Module 09 Accounting for Current Liabilities Flashcards
Describe the nature, valuation, and reporting of current liabilities.
Definition
It is as a present obligation of the entity to transfer an economic resource as a result of past events.
Liability
Enumeration
What are the three criteria to be satisfied in order for a liability to exist?
- the entity has an obligation
- the obligation is to transfer an economic resource
- the obligation is a present obligation that exists as a result of past events.
Definition
It is an obligation as a consequence of binding contract and statutory requirement.
Legal Obligation
Definition
An entity may create a contract/agreement with another entity to supply the former with economic resource to be transferred back to the latter in the future in similar or another form of economic resource.
Obligation as consequence of a binding contract
Definition
In the Philippines, an entity has the to pay taxes to the government under the National Internal Revenue Code.
Obligation as consequence of a statutory requirement
Definition
It arise from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner where the entity has no practical ability to act in a manner inconsistent with those practices, policies or statements.
Constructive Obligation
Explanation
In the first place, why an entity has the obligation to transfer an economic resource to another party?
Because the entity has already obtained economic benefits from another party.
Fill in the Blanks
Because liabilities involve future disbursements of assets or services,
one of their mostimportant features is the _____________________________.
date on which they are
payable
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A company must satisfy ________________________ in the ordinary course of business to continue operating.
currently maturing obligations
Enumeration
What are the two (2) basic division of liability?
(I) current liabilities and (2) non-
current liabilities
Enumeration
Similarly, a current liability is reported if one of two conditions exists:
- The liability is expected to be settled within its normal operating cycle; or
- The liability is expected to be settled within 12 months after the reporting date.
Enumeration
According to IAS 1 Paragraph 69 an entity shall classify a liability as current when: (4)
(a) it expects to settle the liability in its normal operating cycle;
(b) it holds the liability primarily for the purpose of trading;
(c) the liability is due to be settled within twelve months after the reporting period; or
(d) it does not have the right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period.
Definition
The time between the acquisition of assets for processing and their realization in cash or cash equivalents.
Operating Cycle
Definition
The period of time elapsing between the acquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections.
O
Operating Cycle
Definition
These are balances owed to others for goods, supplies, or services purchased on open account. It arise because of the time lag between the receipt of services or acquisition of title to assets and the payment for them.
Accounts payable, or trade accounts payable
Definition
These are written promises to pay a certain sum of money on a specified future date. They may arise from purchases, financing, or other transactions.
Notes payable, or trade notes payable
Definition
It is used to keep track of amounts that are owed as short-term or long- term business loans.
Note Payable
Definition
It specifies the interest rate charged on the principal borrowed. The company receives from the bank the principal borrowed; when the note matures, the company pays the bank the principal plus the interest.
interest-bearing note
Definition
An entity reports as part of its current liabilities the portion of bonds, mortgage notes, and other long-term indebtedness that matures within the next fiscal year. It
current maturities of long-term debt
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When only a part of a long-term debt is to be paid within the next 12 months, as in the case of serial bonds that a company retires through a series of annual installments, a company reports the maturing portion of long-term debt as a ________________ and the remaining portion as a long- term debt.
current liability
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However, a company should classify as current any liability that is ____________________ (callable by the creditor), or will be due on demand within one year (or operating cycle, if longer).
due on demand
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Liabilities often become callable by the creditor when there is a ________________________________________.
violation of the debt agreement
Definition
It is an amount owed by a company to its shareholders as a result of the board of directors’ authorization (or in other cases, vote of shareholders).
cash dividend payable
Fill in the Blanks
Current liabilities may include ________________________ received from customers and employees. Companies may receive deposits from customers lo guarantee performance of a contract or service or as guarantees to cover payment of expected future obligations.
returnable cash deposits
Identification
The classification of these items as current or non-current liabilities depends on the time between the date of the deposit and the termination of the relationship that required the deposit.
Customer Advances and Deposits
Identification
A magazine publisher such as Hachette (FRA) receives paymen nhen a customer subscribes to its magazines. An airline company such as China Southern Airlines (CHN) sells tickets for future flights. And software companies like Microsoft (USA) issue coupons that allow customers to upgrade to the next version of their software.
Unearned Revenues
Fill in the Blanks
- When a company receives an advance payment, it debits Cash and credits a ____________________ account identifying the source of the unearned revenue.
- When a company recognizes revenue, it debits the ________________________ account and credits a revenue account.
(1) current liability; (2) unearned revenue
Definition
It is a consumption tax. This tat s placed on a product or
service whenever value is added at a stage of production and at final sale.
value-added tax payable
Short Explanation
So who actually pays the VAT?
It is the consumers who bear the VAT cost as part of their purchase price, not the companies that produced and distributed the product.
Identification
Most of this tax varies in proportion to the amount of annual income. Using the best information and advice available, a business must prepare an income tax return and compute the income taxes payable resulting from the operations of the current period.
Income Taxes Payable
Identification
Companies also report as a current liability amounts owed to employees for salaries or wages at the end of an accounting period.
Employee-Related Liabilities
Enumeration
The (3) items related to employee compensation.
- Payroll deductions.
- Compensated absences.
- Bonuses.
Enumeration
Enumerate the most common types of Payroll deductions.
Withholding taxes, SSS/GSIS, Philhealth, and PAG-IBIG.
Identification
To the extent that a company has not remitted the amounts deducted to the proper authority at the end of the accounting period, it should recognize them as ___________________.
current liabilities
Definition
These are paid absences from employment-such as vacation, illness/sickness, maternity, and paternity.
Compensated absences
Enumeration
Enumerate the following considerations are refevant to the accounting for compensated absences.
Vested Rights, Accumulated Rights, Non-accumulating Rights
Definition
It exist when an employer has an obligation to make payment to an employee even after terminating his or her employment. Thus, these are not contingent on an employee’s future service.
Vested Rights
Definition
Are those that employees can carry forward to future periods if not used in the
period in which earned.
Accumulated Rights
Identification
They ot carry forward; they lapse if not used. As a result, a company does not
recognize a liability or expense until the time of absence (benefit). Thus, if an employee takes a vacation day during a month and it is non-accumulating, the vacation day is an expense in that month.
Non-accumulating rights
Fill in the Blanks
A benefit such as a maternity or paternity leave is contingent upon a future event and does not accumulate. Therefore, these costs are recognized only when the ____________________________.
absence commences
Fill in the Blanks
A modification of the general rules relates to the issue of sick pay gi sick pay benefits vest, a company must ________________ them.
accrue
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Companies should recognize the expense and related liability for compensated absences in the year _____________________________.
earned by employees
Explanation
What rate should a company use to accrue the compensated absence cost-the current rate or an expected rate?
IFRS recommends the use of the expected rate. However, companies will likely use the current rather than expected rates because future rates are not known.
Fill in the Blanks
Many companies give a ____________________ to certain or all employees in addition to their regular salaries or wages.
bonus
