MODULE 11CURRENT LIABILITIES, PROVISIONS, AND CONTINGENCIES

LEARNING OBJECTIVES:
1. Describe the nature, type, and valuation of current liabilities.
2. Explain the classification issues of short-term debt expected to be refinanced.
3. Identify types of employee-related liabilities.
4. Explain the accounting for different types of provisions.
5. Identify the criteria used to account for and disclose contingent liabilities and assets.
6. Indicate how to present and analyze liability-related information.

OVERVIEW
PAS 37 Provisions, Contingent Liabilities and Contingent Assets outlines the accounting for pro-
visions (liabilities of uncertain timing or amount), together with contingent assets (possible
assets) and contingent liabilities (possible obligations and present obligations that are not
probable or not reliably measurable). Provisions are measured at the best estimate (including
risks and uncertainties) of the expenditure required to settle the present obligation, and reflects
the present value of expenditures required to settle the obligation where the time value of
money is material.

Acquiring new knowledge

Asynchronous - links to more information: www.farhatlectures.com; http://www.ifrsbox.com
A synchronous discussion for this lesson will be scheduled on September22, 2022 (Tuesday
7:30 – 8:30 AM)

Current liabilities are a company's short-term financial obligations that are due within one year
or within a normal operating cycle.

A provision is a liability of uncertain timing or amount.

Contingent liabilities are possible obligations whose existence will be confirmed by uncertain
future events that are not wholly within the control of the entity. 

Contingent assets are possible assets whose existence will be confirmed by the occurrence or
non-occurrence of uncertain future events that are not wholly within the control of the entity. 

Three essential characteristics of liabilities:

1. Present obligation.
2. Arises from past events.
3. Results in an outflow of resources (cash, goods, services).

Current liability is reported if one of two conditions exists:

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

Typical Current Liabilities:

 Accounts payable.
 Notes payable.
  Current maturities of long-term debt.
 Short-term obligations.
 Dividends payable.
 Customer advances and deposits.
 Unearned revenues.
 Sales taxes payable.
 Income taxes payable.
 Employee-related liabilities.

Accounts Payable (trade accounts payable)

Balances owed to others for goods, supplies, or services purchased on open account.

Notes Payable
Written promises to pay a certain sum of money on a specified future date.
 Arise from purchases, financing, or other transactions.
 Notes classified as short-term or long-term.
 Notes may be interest-bearing or zero-interest-bearing.

Current Maturities of Long-Term Debt

Portion of bonds, mortgage notes, and other long-term indebtedness that matures within the
next fiscal year.

Exclude long-term debts maturing currently if they are to be:

1. Retired by assets accumulated that have not been shown as current assets,
2. Refinanced, or retired from the proceeds of a new debt issue, or
3. Converted into ordinary shares.

Short-Term Obligations Expected to Be Refinanced

Exclude from current liabilities if any of the following conditions are met:
1. Refinance the obligation on a long-term basis on or before the FS date.
2. Must have an unconditional right to defer settlement of the liability for at least 12
months after the reporting date.

Dividends Payable
Amount owed by a corporation to its stockholders as a result of board of directors’ authorization.
 Generally paid within three months.
 Undeclared dividends on cumulative preference shares not recognized as
a liability.
 Dividends payable in the form of additional shares are not recognized as
a liability. Reported in equity.

Customer Advances and Deposits

Returnable cash deposits received from customers and employees.
 May be classified as current or non-current liabilities.

Unearned Revenues
Payment received before delivering goods or rendering services?

Examples of Unearned Revenues:

Sales Taxes Payable
Retailers must collect sales taxes or value-added taxes (VAT) from customers on transfers of
tangible personal property and on certain services and then remit to the proper governmental
authority.

Income Tax Payable

Businesses must prepare an income tax return and compute the income tax payable.
 Taxes payable are a current liability.
 Corporations must make periodic tax payments.

Employee-Related Liabilities
Amounts owed to employees for salaries or wages are reported as a current liability.
Current liabilities may include:
 Payroll deductions.
 Compensated absences.
 Bonuses.

