Liabilities are present obligations of an entity to transfer an economic resource as a result of past event.

When to be RECOGNIZED?
1. Entity has present obligation.
2. Obligation is to transfer an economic resource.
3. Liability arises from a past event.

What is the MEASUREMENT?

a. Current liabilities:
Conceptually,
Initial Measurement - Present Value
Subsequent Measurement - Amortized Cost

In practice are measured at face amount.

b. Noncurrent liabilities:
b1. Noninterest bearing
Initial Measurement - Present Value
Subsequent Measurement - Amortized Cost

b2. Interest bearing:

Initial Measurement - Face Amount
Subsequent measurement - Face Amount

When to classify as CURRENT?

a. Settled within the operating cycle.
b. Held primarily for the purpose of trading.
c. Due to be settled within 12 months after the reporting period.
d. Does not have an unconditional right to defer the settlement of liability
at least 12 months after the reporting period.

LONG-TERM DEBT FALLING DUE WITHIN ONE YEAR:

Liability due to be settled within 12 months AFTER the reporting period is classified
as CURRENT even if:

a. Original term was for a period longer than twelve months.

b. An agreement to refinance or to reschedule payment on long-term basis is completed
after the reporting period and before the financial statements are authorized for issue.

However:
If refinancing is completed ON OR BEFORE THE END OF THE REPORTING PERIOD. - NONCURRENT
Entity has the DISCRETION to refinance or roll over an obligation for at least 12 months after the
reporting period. - NONCURRENT

BREACH OF COVENANT:
Liability becomes payable on demand - CURRENT
Unless there is GRACE PERIOD:
Given ON OR BEFORE THE REPORTING PERIOD - NONCURRENT
Given AFTER THE REPORTING PERIOD - CURRENT
PREMIUMS
Premiums are articles of value such as toys, dishes, silverware, and other goods
given to customers as result of past sales or sales promotion activities.

When premiums are purchased

Premiums xxx
Cash xxx

When premiums are distributed to customers

Premiums Expense xxx
Premiums xxx

At the end of the year, if premiums are still outstanding:

Premiums Expense xxx
Estimated premium liabilitiy xxx

ILLUSTRATION:
An entity manufactures a certain product and sells it at P300 per unit.

A soup bowl is offered to customers on the return of 5 wrappers plus

a remittance of P10.

The bowl costs P50, and it is estimated that 60% of the wrappers will
be redeemed.

The data for the first year concerning the premium plan are summarized below:

Sales, 10,000 units at P300 each 3,000,000

Soup bowls purchased, 2,000 units at 50 each 100,000 4,000
Wrappers redeemed 4,000 5
800
The entries that would made in the first year to record the sales, premium 50
purchases and redemption, and year-end adjustments are: 40000

1. To record the sales:

Cash 3,000,000
Sales 3,000,000
50
2. To record the purchase of the premiums: 10
Premiums 100,000 40
Cash 100,000 800
32000
3. To record the redemption of 4,000 wrappers:
Cash 8,000 10,000.00
Premiums expense 32,000 60%
Premiums 40,000 6,000.00
5.00
4. To record the liability for the premiums at the end of the 1st year" 1,200.00
Premiums expense 16,000 40.00
Estimated premium liability 16,000 48,000.00
32000
16,000.00
wrappers

cost
WARRANTY
Home appliances like television sets, stereo sets, radio sets
refrigerators and the like are often sold under guaranttee or warranty
to provide free repair service or replacement during a specified period
if the products are defective.

When to RECOGNIZE?
a. The entity has present obligation.
b. Probable that an outflow of resources embodying economic benefits
would be required to settle the obligation.
c. The amount of the obligation can be measured reliably.

ACCRUAL APPROACH
Recording of estimated warranty cost:
Warranty Expense xxx
Estimated warranty liability xxx

Actual warranty cost is subsequently incurred and paid:

Estimated warranty liability xxx
Cash xxx

ILLUSTRATION:
An entity sells 1,000 units of television sets at P9,000 each for cash.
Each television set is under warranty for one year.

The entity has estimated from past experience that warranty cost will probably
average P500 per unit and that only 60% of the units sold will be returned for
repair.

The entity incurs P 180,000 for repairs during the year.

