College of Accounting Education

3nd Floor, Dr. Florencio T. Facundo Hall, Business

& Engineering Bldg., Matina, Davao City
Phone No.: (082)300-5456 Local 137

LIABILITIES March 10, 2021

PFRS 9/PFRS 15/PAS 1
“Liabilities are present obligations of an entity arising from past transactions or events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.”

Settlement through:
1. Cash
2. Non-cash
3. Performance of service
4. Amortization (passage of time)
5. Forfeiture/expiration

Conceptual Framework of Financial Reporting

Examples of liabilities
Accounts payable (Suppliers of goods or services)
Amounts withheld from employees (taxes, contribution to SSS, Philhealth, GSIS & PAGIBIG)
Accruals (wages, interest, royalties, taxes, product warranties and profit sharing)
Dividends (except stock dividends) declared but not paid
Deposits and advances from customers and officers
Debt obligations for borrowed funds – notes, mortgages and bonds payable
Bank overdraft
Income tax payable
Unearned revenue

Classification & Measurement (PFRS 9)

Conceptually: all liabilities, *present value amortized cost)

* Amount of cash required to settle the obligation if it were today.

Initial: Fair value – transaction Cost* * Subsequent: a. amortized cost b. Fair Value through profit or loss
**except FVPL

Current Liabilities
Practice: face amount

Noncurrent Liabilities
Bonds/non-interest bearing note payable:
**Present value amortized cost

Interest bearing:
Face amount face amount

Presentation:
Current Liabilities
Trade and other payables
Current provisions
Short-term borrowing
Current portion of long-term debt
Current tax liability
Noncurrent liabilities
Noncurrent portion of Long-term debt
Finance lease liability
Deferred tax liability
Long-term obligation to entity officers
Long-term deferred revenue

Page 1 Competency Appraisal mgsombilon

 College of Accounting Education
3nd Floor, Dr. Florencio T. Facundo Hall, Business
& Engineering Bldg., Matina, Davao City
Phone No.: (082)300-5456 Local 137

Example: (1)
On December 31, 2020, the bookkeeper of Orion Company provided the following information:
Accounts payable, including deposits and advances from
customer of P250,000 1,250,000
Notes payable, including note payable to bank on December
31, 2021 of P500,000 1,500,000
Stock dividend payable 400,000
Credit balances in customer’s accounts 200,000
Serial bonds payable in semiannual installment of P500,000 5,000,000
Accrued interest on bonds payable 150,000
Contested BIR tax assessment - possible obligation 300,000
Unearned rent income 100,000
Accounts receivable with credit balance 200,000 
Compute the total current liabilities on December 31, 2020. ___________
CL:AP 1m; Advances from customers 250t; NP 1m; NP-Bank 500t; Credit bal. in customer’s accounts 20,000; BP-Current
potion 1m; interest payable 150t; URR 100,000; AR w/ credit bal. 200t= 4.4m

NCL: 4m

Example: (2)
J Company provided the following information on December 31, 2020
Notes payable:
Trade 3,000,000
Bank loans 2,000,000
Advances from officers 500,000
Accounts payable – trade 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 of contract 700,000
Accrued liabilities 900,000
Estimated premium liability 300,000
Claim for increase in wages by employees covered in
a pending lawsuit 3,500,000
Contract entered into from the construction of building 5,000,000
Compute the total current liabilities on December 31, 2020__________

CL=3m+2m+500t+4m+300t+1m+100t+800t+600t+700t+900t+300t=14,200,000
NCL=3.8m

Long-term debt falling due within one year:

A liability which is due to be settled w/n 12 mos. after the reporting period is classified as current, even if:
a. The original term was for a period longer than 12 mos.
1/1/20--------------12/31/20-----------------12/31/21-----------------12/31/22(due date)
NCL CL

b. An agreement to refinance or to reschedule payment on a long-term basis is completed after the reporting
period and before the FS are authorized for issue.**

12/31/21-----------3/1/22FS issuance-------3/31/22due date---------------12/31/22---------------3/31/23

CL

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 College of Accounting Education
3nd Floor, Dr. Florencio T. Facundo Hall, Business
& Engineering Bldg., Matina, Davao City
Phone No.: (082)300-5456 Local 137

** Except: noncurrent
C. -refinancing on a long-term basis is completed on or before the end of the reporting period.
------ 12/31/21-----------3/1/22FS issuance-------3/31/22due date---------------12/31/22---------------3/31/23(maturity dt)
NCL

