CURRENT LIABILITIES (PAS 1)

Liabilities

Liabilities are obligations existing presently due to past events or transactions, necessitating the transfer of economic resources.

● The essential characteristics of a liability are:

✓ The liability is a present obligation of a particular entity.

✓ The obligation is to transfer an economic resource. The obligation must be to pay cash, transfer noncash asset or provide service at some
future time.

✓ The liability arises from past transaction or event.

o Balance Sheet Classifications

● Current liabilities – Current liabilities are settled within the entity's normal operating cycle, held for trading, due within 12 months post-balance
sheet date, or not eligible for deferral for at least 12 months post-balance sheet date.

o Treatment of Currently Maturing Long-term Debt that is Refinanced on a Long-term Basis –

● Current – if the original term was for a period longer than 12 months and an agreement to refinance or to reschedule payment on a long
term basis is completed after balance sheet date and before the financial statements are authorized for issue.

● Noncurrent – if the refinancing is completed on or before balance sheet date and the refinancing is an adjusting event. Also, if the entity has
the discretion to refinance or roll over an obligation for at least 12 months after balance sheet date.

Note that the refinancing or rolling over must be at the discretion of the entity; otherwise, such obligation is classified as current liability.

Covenants- a promise/agreement, or contract between two parties that certain activities will or will not be carried out.

o Effect of Breach of Covenants

● Current – the liability becomes payable on demand even if the lender has agreed not to demand payment after the balance sheet date and
before financial statements are authorized for issue.

● Noncurrent – if the lender has agreed on or before balance sheet to provide a grace period ending at least 12 months after balance sheet
date.

Provisions

they represent those liabilities of uncertain timing or amount of the future expenditure required in settlement. They are equal to estimated
liabilities or loss contingencies that are accrued because they are both probable and measurable.

o Recognition - recognized in the balance sheet when, and only when:

✓ An enterprise has a present obligation as a result of a past event;

✓ It is probable (i.e., more likely than not to occur –more than 50% likely) that an outflow of resources embodying economic benefits will be
required to settle the obligation; and

✓ A reliable estimate can be made of the amount of the obligation.

Contingent Liabilities

o Definitions:

✓ Possible obligations from past events that will be confirmed only by the occurrence or non occurrence of one or more uncertain future events
not wholly within the control of the enterprise; or

✓ Present obligations from past events but are not recognized because they are not probable that an outflow of resources will be required to
settle the obligation, or the obligation cannot be measured reliably.

o Recognition – should not be recognized but should be disclosed unless the possibilities of an outflow of resources are remote.

Examples: Pending lawsuits and warranties

Contingent Assets

possible assets from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the enterprise.
o Recognition – should not be recognized but disclosed where inflows of economic benefits are probable.

o The disclosure includes a brief description of the contingent asset and an estimate of its financial effects. If contingent assets are only
possible or remote, no disclosures are required.

SAMPLE PROBLEMS

1. The trial balance of PAYB-SIKS Corporation as of December 31, 2024 shows the following, among others.

Estimated premium liability 200,000

Contract entered into for the construction of building 5,000,000
Notes payable (advances from officers) 500,000
Withholding tax payable 100,000
Mortgage payable 3,800,000
Income tax payable 800,000
Accounts payable (trade) 4,000,000
Bank overdraft 300,000
Note receivable discounted 1,500,000
Dividends payable 1,000,000
Notes payable (bank loans – short term) 2,000,000
Estimated warranty liability 600,000
Notes payable (trade) 3,000,000
Estimated damages payable by reason of breach contract 700,000
Accrued liabilities 900,000
Compute the total current liabilities.

a. P12,600,000 c. P15,600,000

b. P14,100,000 d. P19,100,000

e P14,400,000 F. 13,300,000

G. 11,600,000 H. 14,000,000 i. 16,000,000

2. BAON-SA-UTANG Company reported accounts payable on December 31, 2021 at P4,500,000 before any necessary year-end
adjustments relating to the following transactions:

• On December 27, 2021, the entity wrote and recorded checks to creditors totaling P2,000,000 causing an overdraft of P500,000 in the entity’s
bank account on December 31, 2021. The checks were mailed on January 10, 2022.

