LIABILITIES

Liabilities – present obligation to transfer economic resources as a result of past events

Elements:
1. Present obligation – no choice but to settle/pay; even though counterparty and amount are not known,
liability is still recognized
2. Economic resources – needs to pay cash, non-cash assets/services, exchange under unfavorable terms,
conditional obligations
3. Past events – economic benefits received; or the entity takes an action

ACCOUNTS PAYABLE
- Default liability from unpaid purchases of goods or services
Accounts Payable
Payments to credit purchases Beginning balance
Purchase discounts Credit purchases
Purchase returns – arise from credit memos Dishonored notes payable
Purchase allowances – arise from credit memos
Notes payable issued
Ending balance
Adjustments to be made in Accounts Payable
1. Debit balances in suppliers’ accounts – do not net with credit balances
- Recorded as advances to suppliers (asset)
Advances to suppliers xx
Accounts payable xx
2. Unreleased, stale and post-dated checks prepared by the entity
- Assumption: Once a check has been prepared, the following entry will be made:
Accounts payable xx
Cash xx
Adjusting entry:
Cash xx
Accounts payable xx
3. Pre-mature or late recording of suppliers’ invoice
- Assumption: no invoice = no AP; with invoice = record AP
- FOB shipping point, an invoice was received after reporting date. If before reporting date = no issue.
Correcting entry:
Purchases xx
Accounts payable xx
- FOB Destination, an invoice was received before reporting date. If after reporting date = no issue
Correcting entry:
Accounts payable xx
Purchases xx

NOTES PAYABLE
- Perspective of the maker
1. Interest bearing where stated rate = market rate
2. Interest bearing where stated rate =/= market rate
3. Non-interest bearing
Interest bearing SR = MR Interest bearing SR =/= MR Non-interest bearing
Initial recognition Face value PV of cash flows: PV of cash flows:
PV of single payment – PV of single payment -
principal and payment on maturity or
PV of ordinary annuity – PV of ordinary annuity –
interest payment installment payments
Interest expense Face amount x stated rate Beginning CA/PV x MR as of Beginning CA/PV x MR as of
 date of issue date of issue
Subsequent measurement Based on face amount Based on amortization Based on amortization

PROVISIONS AND CONTINGENT LIABILITIES

Provisions
- Liability with uncertain timing or amount
- Recognized as a liability, provided all of the following will be met:
a. Present obligation as a result of past events
b. It is probable that there is an outflow of economic events and measurable
Probable - > 50%
c. Reliable estimate can be made on the amount of provision
Contingent Liabilities
- Possible obligation
- Disclosed in the notes only
a. Probable but not measurable
b. Possible (<=50%) and measurable

