FAR EASTERN UNIVERSITY
Institute of Accounts, Business and Finance
FINANCIAL ACCOUNTING 2
Current and Non-current Liabilities
An entity shall classify a liability as current when:
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. the entity does not have an unconditional right to
defer settlement of the liability for at least twelve
months after the reporting period.
An entity shall classify all other liabilities as non-current.
Notes:
 Some current liabilities, such as trade payables and
some accruals for employee and other operating costs,
are part of the working capital used in the entity’s
normal operating cycle.
 An entity classifies such operating items as current
liabilities even if they are due to be settled more than
twelve months after the reporting period.
 The same normal operating cycle applies to the
classification of an entity’s assets and liabilities.
 When the entity’s normal operating cycle is not clearly
identifiable, it is assumed to be twelve months.
 Other current liabilities are not settled as part of the
normal operating cycle, but are due for settlement
within twelve months after the reporting period or held
primarily for the purpose of trading.
o Examples are some financial liabilities classified as
held for trading in accordance with IAS 39, bank
overdrafts, and the current portion of non-current
financial liabilities, dividends payable, income
taxes and other non-trade payables.
 Financial liabilities that provide financing on a long-term
basis (ie are not part of the working capital used in the
entity’s normal operating cycle) and are not due for
settlement within twelve months after the reporting
period are non-current liabilities, subject to paragraphs
74 and 75.
 An entity classifies its financial liabilities as current
when they are due to be settled within twelve months
after the reporting period, even if: (a) the original term
was for a period longer than twelve months, and (b) an
agreement to refinance, or to reschedule payments, on
a long-term basis is completed after the reporting period
and before the financial statements are authorized for
issue.
 If an entity expects, and has the discretion, to refinance
or roll over an obligation for at least twelve months after
the reporting period under an existing loan facility, it
classifies the obligation as non-current, even if it would
otherwise be due within a shorter period.
 However, when refinancing or rolling over the obligation
is not at the discretion of the entity (for example, there
is no arrangement for refinancing), the entity does not
consider the potential to refinance the obligation and
classifies the obligation as current.
 When an entity breaches a provision of a long-term loan
arrangement on or before the end of the reporting
period with the effect that the liability becomes payable
on demand, it classifies the liability as current, even if
the lender agreed, after the reporting period and before
the authorization of the financial statements for issue,
not to demand payment as a consequence of the
breach.
 An entity classifies the liability as current because, at
the end of the reporting period, it does not have an
unconditional right to defer its settlement for at least
twelve months after that date.
 However, an entity classifies the liability as non-current
if the lender agreed by the end of the reporting period
to provide a period of grace ending at least twelve
months after the reporting period, within which the
entity can rectify the breach and during which the lender
cannot demand immediate repayment.
 In respect of loans classified as current liabilities, if the
following events occur between the end of the reporting
period and the date the financial statements are
authorized for issue, those events are disclosed as non-
adjusting events in accordance with IAS 10 Events after
the Reporting Period:
a. refinancing on a long-term basis;
b. rectification of a breach of a long-term loan
arrangement; and
c. the granting by the lender of a period of grace to
rectify a breach of a long-term loan arrangement
ending at least twelve months after the reporting
period.
When an entity breaches an undertaking under a long-term
agreement on or before the balance sheet date with the
effect that the liability becomes payable on demand, the
liability is classified as current, even if the lender has
agreed, after the balance sheet date and before the
authorization of the financial statements for issue not to
demand payment as a consequence of the breach.
The liability is classified as non-current if the lender agreed
by the balance sheet date to provide a period of grace
ending at least 12 months after the balance sheet date,
within which the entity can rectify the breach and during
which the lender cannot demand immediate payment.
The obligation shall only be classified as non-current if the
maturity date has been rescheduled to a date falling beyond
the twelve month period from the balance sheet date.
