LIABILITIES

LIABILITIES
LIABILITY
A liability is a
a.present obligation of the entity

b.arising from past events
c.the settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits.
LIABILITY
Definition explained:
A.Obligation
a duty or responsibility to act or perform in a certain way
obligations may be legally enforceable or constructive
a.legally enforceable- binding contract, statutory requirement
o a contract (through its explicit or implicit terms);
o legislation; or
o other operation of law.
LIABILITY
A.Obligation
b.constructive- normal business practice, custom and a desire to maintain good business
relations or act in an equitable manner
A constructive obligation is an obligation that derives from an entity’s actions where:
a)by an established pattern of past practice, published policies or a sufficiently specific current statement, the
entity has indicated to other parties that it will accept certain responsibilities; and
b)as a result, the entity has created a valid expectation on the part of those other parties that it will discharge
those responsibilities.
LIABILITY
A.Obligation
An obligation always involves another party to whom the obligation is owed. It is not
necessary, however, to know the identity of the party to whom the obligation is owed—
indeed the obligation maybe to the public at large.
LIABILITY
B.Past event
The past event that leads to a legal or constructive obligation is known as obligating event.
C.Outflow of Economic Benefits

The settlement of an obligation usually involves the entity giving up resources embodying
economic benefits in order to satisfy the claim of the other party
payment of cash;
transfer of other assets;
provision of services;
replacement of that obligation with another obligation;
conversion of the obligation to equity; or
waiver (creditor waiving or forfeiting its rights)
*declaration of stock dividend shall not give rise to a liability
LIABILITY
Recognition:
A liability is recognized in the financial statements when
a.the outflow of economic resources is probable AND

b.the amount at which the settlement will take place can be measured reliably
An entity shall recognize a financial liability in its statement of financial position when,
and only when, the entity becomes party to the contractual provisions of the instrument
LIABILITY
Classification and Presentation:
An entity shall present current and non-current liabilities, as separate classifications except
when a presentation based on liquidity provides information that is reliable and more
relevant.
Whichever method of presentation is adopted, an entity shall disclose the amount of liability
to be settled
(a) no more than twelve months after the reporting period, and
(b) more than twelve months after the reporting period.
LIABILITY
Classification and Presentation:
Current Liabilities:
(a) entity expects to settle the liability in its normal operating cycle;
ü in classifying liabilities arising from the operations of the entity (trade payable and
some accruals for employee and other operating costs), disregard the 12-month rule
ü if the operating cycle is not clearly distinguishable, it is assumed to be twelve months
(b) entity 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) entity does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting period
LIABILITY
DEC 31, 2020 DEC 31, 2021

TOTAL LIABILITIES
1,000,000
Current or Concurrent?
LIABILITY
CURRENT LIABILITY
DEC 31, 2020 DEC 31, 2021

TOTAL LIABILITIES
1,000,000
LIABILITY
NON-CURRENT
LIABILITY
DEC 31, 2020 DEC 31, 2021 JUN 30, 2022

TOTAL LIABILITIES Due date
1,000,000
LIABILITY
CURRENT LIABILITY
(70%) NON-CURRENT
LIABILITY (30%)
DEC 31, 2020

TOTAL LIABILITIES JUL 1, 2021 DEC 31, 2021 JUN 30, 2022
1,000,000 Due date
CL= 700,000
NCL=300,000
LIABILITY
I CANNOT DEFER PAYMENT
CURRENT
LIABILITY
DEC 31, 2020 DEC 31, 2021 JUL 1, 2022

JUL 1, 2021
TOTAL LIABILITIES new due date
due date
1,000,000
CL= 1,000,000
NCL=0
LIABILITY
BUT I CAN POSTPONE PAYMENT FOR
ANOTHER 12 MONTHS WITHOUT
ANY CONDITION.
CURRENT
LIABILITY
DEC 31, 2020 DEC 31, 2021 JUL 1, 2022

JUL 1, 2021
due date
1,000,000
CL= 0
NCL=1,000,000
LIABILITY
ANOTHER 12 MONTHS
CONDITIONAL
CURRENT
LIABILITY
DEC 31, 2020 DEC 31, 2021 JUL 1, 2022

JUL 1, 2021
due date
1,000,000
CL= 1,000,000
NCL=0
LIABILITY
ANOTHER 1 MONTH
WITHOUT CONDITION
CURRENT
LIABILITY
AUG 1, 2021
DEC 31, 2020 new due date DEC 31, 2021
JUL 1, 2021
TOTAL LIABILITIES due date
1,000,000
CL= 1,000,000
NCL=0
LIABILITY
In relation to (c) and (d):
ü liabilities with original term longer than 12 months but due in twelve months after the balance
sheet date are current liabilities
ü refinanced or rescheduled payments
if liabilities become due in the next twelve months according to its term or because of a
breach on the loan covenant, the classification is
CURRENT
if the refinancing (rescheduling) agreement is completed after the reporting period but
before the authorization for issuance of the FS
NON-CURRENT
if an entity expects, and has the discretion, to refinance or roll over an obligation for at
least twelve months after the re porting period
if the agreement to refinance (reschedule the payment of) the liability is completed on
or before the end of the reporting period
LIABILITY
NON-CURRENT
LIABILITY
DEC 31, 2020 DEC 31, 2021 JUN 30, 2022

