INTERMEDIATE ACCOUNTING II
CHAPTER 1: LIABILITIES
Liabilities – are present obligation of an
entity to transfer an economic resource as a
result of past event. (revised CFAS)
Essential Characteristic of Liability
a. Entity has a present obligation
- Obligation is a duty or responsibility
that cannot be avoid by the entity
- Entity liable – must be identified
Payee – not necessary to be
identified
- Present obligation can be:
 Legal obligation – contracts,
legislation, other operation of
law
 Constructive obligation – entity’s
action (past practice and
published policies) that create
valid expectation that entity will
take responsibility.
b. The obligation is to transfer economic
resource
Obligation to:
- Pay, deliver or render
- Exchange assets w/ another
unfavorable items
- Transfer assets if a specified uncertain
event occurs
- Issue a financial instrument the obliges
the entity to transfer an economic
resource
c. Liability arises from past events
- Exists because of past events if:
 Already obtained economic
resource / take an action
 Therefore, entity may have to
transfer economic resource
Examples of Liabilities
a. Accounts Payable (A/P) to suppliers
b. Amounts withheld from employees for
taxes and contribution
c. Accruals (salaries, interest, rent, taxes,
warranties, bonus)
d. Cash Dividends (declared but not paid)
e. Deposits and advances
f. Debt obligations for borrowed funds
(notes, mortgages, bonds payable)
g. Income tax payable
h. Unearned / deferred revenues
Current Liabilities
Current when:
- Expected to be settle within the
entity’s operating cycle
- Holds liability for the purpose of
trading
- Due to be settled within 12 months
after reporting period
- Entity does not have an unconditional
right to defer settlement of the liability
for at least 12 months after the
reporting period
Measurement
- All liabilities are initially measured at
present value and subsequently
measured at amortized cost
- But current liabilities or short-term
obligations are not discounted anymore
but measured, recorded, and reported
at face amount
- Reason: face amount and present value
not material therefore it is ignored
Examples of Current Liabilities
a. Financial liabilities measured at FVPL
(held for trading) – are financial
liabilities that are incurred with an
intention to repurchase them in the
near them
b. Current portion of long-term notes,
bonds, loans, and lease liabilities
c. Trade accounts and notes payable
d. Other non-trade payables due within 12
months after end of reporting period
e. Unearned income expected to be
earned within 12 months
f. Bank overdrafts
*NOTE: See illustration in Module 1 page 6
(example for Current Liabilities
Presentation
Under PAS 1-Paragraph 54, as the minimum of
the face of the statement of financial position
shall include the ff. line items for current
liabilities.
a. Trade and other payables (it is a line
item for accounts payable, nots
payable, accrued interest on NP,
dividends payable and accrued
expenses. NOTE: No objection if trade
accounts and notes payable are
separately presented)
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability
Noncurrent Liabilities
All liabilities not classified as current are
classifies as noncurrent. Noncurrent liabilities
include:
a. Noncurrent portion of long-term debt
b. Finance lease liability
c. Deferred tax liability
d. Long-term obligation to officers
e. Long-term deferred/unearned revenue
Measurement
Noncurrent liabilities (bonds payable and
noninterest bearing note payable) - initially
measure at present value and subsequently
measured at amortized cost
- If notes payable is interest bearing it is
initially and subsequently measured at
face amount.
Financing Agreement
A long-term obligation that is maturing within
12 months after the reporting period – Current
even if:
- An agreement to refinance or to
reschedule payments on a long-term
basis is completed after the reporting
period but before the FS are authorized
is issue
However, if refinancing on long-term basis is
completed on or before the end of the
reporting period – refinancing is just adjusting
event therefore, it is noncurrent.
Entity has discretion to refinance/roll over for
at least 12 months after reporting period
under an existing loan facility – noncurrent
even if it is otherwise be due a shorter period
If entity has unconditional right under existing
loan facility it is still long-term refinancing.
Note the refinancing or rolling over must be at
the discretion of the entity
Covenants
Attached to borrowing agreements which
represent undertaking/oath by the borrower.
Restrictions on the borrower as to
undertaking/oath.
Breach of Covenants
If the conditions under covenants are
breached, the liability becomes payable on
demand.