D. -discretion of the entity

-entity has unconditional right to defer settlement of liability for at least 12 months after
the reporting period.
------ 12/31/21-----------3/1/22FS issuance-------3/31/22due date---------------12/31/22---------------3/31/23(maturity dt)
NCL

Example: TOA
Prerev Company had a note payable due on March 1, 2021. On January 31, 2021 before the issuance of the 2020
financial statements, the entity issued long-term bonds payable. Proceeds from the bonds were used to repay the note
when it came due. On December 31, 2020, the entity should classify the note payable as ______.
a. Current liability with separate disclosure of the note refinancing.
b. Current liability with no disclosure required.
c. Noncurrent liability with separate disclosure of the note refinancing.
d. Noncurrent liability with no separate disclosure required.

Example: (1)
Yellow Company reported the following liability balances on December 31,2020:
12% note payable issued on March 1,2019, maturing on March 1,2021 4,000,000 CL
10% note payable issued on October 1,2019, maturing on October 1,2021 1,000,000 NCL

The 2020 financial statements were issued on March 31,2021. On January 31,2021, the entire 4million balance of the
12% note payable was refinanced through issuance of a long-term obligation payable lump sum. Under the loan
agreement for the 10% note payable, the entity has the discretion to refinance the obligation for at least twelve months
after the December 31,2020. On December 31,2020, the note payable classified as current is ______4m

Example: (2)
Brown Corporation has a P3,000,000 note payable due on June 30,2021. On December 31,2020, Brown signed an
agreement to borrow up to P3,000,000 to refinance the note payable on a long-term basis. The financing agreement
called for borrowing not to exceed 90% of the value of the collateral the entity was providing. On December 31,2020, the
value of the collateral was P2,000,000. On December 31,2020, the note payable that should be reported as current
liability is ______ncl

Covenants
- Are often attached to borrowing agreements which represent undertakings by the borrower.
- Restriction Example: Further borrowing, paying dividends, maintaining specified level of working capital..
- Breach of covenants becomes the liability payable on demand (current liability)
Example:
The 10% mortgage note of P3million was issued October 1,2018 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, 2020, the company is three
months behind in paying its required interest payment. What amount of notes payable should be classified as
current on December 31,2020?_________3m

Page 3 Competency Appraisal mgsombilon

 College of Accounting Education
3nd Floor, Dr. Florencio T. Facundo Hall, Business
& Engineering Bldg., Matina, Davao City
Phone No.: (082)300-5456 Local 137

Estimated Liabilities:
1) Premiums – are articles of value such as toys, dishes, silverware, and other goods and in some cases cash
payments, given to customers as result of past sales or sales promotion.
1. When the premiums are purchased:
Premiums xx. CA
Cash xx

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 CL

Example:
Accounting 1a Company manufactures 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.
Data for the premium offer are: 2020 2021
Soap sales 2,500,000 3,125,000
Towel purchases (P100 per towel) 175,000 200,000
Number of towels distributed as premium 1,000 1,800
Number of towels expected to be
distributed in subsequent period 600 800
The corporation incurs a distribution cost of P5 per towel.
2020 2021
Estimated premium liability 51,000
Premium expense(85 x 600) 51,000

Cash 2,500,000 Cash 3,125,000

Sales 2,500,000 Sales 3,215,000
Premiums 175,000 Premium 200,000
Cash (175t/100=1,750) 175,000 Cash(200t/100=2,000) 200,000
Premium expense(80) 80,000 Premium expense(80x 1,800) 144,000
Cash(20) 20,000 Cash(20x 1,800) 36,000
Premiums(100 x 1,000) 100,000 Premiums(100 x 1,800) 180,000
(100-20) 80
Premium expense 5,000 Premium expense 9,000
Cash(5 x 1,000) 5,000 Cash(5 x 1,800) 9,000
Premium expense(85 x 600) 51,000 Premium expense(800 x85) 68,000
Estimated premium liability 51,000 Estimated premium liability 68,000

(100-20+5) 85

Premium=(1,750-1,000=750x100) 75,000 Premium(750+2,000-1,800=950 x100) 95,000

Premium expense(1t+600=1,600 x 85)136,000 Premium expense(1,800-600+800=2,000x85)170,000
Est. premium liability(600 x 85) 51,000 Est. premium liability (800 x 85) 68,000

Page 4 Competency Appraisal mgsombilon

 College of Accounting Education
3nd Floor, Dr. Florencio T. Facundo Hall, Business
& Engineering Bldg., Matina, Davao City
Phone No.: (082)300-5456 Local 137