TOTAL LIABILITIES Due date
1,000,000=NCL
LIABILITY
CURRENT LIABILITY
DEC 31, 2020 DEC 31, 2021 JUN 30, 2022

Due date
TOTAL LIABILITIES
1,000,000=CL
LIABILITY
CURRENT
LIABILITY
DEC 31, 2020 DEC 31, 2021

JUL 1, 2021
TOTAL LIABILITIES Original due date May 1, 2022
1,000,000
CL=1,000,000
NCL=0
LIABILITY
SURE
Can I pay on
May 1, 2022?
CURRENT
LIABILITY
DEC 31, 2020 DEC 31, 2021

JUL 1, 2021
1,000,000 new due date
CL= 0
NCL=1,000,000
LIABILITY
SURE
Can I pay on
Nov 1, 2021?
CURRENT
LIABILITY
DEC 31, 2020 DEC 31, 2021

JUL 1, 2021
TOTAL LIABILITIES Original due date Nov 1 1, 2022
1,000,000 New due date
CL= 1,000,000
NCL=0
LIABILITY
SURE
Can I pay on
May 1, 2022?
CURRENT
LIABILITY
DEC 31, 2020 DEC 31, 2021

JUL 1, 2021
1,000,000 new due date
CL= 1,000,000
NCL=0
LIABILITY
LIABILITY
PROBABLE AND MEASURABLE

UNCERTAIN OBLIGATION
ü
OBLIGATIONS
ü
PROVISION CONTINGENT LIABILITY
COTINGENT LIABILITY
Liabilities-Concept Connection
Current Liabilities
oAccounts payable/ Trade Accounts Payable
oShort Term Notes Payable
oAccrued Liabilities (Interest, Utilities, Payroll)
oIncome Tax Payable
oDividends Payable
oDeferred Revenue
oDeposits and Advances
oCredit Balance of AR
Non-Current Liabilities
oBonds Payable
oMortgage Loans Payable
oLong-term notes payable
oLong-term deferred revenue
Current Liabilities
oarises from purchase of goods, materials, supplies, services on an
open charge-counts basis.
Assume that on Nov 2, 2020, ABC Corporation purchased merchandise

from DEF Company with an invoice price of P200,000, FOB Shippinng
point ,3/10,n30. Freight cost was P2,000.
Current Liabilities
Assume that on Nov 2, 2020, ABC Corporation purchased merchandise
from DEF Company with an invoice price of P200,000, FOB Shippinng
point ,3/10,n30. Freight cost was P2,000. ABC paid in full in Nov 10.
GROSS, PERIODIC METHOD NET, PERIODIC METHOD

Purchases 200,000 Purchases 194,000
Freight In 2,000 Freight In 2,000
Accounts Payable 202,000 Accounts Payable 196,000
Accounts Payable 202,000 Accounts Payable 196,000

Cash (200k*97%) +2k 196,000 Cash (200k*97%) +2k 196,000
Purchase Discount 6,000 ________________________________________
________________________________________
Accounts Payable 196,000
Accounts Payable 202,000 Purchase Discount Lost 6,000
Cash 202,00 Cash 202,000
Provisions v. Contingent Liabilities
Obligations involving uncertainties are either provisions or contingent liabilities.
Provisions
o defined as: a liability of uncertain timing or amount
o its existence is certain as of the reporting date, only the timing of settlement or
amount to be settled is uncertain
o it is an obligation recognized in the balance sheet
Contingent liabilities
o a present obligation that arises from past events but not recognized because
o it is not probable that outflow of resources embodying economic benefit will be required to
settle the obligation or
o the amount cannot be measure reliably
o defined as: either a possible obligation that arises from past events and whose
existence will on be confirmed by the occurrence or non-occurrence of one or more
future events not wholly within the control on the entity; or
Contingent liabilities
o its existence is uncertain as of the reporting date
o it is not recognized in the balance sheet as an obligation
PROVISIONS CONTINGENT LIABILITIES

Present obligation Possible obligation or
Meets the recognition criteria of Present obligation that is not

probability and measured reliably recognized because it does not meet
the recognition criteria
Recognized as liability Not recognized as liability but may
be disclosed unless remote
Provisions
Measurement of Provisions (and other factors to be considered in measuring

provisions)
1.Single Obligation
Where a single obligation is being measured, the individual most likely outcome
may be the best estimate of the liability.
2.Large Population of Items