Current if lender agreed after the reporting
period and before FS are authorized for issue
and not to demand payment because of
breach.
Noncurrent if the lender agreed on or before
the end of the reporting to provide grace
period ending at least 12 months after that
date.
Grace period is a period within entity can
rectify the breach and during which the lender
cannot demand immediate repayment.
Estimated Liabilities
Obligations exist at the end of the reporting
period, but their amount is not definite
Date when the obligation is due is not definite
Exact payee can be not identified or
determined
Estimated liabilities is valid and
unquestionable
Examples
a. Premium
b. Award points
c. Warranties
d. Gift certificates
e. Bonus
Deferred/unearned Income
It is income already received but not earned
Current – realizable within 12 months
Noncurrent – realizable more than 12 months
NOTE: See illustration in book page 9
Gift certificate payable
Many malls, department stores and
supermarkets sell gift certificate which is
redeemable in merchandise
Gift certificates are no longer have an
expiration date-DTI
Accounting procedure
 When the gift certificates are sold:
Cash
xxx
Gift Certificates Payable
xxx
 When the gift certificates are redeemed:
Gift Certificates Payable
xxx
Sales
xxx
When the gift certificates are not
redeemed:
Gift certificates payable
xxx
Forfeited gift certificates
xxx
NOTE: See illustration in Module 1 page 12
Bonus computation
Large entities often compensate key officers
and employees by way of bonus
Main purpose – to motivate employees by
directly relating their well-being to the success
of entity
Four variation of Bonus computation:
1.Bonus is expressed as a certain percent of
income before bonus and before tax.
B = Income x B%
2.Bonus is expressed as a certain percent of
income after bonus but before tax.
B = B% (Inc. – B)
3.Bonus is expressed as a certain percent of
income after bonus and after tax.
B = B% (Inc. – B – Tax)
4.Bonus is expressed as a certain percent of
income after tax but before bonus.
B = B% (Inc. – Tax)
NOTE: See Illustration in the book page 11
Refundable deposits
Consists of cash or property received from
customers but which are refundable after
compliance with certain
Example
Customer deposits require for returnable
containers like:
 Bottle
 Drums
 Tanks
 Barrels
Journal Entries:
1. When required deposit was received from
the customer:
Cash
xxx
Containers Deposit
xxx
2. Customer returns the containers:
Containers Deposit
xxx
Cash
xxx
3. Assume the customer fails to return the
containers:
Containers Deposit
xxx
Containers
xxx
Gain on Sale of Containers
xxx

CHAPTER 2: PREMIUM LIABILITY
Premiums
Premiums are articles of value (toys, dishes,
silverware, and other goods) given to
customers because of past sales or sales
promotion activities.
Premiums are offer in return of product labels,
box tops, wrappers, and coupons
Journal Entries
1. When the premiums are purchased:
Premiums
xxx
Cash
xxx
Current asset – Inventory account
2. When the premiums are distributed to
customers:
Premium Expense
xxx
Premiums
xxx
Marketing /Selling Expense
3. At the end of the year, if premiums is still
outstanding:
Premiums Expense
xxx
Estimated premium liability
xxx
Current liability
NOTE: See Illustration in the book page 45
Variation of Premium
Cash Rebate Program
Cash Register receipts, bar code, rebate
coupons and other proof of purchase often can
be mailed to cash rebate.
Purpose – to stimulate sales
Estimated amount of cash rebate should be
recognized both as an expense and an
estimated liability in the period of sale.
NOTE: See illustration in the book page 47
Cash discount coupon
Popular marketing tool for stimulating sales
Expense and estimated liability are expected
to be recognized in the period of sale.
NOTE: See illustration in the book page 48
Customer loyalty program – IFRS 15
Use to:
a. Build brand loyalty
b. Retain valuable customers
c. Increase volume of sales
Designed to reward customers for past
purchases and to provide them with incentives
to make further purchases
The entity’s grants customer award credits or
“points”
Redeem points by distributing free or
discounted goods or services
NOTE: See illustration in the book page 51
CHAPTER 3: WARRANTY LIABLITY
Warranty
Home appliances are often sold under
guarantee or warranty to provide free repair
service or replacement during specified period
if the products are defective.
Recognition of warranty provision
PAS 37, paragraph 14 – a provision shall
recognized