MODULE 1 cash- is longer than a year, the length of the operating

cycle determines the classification of the liability

OVERVIEW OF LIABILITIES (Bazley, et. al. 2010).
Philippine Accounting Standards (PAS) 1, paragraph
Lesson 1. Conceptual Overview of Liabilities 69, provides that an entity shall
(Bazley, Nikolai, & Jones, 2010) classify a liability as current when:
As defined in the Revised Conceptual Framework for 1. The entity expects to settle the liability within the
Financial Reporting, liabilities operating cycle
are “present obligations of an entity to transfer an 2. The entity holds the liability primarily for the purpose
economic resource as a result of past of trading.
events.” 3. The liability is due to be settled within twelve months
The definition of liabilities involves three after the reporting period.
characteristics, namely: 4. The entity does not have an unconditional right to
1. A liability involves a responsibility that will be settled defer settlement of the liability
by the for at least twelve months after the reporting period.
probable future transfer or use of assets at a specified Liabilities that are settled as part of the company’s
determinable date, or the occurrence of a specific event normal operating cycle (e.g., trade
or on payables and some accruals for employee and other
demand. operating costs) are presented as
2. The responsibility obligates the company so that it has current even if they are expected to be settled beyond
little or twelve months after the reporting
no discretion to avoid the future sacrifice. period (Millan, 2019).
3. The transaction or event obligating the company has Financial liabilities held for trading are those that are
already incurred with an intention to
happened. repurchase them in the near future.
There are two additional factors involving a liability. Lesson 3. Classification of Current Liabilities
First, the company does not need (Bazley, et. al. 2010)
to know the identity of the recipient before the time of The first section of liabilities in the statement of
settlement. Secondly, a legally financial position shows the current
enforceable claim is not a prerequisite for an obligation classification of liabilities. We may classify the primary
to qualify as a liability, as in the case types of current liabilities into three
of refinancing agreements and liabilities liquidated thru groups. Many current liabilities are easily identifiable
conversion into ordinary or preferred shares. and have contractual amount. Some
We notice that the definition of liabilities involves the current liabilities, though identifiable, have amounts that
present, the future and the past. depends on operations. Others require that amounts must
It is a present responsibility to sacrifice assets in the be estimated.
future because of a transaction or other Current liabilities having a contractual amount
events that has already happened. The short-term liabilities in this group result from the
Special accounting treatment for contingencies, terms or from the existence of
however, is necessary to distinguish it from the common laws.
liabilities because of its uncertainty as to whether the Examples of this type of current liabilities are:
obligation really exists. Discussion of contingencies will 1. Trade accounts payable
be taken in the succeeding modules. 2. Notes payable
Lesson 2. Nature and Definition of Current 3. Currently maturing portion of long-term debt
Liabilities 4. Dividends payable
Liabilities are generally classified as either current or 5. Accrued items
long-term (non-current) 6. Unearned items
liabilities. 7. Bank overdrafts
Current liabilities are obligations of the company that it 8. Income taxes payable
expects to liquidate by using 9. Advances and refundable deposits
existing current assets or creating other current liabilities Current liabilities whose amounts depend on operations
within one year or the normal Several current liabilities and their amounts pertains to
operating cycle whichever is longer. The usual criterion operations. Included are
is one year. However, for certain liabilities which relate to sales taxes, payrolls, corporate
companies, where the operating cycle – from cash to income taxes and bonus agreements.
inventory to receivables and back to
Companies are required by law to withhold from the pay the year if an existing violation is not corrected within a
of each employee an amount specified grace period.
for anticipated income tax payments, social security Lesson 5. Financial Statement Presentation of
contributions and other payables to third Current Liabilities (Bazley, et. al. 2010)
parties like union dues and group insurance premiums. The guidelines on financial statement suggest that a
Since a company must pay these company should arrange its current
taxes and voluntary withholdings within a few months, it liabilities in a way that will highlight their liquidity
classifies them as current liabilities. characteristics and their effect on its financial
flexibility. Most companies report their current liabilities
Current liabilities requiring amounts to be estimated at the top of its Liabilities section.
