Liabilities

INTERMEDIATE ACCOUNTING 2
What is a Liability?
Liabilities are present obligations of an entity to transfer an economic resource as a result of
past events.
Essential Characteristics of Liability
The Entity has a present obligation.
The Obligation is to transfer an economic resource.
The Liability arises from a past event.
Examples of Liabilities
Accounts Payable
Withholding Tax payable
Accrued Expenses
Dividends Payable
Unearned Income/Revenue
Notes Payable
Bonds Payable
Loan Payable
Income Tax Payable
Measurement of Liabilities
Current Liabilities
a. Initial Measurement – Face Amount
b. Subsequent Measurement – Face Amount

 Non-Current Liabilities
a. Initial Measurement – Present Value
b. Subsequent Measurement – Amortized Cost (Effective Interest Method)
Current Liabilities
An entity shall classify a liability as current when:
1. it expects to settle the liability in its normal operating cycle;
2. it holds the liability primarily for the purpose of trading;
3. the liability is due to be settled within twelve months after the
reporting period; or
4. the entity does not have an unconditional right to defer settlement of
the liability for at least twelve months after the reporting period.
Currently maturing long-term
liabilities
General rule: Currently maturing long term liabilities are presented as
current liabilities.

Exceptions:
1. Refinancing agreement fully completed on or before the balance sheet
date – non-current liability
2. Refinancing agreement after the balance sheet date but before the
financial statements are authorized for issue – non-current liability if the
refinancing is at the discretion of the entity.
Breach of loan agreement
General rule: A liability that is payable on demand is a current liability.

Exception: It is presented as non-current liability if the lender provides the

entity, on or before the balance sheet date, a grace period ending at least 12
months after the balance sheet date to rectify a breach of loan covenant.
Other Matters
Estimated Liabilities – are obligations that exist at the end of the reporting period although
their amount is not definite.
Deferred Revenue – is income already received but not yet earned.
Refundable Deposits – consist of cash or property received from customers but which are
refundable after compliance with certain conditions.
Bonus Computations
Bonus Before Bonus and Before Tax
Bonus After Bonus and Before Tax
Bonus After bonus and After Tax
Bonus before Bonus and After Tax
Click icon to add picture

Thankyou Future CPAs!