Payroll Deductions
Taxes:
► Social Security Taxes
► Income Tax Withholding

Compensated Absences

Paid absences for vacation, illness and maternity, paternity, and jury leaves.

Vested rights - employer has an obligation to make payment to an employee even after
terminating his or her employment.

Accumulated rights - employees can carry forward to future periods if not used in the period in
which earned.
Non-accumulating rights - do not carry forward; they lapse if not used.

Profit-Sharing and Bonus Plans

Payments to certain or all employees in addition to their regular salaries or wages.
 Bonuses paid are an operating expense.
 Unpaid bonuses should be reported as a current liability.

Provision is a liability of uncertain timing or amount.

Reported either as current or non-current liability.
Common types are
► Obligations related to litigation.
► Warrantees or product guarantees.
► Business restructurings.
► Environmental damage.

Companies accrue an expense and related liability for a provision only if the following conditions
are met:
1. Probable that an outflow of resources will be required to settle the obligation; and
2. A reliable estimate can be made.

Recognition

Constructive obligation is an obligation that derives from a company’s actions where:

1. By an established pattern of past practice, published policies, or a sufficiently
specific current statement, the company has indicated to other parties that it will
accept certain responsibilities; and
2. As a result, the company has created a valid expectation on the part of those
other parties that it will discharge those responsibilities.

How does a company determine the amount to report for a provision?

Amount recognized should be the best estimate of the expenditure required to settle the
present obligation.
Best estimate represents the amount that a company would pay to settle the obligation at the
statement of financial position date.

Common Types of Provisions:

1. Lawsuits
2. Warranties
3. Premiums
4. Environmental
5. Onerous contracts
6. Restructuring
Litigation Provisions
Companies must consider the following in determining whether to record a liability with respect
to pending or threatened litigation and actual or possible claims and assessments.
1. Time period in which the underlying cause of action occurred.
2. Probability of an unfavorable outcome.
3. Ability to make a reasonable estimate of the amount of loss.

With respect to unfiled suits and unasserted claims and assessments, a company must
determine
1. the degree of probability that a suit may be filed or a claim or assessment may be
asserted, and
2. the probability of an unfavorable outcome.

If both are probable, if the loss is reasonably estimable, and if the cause for action is dated on or
before the date of the financial statements, then the company should accrue the liability.

Warranty Provisions
Promise made by a seller to a buyer to make good on a deficiency of quantity, quality, or
performance in a product.

If it is probable that customers will make warranty claims and a company can reasonably
estimate the costs involved, the company must record an expense.

Warranty Provisions

Accrual-Basis method
► Charge warranty costs to operating expense in the year of sale.
► Method is the generally accepted method.
► Referred to as the expense warranty approach.

Premiums and Coupons

Companies should charge the costs of premiums and coupons to expense in the period of the
sale that benefits from the plan.
Accounting:
 Estimate the number of outstanding premium offers that customers will present
for redemption.
 Charge cost of premium offers to Premium Expense and credits Premium
Liability.

Environmental Provisions
A company must recognize an environmental liability when it has an existing legal obligation
associated with the retirement of a long-lived asset and when it can reasonably estimate the
amount of the liability.

Obligating Events. Examples of existing legal obligations, which require recognition of a

liability include, but are not limited to:
► Decommissioning nuclear facilities,
► Dismantling, restoring, and reclamation of oil and gas properties,
► Certain closure, reclamation, and removal costs of mining facilities,
► Closure and post-closure costs of landfills.
Measurement. A company initially measures an environmental liability at the best estimate of
its future costs.

Recognition and Allocation. To record an environmental liability a company includes

► the cost associated with the environmental liability in the carrying amount of the
related long-lived asset, and
► records a liability for the same amount.

Restructuring Provisions

PFRS provides specific guidance related to certain costs and losses that should be excluded
from the restructuring provision.

Disclosures related to provisions

A company must provide a reconciliation of its beginning to ending balance for each major class
of provisions, identifying what caused the change during the period.
In addition,
► Provision must be described and the expected timing of any outflows disclosed.
► Disclosure about uncertainties related to expected outflows as well as expected
reimbursements should be provided.