A number of liabilities have amounts that a company Items within the current liability section may be listed
must estimate as of the balance (1)in the order of their average length of
sheet date. Unlike other liabilities, provisions must maturity, (2) according to amount (largest to smallest),
necessarily be estimated. Although some or (3) in the order of liquidation
other liabilities are also estimated, their uncertainty is preference- that is, in the order of their legal claims
generally much less compared to against the assets.
provisions. As a minimum requirement, the face of the statement
Examples of this type of current liabilities are premiums, of financial position shall include
warranties, gift the following line item for current liabilities,
certificates, award points and bonuses. according to PAS 1, paragraph 54:
Lesson 4. Other Liability Classification Issues a. Trade and other payables
(Millan, 2010) b. Current provisions
An additional two liability classification issues are c. Short-term borrowings
discussed, in this lesson, long-term d. Current portion of a long-term debt
debt falling due within one year and obligations payable e. Current tax liability
on demand. A company includes any major issue affecting its current
Long-term debt falling due within one year liabilities in a notes to its financial statements. This
A long-term debt that is maturing within twelve months presentation is made so that the notes and other
after the reporting period is supplemental information about current liabilities meet
classified as current, even if a refinancing agreement to the requirement of full disclosure.
reschedule payment on a long-term Lesson 6. Measurement of Current Liabilities
basis is completed after the reporting period but before (Bazley, et. al. 2010)
the financial statements are authorized Conceptually, liabilities should record and report on its
for issue. statement of financial position
However, the obligation is classified as non-current at the present value of the future payments they will
under the following circumstances: require. In practice, however, most
a. Refinancing on a long-term basis was completed on or Current liabilities are measured, recorded, and reported
before the end of the at their maturity or face amount. The difference between
reporting period the maturity amount and the present value of the
b. The entity has the discretion to refinance or roll over maturity amount is usually not material because of the
an obligation for at least short time period involved (usually one year or less.
twelve months after the reporting period under an Although a slight overstatement of liabilities result from
existing loan facility. reporting current liabilities at their maturity amounts,
Obligations payable on demand this overstatement is justified on the basis of cost/benefit
As we noted earlier, generally the company reports the and materiality constraints.
currently maturing portion of
its long-term debt as a current liability. Also, a company
must report the entire amount of a long-term obligation
as a current liability if the company is in violation of a
long-term agreement (covenants) at the balance sheet MODULE 2
date, and the violation makes the liability callable by the
creditor within one year or the operating cycle, if longer, PROVISIONS, CONTINGENT
from the balance sheet date. LIABILITIES AND CONTINGENT
This also includes situations in which debt is not yet ASSETS
callable but will be callable within
Lesson 1. Premium Liability/Obligation
Many companies offer premiums such as novelty items, Total cans sold in 2020 30,000
like mugs, small appliances, hand towels and the like to Multiply by estimated percentage of redemption 60%
promote their products and encourage sales. Other Total labels estimated for redemption 18,000
companies Less: Labels redeemed during 2020 10,500
offer cash rebates and loyalty points for redemption. Estimated number of labels for future redemption 7,500
All of these offers are intended to increase the Premiums expense for estimated future redemptions
company’s sales. Matching principle dictates that the [(7,500 ÷ 3) x P20] P50,000
company matches the related costs as expenses against The company reports Premium Expense as a selling
revenues in the period of sale. Also, at the end of the expense on its 2020 income statement. Premiums shall
accounting period, the company reports any outstanding be shown as a current asset and the estimated premium
offers that it expects to be redeemed or claimed within liability as a current liability on its December 31, 2020
next year or operating cycle, if longer, as a current balance sheet.
liability(Bazley et. al. 2010). Notice that premiums expense was computed based on
Accounting procedures for the acquisition of premiums the gross purchase cost of the premiums. In case the
and recognition of premium liability company will recover a portion of the purchase cost by
are as follows (Valix, Peralta & Valix, 2019): requiring cash payment from the redeeming customers,
1. Premiums are purchased then premium expense will be recorded at the net cost
Premiums xx that is, deducting the cash payment from the customers
Cash (or Accounts Payable) xx from the total purchase cost.
2. Redemption from the customers and distribution of In addition, it is important to note that premium expense
premiums is unaffected by the actual premium
Premiums Expense xx distribution, since it is recorded as a deduction from the
Premiums (or Inventory of Premiums) xx estimated liability for premium.
3. End of year recording of estimated liability for Moreover, premium expense for the year consists not
outstanding premiums only for the actual redemption but also
Premiums expense xx of the future estimated liability for premium.
Estimated premium liability or xx Lesson 2. Product warranties and guarantees
(Estimated premium claims outstanding) (Valix, et. al. 2019)
Example : Premium Liability Another example of a provision is warranty liability.
