Chapter 1:
LIABILITIES
Characteristics
A. Present obligation
Borrower must be identified or particular
It may be Legal Obligation or Constructive Obligation
B. Past events/transactions
Arises from past transactions/events
Not recognized until it is incurred/acquired
C. Outflow of future economic benefits
To pay cash, to transfer noncash assets or to provide service
After settlement of liabilities, there will be an effect in Asset or in Capital
Classification
A. Current Liabilities
Expect to settle within the operating cycle
Held for the purpose of trading (refinancing/repay/retirement/repurchase)
Due date within 1 year after the reporting period
No unconditional right to defer settlement for at least 1 year after the reporting period (No refinancing arrangement)
Trade and other payables
- Accounts Payable
- Notes Payable
- Accrued interest on notes payable
- Dividends Payable
- Accrued Expenses
Current provisions
Short term borrowing
Current portion of long term debt
Income tax Payable
Warranty Payable
Long term deferred income
Deferred tax Payable
B. Noncurrent Liabilities
Residual definition; liabilities not classified as current
Bonds Payable (noncurrent portion)
Notes Payable (noncurrent portion)
Measurement
Measurement
Liabilities
Initial
Current
Noncurrent: Bonds Payable
Notes Payable (noninterest bearing)
Notes Payable (interest bearing)
Subsequent
Present value/Fair value
Amortized cost
Present value/Fair value
Amortized cost
Face amount
Face amount
A. Initial
Fair Value Transaction Cost (not designated at fair value through P/L)
**Fair Value = Present Value of future cash payment to settle the liability
**PV = discounted amount of future cash outflow using the market/effective interest rate
**Transaction cost = cost directly attributable to the issue of liability
- recognized as expense if initially designated at fair value through P/L
B. Subsequent
B1. Amortized Cost, using effective interest method
**Face Value Present Value/Fair Value = Discount or Premium
B2. Fair Value through Profit or Loss
Covenants included in the borrowing agreement which borrower is restricted for further borrowings, paying dividends and etc.
Chapter 2:
PREMIUM AND WARRANT LIABILITY
Premiums
-
Articles of value such as toys, cash payments, and other goods given to the customers as result of past sales
or promotion activities.
In other words, these are promotional items that can be received for a small fee when redeeming proofs of
purchase that come with or on retail products.
Premiums
xx
Cash
xx
**Entity purchased PREMIUMS**
Premiums Expense
Premiums
xx
xx
**Entity distributed PREMIUMS / Customer redeemed PREMIUMS**
Premiums Expense
Est. Premium Liability
xx
xx
**PREMIUMS not redeemed at the end of accounting period**
Customer Loyalty
-
Designed to reward customers for past purchases and to provide them with incentives to make further
purchases
Entity grants customer award credits or points
Warranty
-
To provide free repair service or replacement during specified period if the products are defective
At the point of sale, LIABLITY IS INCURRED once product sold prove to be defective.
Accrual Approach and Expense as incurred Approach
To record sales
Sales
Cash
xx
xx
To record estimated warranty
Warranty Expense
xx
Warranty Liability
xx
To record actual warranty cost
Cash
xx
Chapter 3:
Warranty Liability
xx
Extended warranty
- Recognized as Unearned Income (Liability account)
- Amortized using Straight Line Method
ACCRUED LIABILITIES AND DEFERRED REVENUE (UNEARNED)
Payroll Taxes
Recognized as current liability until remitted by the entity/employer to the government authorities
Contribution to SSS
Contribution to PHILHEALTH
Contribution to PAGIBIG
Income tax
To record PAYROLL EXPENSES including CONTRIBUTION:
PAYROLL EXPENSES
SSS PAYABLE
PAGIBIG PAYABLE
PHIL PAYABLE
TAX PAYABLE
xx
xx
xx
xx
xx
To record REMITTANCE OF CONTRIBUTION:
TAX PAYABLE
SSS PAYABLE
PAGIBIG PAYABLE
PHILHEALTH PAYABLE
CASH
xx
xx
xx
xx
xx
Value Added Tax
Tax from the sales of tangible assets or certain services
Collected from customers
Remitted to BIR
VAT Output VAT Input = VAT Payable
**VAT Output: VAT collected from customer
**VAT Input: VAT paid from purchases/expenses
Gift Certificates
No expiration date
Can be used in an exchange of merchandise
To record the sales of GC:
CASH
GC PAYABLE
xx
To record the sales paid using GC:
GC PAYABLE
SALES
xx
xx
xx
To record unused/unredeemed GC:
GC PAYABLE
GC Forfeited
Refundable Deposits
xx
xx
Cash or properties received which is subject for return
To record deposits received for borrowed items:
To record refund deposits for returned borrowed items:
To record gain on unreturned items:
Bonuses
Before Bonus/Before Tax
B = Bonus % x Net Income
After Bonus/Before Tax
B = Bonus % x (Net Income B)
Before Bonus/After Tax
B = Bonus % x [Net Income Tax % (Net Income B)]
After Bonus/After Tax
B = Bonus % x [Net Income B Tax % (Net Income B)]