Present obligation as a result of past events – obligating events; trigger in incurring liabilities; no choice but to settle the
liability
Types of obligation:
1. Legal obligation – arise from contracts, legislation, and other operation of law
2. Constructive obligation – arise from established pattern of past practice, published policies, specific
statements
Probable – more likely than not (>50%), example - liabilities from litigations
Reliable estimate can be made
- Generally, provision should be recognized in the best estimate by the management:
a. Amount expected to be paid to settle the obligation or
b. Amount expected to be paid to transfer to third party
- If the effect of time value of money is material (>12 months), discount the best estimate to settle the obligation
– pre tax rate (present value)
Specific scenarios:
a. Expected value = summation of probability (%) x amounts
b. Midpoint of range = (upper limit + lower limit)/2
c. Events after the reporting period
d. Future events (assets retirement obligation)
*Generally, do not consider the offer of the plaintiff about out-of-court settlements in measuring the liability.
Initial recognition
Loss on Provision – P/L xx
Provision Liability xx
Or
Natural resource asset/ROU asset/PPE xx
Provision liability xx
Subsequent measurement
- Generally, unchanged carrying amount
- May change in:
a. Partial or full settlement
b. Measured in PV, the accretion of interest
Interest Expense xx
Provision liability xx
c. Change in estimate in amounts – prospective; changes will be recognized, generally, in P/L during the period
of change; increase in provision = loss during the period of change; decrease in provision = gain during the
period of change
d. Change in estimated likelihood – prospective; same with (c) above
Application of specific circumstances
a. Use of provisions – will be used for the purpose they were initially recognized
b. Future operating losses – do not recognize provision
c. Onerous contracts – contracts on which unavoidable costs to fulfill it exceed the benefits expected from it
Measurement of provision – lower between cost of fulfilling (status quo) and penalties and other fees
d. Restructuring – a program planned and controlled by management which either:
i. Changes in the scope of business; or
ii. Change in the manner the business is conducted
Examples: closure or sale of line of business, closure or relocation of one or more geographical locations;
changes in the management (e.g. layer of management); fundamental changes in the business and the manner it
is conducted
- There will be constructive obligation, provided:
i. There is a detailed plane on restructuring; and
ii. Informing of the affected employees
- Inclusions in provision for restructuring (liability):
i. Necessarily entailed by the restructuring
Components: payments to laid-off employees, costs of closing the facilities
ii. Not connected with the entity’s continuing activities
- Exclusions in provision for restructuring:
i. Retraining and relocation of staff
ii. Marketing
iii. Investments in new facilities
iv. Future operating losses

CONTINGENT ASSET – possible asset

- Plaintiff = entity
- Amount from insurer
Asset Liability
Virtually certain Recognize Recognize
Probable Disclose only Recognize
Possible - Disclose only
Remote - -

PREMIUMS
- Marketing program (gimmick)
- Inclusion of coupons (or its equivalent)
- Free items for every pre-determined number of coupons
- Cash maybe collected from customers
Journal entries:
Premiums Inventory xx
Cash xx

Even no actual redemption:

Premium expense xx
Premium liability xx

Total coupons distributed xx

Multiply by % expected to be presented xx
Coupons expected to be presented xx
Divide by number of coupons needed for each item of premium xx
Total units of premium items expected to be redeemed xx
Multiply by *liability/expense per unit xx
Premium expense xx

Cost per unit of premium xx

Add handling costs (e.g. shipping) xx
Less amounts to be received from customers (if any) xx
*Liability/expense per unit of premium xx

There is actual redemption:

Premium liability xx
Cash (amounts to be received from customers, if any) xx
Premiums inventory xx
Cash (handling costs, if any) xx

Liability/expense per unit of premium xx

Multiply by number of units redeemed xx
Premium liability xx

WARRANTIES
- A contract in which the manufacturer binds itself to make good specified defects, free of charge, which
happened during a specified period
Assurance-type Service-type
General description Gives assurance that the products Provides service in addition to
meets certain conditions as to quality assurance that the product meets the
conditions
Does the customer have the option No Yes
to purchase warranty separately?
Legally required? Yes No
Length of coverage Short-term Longer term
Accounting standard applicable PAS 37 PFRS 15

Assurance-type warranty
a. Recognition of expense and liability during the period of sale, regardless of when the costs are expected to be
incurred
Warranty expense xx
Warranty liability xx
b. Measurement will be using the concepts in measuring provision.
1. Based on cost per unit (warranty expense = total sold units x % expected defect x average warranty
cost/unit)
2. Based on revenue (warranty expense = total revenue x % expected defect)
3. If replacement: Cost of replacement unit xx
Less NRV of defective unit xx
“Net Loss” shouldered by entity (warranty cost) xx
Add handling costs shouldered by entity xx
Warranty cost per unit xx
Warranty liability xx
Inventory-defective xx
Inventory-good xx
Cash (if any) xx

Service-type warranty
a. Portion of transaction price should be allocated to deferred income
Cash xx
Sales xx
 Unearned income-warranty xx
b. Normally, recognize income from warranty on straight-line basis
Unearned income-warranty xx
Income from warranty xx
c. Warranty costs are expensed when incurred
Warranty expense xx
Cash xx