1. WHAT ARE LIABILITIES? WHAT ARE THE ESSENTIAL CHARACTERISTICS OF LIABILITIES?

 A liability is a present obligation of an entity to transfer an economic resource as a result of past

events. it is a present obligation arising from past events, the settlement of which is expected to
require an outflow of resources embodying economic benefits, and for which the amount is
reliably measurable.

2. WHAT ARE FINANCIAL LIABILITIES? GIVE EXAMPLES OF FINANCIAL LIABILITIES.

 IFRS 9 defined financial liabilities as contractual obligations to deliver cash or another financial
asset to another entity or to exchange financial assets or financial liabilities to another entity
under potentially unfavorable conditions to the entity. Examples of financial liabilities include
accounts, payable, notes payable, and bonds payable

3. WHICH OF THE FOLLOWING ARE FINANCIAL LIABILITIES?

 Accounts payable
 Notes payable
 Bonds payable
 Salaries payable

4. DISCUSS THE INITIAL RECOGNITION PRINCIPLE FOR FINANCIAL LIABILITIES.

 Financial liabilities are recognized when an entity to the contractual provisions of a financial
instrument, that is the entity becomes obligated to transfer an economic resource, based on the
terms of the financial instrument. It is initially measured at fair value. In case of financial
liabilities that are to be subsequently measured at amortized cost, transaction costs are
considered in their initial measurement.

5. DISCUSS THE METHODS OF ACCOUNTING FOR CASH DISCOUNTS IN THE BOOKS OF THE BUYER OF
GOODS OR SERVICES. HOW SHALL EACH OFTHESE METHODS AFFECT THE MEASUREMENT OF THE
ACCOUNTS PAYABLE AT THE REPORTING DATE?

 Accounting for cash discount using either the gross or net method. Under the gross method, it
initially records the purchases and accounts payable at the gross invoice price. The entity will
only record the cash discount at the payment date within the discount period. The balance of
the purchase discount is reported in profit or loss as a deduction from the gross purchases.
Meanwhile, net method of accounting cash discounts records the purchases and accounts
payable at the invoice price less the cash discounts available, but when it pays beyond the
discount period, the entity will pay the gross invoice price and record the cash discount not
taken as purchase discount lost. At the reporting date, it presents the balance of this account in
profit or loss as part of finance cost.
6. HOW SHALL AN ENTITY ACCOUNT FOR INTEREST-BEARING NOTES? WHAT IS THEIR AMORTIZED COST
AT THE REPORTING DATE

 The initial recognition of an interest-bearing note in its face value, which equals its fair value at
the date of issuance. On maturity date, the maker shall pay the principal plus interest. An entity
shall accrue the interest from the date of the note to the end of the reporting period when the
maturity falls on a date in the next reporting period.

7. HOW SHALL ENTITY ACCOUNT FOR A NON-INTEREST-BEARING NOTE? WHAT IS ITS AMORTIZED COST
AT THE REPORTING DATE?

8. DISCUSS THE ACCOUNTING PRINCIPLES ANF PROCEDURES FOR NOTES BEARING AN UNREALISTIC
INTEREST RATE.

 Notes bearing an unrealistic interest rate happens when the stated rate on the face of the note
and the effective or prevailing market rate are not the same. In such cases, the note and the
interest to be paid based on the stated rate are discounted at the market rate of interest on the
date of issuance. But is the stated rate on the face of the note is higher that the effective rate, it
will result to a premium on notes payable.

9. WHAT ARE BONDS? STATE THE CHARACTERISTICS OF THE DIFFERENT TYPES OF BONDS?

 A bond is a certificate of indebtedness whereby the debtor agrees to pay a sum of money at a
specified data plus periodic interest payment at the stated rate.
 Term bonds- bonds that mature on a single date
 Serial bonds- mature in installment
 Secured bonds- it provides security and protection to investors in the form of a specific assets of
the issuer, such as real-estate or other estate
 Unsecured bonds- termed as debentures, are not protected by pledge of any specific assets , its
issuance is generally based on the credit ratings of a company
 Registered bonds- require the registration of the owner’s name in the book of the issuing
company.
 Bearer bonds/ coupon bonds- not recorded in the names of the owners. Each bond is
accompanied by a coupon representing a periodic payment, covering the life of the issue
 Callable bonds- gives the issuing company the right to call or retire the bonds before maturity
date, usually specified on the bond indenture. The issuing company pays the bond holder an
amount based on the call provisions
 Convertible bonds- give the bondholder the right to exchange their bond holdings into a
specified or predetermined number of the issuing corporation’s share of stocks
 Zero-interest bonds- known as deep-discount bonds, issued at significantly lower than its face
value. The issuing company pays the total interest on these bonds during their entire term
together with the principal amount on the maturity date.

