CONRADO T. VALIX 50SE F. PERALTA CHRISTIAN ARIS M. VALIXINTERMEDIATE ACCOUNTING Volume Two CONRADO T. VALIX, BSC, LLB Certified Public Accountant and Lawyer President, CPA Review Director and CPA Reviewer CPA Review School of the Philippines CPAR Lifetime Member Integrated Bar of the Philippines JOSE F. PERALTA, BBA, MBA, DBA Certified Public Accountant Former President and CPA Reviewer Philippine School of Business Administration CHRISTIAN ARIS M. VALIX, BSME, BSA Certified Public Accountant Ateneo Management Engineering Graduate Former Faculty Member, Ateneo and San Beda Assistant Review Director and CPA Reviewer CPA Review School of the Philippines CPAR 2022 Revised EditionCopyright 2022 by Conrado T. Valix Jose F. Peralta Christian Aris M. Valix Any copy of this book not bearing the signature of one of the authors on this page is unauthorized and shall be considered as proceeding from an illegal source. C i : Onrrere TV: ALL RIGHTS RESERVED ISBN 978-621-416-131-7 Published & Printed by: GIC-ENTERPRISES & CO., INC. *National Book Development Board Registered 2017 C.M. Recto Avenue, Sampaloc Manila, PhilippinesPREFACE Intermediate Accounting Volume Two is in conformity with the new undergraduate syllabus promulgated by the Commission on Higher Education for the degree of Bachelor of Science in Accountancy. This volume is designed to cover the financial accounting standards relative to the recognition, measurement, statement presentation and disclosure requirements of liabilities and shareholders' equity. . Leases, debt restructure, employee benefits, deferred income tax and share-based compensation are extensively discussed in this book. Moreover, this book is revised to conform with the amended Philippine standards,PIC Interpretations, amended International Accounting Standards, current International Financial Reporting Standards or IFRS and IFRIC Interpretations. The Philippine standards are known as Philippine Accounting Standards or PAS and Philippine Financial Reporting Standards or PFRS. These standards are numbered the same as their counterpart in International Accounting Standards and International Financial Reporting Standards. However, in financial accounting issues where there are no Philippine standards and international accounting standards, the pronouncements of the AICPA Financial Aceounting Standards Board are cited and followed.Discussion of subject matters is based on the following PAS and PFRS: PAS 1 PAS 12 PAS 19 PAS 26 PAS 32 pas 37 PFRS 2 PFRS 7 PFRS 9 PFRS 15 PFRS 16 Presentation of financial statements Income taxes Employee benefits Accounting and reporting by retirement benefit plans Financial instruments — disclosure and presentation Provisions, contingent liabilities and contingent assets Share-based payment Financial instruments —‘disclosures Financial instruments Revenue from Contracts with Customers Leases The following IFRIC Interpretations are also fully covered: IFRIC IFRIC 1 17 IFRIC 19 Changes in existing decommissioning, restoration and similar liabilities’ Distributions of noncash assets to owners Extinguishing financial liabilities with equity instrumentsThe problems and multiple choice questions at the end of each chapter are lifted from the following sources: PHILCPA AICPA IAA ACP PAS PFRS IAS IFRS IFRIC Philippine CPA Licensure Examinations given by the Board of Aocountancy Adapted CPA Examinations given by the American Institute of Certified Public Accountants Adapted problems and questions from various intermediate accounting, textbooks Author constructed problems and questions to exemplify Philippine and international accounting standards Questions based on provisions of Philippine Accounting Standards : Questions based on provisions of Philippine Financial Reporting Standards Questions based on illustrations and application guidance of International Accounting Standards Questions based on illustrations and application guidance of International Financial Reporting Standards Questions based on interpretations and illustrations made by International Financial Reporting Interpretations Committee or “IFRIC VALIX PERALTA VALIX June 2022CONTENTS CHAPTER 1 + LIABILITIES Definition of liabilities Current and noncurrent liabilities Measurement of current liabilities Measurement of noncurrent liabilities Long-term debt falling due within year Refinancing of financial liability Covenants Breach of covenants Bonus computation CHAPTER 2 36 PREMIUM LIABILITY Coupon offer 7 Premiums Free product coupon Discount coupon Rebate coupon Gift certificates Customer loyalty program CHAPTER 3 ' m1 WARRANTY LIABILITY Recognition of warranty provision Accrual approach for warranty Expense as incurred approach for warrantyCHAPTER 4 o PROVISION Contingent asset and liability Definition of provision Recognition and measurement of provision Contingent liability Contingent asset Recognition of decommissioning liability CHAPTER 5 BONDS PAYABLE Definition of bond Issuance of bonds at a premium or discount Initial and subsequent measurement of bonds payable Recording interest on bonds payable Bond retirement prior to maturity date Straight line and bond outstanding method Jue option of measuring bonds payable 137 Fair val CHAPTER 6 EFFECTIVE INTEREST METHOD 188 Nominal interest rate Effective interest rate ; Effective amortization of bond discount and premum Market price of bonds payable CHAPTER 7 235 COMPOUND FINANCIAL INSTRUMENT Definition of financial instrument Compound financial instrument Accounting for compound financial instrument Bonds payable issued with share warrants Convertible bonds payableCHAPTER 8 255 NOTE PAYABLE Initial and subsequent measurement of note payable Note payable issued solely for cash Interest-bearing note payable issued for property Noninterest-bearing note payable issued for property Fair value option of measuring note payable CHAPTER 9 282 DEBT RESTRUCTURE Definition of debt restructure of Asset swap. equity swap and modification of terms Substantial modification of terms Nonsubstantial modification of terms CHAPTER 10 308 LESSEE ACCOUNTING Basic principles Definition of lease Finance lease model — lessee Operating lease model — lessee Measurement of right of use asset Measurement of lease liability Implicit interest rate Incremental borrowing rate CHAPTER 11 356 LESSEE ACCOUNTING Other accounting issues Extension option Variable payments Lease modification — separate lease Lease modification — extension of term Lease modification — increase in scope Lease modification — decrease in scope Lease modification — change in rentalCHAPTER 12 OPERATING LEASE - LESSOR Definition of operating lease Criteria for finance lease ~ lessor Accounting for operating lease — lessor CHAPTER 13 — DIRECT FINANCING LEASE - LESSOR Finance lease classification of lessor Gross investment in the lease Net investment in the lease Accounting for direct financing lease CHAPTER 14 427 SALES TYPE LEASE - LESSOR Gross investment in the lease Net investment in the lease Sales revenue and cost of goods sold Accounting for sales type lease CHAPTER 15 456 SALE AND LEASEBACK Definition of sale and leaseback Sale price at fair value Sale price at above fair value Sale price at below fair value Measurement of lease liability Measurement of right of use asset Gain or loss on right transferredCHAPTER 16 5 486 ACCOUNTING FOR INCOME TAX Accounting income Taxable income Permanent and temporary differences Tax base Deferred tax liability Deferred tax asset Income statement and statement of financial position approach Current tax liability and current tax asset Measurement of deferred tax asset and liability Presentation of deferred tax asset and liability Intraperiod and interperiod tax allocation CHAPTER 17 542 POSTEMPLOYMENT BENEFITS Definition of employee benefits Postemployment benefits Contributory and noncontributory plan Funded and unfunded plan Defined contribution plan Defined benefit plan Accounting for defined contribution plan Accounting for defined benefit plan Postemployment benefits under the law Components of defined benefit cost Actuarial valuation method Current service cost Past service cost Net interest Plan assets Qualifying insurance policy Remeasurement of plan assets Fair value of plan assets Projected benefit obligation Remeasurement of projected benefit obligationCHAPTER 18 - 582 DEFINED BENEFIT PLAN Fair value of plan assets - FVPA Projected benefit obligation - PBO Prepaid/accrued benefit cost Settlement of plan before normal retirement date FVPA more than PBO:— surplus Asset ceiling Remeasurement of effect of asset ceiling Transitional provision of Revised PAS 19 Accounting and reporting by retirement benefit plan CHAPTER 19 623 OTHER EMPLOYEE BENEFITS Short-term employee benefits Other long-term employee benefits Termination benefits CHAPTER 20 AO SHAREHOLDERS' EQUITY Concept of corporation Organization of a corporation Articles of incorporation and by-laws Preincorporation subscription agreement Elements of shareholders' equity Ordinary share capital Preference share capital Accounting for share capital Issuance of share capital for noncash consideration Issuance of share capital for services Delinquent subscription Callable preference shares Redeemable preference shares Convertible preference sharesCHAPTER 21 Ge SHAREHOLDERS! Ki QuIT Treasury sharon, righ alist hts Issue, share split Acquisition, rointuance and retirement of treasury shares Donated shares Assessments on bharcholders Recapitalization Rights issue Preference shares issued with share warrants CHAPTER 22 ue RETAINED EARNINGS Dividends Unappropriated retained earnings Appropriated retained earnings Cash dividend Property dividend Share dividend Liquidating dividend Dividend as an expense CHAPTER 23 Uke RETAINED EARNINGS Appropriation and quasi-reorganization Statement of retained earnings Items directly affecting retained earnings Quasi-reorganization SEC requirements for quasi-reorganizationCHAPTER 24 800 SHARE-BASED COMPENSATION Share options Share-based compensation plan Equity settled share-based compensation Cash settled share-based compensation Share options Measurement of share options Recognition of compensation expense Acceleration of vesting Modification of condition for share options Subsidiary employees granted rights to the equity of parent CHAPTER 25 845 SHARE-BASED COMPENSATION Share appreciation right Cash settled share-based payment transaction Share appreciation right Measurement of compensation Recognition of compensation