605,000
 PROBLEM 1-26
Escrow Liability- Jan. 1, 2020 300,000
Escrow deposit received from
Jan. 1 to September 30, 2019
(250,000 x 9 months) 2,250,000

Total: 2,550,000
Less: Payments for real estate tax
from Jan.1 to Sep. 30 2019
( 2,800,000 x3/4) 2,100,000

Escrow liability- September 30, 2020 450,000

1.
PROBLEM 1-27
Bonus is certain percent of income before bonus and tax
B= P 5,250,000 x 10%
B= 525,000

2. Bonus is certain percent of income after bonus but before

tax
B= 0.05 (P 5,250,000 – B)
B= 262,500 – 0.05B
1.05B = 262,500
B= 250,000
3. Bonus is certain percent of income after bonus and tax
B= 0.05 (P 5,250,000 – B -T)
T= 0.30 (P 5,250,000 – B)
B= 0.05 (5,250,000 – B – 0.30 (P5,250,000 – B)
B= 0.05 (5,250,000 – B – 1,575,000 +0.15B)
B= 262,500- 0.05B-78,750+ 0.15B
1.035 B = 183,750
B= 177,536
4. Bonus is certain percent of income after tax but
before bonus
B= 0.05 (P 5,250,000 – T)
T= 0.30 (P 5,250,000 – B)
B= 0.05 (5,250,000 – B – 0.30 (P5,250,000 – B)
B= 0.05 (5,250,000 – B – 1,575,000 +0.30B)
B= 262,500 - 78,750+ 0.015B
0.985 B = 183,750
B= 186,548
 PROBLEM 1-28
Income after bonus and tax
(1,650,000/110%) 1,150,000

Bonus
(10% x 1,500,000) 150,000
 PROBLEM 1-29
Income after bonus and tax
(280,000/10%) 2,800,000

Income before tax

(2,800,000/70%) 4,000,000

Income before bonus and tax

(4,000,000+ 2,800,000) 4,280,000
 PROBLEM 1-30
Income after bonus but before tax
(600,000/125%) 480,000

Bonus
(25% x 480,000) 120,000
Prob 1-32 1. c 1. d Prob 1-36
1. d 2. d 2. a 1. b
2. b 3. a 2. b
3. b 4. b 3. c
4. b
4. c Prob 1-33 5. b
5. d
5. d 1. a 6. b
6. b 2. c 7. b
7. a 3. a 8. a
8. c 4. c Prob 1-35 9. d
9. d 5. d 6. a 10.c
10.c 7. c
Prob 1-34 8. a
Thank you