Module 1
Module 1
Module 1
L Pericon
Module 1: Liabilities
Definition of Liabilities
(1) Present Obligation (2) Obligation is to transfer (3) Arises from a past event
an economic resource or transaction
➔ Entity has no practical ➔ Pay cash, transfer the ➔ Not recognized until
ability to avoid. non-cash asset or provide incurred
➔ Entity liable must be service at some future ➔ Past event is the obligating
identified. time. event
➔ Payee is not required to be ➔ Compare and contrast ➔ The entity has not realistic
identified. Cash and Share/Stock alternative but to settle the
➔ Legal-binding contract or Dividend obligation created by the
statutory requirement e.g. ● Cash dividend event.
AP for goods and services, requires the
taxes, loans with banks. payment of CASH Examples of Obligating events:
➔ Constructive-normal which is an ● Acquisition of goods gives
business practice, custom, economic resource rise to AP. An obligation
and desire to maintain that will be paid to event is the acquisition of
good business relations or stockholders as of goods.
act in an equitable manner. record date. Hence, ● Receipt of a bank loan
A LIABILITY. results in an obligation to
● Share/Stock repay the loans.
dividend will require Obligating event is the
the issuance of receipt of cash from the
own shares of the bank as a consequence of
entity, hence, NOT a bank loan.
A LIABILITY.
● Share/Stock
dividend payable is
classified
EXCEPTION:
(1) Long-term debt falling due within one year or which is due to be settled within 12 months
after the reporting period is classified as CURRENT, even if:
(2) Liabilities are classified as CURRENT even if settled more than 12 months after the reporting
period such as:
● Trade payables and accruals for employee and other operating costs are part of the working capital
used in the entity’s normal operating cycle.
● When certain conditions relating to the borrower’s financial situation are breached, the liability
becomes PAYABLE ON DEMAND.
● Breach of covenant makes a non-current liability to a CURRENT LIABILITY even if the lender has
agreed AFTER THE REPORTING PERIOD and BEFORE THE STATEMENTS ARE AUTHORIZED
FOR ISSUE, not to demand payment as a consequence of the breach.
● Liability is classified as current because, at the end of the reporting period, the entity DOES NOT
HAVE AN UNCONDITIONAL RIGHT TO DEFER SETTLEMENT for at least 12 months after that
date.
EXCEPTION:
➔ Classified as non-current if the lender has agreed on or before the end of the reporting period to
provide a grace period ending at least 12 months after that date.
GRACE PERIOD:
● Period within which the entity can rectify the breach and during which the lender cannot demand
immediate repayment.
● Examples: unearned interest income, unearned rental income, unearned airline ticket sales, and
unearned subscriptions revenues
● Example: unearned revenues from long-term service contracts, long-term leasehold advances.
AE 16: INTERMEDIATE ACCOUNTING 2 A.L Pericon
➔ An entity sells equipment service contracts agreeing to service equipment for a 2-year period.
➔ Concepts application:
Cash 1,000,000
Cash 500,000
➔ Gift certificates are usually issued by department stores, malls, and redeemable in merchandise.
Cash xxx
Sales xxx
(3) When the gift certificates expire or when gift certificates are not redeemed:
➔ Bonus is compensation to key officers and employees for superior income realized during the year.
➔ Purpose is to motivate officers and employees by directly relating their well-being to success of the
entity.
➔ Compensation plan results in liability must be measured and reported in the financial statements.
Bonus 10%
Computation:
Bonus 10%