Professional Documents
Culture Documents
Valderrama
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Liabilities
Liability
Present obligation
As a result of past transactions or events
Expected to result in an outflow of resources
embodying economic benefits
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Types of Liabilities
1. Liabilities of definite timing and amount
2. Liabilities of uncertain timing and amount
(a.k.a. provisions covered by PAS 37)
3. Contingent liabilities
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Accounts payable
Accrued expenses
Salaries payable
Unearned revenues
Loans
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http://www.pwc.com/en_GX/gx/retail-consumer/pdf/ifric13_final_low.pdf
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Contingent Liability
1. Loan guarantee
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Classification of Liabilities
Current liabilities
Expected to be settled in the entitys normal operating
cycle
Held primarily for trading
Due to be settled within 12 months after balance sheet
date
Entity does not have an unconditional right, as of
balance sheet date, to defer settlement of he liability
for at least 12 months after the balance sheet date
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Interest paid
1/1/2008
Interest
expense
amortization
Amortized
cost
4,759,816.87
12/31/2008 500,000.00
12/31/2009 500,000.00
12/31/2010 500,000.00
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interest
paid
interest
expense
Amortization
1/1/2005
12/31/2005 500,000.00
12/31/2006 500,000.00
12/31/2007 500,000.00
12/31/2008 500,000.00
12/31/2009 500,000.00
cv
5,399,271.00
431,941.68
426,497.01
420,616.78
414,266.12
407,407.41
(68,058.32)
(73,502.99)
(79,383.22)
(85,733.88)
5,331,212.68
5,257,709.70
5,178,326.47
5,092,592.59
(92,592.59) 5,000,000.00
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Cumulative Cumulative
Principal
Interest
Loan
Paid
Paid
Balance
10%
800,000
2008
211,038
80,000
131,038
131,038
80,000
668,962
2009
211,038
66,896
144,142
275,180
146,896
524,820
2010
211,038
52,482
158,556
433,736
199,378
366,264
2011
211,038
36,626
174,412
608,147
236,005
191,853
2012
211,038
19,185
191,853
800,000
255,190
(0)
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Equity swap
Equity issued is measured at fair value or, if not
reliably measurable, at the fair value of the liability
extinguished.
Gain/loss recognized in profit and loss is allowed for
debt-equity swaps in a troubled debt restructuring
(IFRIC 19 )
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Asset Swap
Manila Bank loaned P10M to ABC Realty. On
the loans maturity on Dec. 31, 2012, Manila
Bank agreed to accept land with fair value of
P9M in full settlement of the P10M and 1-year
accrued interest at 12% or P1.2M. The land has a
carrying value of P10.5M in ABC Realtys books.
Determine the effect of the asset swap on ABC
Realtys financial condition and performance.
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Equity Swap
Assume that, instead of land, ABC Realty
offered, and Manila Bank accepted, 180,000 of
the formers common shares which have a par
value of P40 and a fair market value of P50.
Determine the effect of the debt-for-equity swap
on ABC Realtys financial condition and
performance.
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Illustration
Lets say the loan of ABC Realty with Manila
Bank was instead restructured and now has the
ff terms:
Illustration
The present value of the revised loan
is determined as follows:
PV of principal
PV of interest
Total PV of revised
loan
Carrying value of
existing loan
Gain from debt
restructuring
7,000,000
0.63552
560,000 3.03735
4,448,640
1,700,916
6,149,556
11,200,000
5,050,444
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Exercises
1. On Jan. 1, 2006, Phoenix Corp. purchased a
building for P15M. The firm made a 20%
downpayment and took out a mortgage
payable over 30 years at a rate of P88,051.70
monthly. The first payment is due Feb. 1, 06.
The mortgage interest rate is 8%. How will the
purchase of the building affect the accounting
equation?
Exercises
2. The Rugless Corp. issued P1M of bonds at a
price of 108.
(a) Determine the total cash the company received
from the bond issue.
(b) Did the bonds sell at par, at a discount, or at a
premium?
(c) For this bond, is the stated rate of interest
higher or lower than the market rate of interest?
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Exercises:
3. On Jan. 1, 06, Cobweb Corp. issued P1.5M of 10year term bonds with a stated rate of interest of
12%. The bonds pay interest semiannually on Jan
1 and July 1. At the time of this issue, the current
market interest rate was also 12%.