Modification from cash settled to equity settled Cash and share alternative,CHAPTER 1 LIABILITIES TECHNICAL KNOWLEDGE To understand the concept of liabilities. To define current and noncurrent liabilities. To know the measurement of current and noncurrent liabilities. To explain the treatment of long-term debt falling due within one year. To explain the treatment of breach of covenants attached to a long-term debt. To describe formulas in computing bonus to officers and employees.LIABILITIES The Revised Conceptual Framework for Financial Reporting provides the following definition of liabilities: Liabilities are present obligations of an entity to transfer an economic resource as a result of past events. Accordingly, the essential characteristics of an accounting liability are: . a. The entity has a present obligation. An obligation is a duty or responsibility that an entity has no practical ability to avoid. The entity liable must be identified but it is not necessary that the payee to whom the obligation 1s owed be identified. b. The obligation is to transfer an economic resource. This is the very heart of the definition of an accounting liability. The economic resource is the asset that represents a right with a potential to produce economic benefit. Specifically, the obligation must be to pay cash, transfer noncash asset or provide service at some future time. c. The liability arises from_a past event. This means that the liability is not recognized until it is incurred. Present obligation An essential characteristic of a liability is that the entity has a present obligation. The present obligation may be a legal obligation or a constructive obligation. bane obligation may be legally enforceable as a consequence of binding contract or statutory requirement. This is normally the case, for I 8 » for example, with accounts for goods and services received a eeaaees coer obligation also gives rise to liability by reason a : imal usiness practice, custom and a desire to maintain good business relations or act in an equitable manner. 2Transfer of an economic resource Without Payment of money, without transfer of noncash asset, without performance of service, there is no accounting liability. A prystallization of the definitive concept of an accounting liability is when an entity declares cash dividend. - In such a case, there is an obligation to pay cash, hence, accounting liability exists. ' But when an entity declares share dividend, there is no accounting liability. The obligation is to issue the entity's own shares. The issuance of the entity’s own shares is not a transfer of noncash asset because the share capital is an equity item. Thus, share dividend payable is classified as part of equity rather than an accounting liability. Past event Another essential characteristic of a liability is that the liability must arise from a past transaction or event. The past event that leads to a legal or constructive obligation is known as the obligating event. . The obligating event creates a present obligation because the entity has no realistic alternative but to settle the obligation created by the event. For example, the acquisition of goods gives rise to accounts payable. The obligating event is the acquisition of goods. The receipt of a bank loan results in an obligation to repay the loan. The obligating event is the cash received from the bank as a consequence of the bank loan. 3Examples of liabilities The more common types of liabilities include the following: a. Accounts payable to suppliers for the purchase of goods b. Amounts withheld from employees for taxes and for contributions to the Social Security System c. Accruals for salaries, interest, rent, taxes, product warranties and profit sharing bonus * d. Dividends payable in cash or noncash asset Deposits and advances from customers {Debt obligations for borrowed funds ~ notes, mortgages and bonds payable Income tax payable . Deferred or unearned revenue g h. Measurement of current liabilities Conceptually, all liabilities are initially measured at present value and subsequently measured at amortized cost. However, in practice, current liabilities or short-term obligations are not discounted anymore but measured and reported at face amount. ‘The reason is that the discount or the difference between the face amount and the present value of the liability is usually not material and therefore ignored. Measurement of noncurrent liabilities Noncurrent liabilities, for example, bonds payable and noninterest-bearing note payable, are initially measured at present value and subsequently measured at amortized cost. If the long-term note payable is interest-bearing, it is initially and subsequently measured at face amount. In this case, the face amount is equal to the present value of the note payable. The amortized cost measurement is taken up ina later chapter in relation to bonds payable.Current liabilities PAS 1, paragraph 69, as amended provides that an entity shall classify a liability as current when: a. The entity expects to settle the liability within the entity's operating cycle. ‘ b. The entity holds the liability primarily for the purpose of trading. The liability is due to be settled within twelve months after the reporting period. d. The entity does not have the right at the end of the reporting period to defer settlement of the iiability for at least twelve months after the reporting period. Trade payables and accruals for employee and other operating costs are part of the working capital used in the entity's normal operating cycle. Such operating items are classified as current liabilities even if settled more than twelve months after the reporting period. When the entity's normal operating cycle is not clearly identifiable, its duration 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. Such other current liabilities include financial liabilities held for trading, bank overdraft, dividends payable, income tax payable, other nontrade payables due within one year and current portion of noncurrent financial liabilities. Financial liabilities held for trading are financial liabilities that are incurred with an intention to repurchase them in the near term. An example is a quoted debt instrument that the issuer may buy back in the near term depending on changes in fair value.Noncurrent liabilities The term noncurrent liabilities is a residual definition. classified as All liabilities not classified as current are nclude: noncurrent liabilities. Noncurrent liabilities # Noncurrent portion of long-term debt Finance lease liability Deferred tax liability Long-term obligation to officers Long-term deferred revenue eaere Long-term debt falling due within one year A liability which is due to be settled within twelve months after the reporting period is classified as current, even if: a. The original term was for a period longer than months. : twelve p. An agreement to refinance or to reschedule payment on a long-term basis is completed after the reporting period and before the financial statements are authorized. for issue. f the refinancing on a long-term basis is completed the end of the reporting period, the refinancing is t and therefore the obligation is classified However, i on or befor an adjusting even! as noncurrent. ‘As amended, if the entity has the right at the end of the reporting period to roll over an obligation for at least twelve months after the reporting period under an existing loan facility, the obligation is classified as noncurrent even if it would otherwise be due within a shorter period. oe eee defer settlement for at least twelve months after the reporting period must exit atthe end of the reporting If the right does not exist at the end i Tio Z z e end of the reporting period, there is no potential to refinance and therefore the ability is classified as current.Covenants Covenants are often attached to borrowing agreements which represent undertakings by the borrower. Covenants are actually restrictions on the borrower such as undertaking further borrowings, paying dividends, maintaining specified level of working capital and so forth. Breach of covenants Under these covenants, if certain conditions relating to the borrower's financial situation are breached, the liability becomes payable on demand. PAS 1, paragraph 74, provides that such a liability is classified as current even 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. This liability is classified as current because at the end of the reporting period, the entity does not have the right to defer settlement for at least twelve months after the end of reporting period. However, the liability is classified as noncurrent if the lendex has agreed on or before the end of the reporting period to provide a grace period ending at least twelve months after the end of reporting period. A grace period is a period within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.Presentation of current liabilities Under Paragraph 54 of PAS 1 inimum, the face of the statement of financial postion shall include the following Hine items for current liabilities: a. Trade and other payables b. Current provisions c. Short-term borrowing d. Current portion of long-term debt e. Current tax liability ade and other payables is a line item for accounts aesled Woes payable, ‘accrued interest on note payable, dividends payable and accrued expenses. No objection can be raised if the trade accounts and notes payable are separately presented. Estimated liabilities a iabilities are obligations which exist at the end of Baimated ab Hc aiigh their amount is not definite. reportin In many cases, the date when the obligation is due is not also definite and in some instances, the exact payee cannot be identified or determined. ite of these circumstances, the existence of the Ba aated liabilities is valid and unquestioned. Deferred revenue e or unearned revenue is income already t yet earned. Deferred revenue may be more than one year after the Deferred revenu received but no ; realizable within one year or in ond of the reporting period. \t the doferred revenue is realizable within one year, it is a wuvvent Hability, Neal examples of current deferred revenue are unearned Witurgat (ncame, unearned rental income and unearned haonplion revenue, it tsvred covenue is realizable in more than one year, vented aw noncurrent liability. Hal wae AW Aaculen of noncurrent deferred revenue are Shaan fe eiiue from long-term service contracts and Wawehold advances. 