CURRENT LIABILITIES, PROVISIONS,
CONTINGENCIES
Liabilities – a present obligation of an enterprise arising from PAST EVENT, the settlement of which
is expected to result in an OUTFLOW FROM THE ENTERPRISE OF RESOURCES
EMBODYING ECONOMIC BENEFITS.
Obligating Events – transaction or event that results in an enterprise having no realistic alternative to
settling
that obligation.
-
Either be:
1. Legal Obligation – derives from contract, legislation, or other operation of law.
2. Constructive Obligation – derive from an enterprise’s actions whereby an established
pattern of past practice, published policies or a sufficiently specific current statement.
- the firm has indicated to the other parties that it will accept
certain responsibilities.
- the enterprise, therefore, created a valid expectation on the
part
of those other parties that it will discharge those responsibilities.
Extinguishment of Obligation
1.
2.
3.
4.
5.
Payment of cash
Transfer of other assets
Provision of services
Replacement of an obligation with other obligation
Conversion of the obligation to equity.
Recognition Principle: Liabilities
 When PAST EVENT HAS OCCURRED and the following conditions are met:
1. It is PROBABLE that an outflow of resources embodying economic benefits will result from the
settlement
of a present obligation.
2. The amount at which the settlement will take place can be measured RELIABLY.

Contingent Liability – disclosed lang sa Notes to Financial Statement, hindi siya pinipresent.
Illustration: Will this results in recognition of liabilities?
1.
2.
3.
4.
5.
6.
7.
8.
9.
Receipt of goods ordered from a supplier.
Signing of employment contract be a new employee.
Declaration of cash dividends on cumulative preference shares.
Declaration of share dividends on ordinary shares.
Declaration of property dividends on ordinary shares.
Receipt of goods to be sold for the account of consignor.
Receipt of cash from customer for goods to be delivered next month.
Withholding taxes on employee’s compensation.
Violation of the terms of a contract; it is more likely than not that there will be
outflow of resources, amount of such outflow can be reasonably estimated.
10. Violation of the terms of a contract; it is more likely than not that there will be
This study source was downloaded by 100000801932233 from CourseHero.com on 04-15-2022 04:32:29 GMT -05:00
outflow cannot be reasonably estimated.
https://www.coursehero.com/file/80851409/Current-Liabilitiesdocx/
- YES
- NO.
- YES
- NO.
- YES.
- NO.
- YES.
- YES
- YES.
- NO.
11. Violation of the terms of a contract; it is less than probable but more than
remote that there will be outflow of economic benefits.
12. Violation of the term of agreement and, as a result, it is likely that there
will be outflow of economic benefits.
13. Sale of goods with product warranty,
14. Receipt of land and building from the city government.
15. Sale of non-refundable tickets for a concert ticket show that will be
staged three months from now.
16. Signing of contract of lease that will take effect next month for
the use of another entity’s facility.

- NO.
- NO.
- YES
- YES
- YES.
- NO.
A financial liability is any liability that is a contractual obligation
a. To deliver cash or another financial asset to another entity;
b. To exchange financial assets or financial liabilities to another entity under conditions that
are potentially unfavorable to the entity, or
c. That will or may be settled in the entity’s own equity instruments and is a non-derivative for
which the entity may be obliged to deliver a variable number of the entity’s own equity
instrument; or
d. That will or may be settled in the entity’s own equity instruments and is a derivative that will or
may be settled other than by exchange of a fixed amount of cash or a financial asset for a fixed
number of the entity’s own equity instruments.
This study source was downloaded by 100000801932233 from CourseHero.com on 04-15-2022 04:32:29 GMT -05:00
https://www.coursehero.com/file/80851409/Current-Liabilitiesdocx/
PROBLEMS:
Problem 1
Requirements:
a. Record the foregoing transactions in the books of Jefferson Corporation using the:
1. Gross Method of Recording Purchases
2. Net Method of Recording Purchases
Gross Method
December 16
Purchases
Accounts Payable
66,0000
Freight In
Accounts Payable
1,400
66,000
1,400
December 19
Purchases
Accounts Payable
72,000
72,000
December 26
Accounts Payable
Cash
Purchase Discount
67,400
66,080
1,320
December 31
Accounts Payable
Cash
Purchase Discount
72,000
70,560
1,440
Net Method
December 16
Purchases
Accounts Payable
64,680
Freight – In
Accounts Payable
1,400
64,680
1,400
December 19
Purchases
Accounts Payable
69,840
69,840
December 26
Accounts
Payable
66,080 on 04-15-2022 04:32:29 GMT -05:00
This study source
was downloaded
by 100000801932233 from CourseHero.com
Cash
https://www.coursehero.com/file/80851409/Current-Liabilitiesdocx/
66,080
December 31
Accounts Payable
Purchase Discount Lost
Cash
69,840
720
70,560
b. Give the necessary adjustment on December 31 assuming that Jefferson uses the net method and
assuming that the account with Celeron is still unpaid at December 31.