Contingent liabilities are not recognized in the financial statements because they are
1. A possible obligation (not yet confirmed),
2. A present obligation for which it is not probable that payment will be made, or
3. A present obligation for which a reliable estimate of the obligation cannot be
made.

Contingent Liabilities Guidelines

A contingent asset is a possible asset that arises from past events and whose existence will
be confirmed by the occurrence or non-occurrence of uncertain future events not wholly within
the control of the company. Typical contingent assets are:
1. Possible receipts of monies from gifts, donations, bonuses.
2. Possible refunds from the government in tax disputes.
3. Pending court cases with a probable favorable outcome.

Contingent Asset Guidelines

Contingent assets are disclosed when an inflow of economic benefits is considered more likely
than not to occur (greater than 50 percent).

Presentation of Current Liabilities

 Usually reported at their full maturity value.
 Difference between present value and the maturity value is considered immaterial.

Analysis of currentliabilities

Liquidity regarding a liability is the expected time to elapse before its payment. Two ratios to
help assess liquidity are:
 MODULE # 11 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. On December 31, 2023, the bookkeeper of the Lyndon Company gave the following information:
 Notes payable arising from purchases of goods, P472,000; arising from ST-loans from banks, 200,000
on which trading securities valued at 280,000 have been pledged as security; arising from long-term
advances by officers, 250,000.
 Employees’ income taxes payable, 9,600.
 Advances received from customers on purchase orders, 64,000
 Accounts payable arising from purchases of goods, 380,000.
 Customers’ accounts with credit balances arising from sales returns, 26,000
 Share dividends distributable, 240,000.
 First mortgage serial bonds, 1,500,000 payable in semi-annual installments of 50,000 due on April 1
and October 1 of each year.
 Cash overdraft with ABC Commercial Bank, 50,000.
 Estimated damages to be paid as a result of unsatisfactory performance on a contract, 24,000
 Estimated expenses of meeting guarantee for service requirement on merchandise sold, 48,000.
 Accrued interest on bonds payable, 57, 500.

What total current liabilities shall be presented in the statement of financial position as of December 31, 2023?
a. 1,431,100 b. 1,609,100 c. 1,921,100 d. 3,321,100

2. The following liability account balances on December 31, 2021 was reported by Righteousness Company:
Accounts Payable 3,000,000
Bonds Payable, due 2023 2,700,000
Premium on bonds payable 300,000
Deferred Tax Liability 420,000
Income Tax Payable 900,000
Dividends in Kind due on March 3, 2022 1,200,000
Note Payable due January 1, 2023 780,000

The deferred tax liability is based on temporary differences stemming from different depreciation method for financial
reporting and income purposes. What amount should be treated as Current liabilities on December 31, 2021?
a. 5,400,000 b. 5,520,000 c. 5,700,000 d. 5,100,000

3. Blackfield Company has the following info of the liabilities as of December 31, 2023:
10% note payable that was issued October 1, 2023, maturing
September 30, 2024 2,230,000
8% note payable issued July 1, 2023, payable in
10 equal annual installments of 330,000 beginning
 June 30, 2024 3,300,000

The business’ financial statements were issued on March 15, 2024. On February 3, 2024, the whole 2,230,000 of the
10% note was refinanced through issuance of a long-term liability payable in lump sum. Furthermore, on December
27, 2023 the business consummated a non-cancelable agreement with a creditor to refinance the 8% note on a long
term basis.

The amount of short-term liabilities on December 31, 2023 financial statements is:
a. 5,530,000 b. 2,230,000 c. 3,300,000 d. 1,070,000

4. Winnie-Pooh Enterprise has a 5,000,000 note payable due on July 1, 2023. The entity signed an agreement on
December 31, 2022 to borrow up to 5,000,000 to refinance the note payable on a long-term basis. The financing
called for borrowing not exceeding the 60% of the value of the collateral to be provided by the business enterprise.
On December 31, 2022, the value of the collateral was 2,450,000.

