Liabilities

Liabilities
Liabilities
are present obligations of an entity to transfer an economic resource as a result of past
events.
Three essential characteristics:
1. Present obligation – obligation is a duty or responsibility that an entity has no practical

ability to avoid; may be legal obligation or constructive obligation
2. Transfer of an economic resource – to pay cash, transfer non-cash asset or provide
service
3. Arises from a past event – liability is not recognized until it is incurred.
obligating event – the past event that leads to a legal or constructive obligation
• Accounts payable
• Amounts withheld from employees
• Accruals for salaries, interest, rent, taxes,
product warranties
• Cash dividend
Examples of • Deposits and advances from customers
Liabilities • Income tax payable
• Unearned revenue
• Estimated liabilities
• Lease liabilities
CLASSIFICATIONS OF LIABILITIES
1. Current Liabilities
- It represents a company’s short term Examples:

obligation due to be paid within the
entity’s operating cycle - Trade accounts payable
- due to be settled within 12 months after - Bank overdraft
reporting period and the entity does not - Dividends payable
have unconditional right to defer the - Income tax payable
settlement beyond 12 months after - Current portion of non-current liability
reporting period.
CLASSIFICATIONS OF LIABILITIES
2. Noncurrent Liabilities
Examples:
- By residual definition, those that do not - Noncurrent portion of long-term debts

qualify as current are noncurrent - Finance lease liability
liabilities. - Deferred tax liability
MEASUREMENT OF LIABILITIES
• All liabilities are initially measured at present value and subsequently

measured at amortized cost.
• Current liabilities are recorded and reported at face amount.
• Noninterest-bearing long-term note payable are initially measured at
present value.
• Interest-bearing long-term note payable are initially measured at face
value.
Long term debt falling due within one year
Is presented as current unless there is are financing agreement that is

completed on or before at the end of the reporting period or if the entity
has the discretion to refinance the liability for at least 12 months after
the reporting period.
Covenants
• Are often attached to borrowing agreements which represent undertakings

by the borrower.
• If agreement attached to the obligation is breached, the liability becomes
payable on demand and thus must be presented as current liability. It can be
presented as noncurrent liability provided a grace period has been given on
or before the end of the reporting period.
EXAMPLE 1
On Dec. 31, 2020, Glare Company provided the ff. information:
Accounts payable, including deposits and advances from customer of 250,000 1,250,000
Notes payable, including note payable to bank due on Dec. 31, 2022 of 500,000 1,500,000
Share dividend payable 400,000
Credit balances of in customer’s accounts 200,000
Serial bonds payable in semi-annual installment of 500,000 5,000,000
Accrued interest on bonds payable 150,000
Contested BIR tax assessment – possible obligation 300,000
Unearned rent income 100,000
What is the total current liabilities on December 31,2020?

SOLUTION
Accounts payable, including deposits and advances from customer of 250,000 1,250,000
Notes payable, including note payable to bank due on Dec. 31, 2022 of 500,000 1,000,000
Credit balances of in customer’s accounts 200,000
Serial bonds payable in semi-annual installment of 500,000 1,000,000
Accrued interest on bonds payable 150,000
Unearned rent income 100,000
TOTAL CURRENT LIABILITIES 3,700,000
EXAMPLE 2
Gar Company disclosed the ff. liability account balances on Dec. 31, 2020:
Accounts payable 1,900,000

Bonds payable 3,400,000
Premium on bonds payable 200,000
Deferred tax liability 400,000
Dividends payable 500,000
Income tax payable 900,000
Note payable, due Jan. 31,2021 600,000
On Dec. 31, 2020, what total amount should be reported as current liabilities?
SOLUTION
Accounts payable 1,900,000

Dividends payable 500,000
Income tax payable 900,000
Note payable, due Jan. 31,2021 600,000
EXAMPLE 3
Willem Company reported the ff. liabilities on Dec. 31, 2020:
Accounts payable 750,000

Short-term borrowings 400,000
Mortgage payable, current portion 100,000 3,500,000
Bank loan payable. Due June 30, 2021 1,000,000
The 1,000,000 bank loan was refinanced with a 5-year loan on Juan. 15, 2021, with the first principal payment due
Jan. 15, 2022.
The financial statements were issue Feb. 28, 2021.
What total amount should be reported as current liabilities on Dec. 31, 2020?
SOLUTION
Accounts payable 750,000

Short-term borrowings 400,000
Mortgage payable, current portion 100,000 100,000
Bank loan payable. Due June 30, 2021 1,000,000

Liabilities

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Liabilities

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Liabilities

Three essential characteristics:

1. Present obligation – obligation is a duty or responsibility that an entity has no practical

- It represents a company’s short term Examples:

- By residual definition, those that do not - Noncurrent portion of long-term debts

• All liabilities are initially measured at present value and subsequently

Is presented as current unless there is are financing agreement that is

• Are often attached to borrowing agreements which represent undertakings

On Dec. 31, 2020, Glare Company provided the ff. information:

What is the total current liabilities on December 31,2020?

Accounts payable 1,900,000

Accounts payable 1,900,000

Willem Company reported the ff. liabilities on Dec. 31, 2020:

Accounts payable 750,000

Accounts payable 750,000

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