Where the provision being measured involves a large population of items, the obligation is
estimated by weighting all possible outcomes by their associated probabilities. The name for
this statistical method of estimation is ‘expected value’.
Where there is a continuous range of possible outcomes, and each point in that range is as
likely as any other, the mid-point of the range is used.
Provisions
3.The risks and uncertainties that inevitably surround many events and circumstances shall be
taken into account in reaching the best estimate of a provision.
4.Where the effect of the time value of money is material, the amount of a provision shall be the
present value of the expenditures expected to be required to settle the obligation.
The discount rate shall be a pre- tax rate that reflects current market assessments of the time
value of money and the risks specific to the liability.
Provisions
5. Future events that may affect the amount required to settle an obligation shall be reflected in
the amount of a provision where there is sufficient objective evidence that they will occur.
The effect of possible new legislation is taken into consideration in measuring an existing
obligation when sufficient objective evidence exists that the legislation is virtually certain to be
enacted.
6.The following factors shall not be considered in measuring provisions

-Gains from the expected disposal of assets
-Future operating losses (no provisions for future operating LOSSES)
CONCEPT CONNECTION
On September 2020, Howell filed a lawsuit against Blue

Company, alleging violations of patent rights and its seeking
payment of damages of P7,000,000. Blue disclaims the
charges and legal counsel advises that as of the date of the
issuance of Blue’s financial statements, it is probable that
the company will not be found liable.
Must there be a provision? Not necessary. Disclose only a contingent liability.

CONCEPT CONNECTION
ABC Company operates in a city where there is no

environmental legislation However, the company has a
widely published policy in which it undertakes to clean up all
contamination it causes. As of the date of the issuance of
2020 financial statements, a reasonable estimate of the
cost of this clean up related to 2020 operations is
P2,000,000
Environmental Clean-up expense 2,000,000

Provision for Environmental Clean -up 2,000,000
CONCEPT CONNECTION
As a result of an uninsured accident during 2020, personal

injury suit for P3,000,000 has been filed against XYZ
Company. It is the judgement of the company’s legal
counsel that an unfavorable verdict will result in a loss
ranging from P1.8 million to P2.88 million. The lawyer
believes that the most reasonable estimate is P2.2 million.
Loss from Accident 2,200,000

Provision for Damages 2,200,000
CONCEPT CONNECTION
JKL is charged with multiple lasuits because of an ccident that
happend in Feb 2020, causing death of about 80 persons due to
stampede in a sales promotion program it was airing through
Channel 6 on Feb 10, 2020. Based on similar accidents suffered by
other entities, JKL ‘s legal counsel are at the opinion that it is
porbabl the JKL would be found liable for the indcident. As of the
date of the issuance of the 2020 financial statemnets, a reasonable
estimate of the obligation is between P16,000,000 to P24,000,000.
Each point within the range is as likely as any other.
Loss from damages 20,000,000

Provision for Damages 20,000,000
Specific Liabilities
• Premiums, Warranty, Customer Loyalty, Bonus, Accrued

Liabilities, Deferred Revenue
Accrued expense= LIABILITY (Dr. Exp, Cr. Liab)

Deferred revenue=LIABILITY (Dr. Cash, Cr.
Liab/Unearned Revenue)
Premiums
o PREMIUMS are articles of value given to customers as a result of past sales or sales promotion
activity.
qPremiums distributed to customers shall be treated as expense (net of any cash

remittance).
qPremiums purchased but undistributed by the end of the year shall be recognized as
asset.
qPremiums earned by the customers but not yet redeemed shall give rise to a liability
(estimated).
q To determine the outstanding liability, an entity shall make estimate the number of premiums to be
redeemed.
Premium
PREMIUM PREMIUM PREMIUM

EXPENSE LIABILITY (ASSET)
-computed on the basis of -premium expense- redeemed -(purchased premium -distributed
expected premiums to be portion premiums) x cost
redeemed multiplied by the cost of
the premium
-premium expense- redeemed portion 500 shirts at P100 each=Php 50,000
Premium expense 40,000 =40,000- 32,000
Estimated Premium Liability 40,000 = 8,000
Premiums (t shirts) 50,000
Estimated Premium Liability 32,000
Cash/AP 50,000
Premium (shirt) 32, 000
• Premiums
Univ Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost Univ P3.00 each. Univ estimates that 40
percent of the coupons will be redeemed. Data for 2019 and 2020 are as follows:
2019 2020
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000
The premium expense for 2019/2020 is _______