December 31
Purchase Discount Lost
Accounts Payable
720
720
Problem 2.
Required: What amount should Washington Company report as total accounts payable at December 31,
2018?
Unadjusted Accounts Payable
Add (Deduct) Adjustments:
Unrecorded issuance of checks
Unrecorded purchases
Unrecorded purchases
Reclassification of the debit balance
Adjusted Accounts Payable
1,000,000
(350,000)
147,000
120,000
80,000
997,000
Problem 3.
Unadjusted Accounts Payable
1,500,000
Add (Deduct) Adjustments:
Unrecorded purchases lost in transit, FOB shipping point
240,000
Purchase returns and allowances
(80,000)
Adjusted Accounts Payable
1,660,000
NOTES PAYABLE PROBLEMS
Problem 4.
Requirements:
a. Give the journal entries on May 01, 2019, December 31, 2019 and April 30, 2020.
May 1
Automobiles
Discount on Notes Payable
Notes Payable
3,600,000
324,000
Face Amount of the Note
Present Value of the Note
Discount on Notes Payable
3,924,000
3,924,000
3,600,000
Dec 31
Interest Expense
216,000
Discount
on
Notes
Payable
216,000
This study source was downloaded by 100000801932233 from CourseHero.com on 04-15-2022 04:32:29
GMT -05:00
https://www.coursehero.com/file/80851409/Current-Liabilitiesdocx/
324,000
April 30
Interest Expense
108,000
Discount on Notes Payable
Notes Payable
Cash
108,000
3,924,000
3,924,000
b. At what amount should the Notes Payable be shown on the December 31, 2019 statement of financial
condition of Madison Company?
Face Value of the Note
3,924,000
Less: Discount on Notes Payable
324,000
Less: Amortization of Discount on Notes Payable
(216,000)
108,000
Carrying Value / Amortized Cost, 12/31/2019
3,816,000
Problem 5.
Requirements:
a. Give the journal entries on June 1, 2019, December 31, 2019 and May 31, 2020.
June 01
Cash
Discount on Notes Payable
Notes Payable
2,700,000
300,000
3,000,000
Face Amount of the Note
Less: Discount on Notes Payable
Proceeds on Discounting Notes
3,000,000
300,000
2,700,000
Dec 31
Interest Expense
175,000
Discount on Notes Payable
175,000
May 31
Interest Expense
900,000
Discount on Notes Payable
Notes Payable
Cash
900,000
3,000,000
3,000,000
b. Determine the carrying value of the liability as of December 31, 2020
Face Value of the Note
Less: Discount on Notes Payable
300,000
Less: Amortization of Discount on Notes Payable(175,000)
Carrying Value / Amortized Cost, 12/31/2019
3,000,000
125,000
2,875,000
Problem 6.
Requirements: Give the journal entries on May 1, 2019, December 31, 2019 (year-end adjustments),
and April 30, 2020 and determine the carrying value of the liability on December
This study source was downloaded by 100000801932233 from CourseHero.com on 04-15-2022 04:32:29 GMT -05:00
31, 2019, assuming that
https://www.coursehero.com/file/80851409/Current-Liabilitiesdocx/
a. The market rate of interest for a note of this type is 5%
Face Value of the Note
Present Value of the Note
Present Value of the Principal
Present Value of the Interest
Premium on Notes Payable
8,000,000
7,619,047.62
685,714.29
8,304,761.90
304,761.90
May 01
Equipment
Notes Payable
Premium on Notes Payable
8,304,761.90
8,000,000
304,761.90
Dec 31
Interest Expense
Premium on Notes Payable
Interest Payable
276,825.40
203,174.60
480,000
April 30
Interest Expense
Premium on Notes Payable
Interest Payable
Notes Payable
Cash
138,412.70
101,587.30
240,000
8,000,000
8,000,000
b. The market rate of interest for a note of this type is 12%
Face Value of the Note
Present Value of the Note
Present Value of the Principal
Present Value of the Interest
Discount on Notes Payable
8,000,000
7,142,857.14
642,857.14
7,785,714.29
214,285.71
May 01
Equipment
Discount on Notes Payable
Notes Payable
7,785,714.29
214,285.71
8,000,000
Dec 31
Interest Expense
Discount on Notes Payable
Interest Payable
622,857.14
142,857.14
480,000
April 30
Interest Expense
Discount on Notes Payable
Interest Payable
Notes Payable
311,428.57
71,428.57
240,000
8,000,000
This study source was downloaded
Cash by 100000801932233 from CourseHero.com on 04-15-2022 04:32:29 GMT -05:00
8,000,000
https://www.coursehero.com/file/80851409/Current-Liabilitiesdocx/
Problem 7.