The amount of the note payable that should be reported as non-current liability is:
a. 5,000,000 b. 3,530,000 c. 2,450,000 d. 1,470,000

5. Toyo Company owns a car dealership that it uses for servicing cars under warranty. The entity’s experience with
warranty claims is that 60% of all cars sold in a year have zero defect, 25% of all cars sold in a year have normal
defect, and 15% of all cars sold in a year have significant defect. The cost of rectifying a “normal defect” in a car is
10,000. The cost of rectifying a “significant defect” in a car is 30,000. The entity sold 500 cars during the year.

What is the “expected value” of the provision for warranty for the current year?
a. 3,500,000 b. 1,750,000 c. 1,400,000 d. 4,000,000

6. The Kingston Company launched a new sales promotional program. For every 10 chewing gum box tops returned to
Kingston, customers receive an attractive prize. Kingston estimates that 40% of the chewing gum box tops reaching
the consumer market will not be redeemed. Additional information is as follows:
Units Amount
Sales of chewing gum (in boxes) 3,000,000 3,600,000
Purchase of prizes by Kingston 80,000 40,000
Prizes distributed to customers 42,000 P-5

At the end of the year, Kingston recognized a provision equal to the estimated cost of potential prizes outstanding.
What is the amount of this provision?
a. 69,000 b. 49,000 c. 39,000 d. 21,000

7. During the year 2022, the Tyler Company started a promotional campaign for the sale of its car wax product. A
coupon is attached for each unit of car wax sold. For every five coupons plus 50, a customer can avail of a bottle of
tire black. Each tire black costs 120. The following information relates to the sale of car wax and coupons redeemed
and expected to be redeemed in the future.
2022 2023
 Sale of car wax 140,000 units 200,000 units
Coupons redeemed 40,000 90,000
Coupons expected to be redeemed in the future 30,000 80,000

What is the Premium Expense for 2022 and 2023?

a. 1,000,000 and 2,000,000
b. 980,000 and 1,960,000
c. 1,960,000 and 980,000
d. 980, 000 and 980,000

8. Ken Company operated a retail store and must determine the proper December 31, 2023 year-end accrual for the
following expenses:

 The store lease calls for fixed rent of 12,000 per month, payable at the beginning of the month, and
additional rent of 6% of sales in excess of 2,500,000, payable on January 31 of the following year.
Net sales for 2023 are 4,500,000.
 An electric bill of 8,500 covering the period December 16, 2023 through January 15, 2024 was
received January 22, 2024.
 A4,000 telephone bill was received January 7, 2024, covering:

Service in advance for January 2024 1,500

Local and toll calls for December 2023 2,500

In its December 31, 2023 statement of financial position, Ken should report accrued liabilities of
a. 150,750 b. 131,000 c. 128,250 d. 126,750

9. Concord Company sells motorcycle helmets. In 2023, the entity sold 4,000,000 helmets before discovering a
significant defect in their construction. By December 31, 2023, two lawsuits had been filed against the entity. The first
lawsuit, which the entity has little chance of winning, is expected to be settled out of court for 1,500,000 in January
2024. The legal counsel believed that the entity has a 50-50 chance of winning the second lawsuit, which is for
1,000,000.

What is the accrued liability on December 31, 2023 as a result of lawsuits?

a. 1,500,000 b. 1,000,000 c. 2,500,000 d. 0

10. During January 2023, Haze Corp. won a litigation award for P15,000 that was tripled to P45,000 to include punitive
damages. The defendant, who is financially stable, has appealed only the P30,000 punitive damages. Haze was
awarded P50,000 in an unrelated suit it filed, which is being appealed by the defendant. Counsel is unable to
estimate the outcome of these appeals. In its 2023 financial statements, Haze should report what amount of pretax
gain?
a. 15,000 b. 45,000 c. 50,000 d. 95,000

11. Garfield Company pays its general manager an annual bonus. For the year 2023, the company reported a profit of
P8,000,000 before deductions for bonus and corporate income taxes. The corporate income tax is 30%.