Assume that on October 1, 2020, Melany Foods Many companies, especially those selling consumer
Corporation began offering to customers a dish towel in goods makes promises in the form of free repair service,
return for 3 can labels. The cost of each premium dish replacement of defective products within a specified
towel is P20.00. Based on past experience, the company period of time. These offers are often made by
estimates that only 60% of the labels will be redeemed. companies to boost sales.
During 2020, the company purchased 60,000 dish Applying the matching principle, then, any costs of
towels. In 2020, the company sold 30,000 cans of its making good on such guarantees should be recorded as
product, at P180.00 per can. From these sales, 10,500 expenses in the same accounting period the products are
can labels were returned for redemption in 2020. The sold. Also, it is in the period of sale that the company
company records the following entries in 2020 to match becomes obligated to make good on a guarantee, so it is
expenses against revenues and to record its current just proper that it recognizes a liability in the period of
liabilities: sale.
1. Purchase of 60,000 dish towels Accounting for warranty
Premiums 1,200,000 There are two methods of accounting for warranty costs:
Cash 1,200,000 a. Accrual method
2. Sale of 30,000 cans at P180.00 b. Expense as incurred method
Cash (or Accounts Receivable) 5,400,000  Accrual method
Sales 5,400,000 Under this method, a company recognizes the
3. Redemption of 10,500 can labels estimated warranty expense and the
Premiums Expense 70,000 estimated warranty liability for future performance in the
Premiums 70,000 period of sale. Accounting procedures for recording
4. End-of-year recording of estimated liability for warranty costs and estimated warranty liability:
outstanding premium offers 1. Record sales of the product
Premiums expense 50,000 Cash (or Accounts Receivable) xx
Estimated premium liability 50,000 Sales xx
The company computes the year-end adjustment to 2. Recognition of warranty expense for the period
premium expense as follows: Warranty Expense xx
 Estimated warranty liability xx 2. When it is not possible for the company to make a
3. Payment of warranty costs reliable estimate
Estimated warranty liability xx of the warranty obligation at the time of sale, and
Cash (or other asset) xx 3. When its results are not materially different from the
Example: Warranty Liability accrual approach.
Assume that Sebastian Appliances sells 100 units of The actual warranty costs incurred is simply recorded by
refrigerators at P24,000 each by the end of December debiting warranty expense and
31, 2020. Each unit carries a warranty for one year. crediting cash at the time it is incurred.
Experience from the past has shown that warranty costs Lesson 3. Other provisions (Valix, et. al. 2019)
will average P2,000 per unit or a total of P200,000. The Provisions are defined as an existing liability of
corporation spent P90,000 in 2020 and P115,000 in the uncertain timing or uncertain amount.
succeeding year, to fulfil the The liability does exist on balance sheet date but the
warranty agreements for the 100 units sold in 2020. The amount is indefinite or the date when the obligation is
company records these transactions in a series of journal due is indefinite, and in some cases, the payee cannot be
entries as follows: identified or determined. It is the equivalent of an
1. Sale of 100 units of refrigerators, 2020 estimated liability or a loss contingency that is accrued
Cash (or Accounts Receivable) 2,400,000 because it is both measurable and probable.
Sales 2,400,000 Recognition of provision
2. Recognition of warranty expense The following conditions must be met:
Warranty Expense 200,000 a. The enterprise has a present obligation, legal or
Estimated warranty liability 200,000 constructive, as a result of past event;
3. Payment of warranty costs, 2020 b. It is probable that an outflow of resources embodying
Estimated warranty liability 90,000 economic benefits will be required to settle the
Cash (or other assets) 90,000 obligation; and
4. Payment of warranty costs, 2021 c. The amount of obligation can be measured reliably.
Estimated warranty liability 110,000 Measurement of the provision
Warranty expense 5,000 Provisions are measured at the best estimate of the
Cash (or other assets) 115,000 expenditure required to settle the present obligation at
The company reports the Warranty expense as an the end of the reporting period. The best estimate refers
operating expense in its 2020 income statement, in the to the amount that the entity would rationally pay to
amount of P205,000. In its 2020 statement of financial settle the obligation at the end of reporting period or to
position the amount of P110,000 (P200,000 accrued transfer it to a third party at that date.
minus P90,000 paid)will be shown as current liability. When the provision consists of a single obligation, the
If the warranty period covers a period of more than one best estimate is normally the most likely outcome. When
year, a portion of the estimated warranty liability shall the provision involves a large population of items, the
be reported as current liability and the remainder as best estimate is by weighing of all possible outcomes by
noncurrent liability. their respective probabilities. Midpoint of the range is
In the preceding journal entry, year 2021, the actual used when there is a continuous range of possible
warranty costs are P5,000 more than what is estimated. outcomes and each point in the range is as likely as any
The entry debited Warranty expense for 2021 because it other.