-----------------------------------
Quizzer
For each of the following cases, determine how much will be
reported as current liabilities and noncurrent liabilities on
December 31, 2015 balance sheet.
Case 1. Ravena, Inc. has P2M of notes payable due June
15, 2016. At December 31, 2015, Ravena signed an
agreement to borrow up to P2M to refinance the notes
payable on a long-term basis. The financing agreement
called for borrowings not to exceed 80% of the value of the
collateral Ravena was providing. At the date of issue of the
December 31, 2015 financial statements, the value of the
collateral was P2.4M and was not expected to fall below this
amount.
Case 2. Ravena, Inc. has P2M of notes payable due June
15, 2016. At February 15, 2016, Ravena signed an
agreement to borrow up to P2M to refinance the notes
payable on a long-term basis. The financing agreement
called for borrowings not to exceed 80% of the value of the
collateral Ravena was providing. The value of the collateral
was P2.4M and was not expected to fall below this amount.
The financial statements are authorized for issuance on
March 5, 2016.
Case 3. In October 2013, Vivian Corp. acquired land from
Carlo, Inc. by paying P750,000 down and signing a note with
a maturity value of P5M due October 2015.
Situation A. Under the terms of the financing agreement,
Vivian has the discretion to roll over the obligation. In
October 2015, management decides to exercise its
discretion to roll over the liability up to October 31, 2017.
Case 3. In October 2013, Vivian Corp. acquired land from
Carlo, Inc. by paying P750,000 down and signing a note with
a maturity value of P5M due October 2015.
Situation B. The existing loan agreement does not carry a
provision to refinance. In October 2015, Vivian was
experiencing financial difficulty and was unable to pay the
maturing obligation. On February 1, 2016, Carlo has
agreed not to demand payment for at least 12 months as a
consequence of the breach of payment on the principal of
the loan. The financial statements were authorized for
issue on March 31, 2016.
Case 3. In October 2013, Vivian Corp. acquired land from
Carlo, Inc. by paying P750,000 down and signing a note with
a maturity value of P5M due October 2015.
Situation C. The existing loan agreement does not carry a
provision to refinance. In October 2015, Vivian was
experiencing financial difficulty and was unable to pay the
maturing obligation. On December 31, 2015, Carlo signed
an agreement to provide Vivian a grace period of 15 months
from that date, during which period, Carlo will not demand
immediate payment in order to give Vivian the chance to
rectify the breach. The financial statements were
authorized for issue on March 31, 2016.
MCQ
1. For a liability to exist,
a. there must be a past transaction or event.
b.the exact amount must be known.
c. the identity of the party to whom the liability is owed
must be known.
d.there must be an obligation to pay cash in the future.
2. Liabilities are
a. any accounts having credit balances after closing entries
are made.
b.deferred credits that are recognized and measured in
conformity with generally accepted accounting
principles.
c. obligations to transfer ownership shares to other entities
in the future.
d.obligations arising from past transactions and payable in
assets or services in the future.
3. Which of the following characteristics may result in
the classification of a liability as current?
a. Short-term obligations expected to be refinanced with
long-term debt.
b.Debts to be liquidated from funds that have been
accumulated and are reported as noncurrent assets.
c. Violation of provisions of a debt agreement.
d.Obligations for advance collections that involve long-
term deferment of the delivery of goods or services.
4. Which of the following is a current liability?
a. A long-term debt maturing currently, which is to be paid
with cash in a sinking fund
b.A long-term debt maturing currently, which is to be
retired with proceeds from a new debt issue
c. A long-term debt maturing currently, which is to be
converted into common stock.
d.None of these
5. Which of the following would not be classified as a
current liability on a classified balance sheet?
a. Unearned revenue.
b.Deferred income tax liability.
c. The currently maturing portion of long-term debt.
d.Accrued salaries payable to management.
6. Of the following items, the only one which should not be
classified as a current liability is
a. current maturities of long-term debt.
b.sales taxes payable.
c. short-term obligations expected to be refinanced.
d.unearned revenues.
