Intermediate Accounting 2

LIABILITIES
What to discuss

I. Review:
1. Essential characteristics of a liability
2. Measurement of Liabilities
3. Classification of Liabilities
4. Presentation of Liabilities
5. Examples of Liabilities
II. Application (Illustration and Exercises) / Other Liabilities
I. Estimated Liabilities/ Deferred or Unearned Revenue
Current and Noncurrent liabilities
Long-term service contracts
Gift certificates payable
Subscriptions
Bonus Computation
Refundable deposits
Essential characteristics of a liability

1. Present obligation (Legal or Constructive)

2. Obligation is to transfer an economic resource
3. Liability arises from past events
Measurement of Liabilities

Current Liabilities Noncurrent Liabilities

a) Initially measured at present value a) Initially measured at present value

& subsequently measured at & subsequently measured at
amortized cost amortized cost
*in practice, these are not discounted
anymore but measured, recorded, & • If interest-bearing= measured at
reported at face amount face amount
** Reason: The discount or difference
bet. Face amount and present value is
usually not material, therefore
ignored
Classification of Liabilities

Current Liabilities Noncurrent liabilities

PAS 1, par. 69 provides: All other liabilities that does not meet
a) Entity expects to settle the liability the criteria for current liabilities are
within the entity’s operating cycle classified as noncurrent.
b) The entity holds the liability
primarily for the purpose of
trading
c) The liability is due to be settled
within 12 months after the
reporting period; or,
d) The entity does not have an
unconditional right to defer
settlement of the liability for at
least 12 months after the reporting
period.
Presentation of Liabilities

Current Liabilities Noncurrent liabilities

As a minimum, under PAS 1, par. 54, Some examples:

the face of the statement of financial a. Noncurrent provisions
position shall include the following: b. Long-term borrowings
a) Trade and other Payables (line c. Noncurrent portion of long-term
item for accounts payable, notes debt
payable-can be presented d. Finance lease liability
separately, accrued interest on e. Long-term obligation to officers
note payable, dividends payable f. Long-term deferred revenue
and accrued expenses)
b) Current provisions
c) Short-term borrowings
d) Current portion of long-term debt
e) Current tax liability
Examples of liabilities

1. Accounts payable to suppliers for the purchase of goods

2. Amounts withheld from employees for taxes and for contributions to
the Social Security System
3. Accruals for salaries, interest, rent , taxes, product warrantis and profit
sharing bonus
4. Cash dividends declared but not yet paid
5. Deposits and advances from customers
6. Debt obligations for borrowed funds – n0tes, mortgages and bonds
payable
7. Income tax payable
8. Unearned revenue
Examples of liabilities

1. Accounts payable to suppliers for the purchase of goods

2. Amounts withheld from employees for taxes and for contributions to the Social
Security System
3. Accruals for salaries, interest, rent , taxes, product warranties and profit
sharing bonus
4. Cash dividends declared but not yet paid
5. Deposits and advances from customers
6. Debt obligations for borrowed funds – n0tes, mortgages and bonds payable
7. Income tax payable
8. Unearned revenue
9. Bank overdraft, other nontrade payables
Examples of Liabilities (financial liabilities)

1. Payables such as accounts, notes, loans, bonds payable and accrued

expenses that are payable in cash.
2. Finance lease obligations.
3. Liabilities held for trading such as obligations to deliver financial
assets borrowed by a “short seller” (i.e. an entity that sells financial
assets it has borrowed and does not yet own).
4. Preference shares issued with mandatory redemption.
5. Security deposits received that are to be returned to tenants at the end
of lease term.
6. Obligations to deliver a variable number of own shares worth a fixed
amount of cash.
Examples of Liabilities (not financial liabilities)

1. Unearned revenues and warranty obligations that are to be settled by

future delivery of goods or services, rather than cash.
2. Taxes, SSS premiums, Philhealth and other payables arising from
statutory requirements and not from contracts.
3. Commodity contracts that either cannot be settled in cash or which
are expected to be settled by commodity exchange (e.g., coffee beans,
gold bullion, oil, and the like). If a commodity contract is expected to
be cash settled, it will be included as financial liability on the part of
the cash payor.
4. Constructive obligations. These obligations do not arise from
contracts.
APPLICATION
Application

Illustration: Problem 1-1, page 15 Glare Company

Seatwork:
In a ¼ sheet of paper, answer the following:
1. Problem 1-2, page 15 Easy Company (5 mins)
2. Problem 1-4, page 16 Multiple Company (5 mins)
Other Liabilities

I. ESTIMATED LIABILITIES
• Obligations which exist at the end of the reporting period although
their amount is not definite
• Either current or noncurrent
• Examples: estimated liability for premium, award points,
warranties, gift certificates, and bonus
Other Liabilities

II. DEFERRED REVENUE OR UNEARNED REVENUE

• income already received but not yet earned
• If realizable within 1 year, it is a current liability (examples:
unearned interest income, unearned rental income, unearned
subscription revenue)
• If realizable in more than 1 year, it is a noncurrent liability
(examples: unearned revenue from long-term service contracts and
long-term leasehold advances)
Other Liabilities

Illustration on long-term service contracts:

1. See page 9 and 10
2. Problem 1-18, page 25 Duanne Company
Other Liabilities

Illustration on subscriptions:
1. Problem 1-20, page 27 Hart Company

Seatwork:
In a ¼ sheet of paper, answer:
1. Problem 1-21, page 27 Weaver Company (3 mins)
Other Liabilities

Illustration on gift certificates payable:

1. See page 10
2. Problem 1-16, page 24 Cobb Company

Seatwork:
In a ¼ sheet of paper, answer:
1. Problem 1-17, page 24 Regal Company (5 mins)
Other Liabilities

BONUS
• Compensation given to key officers and employees for superior income
realized during the year (usually practiced by large entities)
• Purpose: motivation
• Results in a liability

Variations: See page 11

Seatwork: Problem 1-27, page 31 Nature Company

Other Liabilities

Refundable Deposits
• Cash or property received from customers but which are refundable
after compliance with certain conditions
• Examples: customer deposit for returnable containers like bottles,
drums, tanks and barrels
• Illustration on page 13
• Additional illustration on Problem 1-23, page 29 Farr Company
END