Module 3 Part 2
Current Liabilities
13-1
What is a Liability?
Three essential characteristics:
1. Present obligation.
Legal obligation – contract or statutory requirement
Constructive obligation – normal business practice
2. Transfer of economic resource - money, non-cash asset or
performance of a service
3. Arises from past events.
Obligating event
13-2
What is a Liability?
Examples of Liabilities:
Accounts payable. Customer advances and
deposits.
Notes payable.
Unearned revenues.
Bonds Payable
Sales taxes payable.
Current maturities of long-
term debt. Income taxes payable.
Dividends payable. Employee-related liabilities.
13-3
Measurement of a Liability
Initially
An entity shall measure initially a financial liability at present
value
Subsequent
at amortized cost
For Current liabilities or short-term obligations, they are
recorded and reported at face amount.
For Non-Current liabilities, they are initially measured at
present value and subsequently measured at
amortized cost.
13-4
What is a Current Liability?
Current liability is reported if:
1. Liability is expected to be settled within its normal operating
cycle
2. The entity holds the liability primarily for trading.
3. Liability is expected to be settled within 12 months after the
reporting date.
4. The entity does not have an unconditional right to defer
settlement of liability.
The operating cycle is the period of time elapsing between the
acquisition of goods and services and the final cash realization resulting
13-5 from sales and subsequent collections.
What are Noncurrent Liabilities?
Noncurrent liabilities is a residual definition. All
liabilities not classified as current are classified as
noncurrent liabilities:
1. Noncurrent portion of long – term debt.
2. Finance lease liability.
3. Deferred tax liability
4. Long-term obligation to entity officers
5. Long-term deferred revenue
13-6
Presentation of Current Liabilities
The face of the statement of financial position shall
include the following line items for current liabilities:
1. Trade and other payables
2. Current provisions
3. Short-term borrowing
4. Current portion of long-term debt
5. Current tax liability
13-7
Estimated Liabilities
Estimated liabilities are obligations which exist at the end of
reporting period although their amount is not definite.
The existence of the estimated liabilities is valid and
unquestioned.
Estimated liabilities are either current or noncurrent in nature.
Examples : estimated liability for premium, award points,
warranties, gift certificates and bonus.
13-8
What is a Current Liability?
Accounts Payable (trade accounts payable)
Balances owed to others for goods, supplies, or services
purchased on open account.
Time lag between the receipt of services or acquisition
of title to assets and the payment for them.
Terms of the sale (e.g., 2/10, n/30 or 1/10, E.O.M.)
usually state period of extended credit, commonly 30 to
60 days.
13-9
What is a Current Liability?
Deferred Revenue
Income already received but not yet earned.
If realized within one year, it is a current liability.
- Ex. unearned interest income, unearned rental income
If realized more than one year, it is classified as non-current
liability.
- Ex. Unearned revenue from long-term service contracts and
long-term leasehold advances.
13-10
Deferred Revenue
Example: Sports Pro Magazine sold 12,000 annual subscriptions
on August 1, 2020, for P18 each. Prepare Sports Pro’s August 1,
2020, journal entry and the December 31, 2020, annual adjusting
entry.
Aug. 1 Cash 216,000
Unearned revenue 216,000
(12,000 x P18)
Dec. 31 Unearned revenue 90,000
Subscription revenue 90,000
(P216,000 x 5/12 = P90,000)
13-11
What is a Current Liability?
Gift Certificates
Malls, department stores, and supermarkets sell GC which
are redeemable in merchandise.
Journal entry:
Sale: Cash xxx
Gift Certificate Payable xxx
Redemption: Gift Certificate Payable xxx
Sales xxx
Note: DTI ruled that GCs no longer have expiry date.
13-12
What is a Current Liability?
Bonus
To motivate key employees for their performance and
superior income and success of the business.
Bonuses has 4 variations:
Bonus = % x Income before bonus and before tax
Bonus = % x Income after bonus but before tax
Bonus = % x Income after bonus and after tax
Bonus = % x Income after tax but before bonus
13-13
Bonus
Case 1: Before Bonus and Before Tax
Given: Income before bonus and before tax 4.4M
Bonus 10%
Income Tax rate 30%
Computation:
Bonus = 4.4M x 10% = 440,000
13-14
Bonus
Case 2: After Bonus but Before Tax
Given: Income before bonus and before tax 4.4M
Bonus 10%
Income Tax rate 30%
Computation:
Bonus = 10% (4.4M – Bonus)
Bonus = 440,000 – 0.1 Bonus
1.1 Bonus = 440,000
Bonus = 440,000/1.1 = 400,000
13-15
Bonus
Case 3: After Bonus and after Tax
Given: Income before bonus and before tax 4.4M
Bonus 10%
Income Tax rate 30%
Computation:
Bonus = 10% (4.4M – Bonus - Tax)
Tax = 30% (4.4M – bonus)
Bonus = 440,000 – Bonus – (30% (4.4M – Bonus))
1.07 Bonus = 380,000
Bonus = 380,000/1.07 = 287, 850
13-16
Bonus
Case 4: After Tax but before Bonus
Given: Income before bonus and before tax 4.4M
Bonus 10%
Income Tax rate 30%
Computation:
Bonus = 10% (4.4M – Tax)
Tax = 30% (4.4M – bonus)
Bonus = 440,000 – (30% (4.4M – Bonus))
0.97 Bonus = 308,000
Bonus = 308,000/0.97 = 317, 526
13-17
What is a Current Liability?
Refundable Deposits
Cash or property received from customers but which are
refundable after compliance with certain conditions.
Example: returnable containers like bottles, drums, tanks
and barrels.
Entry: Debit Cash, Credit Containers’ deposits
If the customer returns the containers, the deposit is
simple refunded.
If the customer fails to return the containers, the deposit
is considered the sales price of the containers, any
excess is considered gain.
13-18
What is a Premium Liability?
Premiums
Articles of value such as toys, dishes, silverware and other goods
given to customers as a result of past sales or promotion activities.
Journal Entry:
Purchase: Premiums xxx
Cash xxx
Distribution: Premium Expense xxx
Premiums xxx
Outstanding Premiums: Premium Expense xxx
Estimated Premium Liability xxx
13-19