8Bonus computation Large entities often compensate key officers and employees by way of bonus for superior income realized during the year- The main purpose of this scheme is to motivate officers and employees by directly relating their well-being to the success of the entity. The bonus compensation plan results in liability that must be measured and reported in the financial statements. Four variations of bonus computation 1. Bonus is expressed as a certain percent of income before bonus and before tax. 2. Bonus is expressed as a certain percent of income after bonus but before tax. 3. Bonus is expressed as a certain Percent of income after bonus and after tax. 4. Bonus is expressed as a certain percent of income after tax but before bonus. Tilustration Income before bonus and before tax 4,400,000 Bonus 10% Income tax rate 25% Case 1 - Before bonus and before tax Income before bonus and before tax 4,400,000 Multiply by 10% Bonus 440,000Case 2- After bonus but before tax B = .10 (4,400,000 — B) 440,000 - .10B 440,000 1.10B = 440,000 B = 440,000/1. 10 B = 400,000 Proof Income before bonus and before tax Bonus Income after bonus but before tax Multiply by Bonus 3 After bonus and after tax = .10 (4,400,000 - B-T) -25 (4,400,000 — B) Case B+.10B-~.025B = 440,000 ~ 110,000 i 330,000 330,000 / 1.075 306,977 .25 (4,400,000 — 306,977) 1,023,255 Proof Income before bonus and before tax Bonus Tax Income after bonus and after tax Multiply by we Bonus 10 “10 [4,400,000 —-B - .25 (4,400,000 — B)] .10 (4,400,000 — B — 1,100,000 + :25B) 440,000 - .10B — 110,000 + .025B 4,400,000 (306,977) (1,023,255) 3,069, 76 10% 306,977Case 4 - After tax but before bonus B = .10 (4,400,000 - 'T) T = .25 (4,400,000 ~ It) 3) B = 10 {4,400,000 - 26 (4,400,000 - H} B = .10 (4,400,000 ~ 1,100,000 t+ @Ml B = 440,000 - 110,000 + 0261) 40,000 — 110,000 -975B = 330,000 B 30,000 /.975 38,462 Proof Income before bonus and bef q ts 4,400, 000 Tax (4,400,000 — 338,462 x 28%) (M1818 Income after tax but before bonus, 4,010 Multiply by 1 338 and 308,402 Refundable deposits Refundable deposits consist of customers but which are rofy cash oF Property received from ut e ref certain conditions. ‘ndable after compliance will The best example of a refundable de required for returnable containe Posit is the customer deposit and barrels. 7s like bottles, drums, tanks Illustration A deposit of P10,000 is required fy, returnable containers. The containers Cash . Containers’ deposit Om the customer for cost P8000. 10,000 10,000 The containers’ deposit account is usually classified as current liability. If the customer returns the containers, the deposit is simply refunded. However, if the customer fails to return the Containers, the deposit is considered the sale price of the containers, The excess of the deposit over the cost of the containers is considered as gain. i}OD QUESTIONS i 1. Define liabilities. 2, What are the : liability? essential characteristics of an accounting 3. Explain a present obligation. 4, Explain transfer of an economic resource to settle an i obligation. 5. Explain a past event that leads to a present obligation. 6. Explain the measurement of current and noncurrent liabilities. 7. Define current and noncurrent liabilities. 8. Explain the refinancing of a long-term debt falling due within one year. 9. Explain covenants attached to borrowing agreements. 10.Explain the presentation of current liabilities in the statement of financial position. 11. Explain estimated liabilities. 12. Explain deferred revenue. 13. Explain the classification of deferred revenue. 14. Explain the treatment of refundable deposits. 15. What are the four variations in the computation of bonus? 12PROBLEMS Problem 1-1 (TAA) On December 31, 2022, Glare Company provided the following information; Accounts payable 1,250,000 Notes payable, including note payable to bank due on December 31, 2024 of P500,000 1,600,000 Share dividend payable 400,000 Credit balances in customers’ accounts 200,000 Serial bonds payable in semiannual installment of P500,000 5,000,000 Accrued interest on bonds payable 160,000 Contested BIR tax assessment ~ possible obligation 300,000 Unearned rent income 100,000 Required: Compute total current liabilities on December 31, 2022. Problem 1-2 (IAA) Easy Company provided the following information on December 31, 2022: Notes payable:—trade 3,000,000 Note payable — bank due December 31, 2023 2,000,000 Advances from officers 500,000 Accounts payable 4,000,000 Bank overdraft 300,000 Dividends payable 1,000,000 Withholding tax payable 100,000 Mortgage payable 3,800,000 Income tax payable 800,000 Estimated warranty liability 600,000 Estimated damages payable by reason of breach ofcontract 700,000 Accrued liabilities 900,000 Estimated premium liability 200,000 Contract entered into for the construction of building 5,000,000 Required: Compute total current liabilities on December 31, 2022. 13Problem 1-3 (IAA) On December 31, 2022, Cordillera Company Teported the following liabilities: Note payable 9% 3,000,009 Note payable— 8% tooo Note payable — 10% cone Note payable — 11% The 9% note payable is noncancelable and matures on July 31, 2023. Sufficient cash is expected to be available to retire the note at maturity. ‘The 8% note payable matures on May 31, 2028 but the creditor has the option of calling the note or demanding payment on June 30, 2023. However, the call option is not expected to be exercised given the prevailing market condition. The 10% note payable is due on March 31, 2024. A debt covenant requires Cordillera Company to maintain current assets at least equal to 150% of current liabilities. On December 31, 2022, Cordillera Company is in violation of this covenant. However, Cordillera Company obtained a waiver from the creditor until June 2023 having convinced the creditor that Cordillera Company's‘ normal 2 to 1 ratio of current assets to current liabilities shall be reestablished during the first half of 2023. The 11% note payable matures on June 30, 2023. On January ae 2023 before the issuance of the 2022 financial statements, the note payabe was refinanced on a long-term basis. Required: Explain the appropriate classification of the notes payable as current or noncurrent in the statement of financial position on December 31, 2022, 14Problem 1-4 (AA) Cavalier Com ' al 4 December 31, pany Provided the following information on Accounts payable Notes payable ~ bank Seen Interest payable 150,000 Mortgage note payable ~ 10% nv O00 Bonds payable 000 G60 * Bank notes payable include two separate notes payable to First Bank. A P3,000,000, 10% note issued March 1, 2021, payable on demand. Interest is payable every six months. A one-year, P5,000,000, 11% note issued January 2, 2029, On December 31, 2022, the entity negotiated a written agreement with First Bank to replace the note with a 2-year, P5,000,000, 10% note to be issued January 2, 2023, * The 10% mortgage note was issued October 1, 2021 with a term of 10 years. Terms of the note give the holder the right to demand immediate payment if the entity fails to make a monthly interest payment within 10 days of the date the payment is due. On December 31, 2022, the entity is three months behind in paying the required interest payment. * The bonds payable are 10-year, 8% bonds, issued June 30, 2013. Interest is payable semiannually on June 30 and December 31. Required: Compute total current liabilities on December 31, 2022. 15Problem 1-5 (IAA) Burma Company disclosed the following informatis liabilities at year-end: ion about, Accounts payable, after deducting debit balances in suppliers’ accounts amounting to P100,000 4,000,000 Accrued expenses 1,500,000 Credit balances of customers’ accounts 500,000 Share dividend payable 1,000,000 lowance by Claims for increase in wages and al dinapendinglawsuit — 400,000 employees of the entity, covere Estimated expenses in redeeming prize coupons presented by customers 600,000 What total amount should be reported as current liabilities at year-end? 7,700,000 Problem 1-6 (IAA) Manchester Company provided the following information on December 31, 2022: e taxes withheld from employees 900,000 Cash! balance at First State Bank. 2,500,000 Cash overdraft at Harbor Bank 1,300,000 ‘Accounts receivable with credit balance 750,000 Estimated expenses of meeting warranties on merchandise previously sold 500,000 Estimated damages as a result of unsatisfactory performance on a contract 1,500,000 Accounts payable 3,000,000 Deferred serial bonds, issued at par and bearing interest at 12%, payable in semiannual installment of P500,000 due April 1 and October 1 of each year, the last bond to be paid on October 1, 2028. Interest is also paid semiannually. 5,000,000 2,000,000 Share dividend payable What amount should be reported as current liabilities on December 31, 2022? ’ a. 7,950,000 b. 8,100,000 c. 8,600,000 d. 8,450,000 16Problem 1-7 (AICPA Adapted) Achilles Com et i iability balances on Decnine qrrany,repor ‘ted the following liability 12% note payable iegued on March 1, 2021, maturing (on March 1, 5,000,000 10% note payable issued on October 1, 2021, maturing October 1, 2023 3,000,000 On January 31, 2023, the entire P5,000,000 balance of the 12% note payable was refinanced through issuance of a long-term obligation payable lump sum. q On December 31, 2022, the entity has the right to defer settlement of the 10% note payable for at least twelve months after December 31, 2022. The 2022 financial statements were issued on March 31, 2023. What amount of the notes payable should be classified current on December 31, 2022? as a. 8,000,000 b. 5,000,000 c. 3,000,000 d 0 Problem 1-8 (AICPA Adapted) Eliot Company reported the following liablities on December 31, 2022: able Seo ute payable issued November 1, 2021 1,000,000 aly Ls 10% nate payable issued October 1, 2021 2,000,000 » note pay October 1, 2023 —— 10% debentures payable: next annual principal ,400, debe pt vent of P500,000 due Febrearn 1 Sp03 ae On December 31, 2022, the entity consummated a ncelable agreement with the len: nom note payable on a long-term basis. ene te December 31, 2022, the entity has the right to rol the 10% note payable for at least twelve Se ene end of reporting period. ‘otal amount should be reported a: iabilities wee ecember 31, 2022? S current liabilities a. 2,900,000 b. 3,000,000 ec. 1,500,000 d. 2'500,000 17Problem 1-9 (IFRS) The unadjusted trial 31, 2022 included he Golgate Company at December Accounts payable 1,500,000 Bank note payable 600,000 1,200,000 Mortgage note payable The bank note, issued August 1, 2022, is due on July 31, 2023 with interest at a rate of 10% payable at maturity. Che mortgage note is due on March 1, 2023. Interest at 9% }as been paid up to December 31, 2022. The entity intended on December 31, 2022 to refinance the mortgage note on due ate with a new 10-year mortgage note. On March 1, 2023, the entity paid 250,000 in cash on the principal balance of the mortgage note and refinanced the comaining P950,000. On November 1, 2022, the entity rented a dn tenant for P300,000 per year, payal sayment for the 12 months ended Octobe Feceived as required and was credited to rent r What amount should be reported as total current liabilities on December 31, 2022? a. 3,575,000 b. 3,550,000 c. 3,300,000 d. 3,325,000 Problem 1-10 (AICPA Adapted) On December 31, 2022, Largo Company had a P750,000 not payable outstanding due July 3 3 ity d to refinance the note by Pinte Tae an Because the entity te: i i 250,000 of the note on’ enue eh ous ae In February 2023, the entit: ; ‘ ay y completed a P1,5t offering. The entity will use the cel Ear esata repay the note payable at maturity. March 31, 20: snanci On eared oo 2028, the 2022 financial statements were What amount of the not 7 : sv peont abilities on December able, should be included in 2. 