7. Which of the following is true about accounts payable?
i. Accounts payable should not be reported at their
present value.
ii. When accounts payable are recorded at the net
amount, a Purchase Discounts account will be
used.
iii. When accounts payable are recorded at the gross
amount, a Purchase Discounts Lost account will
be used.
a. I c. ii
b. Iii d. Both ii and iii are true.
8. Which of the following statements is false?
a. A company may exclude a short-term obligation from
current liabilities if the firm intends to refinance the
obligation on a long-term basis and demonstrates an
ability to complete the refinancing.
b.Cash dividends should be recorded as a liability when
they are declared by the board of directors.
c. Under the cash basis method, warranty costs are charged
to expense as they are paid.
d.Income taxes withheld from employees' payroll checks
should never be recorded as a liability since the
employer will eventually remit the amounts withheld
to the appropriate taxing authority.
9. Among the short-term obligations of Lance Company as
of December 31, the balance sheet date, are notes
payable totaling P250,000 with the Madison National
Bank. These are 90-day notes, renewable for another
90-day period. These notes should be classified on the
balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.
10. Which of the following is not true about the discount on
short-term notes payable?
a. The Discount on Notes Payable account has a debit
balance.
b. The Discount on Notes Payable account should be
reported as an asset on the balance sheet.
c. When there is a discount on a note payable, the
effective interest rate is higher than the stated
discount rate.
d. All of these are true.
11. Accrued liabilities are disclosed in financial statements
by
a. a footnote to the statements.
b. showing the amount among the liabilities but not
extending it to the liability total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in
the balance sheet.
12. The numerator of the acid-test ratio consists of
a. total current assets.
b. cash and marketable securities.
c. cash and net receivables.
d. cash, marketable securities, and net receivables.
13. The initial fair value of a financial liability is defined as
the
a. Amount of which a liability is settled
b. Amount for which a liability is settled in an arm’s
length transaction
c. Amount for which a liability is settled between
knowledgeable and willing parties
d. Amount for which a liability is settled between
knowledgeable and willing parties in an arm’s
length transaction
14. After initial recognition, an entity shall measure a
financial liability at
I. Amortized cost using the effective interest
method
II. Fair value through profit or loss
a. I only
b. II only
c. Either I or II
d. Neither I nor II
15. Which of the following liabilities that are not part of
the normal operating cycle of an entity shall be
classified as noncurrent?
a. Financial liabilities classified as held for trading
b. Bank overdrafts
c. Current portion of noncurrent financial liabilities
d. Financial liabilities that provide financing but are
not due for settlement within twelve months after
the reporting period
16. With respect to loans classified as current liabilities,
all of the following events that occur between the end
of the reporting period and the date the financial
statements are authorized for issue are disclosed as
nonadjusting events, except
a. Refinancing on a long-term basis
b. The entity has the discretion to refinance an
obligation for a shorter period
c. Rectification of a breach of a long-term loan
arrangement
d. The granting by the lender of a period to rectify a
breach of a long-term loan arrangement ending at
least twelve months after the reporting period.
17. Which of the following shall be classified as
noncurrent liability?
a. Long-term loan arrangement wherein an entity
breaches a provision such that the loan becomes
payable on demand. After the reporting period and
before authorization of the financial statements for
issue, the lender has agreed not to demand
payment.
b. Bond payable issued with the intention to
repurchase in the year
c. Dividends payable due in two years after the
reporting period
d. Trade note payable
18. The principal classification of liabilities are
a. Current liabilities and noncurrent liabilities
b. Current liabilities, noncurrent liabilities and
deferred revenue
c. Current liabilities and deferred revenue
d. Noncurrent liabilities and deferred revenue
19. An entity shall classify as current when (choose the
incorrect one)
a. The entity to settle the liability within the entity’s
operating cycle
b. The entity holds the liability for the purpose of
trading.