• On December 28, 2021, the entity purchased and received goods for P750,000, terms 2/10, n/30. The entity recorded purchases and
accounts payable at net amount. The invoice was recorded and paid January 3, 2022.

• Goods shipped FOB destination on December 20, 2021 from a vendor to the entity were received January 2, 2022. The invoice cost was
P325,000.

On December 31, 2021, what amount should be reported as accounts payable?

a. P7,575,000 c. P7,235,000

b. P7,250,000 d. P7,553,500

3. Included in BUMBAI Corporation’s liability account balances on December 31, 2021 were the following:

14% note payable issued October 1, 2021, maturing September 30, 2022 P500,000 CL

16% note payable issued April 1, 2019 payable in

six equal annual installments of P200,000 beginning April 1, 2020 600,000----200K CL
The December 31, 2021 financial statements were issued on March 31, 2022. On January 15, 2022, the entire P800,000 balance of 16% note
was refinanced by issuance of a long-term obligation payable in lump sum. In addition, on March 10, 2022, it consummated a noncancelable
agreement with the lender to refinance the 14%, P500,000 note on a long-term basis, on readily determinable terms that have not yet been
implemented. Both parties are financially capable of honoring the agreement, and there have been no violations of the agreement’s provisions.
In the December 31, 2021 balance sheet.

The amount of the noted payable that it should classify as short-term obligation is:

a. P700,000 c. P200,000

b. P500,000 d. P0

4. UMALIS-PO-SI-MAMA Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2019, the entity began
a program of granting the employees 10 days of paid vacation each year. Vacation days earned in 2019 may first be taken on January
1, 2020.

Year Hourly Vacation Days Earned Vacation Days Used

Wages by Each Employee by Each Employee
2019 25.80 10 0

2020 27.00 10 8

2021 28.50 10 10

The entity has chosen to accrue the liability for compensated absences at the current rate of pay in effect when the compensated time is
earned.

What is the accrued liability for compensated absences on December 31, 2021?

a. P94,920 c. P79,800

b. P90,720 d. P95,760

5. During 2021, AYAW-BAYAD Company sold 500,000 boxes of cake mix under a new sales promotional program. Each box contains
one coupon, which entitles the customer to a baking pan upon remittance of P4.00. The company pays P5.00 per pan and P0.50 for
handling and shipping. It estimates that 80% of the coupons will be redeemed, even though only 300,000 coupons had been
processed during 2021.

What amount should it report as a liability for unredeemed coupons as of December 31, 2021?

a. P100,000 c. P300,000

b. P150,000 d. P500,000

6. On April 1, 2021, PAUTANG-PLEASE Company began offering a new product for sale under a one-year warranty. Of the 50,000
units in inventory on April 1, 2021, 30,000 had been sold by June 30, 2021. Based on its experience with similar products, it estimated
that the average warranty cost per unit sold would be P80. Actual warranty costs incurred from April through June 30, 2021
amounted to P700,000. As of June 30, 2021,

what amount should it report as estimated warranty liability?

a. P900,000 c. P1,700,000

b. P1,600,000 d. P3,300,000

7. PEY WENYU KEN Company sells gift certificates, redeemable for store merchandise that expire one year after their issuance. It
has the following information pertaining to its gift certificates sales and redemptions:

Unredeemed at 12/31/2020 P75,000

2021 sales 250,000

2021 redemptions of prior year sales 25,000

2021 redemptions of current year sales 175,000

The company’s experience indicates that 10% of gift certificates sold will not be redeemed.

In its December 31, 2021 balance sheet, what amount should it report as unearned revenue?

a. P125,000 c. P100,000

b. P112,500 d. P50,000