750,000 —_— b. 500,000 c. 250,000 d. 0 portion of its factory ble in advance. The x 31, 2023 was evenue. 18Problem 1-11 (AICPA Adapted) Dean Company had a P2,000,000 note payable due June 30, 2023. On December 31, 2022, the entity signed an agreement to borrow up to P2,000,000 to refinance the note payable on a long-term basis. The financing agreement called for borrowing not to exceed of the value of the collateral the entity was providing. On December 31, 2022, the value of the collateral was P1,500,000. On December 31, 2022, what amount of the note payable should be reported as current liability? a 2,000,000 b. 1,500,000 c. 800,000 d. 500,000 Problem 1-12 (AICPA Adapted) Willem Company reported the following liabilities on December 31, 2022: Accounts payable 750,000 Short-term borrowings 400,000 Mortgage payable. current portion P100,000 3.500.000 Bank loan payable, due June 30, 2023 1.000.000 ‘The P1,000,000 bank loan was refinanced with a 5-year loan on January 15. 2023, with the first principal payment due January 15, 2024. The financial statements were issued February 28, 2023. What total amount should be reported as current liabilities on December 31, 2022? a. 1,150,000 b. 2,250,000 c. 1,250,000 d. 850,000 19Problem 1-13 (AICPA Adapted) Greene ee a sells office equipment service contr: service equipment for a two-year period: acts Cash receipts from contracts are credited to unearned contract revenue. ed to service contract service contracts 1S ontracts. Service contract costs are charg expense as incurred. Revenue from d over the term of the ¢ recognized as earne Unearned contract revenue at January a. eo Cash receipts from service contracts sold 980,006 Service contract revenue recognized . ab Service contract expense mount should be reported as unearn December 31? What 4! ed contract revenue oD a. 460,000 . 480,000 c. 490,000 d. 720,000 Problem 1-14 (AICPA Adapted) Ryan Company sells major household ap: contracts for cash. The service contracts are for a on two-year, or three-year period. pliance service e-year, Cash receipts from contracts are credited to unearned ee eoeee abe unearned contract revenue account alance of P720,000 on D 2 e year-end edjustment ecember 31, 2022 before Service contract costs ai f s re charged as incurred to service contract expense which had a balance of P180,000. Outstanding service contracts i on December 31, 2022 expire di 2023 P150,000, during 2024 P225,000 and during 038 8100,000. What amount should b revenue on December slo as unearned contract a. 540,000 b. 475,000 c. 295,000 d. 245,000 20Problom 1-15 (AICPA Adapted) Dunne Company sella equipment service contracts that cover # tworyear period, Tho salo price of each contract is P600, ” Tho past experionce ia that, of the total pesos spent for penta On sorvice contracts, 40% ix incurred evenly during the frat contract: your and 60% evenly during the second contract Yon, The entity sold 1,000 contracts evenly throughout 2022, L vat amount should be reported as contract revenue for 222 a 120,000 b. 240,000 ©, 300,000 d, 150,000 2.. What amount should be reported as deferred contract revenue on December 31, 2022? a, 540,000 b, 480,000 c. 360,000 a. 300,000 3. What amount should be reported as contract revenue for 2023? a. 180,000 b. 360,000 ce. 300,000 d. 120,000 4, What amount should be reported as contract revenue for 2024? a. 240,000 b. 360,000 c. 180,000 a. 0 21Problem 1-16 (AICPA Adapted) Cobb Company sells appliance service contracts ageeing to repair appliances for two-year period. of the total amount spent for (0% is incurred evenly during d evenly during The Past experience is that, repairs on service contracts, 4! the first contract year and 60% is incurre the second contract year. Receipts from service contract sales are 500,000 for 2022 and P600,000 for 2023. Receipts from contracts are credited to unearned contract revenue. All sales are made evenly during the year. 1. What amount should be reported as contract revenue for 2022? a. 100,000 b. 200,000 c. 250,000 d. 500,000 2. What amount should be reported as unearned contract revenue on December 31, 2022? 300,000 400,000 200,000 150,000 ® fone e for 20232 jount should be reported as contract revenu a. 240,000 b. 360,000 c. 370,000 d. 250,000 Be op 4, What amount should be reported as unearned contract revenue on December 31, 2023? 360,000 470,000 480,000 630,000 ee oe 22Problem 1-17 (AICPA Adapted) Hart Company selly subscri pecializd directory e iptions to a 6 ; that is published semiannually and shipped to subscribers on Apri] 15 and October 15. Subscriptions received after the March 31 and September 30 cut-off dates are held for the next publication. Cash from subscribers is received evenly during the year and is credited to deferred subscription revenue. Deferred subscription revenue — January L 1.500.000 Cash receipts from subscribers during the current year 7 200.000 What amount should be reported as deferred subscription revenue on December 31? a. 1,800,000 b. 8,300,000 ¢. 3,600,000 d. 5,400,000 Problem 1-18 (AICPA Adapted) Weaver Company sells magazine subscriptions for a L-year. 2-year or 3-year period. Cash receipts from subscribers are credited to deferred subscription revenue and the account had a balance of P 1,700,000 on January 1, 2022. The entity provided the following information for the year erided December 31, 2022: Cash receipts from subscribers 2,100,000 Subscription revenue recognized on December 31,2022 1.500.000 On December 31, 2022, what amount should be reported as deferred subscription revenue? a. 1,900,000 b. 2,300,000 c¢. 1,400,000 d. 2,100,000 23Problem 1-19 (AICPA Adapted) Anette Video Company sells 1- and 2-year subscriptions for the video-of-the-month business. nd credited to sales. Subscriptions are collected in advance and « alte An analysis of the recorded sales activity reveale following: 2022 2028 Sales 420,000 500,000 Less cancelations 20,000 _-30,000 Net sales 400,000 470,000 Subscription expirations: 2022 120,000 2023 155,000 130,000 2024 125,000 200,000 2025 140,000 400,000 470,000 1. On December 31, 2023, what amount should be reported as unearned subscription revenue? 495,000 470,000 465,000 340,000- Pe cee What amount should be reported as subscription revenue for 2023? w a. 175,000 b. 305,000 c. 285,000 d. 250,000 24Problem 1.29 (AL CP, ee ‘A Adapted) i Sells products with r e and jive containers, ‘Tj Products with reusable and expensi coftainers. The Customer is charged a deposit for each returned within ea and receives a refund for each container on : ‘WO years after the year of delivery. ‘ontainers aelivericn fas by Customers on January 1, 2022 from 2020 2021 430-000 430,000 580,000 Containers delivered in 2099 780,000 Containers returned in 2022 from deliveries in: 2020 90,000 2o21 250,000 286,000 626,000 What amount should be reported deposits on December 31. 9008 as liability for container a. 494,000 b. 584,000 c. 674,000 d. 734,000 Problem 1-21 (IAA) Diversified Company sells perishable electronic products that are shipped in reusable containers, “ for each container. ts, Customers pay a deposit The deposit is equal to the container cost, Customers receive a refund when the container is returned. During the current year, de; ‘osits collected on containers shipped amounted to P00,500. Deposits are forfeited if containers are not returned in 18 inonthi Containers held by customers at th i hi Containers id ers at the beginning of the year During the current year, an amount of P410,000 was refunded and deposits of P25,000 were forfeited. What amount should be reported as liability for refundable deposit at year-end? a. 595,000 b. 620,000 c. 645,000 d. 290,000 S. 25Problem 1-22 (AICPA Adapted) me Mack Company, reyuited nonrefundable adynves payments ‘al ordeva for machinery constructed to custo! apeuifivations c y conatructed to mer ey provided the following information for the current year Customer alvances — beginning of year 1 Advanves hecetved ‘with orders = Tai0,oog Navantces applied to orders ahipped 1,640.000 Advances applicable to orders caneeled 500,000 What amotut should be reported as current liability for adyantees trom customers at year-end? 1,480,000 a b. La80,000 e 880,000 a 0 Problem 1-28 (AICPA Adapted) Lovie Company offered three paytnent plans on twelve-month CONLNALES, The entity Beaiee the following information ts the three plans and the number of children enrolled in each plan from September t, 2028 through August 31, 2024 contract year: i fs Initial payment Monthly fee Number ol per child per chil children # 60,000 . ® 20,000 8,000 . 