Warranty Payable

Ending Beginning
Actual warranty paid Warranty expense (estimated)

*Warranty expense = estimaated warranty cost, normally a percentage of sales

If multiple percentage, add the percentages.

Premium Liability
Ending Beginning
Actual premium redeemed Premium expense

*Premiumm expense = estimated premium redemption, based on estimated number of pre

Unearned revenue - Gift Certificate

Ending Beginning
GC redeemed (revenue earned) GC sold
GC cancelled/expired (Revenue earned)

*GC revenue earned = GC redeemed for the year (may be pertaining to prior period an curre
*Estimated GC that will be cancelled = Percentage of GC that will not be redeemed at all
PROBLEM
In Y1, ABC customers purchased P25,000 gift cards, of which P20,500 were redeemed in Y1 and P3,000 were redeemed du
It is estimated that P1,500 of gift cards sold in Y1 will remain unsold as of the end of Y2 and ABC determines
that this amount will never be redeemed based on historical experience.
During Y2, ABC further sold P32,000 of gift cards, of which P26,000 were redeemed in Y2 and P6,000 remain unused
but may be used by customer in Y3.
Determine the following: Y1
Revenue from GC earned in Y1 and Y2 20,500.00
Unearned revenue from GC, in Y1 and Y2 4,500.00

Unearned revenue - Gift Certificate - Y1

End 4,500.00 -
Redeemed 20,500.00 25,000.00
25,000.00 25,000.00

Unearned revenue - Gift Certificate - Y2

End 6,000.00 4,500.00
Redeemed Y1 3,000.00 32,000.00
Redeemed Y2 26,000.00
Unredeemed 1,500.00
36,500.00 36,500.00
 Unearned Subscription Revenue
Ending Beginning
Subscriptions revenue earned Cash received from subscriptions

*Cash received from subscription = considered as unearned revenue

*Subscription revenue earned = Expired subscription, subscriptions thate have been fulfilled
PROBLEM
Malay Co. sells magazine subscription to its customers.
The balance of advance subscription revenue account on December 31, Year 1 is P650,000.
Cash received from subscribers for Year 2 totaled P1,750,000. Outstanding subscriptions as of December 31, Year 2 expire
During Y3 550,000.00
During Y4 870,000.00
During Y5 450,000.00
Total 1,870,000.00

Determine the advanced subscription revenue in Y2. 1,870,000.00

Determine the subscription revenue in Y2. 530,000.00

Advanced Subscription Revenue Y2

End 1,870,000.00 650,000.00
Earned 530,000.00 1,750,000.00
2,400,000.00 2,400,000.00

Payroll and payroll taxes

Salaries
Payroll deduction/Payroll taxes (Employee's share):
SSS
Pagibig (HDMF)
Philhealth (PHIC)
Withholding tax (BIR)
Employer's share in payroll taxes
SSS/EC
Pagibig
Philhealth

Payroll tax expense = Employer's share

Payroll tax liability = Employee's share and Employer's share
PROBLEM
ABC computed the December 31 payroll of all its employees for the current year to be paid in January 15 as follows:
Gross pay 700,000.00
Less: Deductions (Employee contributions)
SSS 85,000.00
PHIC 20,000.00
HDMF 25,000.00
Taxable net pay 570,000.00
Less: Witholding income tax 105,000.00
Net pay 465,000.00
ABC also shares the same amount of statutory deductions as its employees as required by the government.
Determine the following:
Salaries expense 700,000.00
Salaries payable 465,000.00
Total payroll tax expense 130,000.00
Taotal payroll tax liability 365,000.00

Journal entry for accrued salaries and employees' share

Salaries expense 700,000.00
Salaries payable 465,000.00
Due to SSS 85,000.00
Due to PHIC 20,000.00
Due to HDMF 25,000.00
Due to BIR 105,000.00

Journal entry for employer's contribution

SSS premium expense 85,000.00
PHIC premium expense 20,000.00
HDMF premium expense 25,000.00
Due to SSS 85,000.00
Due to PHIC 20,000.00
Due to HDMF 25,000.00

Bonus (Profit sharing)

Basis: Income before Bonus and tax
1. Income before bonus and tax Bonus
2. Income after bonus but before tax Income after bonus, before tax
3. Income after bonus and tax Income tax
Income after bonus and tax
PROBLEM
Tax rate 25%, bonus 20%
Income before bonus and tax = 1,000,000
1. Bonus is based on income before bonus and tax
1,000,000.00
20%
200,000.00

2. Bonus is based on income after bonus but before tax

Income before Bonus and tax 1,000,000.00
Less: Bonus 166,666.67
Income after bonus, before tax 833,333.33

3. Bonus is based on income after bonus and tax

Using algebra, establish 2 equations for Bonus (B) and Tax (T) as follows:
B = 20% (1,000,000 - B - T) equation 1
To distribute:
B = 200,000 - 0.2B - 0.2T