1. Bonus is 8% of profit before deduction for both bonus and income taxes.
a. 592,593 b. 640,000 c. 459,016 d. 424,242
 2. Bonus is 8% of profit after deduction for bonus but before deduction for income taxes.
a. 592,593 b. 640,000 c. 459,016 d. 424,242

3. Bonus is 8% of profit before deduction for bonus but after deduction for income taxes.
a. 592,593 b. 640,000 c. 459,016 d. 448,000

4. Bonus is 8% of profit after deduction for both bonus and income taxes.
a. 592,593 b. 640,000 c. 459,016 d. 424,242

12. Kent Co., a division of National Realty, Inc., maintains escrow accounts and pays real estate taxes for National’s
mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is credited
to the mortgagee’s account and used to reduce future escrow payments. Additional information follows:

Escrow accounts liability, 1/1/Y2 P 700,000

Escrow payments received during year 2 1,580,000
Real estate taxes paid during year 2 1,720,000
Interest on escrow funds during year 2 50,000

What amount should Kent report as escrow accounts liability in its December 31, year 2 balance sheet?
a. 510,000 b. 515,000 c. 605,000 d. 610,000

13. Toddler Care Co. offers three payment plans on its twelve-month contracts. Information on the three plans and the
number of children enrolled in each plan for the September 1, year 2 through August 31, year 3 contract year follows:

Plan Initial payment per child Monthly fees per child Number of children
#1 P500 P -- 15
#2 200 30 12
#3 -- 50 9

Toddler received P9,900 of initial payments on September 1, year 2, and P3,240 of monthly fees during the period
September 1 through December 31, year 2. In its December 31, year 2 balance sheet, what amount should Toddler
report as deferred revenues?
a. 3,300 b. 4,380 c. 6,600 d. 9,900

14. Eisen Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are paid back
by payroll deductions. Information relating to salaries for the calendar year 2023 is as follows:

12/31/2022 12/31/2023
Employee advances P 24,000 P 36,000
Accrued salaries payable 130,000 ?
Salaries expense during the year 1,630,000
Salaries paid during the year (gross) 1,560,000

On December 31, 2023, what amount should Eisen report for accrued salaries payables?
a. 200,000 b. 188,000 c. 164,000 d. 70,000
15. Voyage, Inc. pays royalties on its purchased trademarks. Royalties for the trademarks are equal to a percentage of
Voyage’s sales. Assume that the sale in 2023 were 83,700,000 and expenses amounted only to 24,580,000 and
were subject to rate of 4.25% . At December 31, 2023, Voyage owes one portion out of five of the year’s royalty, to
be paid in July. What would be the royalties payable?
a. 718,450 b.711,450 c.3,577,250 d.3,348,000

16. During the current year, Erza Company sold 50,000 reversible belts under a new sales professional program. Each
belt carried one coupon which entitled the customer to 80 cash rebate.

The entity estimated that 60% of the coupons will be redeemed even though only 20,000 coupons had been
processed during the current year.

1. What amount of rebate expense should be reported for the current year?
a. 2,400,000 b. 1,920,000 c. 30,000 d. 24,000

2. What amount should be reported as rebate liability for unredeemed coupon at year-end?
a. 2,400,000 b. 1,600,000 c. 800,000 d.900,000

17. In 2020, a personal injury lawsuit was brought against Halsey Co. Based on counsel’s estimate, Halsey reported a
50,000 liability in its December 31, 2020 balance sheet. In November 2021, Halsey received a favorable judgment,
requiring the plaintiff to reimburse Halsey for expenses of 30,000. The plaintiff has appealed the decision, and
Halsey’s counsel is unable to predict the outcome of the appeal. In its December 31, 2021 balance sheet, Halsey
should report what amounts of asset and liability related to these legal actions?
Asset Liability
a. 30,000 50,000
b. 30,000 0
c. 0 20,000
d. 0 0