5,000 9 a The entity received P990,000 of initial payments on September 1, 2028, and P324,000 of monthly fees during the period September t through December 31, 2023. On December 81, 2023, what amount should be reported as deferred revenue? a. 380,000 b, 438,000 660,000 a. 990,000 26Problem 1-24 (ACP) Nature Company had an a ager a greement to pay the sales manage! bonus of 5% of the entity's earnings. The snoome for the year before bonus and tax was P5,250,000. The income tax rate is 25%. Required: Determine the bonus under each of the following independent assumptions: : : 1. Bonus is a certain percent of the income before bonus and before tax. ; 2, Bonus is a certain percent of income after bonus but before tax. 3. Bonus is a certain percent of income after bonus and after tax. 4. Bonusis certain percent of income after tax but before bonus. Problem 1-25 (AICPA Adapted) Christian Company had a bonus agreement which provided that the general manager shall receive an annual bonus of 10% of the income after bonus and tax. The income tax rate is 25%. The general manager received P300,000 for the current year as bonus. What amount should be reported as income before bonus and tax? a. 4,300,000 b. 4,000,000 c. 3,000,000 d. 3,700,000 Problem 1-26 (AICPA Adapted) After three profitable years, Cairo Company decided to offer a bonus to the branch manager of 25% of income over P5,000,000 earned by the branch during the current year. The income for the branch was P8,000,000 before tax and before bonus for the current year. The bonus was computed on income in excess of P5,000,000 after deducting the bonus but before deducting tax. What amunt should be reported as bonus for the current year? a. 1,250,000 b. 2,000,000 c. 600,000 d. 750,000 27Problem 1-27 Multiple choice (IAA) 1. The most common type of liability is a. One that comes into existence due to a loss contingency. b. One that must be estimated. i c. One that comes into existence due to a gain contingency. d. One to be paid in cash and for which the amount and timing are known. 2. Which is not a characteristic of a liability? a. It represents a transfer of an economic resource. b. It must be payable in cash. : ¢. It arises from present obligation to other entity. d. It results from past transaction or event. 3. Classifying liabilities as either current or noncurrent helps creditors assess a. Profitability b. The relative risk of an entity's liabilities c. The degree of an entity's liabilities d. The amount of an entity's liabilities 4, Short-term obligations are reported as noncurrent if a. The entity has a long-term line of credit. b. The entity has tentative plan to issue long-term bonds payable. The entity has the right at the end of the reporting period to defer settlement of the liability for at least 12 months after the end of the reporting period. d. The entity has the ability to refinance on a long-term basis. 5. Which situation would require that noncurrent liabilities be reported as current? a. The long-term debt is callable by the creditor. b. The creditor has the right to demand payment due to a contractual violation. The long-term debt matures within the upcoming year. Cc. d. All of these require the current classification. ies 286. Which of the following represents a liability? a. b. iC d. The obligation to pay for goods that an entity expects to order from suppliers next year The obligation to provide goods that customers have ordered and paid for during the current year The obligation to pay interest on a five-year note payable that was issued the last day of the year The obligation to distribute an entity's own shares 7. Which does not meet the definition of a liability? @ 2 10. BO p The signing of a an employment contract at fixed salary An obligation to provide goods or services in the future A note payable with no specified maturity date An obligation that is estimated in amount . Which of the following is a characteristic of a current liability but not a noncurrent liability? a. b. c d. Unavoidable obligation. Present obligation to transfer an economic resource. Settlement is expected within the normal operating cycle or within 12 months, whichever is longer. The obligating event has already occurred. Which of the following is not considered a characteristic of a liability? a. b. c. d Present obligation Arises from past event Results in a transfer of economic resource Liquidation is reasonably expected to require use of current assets Which of the following is not an acceptable presentation of current liabilities? a. b. c. Listing current liabilities in the order of maturity Listing current liabilities according to amount Offsetting current liabilities against assets that are to be applied to their liquidation . Showing current liabilities in the order of liquidation preference 29Problem 1-28 Multiple choice (IAA) 1. Among the short-term obligations at year-end are 90-day notes, renewable for another 90-day period. What is the classification of the notes payable? a. Current liabilities b. Deferred credits c. Noncurrent liabilities d. Intermediate debt had 120-day note payable followed the policy of replacing the last three years. 2. At year-end, an entity outstanding. The entity has the note rather than repaying it over 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 a. Noncurrent liability payable due next year. After the end of reporting period and before the issuance of the current year the entity issued long-term bonds financial statements, payable. Proceeds from the bonds were used to repay the note when due. How should the entity classify the note payable at current year-end? 3 Anentity had a note a. Current liability with separate disclosure of the note refinancing b. Current liability with no disclosure required ce. Noncurrent liability with separate disclosure of the note refinancing d. Noncurrent liability with no separate disclosure required 304 An entity had a loan due for repayment in six months’ time, but the entity had the right to defer settlement for two years later. The entity planned to refinance this loan. In which section of the statement of financial Position should this loan be presented? Current liabilities Current assets Noncurrent liabilities Noncurrent assets Be op 5. At year-end, an entity classified a note payable as current liability. Under what condition could the entity reclassify the note payable from current to noncurrent? a. If the entity had the intent and ability to-reclassify the note before the end of reporting period. b. If the entity had executed an agreement to refinance the note before issuance of the financial statements c. If the entity had the intent and ability to reclassify the note before the issuance of the financial statements. d. If the entity had executed an agreement to refinance the note before the end of reporting period. 31Problem 1-29 Multiple choice (AICPA Adapted) 1. The most relevant measurement of liabilities at initial recognition should always reflect a. The expectation of the management b. Historical cost c. The credit standing of the entity d. The single most likely minimum possible amount 2. Which statement best describes the term liability? An excess of equity over current assets Resources to meet financial commitments when due The residual interest in the assets of the entity A present obligation arising from past event Boop 3. What is the relationship between present value and the concept of a liability? Present value is used to measure certain liabilities. Present value is not used to measure liabilities. Present value is used to measure all liabilities. Present value is used to measure noncurrent liabilities Sepp only. - 4. If a long-term debt becomes callable due to the violation of a loan covenant The debt may continue to be classified as noncurrent if the covenant can be renegotiated. The debt should be reclassified as current. Cash must be reserved to pay the debt. Retained earnings must be restricted. a. b. c. d. 5. What is the classification of debt callable by the creditor? a. Noncurrent liability b. Current liability c. Current liability if the creditor intends to call the debt within one year d. Current liability if it is probable that the creditor will call the debt within one year 32Problem 1-30 Multiple choice (IAA) 1 ee + An entity received an advance payment for special order goods that are to be manufactured and delivered within six months. How should the advance payment be reported? Deferred credit Contra asset account Current liability Noncurrent liability poop 2. At year-end, an entity sold refundable merchandise coupons. The entity received a certain amount for each coupon redeemable next year for merchandise with a certain retail price. At year-end, how should the entity report these coupon transactions? Unearned revenue at the merchandise's retail price Unearned revenue at the cash received Revenue at the merchandise's price Revenue at the cash received Boe Advance payments from customers represent a, Liabilities until the product is provided. b. A component of shareholders’ equity. c. Assets until the product is provided. d. Revenue upon receipt of the advance payment. All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period? a. Large increase because unearned revenue becomes revenue when earned. b. Large decrease because unearned revenue implies that less revenue has been earned which reduces future revenue. No effect because unearned revenue is a liability. Large decrease because unearned revenue indicates collection problems that will reduce net revenue in future period. ao 335. How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the statement of financial position before the performance? a. Revenue for the entire proceeds b. c Revenue to the extent of related costs expanded Unearned revenue to the extent of related costs expended d. Unearned revenue for the entire proceeds 6. Magazine subscriptions collected in advance should be treated as perp 7. Under a royalty agreemen shall receive royalties from the ass for four years. The royalties receive A contra account to magazine subscriptions receivable Deferred revenue in the liability section Deferred revenue in the shareholders’ equi Magazine subscription revenue in the income statement in the period collected ity section t with another entity, an entity ignment of a patent d in advance should be reported as revenue a. b. c ad In the period received In the period earned Evenly over the life of the royalty agreement ‘At the date of the royalty agreement 8. Anentity is a retailer of home appliances and offers a service contract on each appliance sold. Collections received for service contracts should be recorded as an increase in Sp. pe Deferred revenue account Sales contracts receivable valuation account Shareholders' equity valuation account Service revenue account 349.An entity solls appliances that include a three-year 10. warranty. Service calla under the warranty are performed by an independent mechanic under a contract with the entity. Based on experience, warranty costs are expected to be incurred for each machine sold. When should the entity recognize the warranty costs? Evenly over the life of the warranty When the service callu are performed When payments are made (o the mechanic . When the machines are sald ao op At the end of the current year, an entity received an advance payment of 60% of the sale price for special order goods to be manufactured and delivered within five months. At the same time, the entity subcontracted for production of the special order goods at a price equal to 40% of the main contract price. What liabilities should be reported in the year-and statement of financial position? a. None b. Deferred revenue equal to 60% of the main contract price and payable to subcontractor equal to 40% of the main contract price c. Deferred revenue equal to 60% of the main contract price and no payable to subcontractor d. No deferred revenue but payable to subcontractor is reported at 40% of the main contract price 35CHAPTER 2 PREMIUM LIABILITY Coupon offer TECHNICAL KNOWLEDGE To know the recognition of a premium liability. To know the recognition of coupons for free product. To know the recognition of coupons for discount. To know the recognition of coupons for rebates. To understand the recognition and measurement of a customer loyalty program. 