Module 09 Accounting for Current Liabilities

Question 1

Definition

It is as a present obligation of the entity to transfer an economic resource as a result of past events.

Answer 1

Liability

Question 2

Enumeration

What are the three criteria to be satisfied in order for a liability to exist?

Answer 2

• 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.

Question 3

Definition

It is an obligation as a consequence of binding contract and statutory requirement.

Answer 3

Legal Obligation

Question 4

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.

Answer 4

Obligation as consequence of a binding contract

Question 5

Definition

In the Philippines, an entity has the to pay taxes to the government under the National Internal Revenue Code.

Answer 5

Obligation as consequence of a statutory requirement

Question 6

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.

Answer 6

Constructive Obligation

Question 7

Explanation

In the first place, why an entity has the obligation to transfer an economic resource to another party?

Answer 7

Because the entity has already obtained economic benefits from another party.

Question 8

Fill in the Blanks

Because liabilities involve future disbursements of assets or services,
one of their mostimportant features is the _____________________________.

Answer 8

date on which they are
payable

Question 9

Fill in the Blanks

A company must satisfy ________________________ in the ordinary course of business to continue operating.

Answer 9

currently maturing obligations

Question 10

Enumeration

What are the two (2) basic division of liability?

Answer 10

(I) current liabilities and (2) non-
current liabilities

Question 11

Enumeration

Similarly, a current liability is reported if one of two conditions exists:

Answer 11

1. The liability is expected to be settled within its normal operating cycle; or
2. The liability is expected to be settled within 12 months after the reporting date.

Question 12

Enumeration

According to IAS 1 Paragraph 69 an entity shall classify a liability as current when: (4)

Answer 12

(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.

Question 13

Definition

The time between the acquisition of assets for processing and their realization in cash or cash equivalents.

Answer 13

Operating Cycle

Question 14

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

Answer 14

Operating Cycle

Question 15

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.

Answer 15

Accounts payable, or trade accounts payable

Question 16

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.

Answer 16

Notes payable, or trade notes payable

Question 17

Definition

It is used to keep track of amounts that are owed as short-term or long- term business loans.

Answer 17

Note Payable

Question 18

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.

Answer 18

interest-bearing note

Question 19

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

Answer 19

current maturities of long-term debt

Question 20

Fill in the Blanks

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.

Answer 20

current liability

Question 21

Fill in the Blanks

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).

Answer 21

due on demand

Question 22

Fill in the Blanks

Liabilities often become callable by the creditor when there is a ________________________________________.

Answer 22

violation of the debt agreement

Question 23

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).

Answer 23

cash dividend payable

Question 24

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.

Answer 24

returnable cash deposits

Question 25

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.

Answer 25

Customer Advances and Deposits

Question 26

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.

Answer 26

Unearned Revenues

Question 27

Fill in the Blanks

1. When a company receives an advance payment, it debits Cash and credits a ____________________ account identifying the source of the unearned revenue.
2. When a company recognizes revenue, it debits the ________________________ account and credits a revenue account.

Answer 27

(1) current liability; (2) unearned revenue

Question 28

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.

Answer 28

value-added tax payable

Question 29

Short Explanation

So who actually pays the VAT?

Answer 29

It is the consumers who bear the VAT cost as part of their purchase price, not the companies that produced and distributed the product.

Question 30

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.

Answer 30

Income Taxes Payable

Question 31

Identification

Companies also report as a current liability amounts owed to employees for salaries or wages at the end of an accounting period.

Answer 31

Employee-Related Liabilities

Question 32

Enumeration

The (3) items related to employee compensation.

Answer 32

1. Payroll deductions.
2. Compensated absences.
3. Bonuses.

Question 33

Enumeration

Enumerate the most common types of Payroll deductions.

Answer 33

Withholding taxes, SSS/GSIS, Philhealth, and PAG-IBIG.

Question 34

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 ___________________.

Answer 34

current liabilities

Question 35

Definition

These are paid absences from employment-such as vacation, illness/sickness, maternity, and paternity.

Answer 35

Compensated absences

Question 36

Enumeration

Enumerate the following considerations are refevant to the accounting for compensated absences.

Answer 36

Vested Rights, Accumulated Rights, Non-accumulating Rights

Question 37

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.

Answer 37

Vested Rights

Question 38

Definition

Are those that employees can carry forward to future periods if not used in the
period in which earned.

Answer 38

Accumulated Rights

Question 39

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.

Answer 39

Non-accumulating rights

Question 40

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 ____________________________.

Answer 40

absence commences

Question 41

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.

Answer 41

accrue

Question 42

Fill in the Blanks

Companies should recognize the expense and related liability for compensated absences in the year _____________________________.

Answer 42

earned by employees

Question 43

Explanation

What rate should a company use to accrue the compensated absence cost-the current rate or an expected rate?

Answer 43

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.

Question 44

Fill in the Blanks

Many companies give a ____________________ to certain or all employees in addition to their regular salaries or wages.

Answer 44

bonus