18. In 2021, Infinite Incorporated sells 5000 electric fans at an average price of P750 each. To earn additional income,
Infinite Inc. sells separate items such as television for P 1750 each and refrigerator with a negotiable price of P4670.
The selling price includes one-year warranty on parts. Infinite Inc. expects that 88% of the fans won’t be defective
and certainly in good condition. Warranty repair costs will average P103.75 per unit. In 2021, How much would be the
estimated warranty liability?
a. 181,562.50 b.62,250 c.456,500 d.86,457.50

19. Norris Co. has a contract with its president to pay her a 5% bonus for 2022 and 2023. The income tax rate is 30%
during these two years. In 2022, income before deductions for the bonus and income taxes was P600,000. If the
bonus is based on income before deduction of the bonus but after deduction of income tax, the bonus (ROUNDED
OFF) is
a. 20,690 b.21,000 c. 21,320 d. 30,000

20. Gifted Company is preparing annual financial statements on December 31, 2023. Because of the recently proven
health hazard in one of the products, the Philippine Government has clearly indicated its intention of requiring the
entity to recall all cans of this product sold in the last three months. The entity estimated that this recall would cost
680,000. What accounting recognition should be accorded in this situation?
 a. No recognition
b. Note disclosure only
c. Expense of 680,000 and Retained earnings restriction 680,000
d. Expense of 680,000 and liability of 680,000.

21. Soulwinning Company have the following information at year-end:

Accounts payable net of debit balances in

supplier’s accounts of 120,000 and includes cost
of goods received on consignment of 90,000 3,910,000
Accrued Rent expense 25,000
Credit balances of customer’s accounts 100,000
Claims for increase in wages by employees of the
business, covered in a pending lawsuit 420,000
Estimated expenses in redeeming coupons
presented by customers 180,000
Soulwinning Company as guarantor 200,000
Reserve for contingencies 90,000

What amount should be presented as short-term debt at year-end?

a. 4,455,000 b. 4,735,000 c. 4,005,000 d. 4,245,000

22. In June 2022, Goalkeeper Company filed suit against La Company for the damages for patent infringement. The
damages being sought by Goalkeeper Company was 3,000,000. A court verdict in August 2022 awarded Goalkeeper
2,600,000. La Company appealed for that amount but, Goalkeeper’s counsel believed that Goalkeeper will be
successful against La Company for an estimated amount in the range between 2,200,000 and 2,400,000 with
2,300,000 as the most likely amount.

For the year 2022, what amount would Goalkeeper Company record as income from lawsuit?
a. 3,000,000 b. 2,600,000 c. 2,300,000 d. 0

23. Aztral Company had P 3,000,000 note payable due on May 31, 2024. Under the existing loan
facility, the entity had the discretion to refinance or roll over the note payable for at least twelve months after the end
of reporting period.

On December 31, 2023, what amount of the note payable should be reported as noncurrent liability?
a. 250,000 b. 1,500,000 c. 2,000,000 d. 3,000,000

24. Fierce Company had the following liability balances as of December 31, 2022:
6% note payable due 2023 2,000,000
8.6% term note due 2023 1,000,000
12% note payable due 2025 4,200,000
 Bonds payable 5,000,000
Premium on bonds payable 150,000
7.5% debentures payable, due in 5 equal annual principal
payment plus interest beginning June 30, 2023 3,600,000

On January 1, 2023, the full 6 % note payable was refinance through issuing a long-term obligation payable lump
sum. On December 29, 2022, Fierce Co. completed a 2,100,000 bond offering and will use the proceeds to repay the
8.6% note payable at maturity. On March 31, 2023, the financial statements were authorized to issue.

What amount should be included as non-current obligations for 2022?

a. 6,600,000 b. 13,230,000 c. 10,350,000 d. 12,950,000

25. During 2023, Lucky Company sold 800,000 boxes of cupcake mix under a new sales promotional program. Each box
contained one coupon, which entitled the customer to a baking pan coupon remittance of 35. The entity paid 40 per
pan and 6 for handling and shipping. The entity estimated that 75% of the coupons would be redeemed, even though
only 500,000 had been processed during 2023.

What amount should be reported as premium expense for 2023?

a. 5,000,000 b. 6,000,000 c. 5,500,000 d. 6,600,000