36PREMIUMS Premiums are articles of value such as toys, dishes, silverware and other goods given to customers as result of past sales OF sales promotion activities. In order to stimulate the sale of their products, entities offer premiums to customers in return for product labels, box tops, wrappers and coupons. Accordingly, when the merchandise in sold, an accounting liability for the future distribution of the premium arises and should be given accounting recognition. 1. When the premiums are purchased: Premiums XX Cash xXx 2. When the premiums are distributed to customers: Premium expense xx Premiums xX 3. At the end of the year, if premiums are still outstanding: Premium expense xx Estimated premium liability xx Illustration An entity manufactures a certain product and sells it at P300 per unit. A soup bow is offered to customers on the return of 5 wrappers plus a remittance of P10. The bow] 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 P50 each 100,000 Wrappers redeemed 4,000 37Journal entries 1. To record the sales: ae 3,000,000 3,000,000 2, To record the purchase of the premiums: Premiums soup bowls 100,000 100,000 3. To record the redemption of 4,000 wrappers: Cash (800 x 10) 8,000 Premium expense (800 x 40) 32, 40,000 Premiums — soup bowls (800 x 50) (4,000 wrappers/5 = 800 bowls distributed) 4. To record the liability for the premiums at the end of the first year: Premium expense ‘ » 16,000 Estimated premium liability 72060 Computation Wrappers to be redeemed (60% x 10,000 wrappers) 6,000 Wrappers redeemed £4,000 Wrappers outstanding 2,000 Premiums to be distributed (2,000/5) 400 Estimated liability (400 x 40) 16,000 Financial statement classification At the end of the year, the accounts related to the premium plan are classified as: Current asset: Premiums - soup bowls 60,000 Current liability: i: Estimated premium liabilit; nares a 16,000 Distribution cost: Premium expense 48,000 38FREE PRODUCT, DISCOUNT AND REBATE In a contract of sale of goods, an entity may offer customer incentives such as free product coupons, discount coupons a rebate coupons with the end in view of stimulating sales. IFRS 15, paragraph 22, provides that at contract inception, an entity shall assess the goods promised in a contract with customer and shall identify as a performance obligation. each promise to transfer to the customer either: a. A distinct good b. A series of distinct goods that are substantially the same and that have the same pattern of transfer to the customer Under paragraph B40, such options to purchase additional goods provide the customer a material right and therefore gives rise to a performance obligation that the seller must satisfy. If the options provide a material right to the customer, the customer in effect pays the seller in advance for future delivery of additional goods. Accordingly, the entity has two performance obligations in these customer options, namely: 1. To deliver or transfer the goods or products sold. 2. To satisfy the customer options for coupons for free product, discount and rebate, Under IFRS 1 5, paragraph 74, an entity is required to allocate the transaction price of goods sold between the products sold and the customer options based on relative stand-alone selling price. The allocated transaction price of the customer options shall be deferred and recognized as income when options are exercised or when the options expire. 39Illustration — Free product coupons An entity sells shelf : There is 7 helf on; P1,500 each. There is a Praneaeton a cai customer bug Spices in 8 singe piece for free’ “tomer receives a coupon for one additional During 2022, the entit f ivalent of Pe Y sold or an equivalent o} St ain? 1}. 80 pion cw eo so) ; is 1,800 multiplied by P1,500 or P2,700,000. It is expected t) i meen Bae | that 75% of the coupons will be redeemed. to the clistomen” entity delivered. 150 free additional pieces The stand-alone selling price of the is equal to the selling price of the free product adjusted by ihe Gepost redemption. Number of free additional product ! 600 Multiply by actual selling price” 1800/3) 1,500 Selling price of free products 900,000 Expected redemption 75% Stand-alone selling price of coupons 675,000 Allocation of transaction price Stand-alone Fraction Allocated Products sold 2,700,000 —_2,700/3,375 2,160,000 Coupons 675,000 675/3,375 __ 540,000 _3,375,000 2,700,000 The fractions are multiplied by the selling price of the products sold of P2,700,000 to get the allocated transaction price for the products and coupons. 1. To record the sales for 2022: Cash 2,700,000 °* Sales 2,160,000 Deferred revenue ~ coupons 540,000 2. To record the delivery of 150 free products in 2023: Deferred revenue - coupons 135,000 Sales 135,000 Stand-alone selling price of 600 coupons 540,000 Coupons redeemed (150/600 x 540,000) 135,000 Deferred revenue - December 31, 2023 4 40Illustration - Discount coupons An entity is a retailer that sells clothing, The entity has launched a promotional campaign wherein customers who buy clot! in with single purchase of at least P10,000 shall be granted "4 M% discount 3 ovPons" on future purchases. The coupons may used for 3 months following immediately the campaign. Purine the campaign, the entity sold clothing. worth i is foupons'g, and "40% discount coupons" to the dagued simultaneously 100 "40! It is expected that 80% of the cou, ill be redeemed and pons will be redeeme the customers using the dy i end an average price of 12500,“ °°wt coupons will sp The stand-alone selling price of the discount coupons is equal to the amount of discount on future purchases adjomten bs the expected redemption, Average price of future purchases 12, 508 Multiply by number of discount coupons oe 100 Brbamputet fare purchaces, 1.350 999 Total discount on future purchases : 500,000 Stand-alone selling price of coupons 400,000 Stand-alone Fraction Allocated Gime TEETH Tage £000,000 - $600,000 The fractions are multiplied by the selling price of products of P7,600,000 to get the allocated transeerie eae the products sold and the discount coupon 1. To record the sales: Cash 7,600,000 *SSales 7,220,000 Deferred revenue ~ coupons 380,000 2, To record the redemption of coupons: Cash 600,000 Deferred revenue — coupons * 380,000 Sales 980,000 ] amount of future purchases 1,250,000 Peasant (40% x 1,250.00) ice 750,000 Ae eeted redemption 80% Cash received from customers 600,000 41Rebate coupons Manw rers sell their products to retailers who ; ‘, sell ufacture! end-customers. End-customers may es coupons for discounts if they purchase the same product from the retailers in the future. i Since the retailers shall receive a lower consideration due to the discount, manufacturers may reimburse them for such discount. In effect, the manufacturer would recognize a refund liability or rebate liability to. the retailers. Such liability is recuce! when the manufacturer reimburses the retailers. ice shall be Under IFRS 15, paragraph 70, the transaction rics or ipa . allocated between the products sold and the rebate on relative stand-alone selling price. ae The stand-alone selling price of the rebate coupon is equal to discount onthe products sold ‘hiking thegoar adjusted by the expected 7mption. Illustration An entity is a manufacturer and sells its product to local retailers. Retailers sell the product to its customers and tor each product purchased by the customers, a ecupon of P50 discount is given and may be used on fwture purchase of the same product. Retailers are reimbursed for the discount by the manufacturer. During the current year, the manufactuyer sold 30,000 products 7 the retailers at P150 each product or P4,500,000. It is expected that 75% of the coupons will be redeemed. At year-end, the manufacturer paid the retailer P200,000 as rembursement. Number of products sold 30,000 Multiply by discount per coupon eee Total amount of discount 1,500,000 Expected redemption eee roe Stand-alone selling price of rebate coupons 1,125,000 Stand-alone Fraction Allocated Products sold (30,000 x 150) 4,500,000 4,300/5,625 3,600,000 Rebate coupons 1,125,000 —1,125/5,625 900,000 5,625, 000 1. To record the sales to retailers: Cash 4,500,000 Sales 3,600,000 Rebate liability 900,060 2. To record the reimbursement to retailers: Rebate liability 200,000 Coat 200,600 42Gift certificates Department stores may sell gift certificates or gift cards to customers in exchange for future delivery of goods. The gift certificates are usually nonrefundable and therefore the seller should consider that some customers might not redeem such certificates, Under IFRS 15, the nonredemption of the gift certificates is referred to as "breakage", The seller shall recognize revenue from breakage based on the value of certificates redeemed in proportion tothe expected value of certificates to be redeemed. Illustration During the current year, an entity sold gift certificates worth P5,000.000 to customers in exchange for future delivery of its product. The gift certificates are nonrefundable and the entity expects that 10% of the certificates will not be redeemed, The entity redeemed gift certificates worth P1,800,000 during the current year. Expected value of breakage (5,000,000 x 10%) 500,000 Expected value of certficates to be redeemed (5,000,000 x 90%) 4,500,000 Value of certificates redeemed 1,800,000 The breakage revenue is equal io the Proportion of value of certificates redeemed to the expected value of certificates to be redeemed multiplied by the expected value of breakage. Breakage revenue (1,800,000 / 4,500,000 x 500,000) 200,000 1, To record the sale of gift certificates: Cash 5,000,000 Deferred revenue ~ gift certificates 5,000,000 2. To record the value of certificates redeemed: Deferred revenue — gift certificates 1,800,000 Sales 1,800,000 3. To record the breakage revenue: Deferred revenue — gift certificates 200,000 Breakage revenue 200,000. 