• Premiums
Univ Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers
receive a leash. The leashes cost Univ P3.00 each. Univ estimates that 40 percent of the coupons will be
redeemed. Data for 2019 and 2020 are as follows:
2019 2020
2019 2020
Number of coupons issued 500,000 600,000
Estimated coupons to be redeemed (40%) 200,000 240,000
Expected number of leash to be redeemed ( 8 coupons: 25,000 30,000
1 leash)
Premium Expense (each leash cost P3) P75,000 P90,000
• Premiums
2019 2020
2019 2019
Premiums (Leash) 54,000 Est.Premium Liability (120,000/8)*3 45,000
Cash 54,000 Premium 45,000
2019
Premiums expense 75,000 2019 BALANCE SHEET
Est.Premium Liability 75,000 Premiums P9,000 or 3000 units
Est Premium Liability P30,000
• Premiums
2019 2020
Leashes purchased 18,000 22,000 =40,000 units
Coupons redeemed 120,000 150,000 =(270,000/8) 33,750
2020 2020
Premiums (Leash) 66,000 Est.Premium Liability (150,000/8)*3 56,250
Cash 66,000 Premium 56,200
2020
Premiums expense 90,000 2020 BALANCE SHEET
Est.Premium Liability 90,000 Premiums P18,750 or 6,250 units
• Premiums
2019 2020
The premium liability for 2019/2020 is _______

• Premiums
2019 2020
2019
Number of coupons issued 500,000
Estimated coupons to be redeemed (40%) 200,000
Coupons redeemed 120,000
Estimated remaining coupons to be redeemed 80,000
Estimated remaining leash to be redeemed (8:1) 10,000
Estimated Premium Liability P30,000

• Premiums
2019 2020
Beg Bal 2020 TOTAL
Estimated coupons to be redeemed (40%) 80,000 (from 2019) 240,000 320,000

Estimated remaining leash to be redeemed (8:1) 21,250
Estimated Premium Liability P63,750

• Premiums
2019 2020
The premium (asset) for 2019/2020 is _______

• Premiums
2019 2020
2019
Leash redeemed (8:1) 15,000
Leash Purchased 18,000
Premium (asset) at P3 Php 9,000 or 3,000 units

leash
• Premiums
2019 2020
2019
Leash redeemed (8:1) 18,750
Leash Purchased 22,000
Beg Balance of Leash 3,000
Total Available Leash 25,000
Premium (asset) at P3 Php 18, 750 or 6,250
leash
• Univ Music Shop gives its customers coupons redeemable for a poster plus a
BTS CD. One coupon is issued for each peso of sales. On the surrender of
100 coupons and P5.00 cash, the poster and CD are given to the customer.
It is estimated that 80% of the coupons will be presented for redemption.
• Sales for the first period were P1,050,000, and the coupons redeemed
totaled 510,000. Sales for the second period were P1,260,000, and the
coupons redeemed totaled 1,275,000. Univ Music Shop bought 30,000
posters at P2.00/poster and 30,000 CDs at P6.00/CD.
2019 2020
Sales/Number of coupons issued 1,050,000 1,260,000
Estimated coupons to be 840,000 1,008,000

redeemed (80%)
Expected number of cd + poster 8,400 10,080
to be redeemed (100:1) + Php
5.0
Premium Expense (Php 6 +Php Php25,200 Php 30,240
2- Php 5)=Php 3 (cd+poster)
One coupon is issued for each dollar of sales. On the surrender of 100 coupons and P5.00 cash,
the poster and CD are given to the customer. It is estimated that 80% of the coupons will be
presented for redemption.
Univ Music Shop bought 30,000 posters at P2.00/poster and 30,000 CDs at P6.00/CD.
2019 2019
Premiums (CD+P) 240,000 Est.Premium Liability (510,000/100)*3 15,300
Cash 240,000 Cash (510,000/100)*5 25,500
Premium(510,000/100)*8 40,800
2019
Premium expense 25,200
Est.Premium Liability 25,200
2019 BALANCE SHEET
Premiums P199,200 or 24,900 units
(30,000-5,100)
2020 2020
Premium expense 30,240 Est.Premium Liability (1,275,000/100)*3 38,250
Est.Premium Liability 30,240 Cash (1,275,000/100)*5 63,750
Premium(1,275,000/100)*8 102,000
2020 BALANCE SHEET

Premiums P97,200 or 12,150 units
(24,900-12,750)
2019
Sales/Number of coupons issued 1,050,000

Estimated remaining coupons to be 330,000
redeemed next period
Expected remaining number of CD + 3,300
poster to be redeemed (100:1)
Premium Liability (Php 2 + Php 6 -Php 5) Php 9,900
Sales for the first period were P1,050,000, and the coupons redeemed totaled 510,000. Sales for
the second period were P1,260,000, and the coupons redeemed totaled 1,275,000.
2019 2020 TOTAL
Sales/Number of coupons issued 1,260,000 1
Estimated coupons to be redeemed (80%) 1,008,000 1,008,000
Estimated remaining coupons to be redeemed 330,000 330,000
from prev period
Coupons redeemed 1,275,0000