T = 25% (1,000,000 - B) equation 2

To distribute:
T = 250,000 - 0.25B

Substitute T to B:
B = 200,000 - 0.2B - 0.2T
B = 200,000 - 0.2B - 0.2(250,000 - 0.25B)
B = 200,000 - 0.2B - 50,000 + 0.05B
B = 150,000 - 0.15B
B + 0.15B = 150,000
1.15B = 150,000
B = 150,000/1.15
Bonus = 130,434.78

To double check the calculated bonus:

Income before Bonus and tax 1,000,000.00
Less: Bonus 130,434.78
Income after bonus, before tax 869,565.22
Less: Income tax 217,391.30
Income after bonus and tax 652,173.91
Multiply by: Bonus rate 20%
Bonus 130,434.78

Alternative method, get the equivalent percentages:

Income before Bonus and tax 1,000,000.00
Less: Bonus 130,434.78
Income after bonus, before tax
Less: Income tax
Income after bonus and tax 652,173.91

Income before Bonus and tax xxx

Divide by: Equivalent rate x%
Income after bonus and tax xxx
Multipy by: bonus rate x%
Bonus xxx

Hundred percent 100%

Divide by: After tax rate (100% - 25%) 75%
133.33%
Add: Bonus rate 20%
Equivalent rate 153.33%
tage of sales

stimated number of premium x net premium cost

to prior period an current period GC)

be redeemed at all

,000 were redeemed during Y2.

0 remain unused

Y2
30,500.00
6,000.00

Beg
GC sold

Beg
GC sold
hate have been fulfilled

ember 31, Year 2 expires as follows:

Beg
Cash received

Recognize Expense or payable?

Expense Payable
Yes (Gross pay) Yes (Net pay)

No Yes
No Yes
No Yes
No Yes

Yes Yes
Yes Yes
Yes Yes

ary 15 as follows:
 365,000.00

xxx
xxx
xxx
xxx
xxx

120%
20%
100%
 153.333%
20% 20%
100% 133.333%
25%
75% 100%

1,000,000.00
153.33%
652,173.91
20%
130,434.78
Outstanding notes payable, 10% pa, 12/31/2020. 2,000,000.00
Unpaid interest, 3 months 50,000.00
The company cannot pay the full amount in cash and entered into restructuring agreement with the bank.

Case 1: Asset swap JE - Asset Swap

Equipment given to settle the notes: Notes payable
Cost 3,000,000.00 Accrued interest payable
Fair value 2,100,000.00 Accum. Dep.
Accumulated depreciation 1,100,000.00 Equipment
Gain on debt restructure
*FV of noncash asset given ignored

Case 2: Equity swap

Ordinary shares issued to settle the note JE - Equity Swap
Number of shares 20,000.00 Notes payable
Par value per share 90.00 Accrued interest payable
Market price per share 110.00 Loss on debt restructure
Fair value of notes and unpaid interest 2,100,000.00 Ordinary share capital
a) Use the order of priority Share premium - OS
b) Assume FV of shares not given
c) Assume FV of shares and the notes not given JE - Equity Swap (assume FV of share
Notes payable
Accrued interest payable
Loss on debt restructure
Ordinary share capital
Share premium - OS

JE - Equity Swap (assume FV of share

Notes payable
Accrued interest payable
Ordinary share capital
Share premium - OS
*No gain or loss to be recognized

Case 3: Modification of terms JE - modification of terms w/o substa

Principal will be reduced by 200,000.00 Notes payable
Maturity date of new obligation 12/31/2024 Accrued interest payable
New interest rate, 12% Notes payable -new
PV of 1, 10%, 4 periods 0.6830 Premium on notes payable
PV of ordinary annuity, 10%, 4 periods 3.1699 *No gain or loss to be recognized
Principal 1,800,000.00 0.6830 1,229,400.00 Assume with substantial modificatio
Interest 216,000.00 3.1699 684,698.40 Notes payable
PV of new liability 1,914,098.40 Accrued interest payable
PV of old liability 2,050,000.00 Notes payable -new
Differrence 135,901.60 Gain on debt rstrycture
Percent difference 6.63% Premium on notes payable
Below 10%, no substantial modification
No gain or loss to be recognized
with the bank.

