Intermediate Accounting II (Acctg 104)

Chapter 1 – Current Liabilities

Liability is a present obligation of an entity to transfer an economic resource as a result of past events.
Three Aspects of Liability
1. Obligation
2. Transfer of Economic Resource
3. Present obligation as a result of past events

A. Obligation is a duty or responsibility that an entity has no practical ability to avoid

1. Legal Obligation – results from a contract legislation, or other operation of law
Salaries Expenses xxxxxx
SSS Payable xxxxx
Taxes payable xxxxx
HMDF Payable xxxxx
Philhealth Payable xxxxx
Cash xxxxx

2. Constructive Obligation – results from an entity’s action that create a valid expectation on
others that the entity will accept and discharge certain responsibilities.

Coca Cola Products -

B. Transfer of Economic Resource

1. Pay Cash, deliver goods or render of services
2. Exchange assets with another party on unfavorable terms
3. Transfer of asset if a specified uncertain future event occurs
4. Issue financial instruments that oblige the entity to transfer an economic resource
Financial Instruments
- Financial assets
- Financial liability
- Financial equity

C. Present Obligation as a result of Past Events

1. An entity has already obtained economic benefits or taken an action
2. As a consequence, the entity will or may have to transfer an economic resource that it would
not otherwise have had to transfer
Recognition Criteria of Liability
1. It meets the definition of liability
2. Recognizing it would provide useful information
Financial and Non-Financial Liabilities
Financial Liabilities is any liability that is:
1. A contractual obligation to deliver cash or another financial asset to another entity;
2. A contractual obligation to exchange financial assets or financial liabilities with another entity
under conditions that are potentially unfavorable to the entity
3. A contract that will or may be settled in the entity’s own equity instruments and is not classified
as the entity’s own equity instruments.
Non-financial Liabilities – is a liability other than financial liability
Examples of financial liabilities
1. Payables, such as accounts, notes, loans, bonds and accrued payables
2. Lease liabilities
3. Held for trading liabilities and derivative liabilities
4. Redeemable preference shares issued

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Chapter 1 – Current Liabilities

5. Security deposits and other returnable deposits

The following are not financial liabilities
1. Unearned revenues and warranty obligations
2. Taxes, SSS, Philhealth and HDMF Payables
3. Constructive Obligations
Financial Statement Presentation
Liabilities are presented as either current or non-current on the face of a classified statement of
financial position.
Current Liabilities
1. Expected to be settled in the entity’s normal operating cycle
2. Held primarily for trading
3. Due to be settled within 12 months after the end of the reporting period (December 31, 2024)
4. The entity does not have the right at the end of the reporting period to defer settlement of the
liability for at least twelve months after the reporting period
All other liabilities are classified as noncurrent, if they do not meet the definition of current
liabilities.
Examples of current liabilities
1. Financial assets measured at FVPL
2. Current portion of long-term notes, bonds, loans and lease liabilities
3. Trade accounts and notes payables
a. Accounts Payable – obligations not supported by formal promises to pay by the debtor
b. Notes Payable - obligations supported by promissory notes to pay by the debtor
c. Loans Payable – usually used to connote bank loans
d. Bonds Payable - obligations issued by the debtor supported by promises to pay made
under seal
e. Liabilities under trust receipts
f. Other Payables arising other than from the purchases and borrowings (dividend payable,
taxes payable, remittances payable and accrued expenses)
4. Non-trade payables due within 12 months after the end of the reporting period
5. Unearned income expected to be earned within 12 months after the end of the reporting period
6. Bank overdrafts
Refinancing Agreement
Refinancing refers to the replacement of an existing debt with a new one but with different terms
(extended maturity date or revised payment schedule).
A long-term obligation that is maturing within 12 months after the reporting period is classified as
current, even if a refinancing agreement to reschedule payments on a long-term basis is completed after
the reporting period and before the financial statements are authorized for issue.
End of reporting period (December 31, 2024) – Accountant or Bookkeeper
Restatement of FS – reviewed by the auditor
Date of FS are authorized to issue (March 31, 2025)

However, the obligation is classified as noncurrent if the entity has the right, at the end of the reporting
period to roll over the obligation for at least twelve months after the reporting period under an existing
loan facility.
If the refinancing is not at the discretion of the entity, the financial liability is current.