10. HOW IS A BOND PRICE CALCULATED, GIVEN THE PREVAILING MARKET RATE OF SIMILAR
INSTRUMENTS? WHEN IS A BOND ISSUED AT FACE VALUE? AT LESS THAN FACE VALUE? AT MORE THAN
FAVE VALUE?
11. WHAT ARE BOND ISSUE COST? HOW SHOULD AN ENTITY ACCOUNT FOR THE BONDS ISSUE COST?

 These are expenditures incurred by the issuer for legal services, printing and engraving, rights
and obligations of the contracting parties. Bond issue costs are not treated as outright expense
but amortized over the life of the bond similar to that for discount on bonds payable. Bond issue
costs are conceived as cost of borrowing and therefore will increase interest expense.

12. HOW DOES A PREMIUM AMORTIZATION AFFECT THE NOMINAL INTEREST AND CARRYING VALUE OF
THE BOND

 Premium amortization reduces the reported interest expense for the issuer of a bond, resulting
in an interest expense that is lower than the cash interest paid. Amortization of premium
reduces the bond carrying value. On the maturity date, after appropriate premium amortization
for the entire bond term, the bond’s carrying value equals to its face value.

12. HOW DOES A DISCOUNT AMORTIZATION AFFECT THE NOMINAL INTEREST AND CARRYING VALUE OF
THE BOND

 Discount amortization increases the effective interest expense reported each period, making it
higher than the nominal (cash) interest paid. Likewise, discount amortization increases the
carrying value of the bonds, so on its maturity date, the carrying value will equal to its face value

13. WHAT ARE DETTACHABLE SHARE WARRANTS? WHY DO CORPORATION ISSUE BONDS WITH
DETTACHABLE SHARE WARRANTS?

14. DESCRIBE THE ACCOUNTING ENTRIES INVOLVED IN THE ISSUE OF BONDS WITH SHARE WARRANTS

15. WHAT ARE CONVERTIBLE BONDS? WHY DO CORPORATION ISSUE CONVERTIBLE BONDS?

 Convertible bonds give their holders the right to exchange their bond holdings into an ordinary
shares or other securities of the issuing company within a specified period. Corporations issue
convertible bonds to raise money more cheaply than with traditional bonds, control dilution
through a delayed equity issuance, and protect their assets by offering investors a hybrid
security that combines bond-like safety with stock-like growth potential.

16. DISCUSS THE ACCOUNTING FOR THE ISSUANCE OF CONVERTIBLE BONDS

 Under the residual approach, the issuer of a bond convertible into ordinary shares first
determines the amount of the liability component by measuring the fair value of a similar
liability that does not have an associated equity component. Page 323 3 rd paragraph

17. WHAT IS A TROUBLED DEBT RESTRUCTURING? WHAT ARE THE DIFFERENT WAYS OF
RESTRUCTURING A TROUBLED DEBT? DESCRIBE EACH BRIEFLY
  This happens during periods of depressed economy where debtors experiences difficulty I
meeting their maturing obligations. That being said, Concessions were granted by a creditor to
the debtor that it would not otherwise have granted under normal conditions
1. Asset swap- a transfer of non-cash assets can be used to settle a debt obligation in a
troubled debt restructuring
2. Equity swap- issuance of equity instruments. These equity instruments are measured at
fair value of the equity instruments granted or fair value of the financial liability settled,
in order of priority
3. Modification of terms- may take the form of one or any combination, such as:
a) Reduction of stated interest rate
b) Reduction of the face amount of the debt
c) Reduction or condonation of accrued interest
d) Extension of the maturity
e) Moratorium on the payment of the interest and or principal

18. WHEN WOULD A MODIFICATION OF DEBT TERMS QUALIFYS AS A DERECOGNITION OF THE OLD
LIABILITY AND RECOGNITION OF A NEW FINANCIAL LIABILITY?

 page 331, last paragraph

19. HOW DOES AN ENTITY PRESENT ITS FINANCIAL LIABILITIES IN ITS STATEMENT OF FINANCIAL
POSITION?

 An entity shall classify its financial liabilities as current based on the following criteria:
1. Expected to be settled in the entity’s normal operating cycle
2. Held primarily for the purpose of being traded
3. It is due to be settled within 12 months after the reporting period
4. The entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period
 Other than those stated will be classified as non-current financial liabilities

20. GIVE AT LEAST 5 DISCLOSURES THAT ARE PRESENTED IN THE NOTES TO THE FINANCIAL STATEMENTS
RELATING TO FINANCIAL LIBAILITIES.

 Page 341-342 numbers 1,3,4,5,7