43— ‘ reward customers for past Purchases and to P! Customer loyalty program Many entities iid brand use a customer loyalty program to bu: joyalty, retain their valuable swt e ened of course, increase sales volume. The customer loyalty program is generally designe en With incentives to make further purchases. é the If @ customer buys goods or services, the entity eran*® customer award credits often deseribed as "points". < ee the The entity can redeem the "points" by distributing = customer free or discounted goods or services. ; s. A customer loyalty program operates in a variety of ways specified ores pefore they Customers may be required to accumul jainimum number of award credits or "points can be redeemed, 44 wovide them , —Measurement An entity shall account for the award credits as a separately component of the initial sale transaction. ting of award credits is effectively In othe: ant ° r Words, the & delivery of goods or services. accounted for as a future IFRS 15, h 74, provides that an entity shall allocate the tranpactooa price to each performance obligation identified in a contract on a relative stand-alone selling price basis. In other words, the fair value of the consideration received with respect to the initial sale shall be allocated between the award credits and the sale based on relative stand-alone selling price. The stand-alone selling price is the price at which an entity would sell a promised good or service separately to 4 customer. Recognition The consideration allocated to the award credits is initially recognized as deferred revenue and subsequently recognized as revenue when the award credits are redeemed. The amount of revenue recognized shall be based on the number of award credits that have been redeemed relative to the total number expected to be redeemed. The estimated redemption rate is assessed each period. Changes in the total number expected to be redeemed do not affect the total consideration for the award credits. Instead, the changes in the total number of award credits expected to be redeemed shall be reflected in the amount of revenue recognized in the current and future periods. In other words, the calculation of the revenue to be recognized in any one period is made on a "cumulative basis" in order to reflect the changes in estimate. 45Illustration loyalty stomer An entity, 2 grocery retailer, operates a cu program. jnts when they oi The entity 8rants program members loyalty P pend a specifiog amount on groceries. ts for further ints Program members can redeem, hee Broceries, The Points have no expiry don 0,000 base The sales during 20229 amounted to P9,00! stand-alone Selling price. ints. During 2029, the customers earned 10,000 P But ma: ints of these poin ill be n28ement expects that. 80% or 8,000 will be ed. redeemed. int is loyalty \poin The stand-alone selling price of each estimated at P100. en redeemed in On December 31, 2022, 4,000 points have_be exchange for groceries. expectations and now In 2023, the management revised ts will be redeemed n ©xpects that 90% or 9,000 poi! altogether, joints. In 2024, a During 2023, the entity reldeanied ie further 900 points, are redeem: Jy 9,000 points will at om : Management continues to expect that only 9.07) redeemed : Join ever bé redeemed, meaning, no more P' after 2024. ii ice Allocation of transaction pri 9,000,000 000 Product sales ing price (10,000 x 100) 1,000,000 Points — stand-alone selling p 10,000,000 Total : 000) 8,100,000 100,000 x 9,000, Poa e (oeeg oan 10,000000%9,000000) 900000 oints : 9,000,000 Total transaction price ares 46Ia RZ 2 =r Journal entries To record the initial sale in 2022: Cash 9,000,000 Sales 8,100,000 Unearned revenue — points 900,000. Redemption of 4,000 points in 2022 Unearned revenue —points ° 450,000 Sales 450,000 Revenue to be recognized in 2022 (4,000/8,000 x 900,000) 450,000 Redemption of 4,100 points in 2023 Unearned revenue —poihts 360,000 Sales 360,000 Points redeemed in 2022 4,000 Points redeemed in 2023 : 4,100 Total points redeemed to December 31, 2023 8,100 Cumulative revenue on December 31, 2023 (8,100 / 9,000 x 900,000) Revenue recognized in 2022 Revenue to be recognized in 2023 Redemption of 900 points in 2024 Unearned revenue — points 90,000 Sales 90,000 Points redeemed in 2022 4,000 Points redeemed in 2023 4100 Points redeemed in 2024 ‘900 Total points redeemed to December 31, 2024 9 Cumulative revenue --December 31, 2024 (9,000 / 9,000 x 900,000) 900,000 Cumulative revenue — December 81, 2023 (810,000) Revenue to be recognized in 2024 90,000 47Third party operates loyalty program An entit ‘Y, a i customer loyaie et of electrical goods, participates in a 'Y program operated by an airli es ; airline. ti every PL grants program mem! 900 spent on electrical goods, Pro, eram m, ir]; ‘embers can _ ct redeem the points for travel with the © Subject to availahi: for each p oe availability. The entity pays the airline P60 bers one air travel point for ng the current Consideration totale the entity sold electrical goods for Selling price a; & P4,500,000 based on stand-alone Price of Pio 8ranted 5,000 points with stand-alone selling Per point. Prod Selling price Fraction Allocated TOC peo 4,500,000 45/50 4,050,000 (6,000 x 100) 500,000 5/50 450,000 100 Revenue from points 450,000 Payment to airline (5,000 x 60) (300,000) - Net revenue from points 150,000 The entity has fulfilled its obligation by granting the points. Therefore, revenue from points is recognized when the electrical goods are sold. To record the initial sale Cash 4,500,000 Sales 4,050,000 Revenue from points 450,000 To record payment to airline Loyalty program expense 300,000 Cash 300,000 48QUESTIONS 1. Explain a premium offer. 2. Explain a coupon offer for free product. 3. What is the stand-alone selling price of the coupon for free product? 4, Explain a coupon offer for discount. 5. What is the stand-alone selling price of the discount coupon? 6, Explain a coupon offer for rebate or refund, 7, What is the stand-alone selling price of rebate coupon? 8. Explain gift certificates. 9. Explain breakage and breakage revenue in connection with gift certificates. 0. Explain a customer loyalty program. 49Co; And solq. 4'Pany manufacturers a product that is packaged Wrappers g.,Plate is offered to customers sending in three ‘companied by a remittance of P10. Data wi. Wi ith respect to the premium offer are summarized below 7 2022 2023 8 P 3,600,000 "4,200,000 Nuits of premium, P50 per plate 390,000 580,000 ened of plates distributed as premiums 5,000 9,000 “stimated number of plates to be distributed in subsequent period 2,000 3,000 Distribution cost P20 per plate Required: Prepare journal entries that would be made in 2022 and 2023 to record sales, premium purchases and redemptions, and year-end adjustments. . Problem 2-2 (IAA) Cascade Company manufactures a special laundry soap. A towel is offered as a premium to customers who send in two proof-of-purchase seals from the soap boxes and a remittance of P20. Distribution cost is P5 per towel. Data for the premium offer are. 2022 2023 Soap sales 2,500,000 3,125,000 Towel purchases, P100 per towel 175,000 200,000 1,000 1,800 Number of towels distributed as premium Number of towels expected to be distributed in subsequent period 600 800 Required: 1. Prepare journal entries for 2022 and 2023. / 2. Statement classification of the account balances pertaining to the premium plan. 50Problem 2-8 (IAA) Pop Company sells banana juice. In orter ty promote the dvink the entity inaugurated in the current your a premium plan ealled “Drink-N-Win.” ! For every 10 bottle caps and PS turned i, customers yeueive an attractive ball-pen and become eligible toy a aval Prive ot P5,000 in cash awarded for every 100 tops turned (1) The entity estimated that only 25° of bot tle cape veneliiig Ue hands of customers will be presented for redemption During the current year, the entity sold 400,000 bottles af banana juice at P9 each, purchased 10,000 ball point pens fn 4 total cost of P900,000, and incurred nondeterrable corte vt P30,000 applicable to the premium plan. A total of 8,000 pens have been redeemed and thirty grand prizes have been awarded. Required: Prepare journal entries to record the transactions relating to the premium plan for the current year. Problem 2-4 (AICPA Adapted) Topsy Company started a promotional program. For every 10 box tops returned, customers receive a basketball. The entity estimated that only 60% of the box tops reaching the market will be redeemed. The entity provided the following information for the current year: Units Amount Sales of product 100,000 30,000,000 Basketball purchased 5,500 4,125,000 Basketball distributed 4,000 Required: Prepare journal entries to record the transactions relating to the premium plan for the current year. 51i Mpa tran motion Ww Slls bodshoots for P3,000 por set. Thore t 8) ; d in a single additional" the gut,if a customer baye Steen for one @ websi t Cust; ives ity! ebsite, fill cee free Guctemers should go to the entity's that Boot onlin’ “equest. form, input the coupon number 80% of thane before the expiration date. It is expected Upons will be redeemed. i) 2 22, P3.000, 009" the entity sota 1,000 sets at P3,000 Additional gouging 2023, the entity delivere per set or d 75 free Com Piite the stand-alone price of the coupons. 