(a) How much cash did Cobweb receive when the
bond was issued?
(b) How much interest will be paid every 6
months?
(c) Assuming Cobweb has a Dec 31 year-end, what
adjustment will need to be made at the end of each
year?
Exercises:
4. On Jan. 1, 2006, the Old Spice Company issued
P300k of 10-year, 12% bonds at a price of 86.668.
The market interest rate on the bond issuance date
was 14%. The bonds pay interest semiannually on
Jan. 1 and July 1.
(a) How much cash did the company receive from the
issuance of the bonds?
(b) How much cash did the firm expend for interest
during 2006?
(c) How much interest expense did the company
report for 2006?
(d) How much total interest expense will the firm
incur over the 10-year life of these bonds?
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Exercises:
5. Determine the financial reporting implications
of the ff situations affecting Animaniacs Ltd., a
manufacturer of toys:
(a) A safety hazard related to one of its toy products
was discovered. It is considered probable that
liabilities have been incurred. On the basis of
past experience, a reasonable estimate of the
amount of loss can be made.
Exercises:
(b) This year, Animaniacs began promoting a new
toy by including a coupon, redeemable for a movie
ticket, in each toys carton. The movie ticket, which
cost AnimaniacsP30, is purchased in advance and
mailed to the customer when the coupon is received
by Animaniacs. Animaniacs estimated, based on
past experience, that 60% of the coupons will be
redeemed 45% of the coupons were actually
redeemed this year, and the remaining 15% of the
coupons are expected to be redeemed next year.
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Types of Lease
Operating lease a lease other than a finance
lease periodic payment is recognized as lease
expense by the lessee and lease income by the
lessor; an off-balance sheet transaction for the
lessee
Finance (or capital) lease a lease that transfers
substantially all the risks and rewards incidental
to ownership of an asset. Title may or may not
eventually be transferred. lessee recognizes an
asset and a liability; lessor derecognizes the leased
asset and recognizes a receivable
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Rewards of ownership
Benefits obtained from using
the asset to provide benefit or
service to the entity
Appreciation in residual value
or gains on the eventual sale of
the asset
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Risks of ownership
Unsatisfactory performance
Obsolescence
Idle capacity
Decline in residual value or
losses on eventual sale of the
asset
Uninsured damage and
condemnation of the asset
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Amortization Schedule
Date
Payment
Interest
Cumulative Principal
Principal Principal Balance
1/1/2008
303,730.00
(7.76)
Lease: Exercises
1. Myra Company purchased a tractor on Jan. 1,
08 at a cost of P1.6M for the purpose of leasing
it. The tractor is estimated to have a useful life
of 5 years with a residual value of P100,000. On
April 1, 08, Myra entered into a lease contract
for the lease of the tractor for a term of 2 years
up to March 31, 2010. The lease is P50,000 a
month and the lessee paid P600,000, the lease
fee for one year. Determine the effects of these
transactions on the lessee and lessors financial
position and performance.
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Lease: Exercises
2. Overland Company closed a lease contract for
newly constructed terminals and freight storage
facilities on 1.1.08. Although the terminals have a
composite life of 10 years, the lease runs for 5
years with a favorable bargain purchase option
upon expiration of the lease. The annual rental is
P1M payable at the end of each year starting
12.31.08. The contract was negotiated to assure
the lessor a 10% rate of return. Determine the
effects of this transaction on the financial position
and performance of lessee and lessor.
Employee Benefits
Short-term employee benefits (includes bonuses
and compensated absences)
Post-retirement (pension) benefits
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Employee Benefits
Employee benefits are considered additional
compensation expense in the period in which the
service rendered resulted in the benefit earned
Post-employment (pension) benefits may result
in a significant liability to the company if
periodic contributions to a pension fund are not
made.
Defined Benefits
Liability of the employer is based on benefits promised to
be received upon employees retirement
Requires an actuarial estimate of the pension obligation
May be funded or unfunded
Pension asset (liability) in the Balance Sheet is mainly the
difference between the fair value of the pension fund (if
any) and the present value of the pension obligation
Factors affecting the pension liability include the
contributions to and return on pension plan assets,
employee salary levels and expected increases, the duration
of pension payments to retired employees
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