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Chapter 1 – Current Liabilities

Illustrative Problem – No. 1

AAA Company’s liabilities on December 31, 2022 were:
Accounts Payable ……………………………………………………….. 1,000,000.00
12% Note Payable issued November 1, 2020 maturing July 1, 2023…… 2,000,000.00
10% Note Payable, next annual principal installment of P 500,000.00 due
February 1, 2023…………………………………………………………… 7,000,000.00
On December 31, 2022, AAA Company consummated a non-cancelable agreement with the lender to
refinance the 12 % Notes Payable on a long-term basis. On December 31, 2022, what amount should be
reported as current liabilities?
AP ------------------------------------1,000,000.00
10% NP (installment)-------------- 500,000.00
Total ----------------------------------1,500,000.00

Illustrative Problem – No. 2

BBB Company had the following liabilities on December 31, 2022:
Accounts Payable, after deducting debit balance in suppliers account of
100,000.00…………………………………………………………………… 500,000.00
Accounts Payable
Beginning Balance
Payment Purchases on Account
100,000.00 Ending Balance
Accrued Liabilities…………………………………………………………… 50,000.00
Notes Payable – due March 31, 2023…………………………………………. 1,000,000.00
Notes Payable – due May 31, 2023…………………………………………… 800,000.00
Bond Payable – due December 31, 2024…………………………………….. 2,000,000.00
On March 1, 2023, before the 2022 Financial Statements were issued, the Notes Payable of 1,000,000.00
was replaced by an 18th month note of the same amount. The entity is considering similar action on the
800,000.00 due on May 1, 2023. The Financial Statements were issued on March 31, 2023.
Compute for the following:
1. Total current liabilities
AP ( 500,000.00+100,000.00) -------600,000.00
Accrued liabilities ---------------------50,000.000
NP – due March 31, 2023-------------1,000,000.00
NP – due May 31, 2023---------------800,000.00
Total ------------------------------------2,450,000.00

2. Total non-current liabilities

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Bond Payable due December 31, 2024 ------------2,000,000.00

Illustrative Problem – No. 3
The following information about CCC Company is available on December 31, 2022:
Income taxes withheld from employees……………………………………….. 900,000.00 CL
Cash balance at First State Bank………………………………………………. 2,500,000.00 x
Cash overdraft at Harbor Bank………………………………………………..1,300,000.00 CL
Accounts Receivable with credit balance……………………………………… 750,000.00CL
Accounts Receivable
Beginning Bal
Sales on Account Collections
Ending Bal 750,000.00

Estimated expenses of meeting warranties on merchandise inventory sold……. 500,000.00 CL

Estimated damages because of unsatisfactory performance on a contact……….1,500,000.00 CL
Accounts Payable………………………………………………………………..3,000,000.00 CL
Deferred serial bonds, issued @par and bearing interest at 12% payable in
semi-annual installment of 500,000.00 due April 1 and October 1 of each year,
the last bond to be paid on October 1, 2027. Interest is also paid semi-annual…. 5,000,000.00
April October Total
2027 500,000.00 500,000.00 1,000,000.00
2026 500,000.00 500,000.00 1,000,000.00
2025 500,000.00 500,000.00 1,000,000.00
2024 500,000.00 500,000.00 1,000,000.00
2023 500,000.00 500,000.00 1,000,000.00
Interest (PxRxT)
Interest : (5,000,000 x 12% x 3/12) = 150,000.00
October to December = 3 months
Stock Dividend Payable……………………………………………… 2,000,000.00 Equity
Compute the total current liabilities as of December 31, 2022.

Taxes Payable 900,000.00

Bank Overdraft 1,300,000.00
AR with credit balance 750,000.00
Warranties 500,000.00
Damages 1,500,000.00
AP 3,000,000.00
Serial Bonds Payable
Semi annual installment 1,000,000.00
Interest Payable 150,000.00
Total 9,100,000.00

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