c. The liability is due to be settled within twelve
months after the reporting period
d. The entity has an unconditional right to defer
settlement of the liability for at least twelve
months after the reporting period
20. A long-term debt which is due to be settled within
twelve months after the reporting period is classified
as noncurrent when
I. An agreement to refinance or to reschedule
payments on a long-term basis is
completed on or before the end of the
reporting period and before the financial
statement are authorized for issue
II. The entity has the discretion to refinance
or roll over the obligation for at least
twelve months after the reporting period
under an existing loan facility
a. I only
b. II only
c. Both I and II
d. Neither I nor II
21. Which obligation are classified as current even if they
are expected to be settled after more than twelve
months from the end of reporting period?
a. Trade payables and accruals for employee and other
operating costs
b. Bang overdrafts
c. Dividends payable
d. Income taxes payable
22. Some borrowing agreement incorporate covenants
which have the effect that the liability becomes
payable on demand if certain condition related to the
covenants are breached. In such a case, the liability is
classified as
I. Current event if the lender has agreed,
after the reporting period and before the
statements are authorized for issue, not to
demand payment as a consequence of the
breach
II. Noncurrent when the lender has agreed on
or before the end of the reporting period to
provide a period of grace ending at least
twelve months after that date.
a. I only
b. II only
c. Either I or II
d. Neither I nor II
23. Which of the following represents a liability?
a. The obligation to pay for goods that an entity
expects to order from suppliers next year
b. The obligation to provide goods that customers
have ordered and paid for during the current year
c. The obligation to pay interest on five-year note
payable that was issued the last day of the current
year
d. The obligation to distribute an entity’s own shares
next year as a result of a stock dividend declared
near the end of the current year
24. Which of the following does not meet the definition of
a liability?
a. The signing of a three-year employment contract at
a fixed annual salary
b. An obligation to provide goods or services in the
future
c. A note payable with no specified maturity date
d. An obligation that is estimated in amount
25. Among the short-term obligation as of the year-end Invoice Date Date
are notes payable with a certain bank. These are 90- date Amount shipped received FOB terms
day notes, renewable for another 90-day period. 1-3-16 P400,000 12-22-15 12-24-15 Destination
These notes should be classified Shipping
1-2-16 650,000 12-28-15 1-2-16
a. Current liabilities point
b. Deferred credits Shipping
12-26-15 600,000 1-2-16 1-3-16
c. Noncurrent liabilities point
d. Intermediate debt 1-10-16 450,000 12-31-15 1-5-16 Destination

26. At year-end an entity has 120-day not payable
outstanding. The entity has followed the policy of
replacing the note rather than repaying it over the
last three years. The entity’s treasurer says that this
policy is expected to continue indefinitely, and the
arrangement is acceptable to the bank to which the
note was issued. What is the proper classification of
the note in the year-end statement of financial
position?
a. Dependent on the intention of management
b. Dependent on the actual ability to refinance
c. Current liability, unless specific refinancing criteria
are met
d. Noncurrent liability
27. Which of the following is a characteristic of a current
liability but not a noncurrent liability?
a. Unavoidable obligation
b. Present obligation that entails settlements by
probable future transfer or use of cash, goods or
services
c. Settlement is expected within the normal operating
cycle or within 12 months, whichever is longer
d. The obligation event creating the liability has
already occurred
In the December 31, 2015 statement of financial
position, the accounts payable should be reported in
the amount of
a. P5,000,000 c. P6,050,000
b. P5,400,000 d. P7,100,000
33. The balance in Iwig Co.'s accounts payable account at
December 31, 2015 was P400,000 before any
necessary year-end adjustments relating to the
following:
 Goods were in transit to Iwig from a vendor on
December 31, 2015. The invoice cost was P50,000.
The goods were shipped f.o.b. shipping point on
December 29, 2015 and were received on January
4, 2016.
 Goods shipped f.o.b. destination on December 21,
2015 from a vendor to Iwig were received on
January 6, 2016. The invoice cost was P25,000.
 On December 27, 2015, Iwig wrote and recorded
checks to creditors totaling P30,000 that were
mailed on January 10, 2016.
In Iwig's December 31, 2015 statement of financial
position, the accounts payable should be
a. P430,000 c. P475,000
b. P450,000 d. P480,000

28. Which of the following is not considered a 34. Gear Co.'s accounts payable balance at December 31,
characteristic of a liability 2015 was P1,100,000 before considering the following
a. Present obligation transactions:
b. Arises from past event  Goods were in transit from a vendor to Gear on
c. Results in an outflow of resources December 31, 2015. The invoice price was P80,000,
d. Liquidation is reasonably expected to require use and the goods were shipped f.o.b. shipping point on
of existing resources classified as current liability December 29, 2015. The goods were received on
January 4, 2016.
29. Which of the following should be classified as
 Goods shipped to Gear, f.o.b. shipping point on
noncurrent liability?
December 20, 2015, from a vendor were lost in
a. Unearned revenue
transit. The invoice price was P50,000. On January
b. Mandatorily redeemable preferences share
5, 2016, Gear filed a P50,000 claim against the
c. The currently maturing portion of long-term debt
common carrier.
d. Accrued salaries payable to management
In its December 31, 2015 statement of financial
30. Which of the following is a noncurrent liability?
position, Gear should report accounts payable of
a. Income tax payable
a. P1,230,000 c. P1,150,000
b. One-year magazine subscription
b. P1,180,000 d. P1,100,000
c. Unearned interest income related to noninterest
bearing long-term not receivable
35. Dolan Co. pays all salaried employees on a biweekly
d. Estimated warranty
basis. Overtime pay, however, is paid in the next
biweekly period. Dolan accrues salaries expense only
31. Some liabilities, such as trade payables, accruals for
at its December 31 year end. Data relating to salaries
employee and other operating costs, are expected to
earned in December 2015 are as follows:
be settled in more than twelve months after the
reporting period. How will an entity classify these
 Last payroll was paid on 12/26/15, for the 2-week
items in the statements of financial position?
period ended 12/26/15.
a. Current
 Overtime pay earned in the 2-week period ended
b. Noncurrent
12/26/15 was P5,000.
c. First classify as noncurrent since the term is more
 Remaining work days in 2015 were December 29, 30,
that twelve months, then reclassify to current if the
31, on which days there was no overtime.
term is less that twelve months.
 The recurring biweekly salaries total P90,000.
d. It will depend on the entity’s policy.
Assuming a five-day work week, Dolan should record a
32. Case Corporation had accounts payable of
liability at December 31, 2015 for accrued salaries of
P5,000,000 recorded in the general ledger as of
a. P27,000 c. P32,000
December 31, 2015 before consideration of the
b. P54,000 d. P59,000
following unrecorded transactions:
36. Ross Co. pays all salaried employees on a Monday for
the five-day workweek ended the previous Friday. The
 last payroll recorded for the year ended December 31, b. P3,100,000 d. P2,700,000
Year 2 was for the week ended December 25, Year 2.
The payroll for the week ended, Friday, January 1, Year
3 included regular weekly salaries of P80,000 and STRAIGHT PROBLEMS
vacation pay of P25,000 for vacation time earned in
Year 2 but not taken by December 31, Year 2. Ross 1. Alpha company reported the following information on
had accrued a liability of P20,000 for vacation pay at December 31 2015:
December 31, Year 1. In its December 31, Year 2 Accounts payable 1,000,000
statement of financial position, what amount should Advances to employees 45,000
Ross report as accrued salary and vacation pay? Unearned rent revenue 300,000
a. P64,000 c. P84,000 Estimated liability under warranties 250,000
b. P69,000 d. P89,000 Cash surrender value of officers’ life 75,000
insurance
37. Pythagoras Co. must determine the December 31, Bonds payable 5,000,000
2015 year-end accruals for advertising and rent Discount on bonds payable 500,000
expenses. A P2,000 advertising bill was received Trademark 50,000
January 7, 2016. It related to costs of P1,500 for
advertisements in December 2015 issues and P500 for What amount should be reported in the statement of
advertisements in January 2, 2016 issues of the financial position as total liability?