2,000,000.00
ued interest payable 50,000.00
1,100,000.00
3,000,000.00
Gain on debt restructure 150,000.00
of noncash asset given ignored

Equity Swap
2,000,000.00 Total equity component at FV of shares
ued interest payable 50,000.00 2,200,000.00
on debt restructure 150,000.00
Ordinary share capital 1,800,000.00
Share premium - OS 400,000.00

Equity Swap (assume FV of shares not given) Total equity component at FV of liability
2,000,000.00 2,100,000.00
ued interest payable 50,000.00
on debt restructure 50,000.00
Ordinary share capital 1,800,000.00
Share premium - OS 300,000.00

Equity Swap (assume FV of shares and notes not given) Total equity components at CA of liability
2,000,000.00 2,050,000.00
ued interest payable 50,000.00
Ordinary share capital 1,800,000.00
Share premium - OS 250,000.00
gain or loss to be recognized

modification of terms w/o substantial modification

2,000,000.00
ued interest payable 50,000.00
Notes payable -new 1,800,000.00
Premium on notes payable 250,000.00
gain or loss to be recognized
me with substantial modification
2,000,000.00
ued interest payable 50,000.00
Notes payable -new 1,800,000.00
Gain on debt rstrycture 135,901.60
Premium on notes payable 114,098.40
ent at FV of shares

ent at FV of liability

ents at CA of liability
 Particular
Notes payable:
Arising from purchase of goods
Arising from 5 year-bank loans, on which marketable securities
valued at P600,000 have been pledged as security, P400,000 due
on June 30, 2006; P100,000 due on Dec. 31, 2006
Arising from advances by officers, due June 30, 2006
Reserve for general contingencies
Employees’ income tax withheld
Advances received from customers on purchase orders
Containers’ deposit
Accounts payable arising from purchase of goods,
net of debit balances of P30,000
Accounts receivable, net of credit balances P40,000
Cash dividends payable
Stock dividends payable
Dividends in arrears on preferred stock, not yet declared
Convertible bonds, due January 31, 2007
First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year
Overdraft with Allied Bank
Cash in bank balance with PNB
Estimated damages to be paid as a result of unsatisfactory
performance on a contract
Estimated expenses on meeting guarantee for service
requirements on merchandise sold
Estimated premiums payable
Deferred revenue
Accrued interest on bonds payable
Common stock warrants outstanding
Common stock options outstanding
Unused letters of credit
Deficiency VAT assessment being contested
Notes receivable discounted
Other Items:
Lawsuit filed by employee, no merit according to lawyers
Unpaid income tax on 2003 per BIR assessment

Notes payable:
Arising from purchase of goods
Arising from 5 year-bank loans, o P400,000 due
valued at P600,000 have been pledged as security,
 on June 30, 2006; P100,000 due on Dec. 31, 2006
Arising from advances by officers, due June 30, 2006
Employees’ income tax withheld
Advances received from customers on purchase orders
Containers’ deposit
Accounts payable arising from purchase of goods,
net of debit balances of P30,000
Accounts receivable, net of credit balances P40,000
Cash dividends payable
First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year
Overdraft with Allied Bank
Estimated damages to be paid as a result of unsatisfactory
performance on a contract
Estimated expenses on meeting guarantee for service
requirements on merchandise sold
Estimated premiums payable
Deferred revenue
Accrued interest on bonds payable
Unpaid income tax on 2003 per BIR assessment

Total Current Liabilities

Convertible bonds, due January 31, 2007

First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year
Total Noncurrent Liabilities

Total Current Liabilities

Total Noncurrent Liabilities
Total Liabilities
Amount Classification Remarks

304,000 CL Accounts payable with promissory notes(trade accounts)

P400,000 refinanced after reporting date

500,000 CL P100,000 no refinancing made
50,000 CL
400,000 n/a Not to be recognized (has to be specific & probable)
20,000 CL due to BIR
64,000 CL Advances from customers/Customers' deposit/Unearned revenue
50,000 CL Refundable deposits

170,000 CL & CA P30,000 as CA, not to be netted against AP

360,000 CL & CA P40,000 as CL, not to be netted against AR
80,000 CL
100,000 SHE Share dividends distributable
200,000 n/a Not to be recognized unless declared
1,000,000 NCL

2,000,000 CL & NCL P100,000 as CL, two semiannual installments in 2006

90,000 CL Not to netted against account from a different bank
390,000 CA

160,000 CL Estimated expenses (provisions)

120,000 CL Estimated expenses (provisions)

75,000 CL Estimated expenses (provisions)
87,000 CL Unearned revenue, CL if silent
360,000 CL
120,000 SHE Part of share premium or APIC
210,000 SHE Part of share premium or APIC
400,000 CA Office Supplies
500,000 n/a Not yet to be recognized
200,000 n/a As deduction to Notes receivable, disclose only as liability(contingent liability)

200,000.00 n/a Remote, no recognition and disclosure

300,000.00 CL Recognize P200,000 as best estimate of lawyer

304,000
 500,000
50,000
20,000
64,000
50,000

200,000 *Gross AP balance

40,000 *AR credit balance
80,000

100,000 *Two installments in 2006

90,000

160,000

120,000
75,000
87,000
360,000
200,000.00 *Use attorneys best estimate

2,500,000.00 (1)

1,000,000

1,900,000 *Net of first 2 installments

2,900,000.00 (2)

2,500,000.00
2,900,000.00
5,400,000.00 (3)
 rned revenue

ability(contingent liability)