Requirements:
a. Determine the effective interest rate of this note.
Cash Price of the Land
Face Value of the Note
PV Factor of the Note
6,949,800
9,000,000
0.7722
Effective Interest Rate
PV Factor of 9% for three periods
9%
0.7722
b. Prepare a table of discount amortization over the term of the note.
Date
April 01, 2018
March 31, 2019
March 31, 2020
March 31, 2021
Discount Amortization
Carrying Value
625,482
681,775.38
742,942.62
6,949,800
7,575,282
8,257,057.38
9,000,000
c. Determine the interest expense for the year ended December 31, 2018 and the carrying amount
of the note at December 31, 2018.
Interest Expense
469,111.50
Face Value of the Note
9,000,000
Less: Discount on Notes Payable
2,050,2000
Less: Amortization of Discount on Notes Payable
(469,111.50) 1,581,088.50
Carrying Value / Amortized Cost, 12/31/2018
7,418,911.50
d. Prepare the necessary entries for the years 2018 through 2021 relative to the foregoing,
including any
adjustments at year-end, December 31.
2018
April 01
Land
Discount on Notes Payable
Notes Payable
6,949,800
2,050,2000
9,000,000
Dec 31
Interest Expense
469,111.50
Discount on Notes Payable
469,111.50
2019
This
study source was downloaded by 100000801932233 from CourseHero.com on 04-15-2022 04:32:29 GMT -05:00
March 31
https://www.coursehero.com/file/80851409/Current-Liabilitiesdocx/
Interest Expense
156,370.50
Discount on Notes Payable
156,370.50
Dec 31
Interest Expense
170,443.85
Discount on Notes Payable
170,443.85
2020
March 31
Interest Expense
557,206.97
Discount on Notes Payable
557,206.97
2021
March 31
Interest Expense
185,735.66
Discount on Notes Payable
185,735.66
Notes Payable
Cash
9,000,000
9,000,000
Problem 8.
Requirements:
a. Compute the interest expense for the years 2018, 2019 and 2020.
2018 Interest Expense
2019 Interest Expense
From 1/1 – 4/30
From 5/1 – 12/31
2020 Interest Expense
From 1/1 – 4/30
From 5/1 – 12/31
2021 Interest Expense
416,988
208,494
454,516.92
663,019.92
227,258.46
495,423.44
722,681.90
247,711.72
b. At what amount should a notes payable, inclusive of accrued interest, be shown on December
31, 2019
statement of financial position?
Face Value of the Note
Add: Accrued Interest, 2018
Accrued Interest, 2019
Carrying Value of the Note, 12/31/2019
6,949,800
416,988
663,019.92
8,029,798.92
c. How will the Notes Payable and the Interest Payable be shown on December 31, 2019
statement
of financial position? On December 31, 2020 statement of financial position?
On December 31, 2019 statement of financial position, the notes together with the accrued
interest
This study source
wasbe
downloaded
by as
100000801932233
from CourseHero.com
shall
shown
non-current
liability. on 04-15-2022 04:32:29 GMT -05:00
https://www.coursehero.com/file/80851409/Current-Liabilitiesdocx/
On December 31, 2020 statement of financial position, the notes together with the accrued
interest
shall be shown as current liability, since this amount will be due on April 30, 2021.
d. Prepare entries relating to the foregoing years 2018 through 2021. (Prepare adjusting entries
only at
December 31.)
2018
May 01
Land
6,949,800
Notes Payable
6,949,800
Dec 31
Interest Expense
Interest Payable
416,988
416,988
2019
Dec 31
Interest Expense
Interest Payable
663,019.92
663,019.92
2020
Dec 31
Interest Expense
Interest Payable
722,681.90
722,681.90
2021
April 30
Interest Expense
Interest Payable
247,711.72
Notes Payable
Interest Payable
Cash
6,949,800
2,050,392.54
247,711.72
9,000,192.54
,
This study source was downloaded by 100000801932233 from CourseHero.com on 04-15-2022 04:32:29 GMT -05:00
https://www.coursehero.com/file/80851409/Current-Liabilitiesdocx/
Powered by TCPDF (www.tcpdf.org)