newspaper. A store lease, effective December 16,
2015, calls for fixed rent of P4,800 per month payable 2. An analysis of BRAVO Company’s liabilities disclosed
1 month from the effective date and monthly
the following information:
thereafter. In addition, rent equal to 5% of net sales
over P1,200,000 per calendar year is payable on
Accounts payable, after deducting debit
January 31 of the following year. Net sales for 2015 balances in suppliers’ accounts
were P2,200,000. In its December 31, 2015 statement amounting to P100,000 4,000,000
of financial position, Pythagoras should report accrued Accrued expenses 1,500,000
liabilities of
Credit balances of customers’ accounts 500,000
a. P56,800 c. P56,300
Stock dividend payable 1,000,000
b. P51,500 d. P53,900
Claims for increase in wages and allowance by
employees of the entity, covered in a pending
38. Atlanta Co. sells its products in reusable containers. lawsuit 400,000
The customer is charged a deposit for each container Estimated expenses in redeeming prize coupons
delivered and receives a refund for each container presented by customers 600,000
returned within two years after the year of delivery.
Atlanta accounts for the containers not returned within
What total amount should be presented as current
the time limit as being retired by the sale at the deposit
liabilities in the statement of financial position?
amount. Information for 2015 is as follows:
3. The trial balance of Chariel Company included the
Container deposits at following account balances on December 31, 2013:
December 31, 2014,
from deliveries in
Accounts payable 1,500,000
2013 P150,000
Bonds payable due 2014 2,500,000
2014 430,000 P580,000
Discount in bonds payable 300,000
Dividends Payable 800,000
Deposits for containers Note payable, due 2015 2,000,000
delivered in 2015 780,000
Deposits for containers
What total amount should be reported as current
returned in 2015 from
liabilities?
deliveries in
2013 P 90,000
4.
Delta Company had the following liabilities in
2014 250,000 December 31, 2016:
2015 286,000 626,000 Accounts Payable 550,000
Unsecured note payable, 8%, due 7/1/2017 4,000,000
In Atlanta’s December 31, 2015 statement of financial
Accrued expenses 350,000
position, the liability for deposits on returnable
Contingent liability 450,000
containers should be
Deferred tax liability 250,000
a. P494,000 c. P584,000 Senior bonds payable, 7%, due 3/31/2017 5,000,000
b. P674,000 d. P734,000
What total amount should be reported as current
39. Karon Company maintains escrow accounts and pays liabilities?
real estate taxes for mortgage customers. Escrow
funds are kept in interest bearing accounts. Interest,
5. The following data pertain to Echo Company on
less a 20% services fee, is credited to the mortgagee's
December 31, 2015:
account and used to reduce future escrow payments. Trade accounts payable, including cost of
The information regarding the escrow accounts kept by goods received on consignment of P150,000 1,350,000
Karon is as follows: escrow accounts liability as of Accrued taxes payable 125,000
January 1, 2015 was P2,000,000, while Karon received
Costumers’ deposit 100,000
payments from customers during 2015 amounting to
Manila company as guarantor 200,000
P4,200,000. Karon paid real estate taxes during 2015
Bank overdraft 55,000
in the amount of P3,500,000, while the interest earned
Accrued electric and power bills 60,000
on the escrow funds was P500,000. What amount Reserved for contingencies 150,000
should Karon report as escrow accounts liability in its
December 31, 2015 statement of financial position? What total amount should be reported as current
a. P3,200,000 c. P2,300,000
liabilities?