1. To record the sales

Cash 9,000,000
Sales 9,000,000

2. To set up the estimated liability on the warranty:

Warrant Expense 300,000
Estimated warranty liability 300,000

3. To record the payment of the actual cost:

Estimated warranty liability 180,000
Cash 180,000
 1000
500
60%
300000
DEFINITION OF TERMS

SHARE CAPITAL
Portion of the paid in capital representing the total
par or stated value of the sharess issued.

SUBSCRIBED SHARE CAPITAL

Portion of the authorized share capital that has been subscribed but
not yet fully paid and therefore still unissued.

Reported minus subscription receivable not collectible currently.

SHARE PREMIUM
Portion of the paid in capital representing excess over the par
or stated value.

Common sources of Share Premium:

a. Excess over par or stated value.
b. Resale of treasury shares at more than cost.
c. Donated Capital
d. Issuance of share warrants.
e. Distribution of share dividends.
f. Quasi-reorganization and recapitalization.

RETAINED EARNINGS
Cumulative balance of periodic earnings, dividend distributions,
prior period errors, and capital adjustments.

REVALUATION SURPLUS
Excess of revalue amount over the carrying amount of revalued asset.

TREASURY SHARES
Corporation's own shares that have been issued and them acquired but not cancelled.
The shareholder's equity section of Kristal Mae Company revealed the following information on December 31, 2020:

Share premium on preference shares 150,000.00

Premium on bonds payable 100,000.00
Share Premiun conversion option-bonds payable 40,000.00
Authorized ordinary shares at P10 stated value 1,200,000.00
Subscribed Preference Shares 60,000.00
Authorized preference shares at P50 par value 800,000.00
Gain on sale of treasury shares 60,000.00
Unrealized increase in value of FVTOCI securities 10,000.00
Ordinary share warrants outstanding 35,000.00
Unissued ordinary shares 650,000.00
Unissued prefrence shares 150,000.00
Cash dividends payable - preferences 80,000.00
Donated Capital 40,000.00
Reserve for bond sinking fund 320,000.00
Reserve for depreciation 100,000.00
Revaluation Surplus 130,000.00
Subscription receivable - preference 15,000.00
Subscription receivable - ordinary shares 20,000.00
Ordinary share options outstanding 25,000.00
Accumulated profits - unappropriated 500,000.00
Bonds payable 1,000,000.00
Subscribed ordinary shares 200,000.00
Long term investments in equity securities 400,000.00
Share Premium on ordinary shares 300,000.00

1. Ordinary shares issued

2. Preference shares issued
3. Share premium
4. Contributed capital
5. Total legal capital
6. Total shareholder's equity
mber 31, 2020:

Authorized ordinary shares at P10 stated value 1,200,000.00

Unissued ordinary shares 650,000.00
Ordinary shares issued 550,000.00

Authorized preference shares at P50 par value 800,000.00

Unissued prefrence shares 150,000.00
Preference shares issued 650,000.00

Share premium on preference shares 150,000.00

Share Premiun conversion option-bonds payable 40,000.00
Gain on sale of treasury shares 60,000.00
Donated Capital 40,000.00
Ordinary share warrants outstanding 35,000.00
Ordinary share options outstanding 25,000.00
Share Premium on ordinary shares 300,000.00
Total share premium 650,000.00

Ordinary shares issued 550,000.00

Preference shares issued 650,000.00
Subscribed ordinary shares 200,000.00
Subscription receivable - ordinary shares - 20,000.00
Subscribed Preference Shares 60,000.00
Subscription receivable - preference - 15,000.00
Total share premium 650,000.00
Contributed Capital 2,075,000.00

Ordinary shares issued 550,000.00

Preference shares issued 650,000.00
Subscribed Preference Shares 60,000.00
Subscribed ordinary shares 200,000.00
Share Premium on ordinary shares 300,000.00
Legal Capital 1,760,000.00

Contributed Capital 2,075,000.00

Accumulated profits - unappropriated 500,000.00
Unrealized increase in value of FVTOCI securities 10,000.00
Reserve for bond sinking fund 320,000.00
Revaluation Surplus 130,000.00
Shareholder's Equity 3,035,000.00