resulted in a change in accounting estimate, which shall Examples of provisions
be treated currently and prospectively, if necessary. 1. Warranties
Expense as incurred approach (Valix, et. al. 2019) 2. Environmental contamination
Under the “expense as incurred approach”, the 3. Decommissioning or abandonment costs
company records the warranty costs as an expense in the 4. Court case
period when it actually makes the payments for repairs. 5. Guarantees
Since the company does not estimate and recognize the Reimbursements (Millan, 2019)
warranty costs during the period of sale, it does not Where some or all of the expenditure required to
record a liability for the future warranty costs. While this settle a provision is expected to be reimbursed by
method is conceptually unsound because it violates the another party, the reimbursement shall be recognized
matching principle, it is justified for accounting when, and only when, it
under three conditions: is virtually certain that reimbursement will be received
1. From a cost/benefit standpoint, when the warranty when the entity settles the obligation.
period is The reimbursement shall be treated as a separate asset
relatively short, and not be offset with the
provision. The amount recognized for the reimbursement BONDS PAYABLE AND OTHER
shall not exceed the amount of
provision. However, in the statement of comprehensive
CONCEPTS
income, the expense relating to the Contingent Contingent
provision may be presented net of the amount Liabilities Assets
recognized for a reimbursement.
Virtually certain Provide Recognize
Lesson 4. Contingencies
Contingency is defined as “an existing condition, or a set
of circumstances involving uncertainty as to a possible Probable Provide Disclose by note
gain (a “gain contingency”) or loss (a “loss
contingency”) that will be resolved when a future event Possible Disclose Disclose by note No disclosure
occurs or fails to occur (Bazley, et. al. 2010).
Contingent liability and contingent asset defined
Remote No disclosure No disclosure
Contingent liability is a possible obligation that arises
from past event and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more Lesson 1. Reasons for issuance of Long-term
uncertain future events not wholly within the control of Liabilities (Bazley, et. al. 2010)
the entity. It is a present obligation that arises from past A company classifies an item as a long-term liability if it
event but is not recognized because it is not probable is not to be repaid within one
that an outflow of resources of economic benefits will be year or the normal operating cycle, whichever is longer.
required to settle the obligation or the amount of the When additional funds are needed
obligat ion by the entity to finance its operations, it may resort to
cannot be measured reliably (Valix, et. al. 2019). external sources to satisfy their needs.
On the other hand, a contingent asset is a possible asset There are four basic reasons why a company may resort
that arises from past event and whose existence will be to debt financing rather than issuance of other type of
confirmed only by the occurrence or non-occurrence of securities.
one or more uncertain future events not wholly within Debt financing offers the opportunity for leverage
the control of the entity (Valix, et. al. 2019). Trading on equity or leverage refers to a company’s use
Degrees of probability of borrowed funds. Earnings in excess of interest
PAS 37 recognizes four degrees of probability for charges increases earnings per share. However, if the
contingencies but it gives no guidance to the meaning of return on borrowed funds falls below the effective
the terms. One interpretation could be: interest rate, earnings per share will deteriorate rapidly.
Virtually -certain probability above 95% The voting privilege is not shared
Probable -probability above 50% and up to 95% By issuing debt instruments, which does not provide
Possible -probability of 5% up to 50% voting rights, ownership interests
Remote -probability below 5% are not diluted. Corporate shareholders maintain their
Accounting for contingent liabilities and contingent equity interests in the firm.
assets Debt financing offers an income tax advantage
Interest payments on outstanding debts are deductible as
Differentiate provisions from contingent liability interest expenses for income tax purposes while
(Millan, 2019) dividend payments on shares issued and in the hands of
A provision is a liability of an uncertain timing or shareholders are not.
uncertain amount that meets all of Debt financing may be the only available source of
the following conditions: present obligation, probable financing As in the case of small- and medium sized
outflow of economic resources and can companies, some investors may find it too
be reliably estimated. risky to invest in equity or capital stock investments.
A contingent liability, on the other hand, is only a Debt securities issued by a company may appear less
possible obligation whose existence will be confirmed risky because interest payment is required to be paid on
only by the occurrence or non-occurrence of one or more every interest payment date. In addition, some types of
uncertain future events not wholly within the control of debts are backed up or secured by a lien against some
an entity; or a present obligation but it is not probable company assets.
that it will cause an economic outflow in its settlement Lesson 2. Bonds Payable and Other concepts
and its amount cannot be reliably estimated. (Bazley, et. al. 2010)
The most common form of corporate debt is by issuing
MODULE 3 bonds. Since bonds are issued in specified
denominations, say P1,000 or P5,000 bonds, it breaks
down a large obligation into manageable parts. There are is the face value of the bonds plus any unamortized
several key terms about bonds: premium or minus any unamortized discount. Thus, in
Bond - a type of note in which a company agrees to pay the example given, the book value on the issue date is
the holder the face value at maturity date and pay P5,100,000.
interest periodically at a specified Bonds are often sold after their authorization date and
rate on the face value between interest payment dates. In such instances, the
Face value – or par value is the amount of money that company must pay interest only for the period of time
the issuer agrees to pay at maturity the bonds are outstanding. The company also will collect
Maturity date - the date on which the issuer of the from the investors both the selling price and the interest
bond agrees to pay the face value to the holder accrued on the bonds from the interest payment date
Contract rate - also called stated rate, or nominal rate is prior to the date of sale. This procedure reduces the
the rate at which the issuer of the bond agrees to pay record keeping for the interest payment. This interest
interest each period until maturity amount collected is credited to Interest Expense and is
Bond certificate – a legal document that specifies the computed by multiplying the face value by the stated
face value, the annual interest rate, the maturity date and interest rate for the fraction of the year from the interest
other characteristics of the bond issue payment date prior to the date of sale.
Bond indenture – is a document (contract) that defines Lesson 4. Initial and Subsequent Measurement
the rights of the bondholders of Bonds Payable (Valix, et. al. 2019).
Lesson 3. Recording the Issuance of Bonds PFRS 9, paragraph 5.1.1 provides that bonds payable not
(Bazley, et. al. 2010) designated at fair value through profit or loss shall be
Three alternatives are possible for a company selling measured initially at fair value minus transaction costs
bonds: that are directly attributable to the issue of bonds
a. Bonds sold at par – the yield (effective rate) is equal payable.
to the contract rate, buyer of the bonds pay the face Bond issue costs shall be deducted from the fair value or
value of the bonds issue price of bonds in measuring initially the bonds
b. Bonds sold at a discount – yield is more than the payable, except that if the bonds are designated and are
contract rate, buyer of the bonds pay less than the face accounted for at fair value through profit or loss, the
value of the bonds bond issue costs are treated as expense immediately.
c. Bonds sold at a premium – yield is less than the After initial recognition, bonds payable shall be
contract rate, buyer of the bonds pay more than the face measured either at amortized cost using the effective
value of the bonds interest method or at fair value through profit or loss.
When the bonds has an effective rate either Lesson 5. Amortizing Discounts and Premiums
lower or higher than the contract rate, the interest When a company pays the interest on the bonds, this
expense recorded by the issuer each period is different payment is based on the stated rate. However, to
from the interest paid. When bonds are sold at a properly report the interest cost on the bonds, the Interest
premium, the interest expense is less than the interest Expense on the income statement must show an amount
paid. When the bonds are sold at a discount, the interest based on the effective interest rate and the book value of
expense is more than the interest paid. The difference the bonds. There are three approaches in amortizing
between the interest expense and the interest payment is bond discount or bond premium, namely; straight line,
the discount or premium amortization. bonds outstanding and the effective interest method
The company records the face value of bonds issued thru (Bazley, et. al. 2010).
a Bonds Payable account, and it records any premium or PFRS 9 requires the use of the effective interest method
discount in a separate account titled Discount on Bonds in amortizing discount, premium and bond issue costs
Payable or Premium on Bonds Payable. To illustrate, (Valix, e.t al. 2019).
assume the company sells bonds with Straight line Method
a face value of P5,000,000 at 102. It records the sales as When using the straight line method, the
follows: discount or premium is amortized to interest
Cash (P5,000,000 x 1.02) 5,100,000 expense in equal amounts each period during the life of
Bonds Payable 5,000,000 the bonds(Bazley, et. al. 2010).The
Premium on Bonds Payable 100,000 periodic amortization is computed by simply dividing
Premium on Bonds Payable is an adjunct account and is the amount of bond premium or bond
added to the Bonds Payable discount by the life of the bonds. Life of the bonds is the
account, whereas the Discount on Bonds Payable is a period commencing on the date of
contra account and is subtracted from sale up to maturity date (Valix, et. al. 2019).
the Bonds Payable account. The book value or carrying Bonds outstanding Method
value of the bond issue at any time
This method of amortization is applicable to serial bonds equity. Therefore, the issue price of the convertible
whether issued at a discount or premium. Serial bonds bonds shall be allocated between the
are those with a series of maturity dates. Bond discount bonds payable and the conversion privilege. The bonds
or bond premium amortization is computed by are assigned an amount equal to
multiplying the amount of the premium or the discount the market value of the bonds without the conversion
by fractions developed from the diminishing balance of privilege. The residual amount or remainder of the issue
the bonds (Valix, et. al. 2019). price shall then be allocated to the conversion privilege
or equity component.