1 2 Al tl eocate the transaction price to the products sold and 3. Prop owPons, 4. Cop are journal entries for 2022 and 2023. Decur tte the deferred revenue from coupons on Scember 31, 2023, Problem 2-6 (IFRS) qnton Company sells one dozen doughnuts for P500 per box. here is a promotion wherein if a customer buys 3 boxes in a Single transaction, a customer received a coupon for one additional box for free. Customers can redeem coupons at any time following the month of sale of the 3 boxes before the expiration date. It is expected 60% of the customers will redeem the coupons. : During 2022, the entity sold 15,000 boxes at P500 per box or P7,500,000. During 2023, the entity delivered 2,000 free additional boxes to the customers. Required: 1. Compute the stand-alone selling price of the coupons. 2. Allocate the transaction price to the products sold and the coupons. 3. Prepare the journal entry to record the sale of the products and issue of the free product coupons in 2022. 4. Prepare the journal entry to record the delivery of 2,000 free additional boxes in 2023. 52Problem (TRS) Sydney Company ia a retailer that aells clothing, The entity haa launohed a promotional CAMA wherein if cuatamers buy clothing with a single purchawe af ai least UH,000, the ent shall issue "O98 clinooUAt coNpons On AEleGtad [tere for 2 Months following the onmpalgn During the campaian, the entity aold olathing worth P9.240,000 and had iawued 100 "10% discount coupons! 1G 4a expected that 809% af the coupona will be redeemed and euatomers vaing the coupons will buy clothing al an average price of P15,000, Required; 1, Compute the atandalone rolling price of the diacount coupona, 2 Allocate the transaction price (o the producta sold and the discount coupons, 3. Prepare journal entries for the current year including the redemption of the coupona, Problem 2-8 (IFRS) Nia Company is a retailor and haa launched a promotional campaign wherein if customers buy clothing with a aingle purchase of at least P4,000, the entity shall iasue "40 discount coupons" on selected itema, The coupons may be used for 2 months following the campaign. During the campaign, the ontity sold clothing worh P1,860,000 and issued 100 "40% discount coupons", The entity expected that 70% of the coupons will be rodeomod and customers using the coupons buy clothing at an avorage price of P5,000, Required: 1, Compute the stand-alone price of the discount coupons. 2. Allocate the transaction price to the products ald and the discount coupons 3. Prepare the journal entry to recognize the sale of the roducts and issue of discount coupons. 4, Prepare the journal entry to recognize the redemption of coupons, 53Problem 2-9 arRg) Susan Company j a s Y is a - shampoo ani sells is droeet Ghrough aap fectarer of cs tmp conte Fon and for each prectailers Sell the product to its customers of P100 discouprauct purchased by the customer, 8 coupon of the same prog, given and may be used 0” ow? Retailers ay e iscount by the entity reimbursed for the discount by the dil hi when customers redeem their coupons- ae Current year, the entity sold 8,000 products to lers at P550 each product or P4,400,000. The entity At year fat 75% of the coupons issued will be redeemed: reimbursemtnte® entity paid the retailers P260, Required: 1. Compute the stand-alone selling price of the rebate coupons. 2. Allocate the transaction price to products sold and to the rebate coupons. 8. Prepare journal entries for the current year. 4. Compute the rebate liability at year-end. Problem 2-10 (IFRS) Isabel Company is a manufacturer of deodorant and sells its product through local retailers. The deodorant costs P64 to the retailer. Retailers sell the product to its customers and for each product purchased by the customer, a coupon of P20 discount is given and may be used on future purchase of the same product. Retailers are reimbursed for the discount by the manufacturer when customers redeem their coupons. During the current year, the entity sold 10,000 deodorants to local retailers at P64, each or P640,000. The entity expected that 80% of the coupons issued will be redeemed. At year end, the entity paid the retailers P50,000 as reimbursement. Required: 1. Compute the stand-alone selling price of the rebate coupons. | 2. Allocate the transaction price between the products sold and the rebate coupons. 3. Prepare journal entries for the current year. 54Problem gt] (PRA) 500,000 Lo ia Cl Marie Company selln gift certificates worth P2, product. eHNfAMare I exchange for fulure delivery of ite ‘Tho will CorCiFiowtes are nonrefundable by the customer and the #nLilY expecta thal BY of the gill certificates will not be redevmad During (he current year, the entity redeemed gift certifieates worth P1,426,000, Maes Required: J, Compute the expected value of breakage. 2, Compute the expected yalue of gift certificates to be redeemed, 4, Compule the breakage revenue, 4, Prepare the journal entries to recognize the sale of gift certificates and the redemption of gift certificates. Problem 2-12 (IFRS) Shawn Company sells gift certificates worth P8,000,000 to customers in exchange for future delivery of its product. ‘The gift certificates are nonrefundable by the customer and the entity expects that 15% of the gift certificates will not be redeemed, During the current year, the entity redeemed gift certificates worth P2,975,000, Required: 1, Compute the expected value of breakage. 2, Compute the expected value of gift certificates to be redeemed. 3, Compute the breakage revenue. 4, Prepare the journal entries to record the sale of gift certificates and the redemption of gift certificates. 55problem 2-13 IFRS) Arianne Compan; 4 YY, & loyalty program. The S°°°ery retas us points when they We, Chtity gractiiler, operates #6. ipy4 Program membg.. SPend Program men mgroceries, i ers ¢; } Specified amount ni Points have no expine 3 Pedeem the points for groceries: The 7 rei ny date. During 2029 2022, the d stand-alone sellin, Sales amounted to 7,000,000 bases ‘000 Points. But manager ce, During 2022, the entity eranted 10,000 i rer leemed. Th ‘ent expected that only OP each loyalty point was estimated at Place ee On December . de d. 1 81, 2029 ints have been redeemed. In 2023, management tevisel te Expectations and now expedied shat 90% or 9,000 paints wuitbe redeemed altogether. During 2028, the entity redeemed 2,400 points. Required: Prepare journal entries for 2022 and 2023. Problem 2-14 (IFRS) Erika Compan ses * loyalty program. The 7 Y Operates a customer loy: ee entity grants loyalty points for goods purchased. The loy: alty points can be used by the customers in exchange for goods of the entity. The points have no expiry date. During 2022, the entity-issued 50,000 award credits and expected that 80% of these award credits shall be redeemed The stand-alone selling price of the award credits granted is reliably measured at P1,000,000. In 2022, the entity sold goods to customers for a total consideration of P7,000,000 based on stand-alone selling price. The awar' fredits redeemed and the total award credits expected to be redeemed each year are: Redeemed Expected to be redeemed 2022 15,000 ne 2023 7,950 ea 2024 2,550 te 2025 15,000 90% Required Prepare journal entries for 2022, 2023, 2024 and 2025. 56Problem 2-15 (AICPA Adapted) In an effort to increase sales, Mill Company inaugurated a sales promotional campaign on June 30. The entity placed a coupon redeemable for a premium in each package of cereal sold, Each premium cost P20 and five coupons must be presented by a customer to receive a premium. The entity estimated that only 60% of the coupons issued will be redeemed, For the six months ended December 31, the following information is available: Packages of cereal gold 160,000 Premiums purchased 12,000 Coupons redeemed 40,000 1. What amount should be reported as premium expense ? a, 640,000 b. 384,000 c, 240,000 d. 160,000 2. What amount should be reported as estimated premium liability on December 31? a. 169,000 b. 224,000 c, 288,000 d. 384,000 Problem 2-16 (AICPA Adapted) Baker Company sold consumer products that are packaged in boxes. The entity offered an unbreakable glass in exchange for two box tops and P50 as a promotion during the current year. The cost of the glass was P200, The entity estimated at the end the year that it would be probable that 50% of the box tops will be redeemed. The entity sold 100,000 boxes of the product during the current year and 40,000 box tops were redeemed during the year. What amount should be reported as estimated premium liability at year-end? a. 3,000,000 b. 1,500,000 ec. 750,000 d. 500,000 5717 (AICPA Adapted) Problem 9- ring the cu of current year, Day Company g f cake mix under a new sales promotional program. Tics! bakcottained one coupon, which entitled the paid P50 per ing Pan upon remittance of P40. The enti Pan and P5 for handling and shipping. s will be The entity estimated that 80% of the coupons wit be redeemed, even though only 300,000 coup Processed during the current year. expense 1. What amount should be reported as premium for current year? a. 6,000,000 b. 7,500,000 c. 4,500,000 d. 2,000,000 Po 2 What amount should be reported as liability for unredeemed coupons at year-end? 0,000 boxes sold 50! ach a. 1,000,000 b. 1,500,000 c. 3,000,000 d. 5,000,000 Problem 2-18 (IAA) fo x 1 bow] if they Clam Company offers customers a pottery cerea u send in three boxtops from its products and P10. oe entity estimated that 60% of the boxtops will be redeemed. During the current year, the entity sold 675,000 boxes and customers redeemed 330,000 boxtops receiving 110, bowls. The cost of each bowl was P25. 1. What amount should be reported as premium expense for current year? a. 2,025,000 b. 6,075,000 c. 4,550,000 d. 1,650,000 2. What amount should be reported as liability for outstanding premiums at year-end? a. 250,000 b. 375,000 c. 625,000 d. 875,000 58Problem 2-19 (IAA) Charlene Company included one coupon in each b laundry soap sold. ox of A towel was offered as a premium to customers who send in 10 coupons and a remittance of P10. Distribution cost of premium is P5. Experience indicated that only 30% of the coupons will be redeemed. or 2028 Boxes of soap sold , 2,000,000 2,500,000 Number of towels purchased at P50 each 50,000 80,000 Coupons redeemed 400,000 700,000 1. What amount should be reported as premium expense for 2022? I a. 2,500,000 b. 2,400,000 c. 1,800,000 d. 2,700,000 2. What amount should be reported as estimated premium liability on December 31, 2022? a. 1,000,000 b 1,100,000 c. 800,000 d. 900,000 3. What amount should be reported as premium expense for 2023? a. 3,000,000 b. 3,750,000 c. 3,375,000 d. 4,000,000 4, What amount should be reported as estimated i liability on December 31, 2023? ated premium a. 1,000,000 b. 1,250,000 c.. 1,125,000 d. 1,375,000 59