next period
Respected remaining number of cd + poster to 630
be redeemed (100:1)
Premium Liability (Php 2 + Php 6 -Php 5) Php 1,890
Sales for the first period were P1,050,000, and the coupons redeemed totaled 510,000. Sales for
the second period were P1,260,000, and the coupons redeemed totaled 1,275,000.
Warranty
o WARRANTY are normally attached to sale of appliances (and other products) and gives rise to free
repair or replacement of parts during a specified period of time if the products.
q An estimate shall be made on the expected repairs or replacement on the items/products sold.
q A corresponding liability is incurred at the point of sale.
q Changes on the estimate of difference in the estimated warranty and the actual amount is treated
as a change in estimate and therefore treated prospectively.
q If the warranty is for more than a year, the liability shall be treated as current and non
current as may be appropriate.
q Warranty may be sold separately from a product ( i.e. extended warranty). Revenue from
such shall be treated as deferred revenue and subsequently amortized over the life of the
contract (on a straight line basis or in proportion to the cost to be incurred in relation to the
warranty).
PROBLEM 1
Univ Company sells washing machines that carry a three year warranty against
manufacturer’s defects. Based on company experience, warranty costs are
estimated at P300 per machine. During 2020 Univ sold 2,400 washing
machines and paid warranty costs of P170,000. In its income statement for the
year ended December 31, 2020,
Warranty Expense 720,000 Warranty Liability 2020: P550,000

Estimated Warranty Liability 720,000
Estimated Warranty Liability 170,0000 Warranty Expense 170,000

Cash 170,000 Cash 170,000
Expense as incurred approach
PROBLEM 2
Univ 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% have normal defect and 15% have significant
defect. The cost of rectifying a normal defect in a is P10,000, while a significant
defect in a car is rectified at a cost of P30,000. The entity sold 500 cars during the
year. What is the expected provision for warranty at the end of the year?
NORMAL 500x25%= 125 cars x P10,000=P1,250,000 Warranty Expense 3,500,000

SIGNIFICANT 500 x15%=75 cars x P30,000=2,250,000 Estimated Warranty Liability 3,500,000
Estimated Warranty Liability xxx

Cash xx
PROBLEM 3
Univ Company gives warranties at the time of sale to purchasers of its product.
Under the terms of the sale, the entity undertakes to make good, by repair or
replacement, manufacturing defects that become apparent within one year from
the date of sale.
In 2020 Univ introduced a new television model with a two year warranty
against defects. It is estimated that warranty cost equal to 2% of sales is
incurred within 12 months following the sale and 4% of sales in the second 12
months following the sale.
Sales and actual warranty expense for 2020 are P3,000,000 and P45,000,
respectively. In 2021, sales and actual warranty expense are P5,000,000 and
P150,000.
How much is the warranty expense in 2020/2021? 300,000

How much is the warranty liability in 2020/2021? 285,000
Warranty 2020 Warranty 2021

Sales 3,000,000 Sales 5,000,000
Est Warranty 6% Est Warranty 6%
Exp/Liab 180,000 Exp/Liab 300,000
Incurred - 45,000 Incurred - 150,000
Liab 135,000 Liab 150,000
Beg Bal 135,000
Total 285,000
o Customer Loyalty
q CUSTOMER LOYALTY PROGRAM designed to reward customers for past purchases
and to further encourage them to make further purchases
q On every sale transaction recognized, the points accumulated by the customer from his
purchase shall be accounted for separately.
q The points or credits earned is expected to result in the future delivery of goods or services
q The consideration on the sale transaction shall therefore be allocated to the reward and the
sale itself.
q The amount allocated to the reward is equal to its fair value.
q SUBSEQUENT RECOGNITION OF REVENUE depends on who provides the rewards:
o Customer Loyalty
q CUSTOMER LOYALTY PROGRAM designed to reward customers for past purchases
and to further encourage them to make further purchases
q SUBSEQUENT RECOGNITION OF REVENUE depends on who provides the rewards:

q by the ENTITY
q The part (amount) allocated to the reward/credit points is recognized as deferred revenue.
q Upon redemption of points, the revenue is realized.
q An entity typically makes an estimate of the rewards expected to be redeemed and shall make the same
assessment at the end of each period. Changes on the estimate shall be accounted for prospectively.
q by a THIRD ENTITY
q Revenue from the award is recognized at the point of sale.
q Collected acting as principal: Revenue=gross consideration; subsequently recognize
q Collected acting as agent: Revenue= net amount retained; amount collected on behalf of the third party is
a liability
o Customer Loyalty (reward provided by the company)
Assume that SM Corporation grants its customers one reward point for each
P200 sales. Each point is redeemable in the form of merchandise and
equivalent to P1. The points accumulate and may be used by the customer
as part of payment for merchandise purchases in the future. During the
month of April of the current year, total sales of the company amounted to
P24M. Fair value of merchandise and the reward points are P23,880,000
and P120,000, respectively.
Cash 24,000,000
Sales 23,880,000 liability for customer loyalty poits
Liability for Customer Loyalty 120,000 same as deferred revenue/unearned
Entry at the point of sale

o By the end of first year, 45 % of the points have been redeemed and it is
expected that only a total of 90% of the points granted will be redeemed by
the customers. SM recognizes revenue for the points redeemed.
Liability 120,000
Redeemed (45%/90%)
60,000
Liability for Customer Loyalty 60,000

Sales 60,000
Entry for redemption.