2) Customer loyalty program – PFRS 15

- Generally designed to reward customers for past purchases and to provide them with incentives to make
further purchase. It is used to build brand loyalty, retain valuable customers and of course, increase sales
volume.
Measurement:
Transaction price : stand-alone selling price(award credits and sales)

Sales xx xx
Pts xx xx
xx Sales

Cash xx
Sales xx
Unearned revenue pts xx

Unearned revenue pts xx

Sales xx

Recognition:
Deferred revenue Revenue
(unearned revenue pts) Sales

Example: (1)
Mega Corporation, a grocery retailer, operates a customer loyalty program. It grants program members loyalty
points when they spend a specified amount on groceries. Program members can redeem the points for further
groceries. The points have no expiry date. The sales during 2019 amounted to P9,000,000 based on stand-alone
selling price. During 2019, the customers earned 10,000 points. But management expects that 80% or 8,000 of
these points will be redeemed. The stand-alone selling price of each loyalty point is estimated at 100. On December
31,2019, 4,000 points have been redeemed in exchange for groceries. In 2020, the management revised its
expectations and now expects that 90% or 9,000 points will be redeemed altogether. During 2020, the entity
redeemed 3,600 points. In 2021, a further 1,400 points are redeemed. Management continues to expect that only
9,000 points will ever be redeemed, meaning, no more points will be redeemed after 2021.

2019
Sales 9,000,000 8,100,000
Pts (10t x 100) 1,000,000 900,000
Total 10,000,000 9,000,000

Cash 9,000,000
Sales 8,100,000
Unearned revenue pts 900,000

Unearned revenue pts 450,000

Sales(4t/8t x 900,000) 450,000

2020
UR-pts(4t+3.6t/9tx900t=760t-450t) 310,000
Sales ` 310,000

2021
UR-pts(4t+3.6t+1.4t=9t/9tx900t-760t) 140,000
Sales 140,000

Page 5 Competency Appraisal mgsombilon

 College of Accounting Education
3nd Floor, Dr. Florencio T. Facundo Hall, Business
& Engineering Bldg., Matina, Davao City
Phone No.: (082)300-5456 Local 137

Example: (2)
Edifice Company operates a customer loyalty program. The entity grants loyalty points for goods purchased. The
loyalty points can be used by the customers in exchange for goods of the entity. The points have no expiry date.
During 2019, the entity issued 50,000 award credits and expects that 80% of these award credits shall be redeemed.
The stand-alone selling price of the expected award credits is reliably measured at P1, 000,000. In 2019, the entity
sold goods to customers for a total consideration of P7, 000,000 based on stand-alone selling price. The award
credits redeemed each year are as follows:
Redeemed Expected to be redeemed
  2019 15,000 80% x 50t= 40t
2020 7,950 85% x 50t= 42,500
2021 2,550 85%
2022 15,000 90%  x50t= 45,000
40,500
Prepare all indicated entries from 2019 to 2022 in connection with the customer loyalty program.

2019
Sales 7m 6,125,000
Pts 1m 875,000
Total 8m 7m

Cash 7,000,000
Sales 6,125,000
UR-pts 875,000

UR-pts(15t/40tx875t) 328,125
Sales 328,125

2020
UR-pts 144,375
Sales 144,375
(15t+7,950/42,500x875t-328,125)

2021
UR-pts 52,500
Sales 52,500
(15t+7,970+2,550/42,500x875t-328,125-144,375)

2022
UR-pts 262,500
Sales(40,500/45tx875t-328,125-144,375-52,500) 262,500

3rd Party:
LMN Corporation, a retailer participates in a customer loyalty program operated by CebuPac. The entity grants
program members one air travel point for every P200 spent with the company. Such points can be redeemed by the
members with CebuPac subject to availability. The entity pays CebuPac P50 per each point. During 2021, LMN sold
goods totaling to 2,000,000 based on stand-alone selling price and granted 5,000 points with the stand-alone selling
price of P100 per point. LMN has fulfilled its obligation by granting the points.

Sales 2,000,000 1,600,000

Pts(5tx100) 500,000 400,000
Total 2,500,000 2,000,000

Cash 2,000,000
Sales 1,600,000
Revenue from pts 400,000

Loyalty program expense 250,000

Cash (5,000 x 50) 250,000
Net revenue pts= 400t-250t=150,000

Page 6 Competency Appraisal mgsombilon

 College of Accounting Education
3nd Floor, Dr. Florencio T. Facundo Hall, Business
& Engineering Bldg., Matina, