Chapter 1

LIABILITIES

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 LEARNING OBJECTIVES
To understand the concept of liabilities.

To describe the nature and type of current and noncurrent liabilities.

To know the measurement of current and noncurrent liabilities.

To explain the issue of long-term debt falling due within one year.

To explain the issue of breach of covenants attached to a long-term debt.

To describe formulas in computing bonus to officers and employees.

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 LIABILITIES
Present obligation of an entity to transfer an
economic resource as a result of past events.

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 MEASUREMENT OF LIABILITIES
Current liabilities
Recorded and reported at face amount.

Noncurrent liabilities
Bonds payable and noninterest bearing note payable = initial
measured at present value and subsequently measured at
amortized cost.
If the long-term note payable is interest-bearing = face amount
(initial and subsequent)

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 CURRENT LIABILITIES
PAS 1, par 69
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.

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 EXAMPLES OF CURRENT
LIABILITIES
a. Trade and other payables
b. Current provisions
c. Short-term borrowings
d. Current portion of long-term debt
e. Current tax liability

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 EXAMPLES OF NONCURRENT
LIABILITIES
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

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 LONG TERM DEBT FALLING DUE
WITHIN OINE 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 statements are
authorized to issue.

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 LONG TERM DEBT FALLING DUE
WITHIN OINE YEAR
If the refinancing on a long-term basis is completed on or
before the end of the reporting period, the obligation is
classified as noncurrent.

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 LONG TERM DEBT FALLING DUE
WITHIN OINE YEAR
If the entity has the discretion to refinance an obligation
for at least twelve months after the reporting period
under an existing loan facility, the obligation is classified
as noncurrent.

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 LONG TERM DEBT FALLING DUE
WITHIN OINE YEAR
If the entity has an unconditional right under the existing
loan facility to defer settlement of the liability for at least
twelve months after the reporting period, the obligation
is considered part of the entity’s long-term refinancing.

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 BREACH OF COVENANTS
PAS 1, par. 74, provides that if a liability becomes payable
on demand, 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 consequence of the breach.

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 BREACH OF COVENANTS
The liability is classified as noncurrent if the lender has
agreed on or before the end of reporting period to
provide a grace period ending at least twelve months
after that date.

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 +
+
+
+
+
+
+
4M /20 x 2 +
+
Ans. = 2,225,000

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 ESTIMATED LIABILTIES
These are obligations which exist at the end of reporting
period although their amount is not definite.

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 EXAMPLES OF ESTIMATED LIABILTIES
1. Estimated liability for premium
2. Award points
3. Warranties
4. Gift certificates
5. Bonus
6. Refundable deposits

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 DEFERRED REVENUE
Income already received but not yet earned.
It may be realizable within one year or in more than one
year after the end of the reporting period.

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 DEFERRED REVENUE
Income already received but not yet earned.
It may be realizable within one year or in more than one
year after the end of the reporting period.

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Journal entries for first year
Cash 1,000,000
Unearned service revenue 1,000,000
Service contract expense 500,000
Cash 500,000
Unearned service revenue 800,000
Service contract revenue 800,000

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 GIFT CERTIFICATES PAYABLE
1. When the GC are sold:
Cash xxx
Gift certificates payable xxx

2. When the GC are redeemed:

Gift certificates payable xxx
Sales xxx

3. When the GC expire or when GC are not redeemed:

Gift certificates payable xxx
Forfeited gift certificates xxx

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 BONUS COMPUTATION
1. Bonus is expressed as a certain percent of income
before bonus and before tax.
2. Bonus is expressed as a certain percent of income
after bonus but before tax.
3. Bonus is expressed as a certain percent of income
after bonus and after tax.
4. Bonus is expressed as a certain percent of income
after tax but before bonus.
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Case 1: Before bonus and before tax

Income before bonus and before tax 4,400,000

Multiply by 10%
Bonus 440,000

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Case 2: After bonus and before tax

B = 10% (4,400,000 – B)
B = 440,000 - .10B
B + .10B = 440,000
1.10B = 440,000
B = 440,000 / 1.10
B = 400,000

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Case 3: After bonus and after tax
B = 10% (4,400,000 – B – T )
T = .30 (4,400,000 – B)
B = .10 [4,400,000 – B - .30 (4,400,000 – B)]
B = .10 (4,400,000 – B – 1,320,000 + .30B)
B = 440,000 - .10B – 132,000 + .03B
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

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Case 3: After tax but before bonus
B = 10% (4,400,000 – T )
T = .30 (4,400,000 – B)
B = .10 [4,400,000 – .30 (4,400,000 – B)]
B = .10 (4,400,000 – 1,320,000 + .30B)
B = 440,000 – 132,000 + .03B
B - .03B = 440,000 – 132,000
.97B = 308,000
B = 308,000 / .97
B = 317,526

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 REFUNDABLE DEPOSITS
It is consisted of cash or property received from
customers, but which are refundable after compliance
with certain conditions.

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 Cash 10,000
Containers’ deposit 10,000
Current liability

• If the customer returns the containers, the deposit is simply refunded.

• If the customer fails to return the containers, the deposit is considered the sale
price of the containers.
• The excess of the deposit over the cost of the containers is considered as gain.

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