By the end of second year, additional 40 % of the points have been
redeemed and it revised its estimate that total points to be redeemed will be
100%
Liability 120,000
Redeemed (85%/100%)
Cumulative Amt 102,000
Amt Recognized in Y1 (60,000)
Amt Recognized in Yr 2 42,000

Sales 42,000

Remaining points redeemed in year 3.
Liability 120,000
Redeem (100%/100%)
120,000
Amt Recognized in Y1 60,000

Sales 18,000
o Customer Loyalty (reward provided by 3rd party
Assume that Petron participates in a customer loyalty program SM
Corporation. It grants SMAC holder one reward point for every P50 spent
on fuel.
SMAC holders can redeem the points for reduction in selling prices of goods
to be bought in SM. Petron pays SM P0.50 for each point redeemed
PETRON
SM
Cash xx
Sales xx
No entry
Entry at the point of sale
on fuel.
PETRON
SM
Premium Expense xx
Cash xx
Accounts Payable xx
Sales xx
Upon redemption of Points Sales made with SMAC points

on fuel.
PETRON
SM
Premium Expense xx
Premium Claims Outstanding xx
No entry
Unredeemed points
o Unearned Revenue
q Amounts collected in advance that have not been earned and recorded as unarned pending
satisfaction of performance obligation.
q Magazine subscriptions, tickets, tokens, gift certificates, service contracts
Cash xx
Unearned Revenue xx
To record collection in advance
Unearned Revenue xx
Revenue xx
When performance obligation is satisfied
o Unearned Revenue
ABC Service Company sells service contract for computer units that cover a
two year period. the sales price of each contract is P750. ABC’s past
experience shows that the total peso spent for repairs in service contracts , 40%
is incurred evenly during the first year of contract and 60% evenly during the
second contract year. During 2020, ABC sold 1,000 contracts. Cost of servicing
the units (labor, materials, etc.) during 2020 amounted to P80,000.
Unearned Revenue 150,000

Cash 750,000 Revenue 150,000
Unearned Revenue 750,000 When performance obligation is satisfied
Cost of Service Contracts 80,000
Materials, Labor, etc 80,000
To record cost of service
o Unearned Revenue
In 2021, additional 1,200 service contracts were sold and repairs were made
evenly during the year at a cost of P220,000.

Cash 900,000 Revenue 555,000
Unearned Revenue 900,000 When performance obligation is satisfied
Cost of Service Contracts 220,000
Materials,Labor etcc 220,000
To record cost of service
o Unearned Revenue
CONTRACT
YEAR SOLD EARNED
SOLD (Php)
40% (300,000) 60% (450,000)
2020 2021 2021 2022
2020 750,000 150,000 150,000 225,000 225,000
40%=150,000 60% 40%=225,000
Jan 1, 2020 Dec 31, 2020 Dec 31, 2021

375,000
o Unearned Revenue
CONTRACT
YEAR SOLD EARNED
SOLD (Php)
40% (300,000) 60% (450,000)
2020 2021 2021 2022
2020 750,000 150,000 150,000 225,000 225,000
CONTRACT
YEAR SOLD EARNED
SOLD (Php)
40% (360,000) 60% (540,000)

2021 2022 2022 2023
2021 900,000 180,000 180,000 270,000 270,000
o Unearned Revenue
Assume the following information about Glorietta Corp for the year 2020. It has
a pricing policy allowing a 30% profit on sales.
Particulars Amount
Unearned revenue from Gift Certificates Outstanding,Jan 1 500,000
Gifts certificates sold during the year 1,800,000
Gift certificates issued relating to sales promotion during the year 200,000
Gift certificates redeemed during the year 1,800,000
Gift certificate relating to a promo which expired during the year 25,000
Aditional outstanding certificates expected to expire in 2021 12,000
Unearned Revenue ???
o Unearned Revenue
Particulars Amount
Unearned revenue from Gift Certificates Outstanding,Jan 1 500,000 Cash 1.8M
Unearned Rev 1.8M
o Unearned Revenue
Particulars Amount
Gifts certificates sold during the year 1,800,000 Cash XX
Gift certificates issued relating to sales promotion during the year 200,000 Sales XX
Unearned Rev 200,000
o Unearned Revenue
Particulars Amount
Gift certificates redeemed during the year 1,800,000 Unearned Rev 1.8M
Gift certificate relating to a promo which expired during the year 25,000 Redeemed GC 1.8M

o Unearned Revenue
Particulars Amount
Gift certificates redeemed during the year 1,800,000 Unearned Rev 25,000
Gift certificate relating to a promo which expired during the year 25,000 Gain from foreitedGC 25,000

o Unearned Revenue
Particulars Amount
Gift certificates redeemed during the year (1,800,000)
Gift certificate relating to a promo which expired during the year (25,000)
Bonus
Norris Co. has a contract with its president to pay her a 5% bonus for 2020 and 2021. The
income tax rate is 30% during these two years.
In 2020, income before deductions for the bonus and federal income taxes was P400,000. If
the bonus is based on income before deduction of the bonus but after deduction of income tax,
the bonus is
B=5%(NI-T)
Sales XX B=5%(NI- 30%(NI-B))
COGS XX
B=5%(400,000- 30%(400,000-B))
GP XX
B= 5%(400,000-120,000+ 0.30B)
OPEX XX
B=5%(280,000 + 0.30B
EBIT XX
B=14,000+ 0.015B
T, % XX
1B-0.015B=14,000
NI XX
0.985B= 14,000
B=14,213.20
Bonus
Norris Co. has a contract with its president to pay her a 5% bonus for 2020 and 2021. The
income tax rate is 30% during these two years. In 2021, income before deductions for the
bonus and income taxes was P600,000. If the bonus is based on income after deductions for
the bonus and income tax, the bonus is
Bonus=5%(NI - Bonus -Tax)

TAX=30% (NI-B)
B=5%(NI - B -( 30%(NI-B))
B=5% (600,000-B- (30%(600,000-B))
B=5% (600,000-B- (180,000-0.30B)
B=5% (600,000-B-180,000+ 0.30B)
B=5%(420,000-0.70B)
B=21,000 - 0.035B
B + 0.035B=21,000
1.035B=21,000
B=20,290.
Bonus
Univ Co. has an agreement with the sales manager that she is to receive a
bonus of 5% of net income after deduction of the bonus and income taxes.
Company income before deduction of the bonus and income taxes is P250,000.
Income taxes are 30% and the bonus is deductible for taxes. Show your
calculation of the amount of the bonus.
B=5%(NI-B-T)
T= 30% (NI-B)
B=5%(NI- B-30%(NI-B))
B=5%(250,000-B-(30%(250,000-B))
B=5%(250,000-B-(75,000-0.30B)
B=5%(250,000-B-75,000+0.30B
B=5%(175,000-0.70B)
B=8,750- 0.035B
1.035B=8,750
B=8,454
Deposits and Advances
Balance of Deposits for Returnable Containers-1/1/20 250,000

Deposits received for containers of products sold in 2020 800,000
Deposits refunded during 2020 upon return of containers 720,000
Deposits forfeited(containers not returned within prescribed period) 60,000
Cost of Containers not returned within precribed period 55,000
Accumulated depreciation of conatiners not returned 15,000
Balance of Deposits for Returnable Containers-1/1/20 250,000

Deposits received for containers of products sold in 2020 800,000
Deposits refunded during 2020 upon return of containers 720,000
Cash 800,000
Customer Deposits on returnable containers 800,000
Deposits received on returnable containers

Cash 800,000
Refund on returnable containers returned

Deposits forfeited(containers not returned within prescribed period) 60,000

Cost of Containers not returned within precribed period 55,000
Accumulated depreciation of conatiners not returned 15,000

Accumulated depreciation 15,000 COST 55,000
Returnable Containers 55,000 AD (15,000)
Gain on sale of containers 20,000 CV 40,000
Unreturned containers within prescribed period considered sold
DEPOSITS 60,000
Balance of Deposits for Returnable Containers-1/1/20 P250,000

Deposits received for containers of products sold in 2020 +800,000
Deposits refunded during 2020 upon return of containers -720,000
Deposits forfeited(containers not returned within prescribed period) - 60,000
Balance of Deposits for Returnable Containers-12/31/20 P 270,000
Payroll and Payroll Deductions
Salaries expense 5,000,000

SSS Payable 200,000
Pag-ibig Payable 250,000
Philhealth Payable 300,000
Withholding tax payable 150,000
Accrued Payroll 4,100,000
Accrued Payroll 4,100,000

Cash 4,100,000
Employee Benefits 1,500,000

SSS Payable 400,000
Payroll and Payroll Deductions
SSS Payable 200,000

Withholding tax payable 150,000
Cash 900,000
To record remittance of employee mandatory deductions to the government
SSS Payable 400,000

Cash 1,500,000
To record remittance of employer’s share in the mandatory contributions
Problem 5-1
(66,000*98%) +1400
72,000*98%
Problem 5-1
72,000*97%
72,000*98%
72,000*1%
Problem 5-2
Unadjusted balance P1,000,000

Payment to creditors ( 350,000)
Purchase of Merchandise on accountnet 147,000
Purchase of merchandise on account-NYC 120,000
Debit balance in AP (in fact your rec) 80,000
Total P997,000
Problem 5-3
Unadjusted balance P1,500,000

Goods purchase FOB Shipping point 240,000
Goods returned, credit memo ( 80,000)
Total P1,660,000
CONCEPT Connection:
On December 31, 2020, the bookkeeper of Univ Company gave the following information.
Notes payable arising from purchases of goods,P472,000; arising from loans from banks P200,000
on which trading security was valued at P280,000 have beed pledged as security; arising from long
term avances by officers P250,000
Employees’ income tax payable, P9,600
Advances received from customes on purchase orders, P64,000
Accounts payabale arising from purchase of goods, P380,000
Customers accounts with credit balances arising fromm sales returns, P26,000
Shares dividends payable, P240,000
First mortgage serial bonds, P1,500,000 payable on semi annual installemnts of P50,000 due april 1
and October 1
Cash overdraft with Commercial Bank P50,000
Estimated damages to be paid as a result of unsatisfactory performance of a contract P48,000
Estimated expenses on meeting a guarantee for service requirement on merchandise sold, P48,000
Accrued interest on bonds payable P57,500
CURRENT LIABILITIES
Notes payable arising from purchases of goods,P472,000;
arising from loans from banks P200,000 on which trading
security was valued at P280,000 have beed pledged as security;
arising from long term avances by officers P250,000
Employees’ income tax payable, P9,600
Advances received from customes on purchase orders, P64,000
Accounts payabale arising from purchase of goods, P380,000

Customers accounts with credit balances arising fromm sales
returns, P26,000
Shares dividends payable, P240,000
First mortgage serial bonds, P1,500,000 payable on semi
annual installemnts of P50,000 due april 1 and October 1
Cash overdraft with Commercial Bank P50,000

Estimated damages to be paid as a result of unsatisfactory
performance of a contract P48,000
Estimated expenses on meeting a guarantee for service
requirement on merchandise sold, P48,000
Accrued interest on bonds payable P57,500
END

LIABILITIES

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LIABILITIES

a.present obligation of the entity

A constructive obligation is an obligation that derives from an entity’s actions where:

C.Outflow of Economic Benefits

A liability is recognized in the financial statements when

a.the outflow of economic resources is probable AND

DEC 31, 2020 DEC 31, 2021

DEC 31, 2020 DEC 31, 2021

DEC 31, 2020 DEC 31, 2021 JUN 30, 2022

DEC 31, 2020

I CANNOT DEFER PAYMENT

DEC 31, 2020 DEC 31, 2021 JUL 1, 2022

DEC 31, 2020 DEC 31, 2021 JUL 1, 2022

DEC 31, 2020 DEC 31, 2021 JUL 1, 2022

DEC 31, 2020 DEC 31, 2021 JUN 30, 2022

DEC 31, 2020 DEC 31, 2021 JUN 30, 2022

DEC 31, 2020 DEC 31, 2021

DEC 31, 2020 DEC 31, 2021

DEC 31, 2020 DEC 31, 2021

DEC 31, 2020 DEC 31, 2021

PROBABLE AND MEASURABLE

Assume that on Nov 2, 2020, ABC Corporation purchased merchandise

GROSS, PERIODIC METHOD NET, PERIODIC METHOD

Accounts Payable 202,000 Accounts Payable 196,000

Obligations involving uncertainties are either provisions or contingent liabilities.

Obligations involving uncertainties are either provisions or contingent liabilities.

Obligations involving uncertainties are either provisions or contingent liabilities.

PROVISIONS CONTINGENT LIABILITIES

Meets the recognition criteria of Present obligation that is not

Measurement of Provisions (and other factors to be considered in measuring

2.Large Population of Items

6.The following factors shall not be considered in measuring provisions

On September 2020, Howell filed a lawsuit against Blue

Must there be a provision? Not necessary. Disclose only a contingent liability.

ABC Company operates in a city where there is no

Environmental Clean-up expense 2,000,000

As a result of an uninsured accident during 2020, personal

Loss from Accident 2,200,000

Loss from damages 20,000,000

• Premiums, Warranty, Customer Loyalty, Bonus, Accrued

Accrued expense= LIABILITY (Dr. Exp, Cr. Liab)

qPremiums distributed to customers shall be treated as expense (net of any cash

PREMIUM PREMIUM PREMIUM

The premium expense for 2019/2020 is _______

The premium liability for 2019/2020 is _______

Estimated Premium Liability P30,000

Coupons redeemed 150,000

Estimated Premium Liability P63,750

The premium (asset) for 2019/2020 is _______

Premium (asset) at P3 Php 9,000 or 3,000 units

Estimated coupons to be 840,000 1,008,000

2020 BALANCE SHEET

Estimated coupons to be redeemed (80%) 840,000

Estimated remaining coupons to be redeemed 63,000

Warranty Expense 720,000 Warranty Liability 2020: P550,000

Estimated Warranty Liability 170,0000 Warranty Expense 170,000

NORMAL 500x25%= 125 cars x P10,000=P1,250,000 Warranty Expense 3,500,000

Estimated Warranty Liability xxx

How much is the warranty expense in 2020/2021? 300,000

Warranty 2020 Warranty 2021

q SUBSEQUENT RECOGNITION OF REVENUE depends on who provides the rewards:

Entry at the point of sale

Liability for Customer Loyalty 60,000