In the absence of market value of the bonds without
Effective Interest Method conversion privilege, the amount allocated to the bonds
Under the effective interest method, the effective interest is equal to the present value of the principal bond
expense is determined by multiplying the effective rate liability plus the present value of future interest
by the carrying amount of the bonds. The carrying payments using the effective or market interest rate for
amount of the bonds changes every year as the amount similar bonds without conversion privilege.
of premium or discount is amortized periodically. Conversion of bonds
The effective interest is then compared with the nominal The amortized cost/carrying value of the debt, which is
interest and the difference is the equal to the face value of the instrument less any
premium or discount amortization (Valix, et. al. 2019). unamortized bond issue costs and unamortized bond
Lesson 6. Compound Financial instruments discount or plus any unamortized bond premium
A company may issue bonds that allow creditors to derecognized as a liability will be recognized as an
ultimately become stockholders by attaching share equity. The
warrants to the bonds or including a conversion feature equity component at the time of issue remains in equity,
in the bond indenture (Bazley, et. al. 2010). A compound although it may be transferred from
financial instrument is a financial instrument that, from one line item within equity to another. No gain or loss is
the issuer’s perspective, contains both a liability and an recognized from the initial recognition
equity component. These components are treated of the components of the instrument.
separately. In other words, one component of the Lesson 7.Derecognition of a financial liability
financial instrument meets the definition of a financial (Millan, 2019)
liability and another component meets the definition of A financial liability is derecognized when it is
an equity instrument (Valix, et. al. 2019) extinguished, that is, when the obligation
PAS 32, paragraph 11, defines a financial instrument as is discharged or cancelled or expires. Derecognition also
any contract that gives rise calls for the removal of a previously recognized asset or
to both a financial asset of one entity and a financial liability from the entity’s statement of financial position.
liability or equity instrument of another It can be done through various methods, namely:
entity. a. Repayment in cash
Bonds issued with detachable share warrants b. Transfer of non-cash assets or rendering of services
(Bazley, et. al. 2010) c. Issuance of equity securities
When a company issues with detachable share warrants, d. Replacement of existing obligation with a new
these warrants represent rights that enable the security obligation
holder to acquire a specified number of ordinary shares e. Waiver or cancellation of the creditor
at a given price within a certain time period. This f. Expiration of period, such as in the case of warranties
issuance requires splitting the proceeds from issue in (Millan, 2019 Edition)
accordance with the new standards, that on initial Lesson 8. Financial Statement Presentation of
recognition, the equity component (warrants) represents Long-term Liabilities
the residual amount of the fair value (proceeds) of the Discount on bonds payable and premium on bonds
instruments as a whole after deducting the amount payable are reported as adjustments to the bond liability
separately determined for the liability (bonds). account.
The bonds are assigned an amount equal to the “market The discount on bonds payable is a deduction from the
value of the bonds without warrants “, regardless of the bonds payable and the premium on bonds payable is and
market value of the warrants. The residual amount or the addition to the bonds payable account.
remainder of the issue price shall then be allocated to the The treatment is on the theory that the discount
warrants. represents an amount that the issuer cannot borrow
Convertible bonds (Valix, et. al. 2019) because of interest differences, and the premium
The issuance of convertible bonds shall be accounted for represents an amount in excess of face amount that the
as partly liability and partly issuer is able to borrow.
The discount on bonds payable and the premium on
bonds payable shall not be considered separate from the
bonds payable account. Both accounts shall be treated
consistently as valuation accounts of the bond liability.
Notice the following presentation in the statement of
financial position.
Noncurrent liabilities
Bonds payable xx
Discount on bonds payable (xx) xx
And
Noncurrent liabilities
Bonds payable xx
Premium on bonds payable xx xx

MICAH MAE G. MARQUEZ

BSAIS 2A
MODULES 1-3 PRELIM
ACCTG 4
REVIEWER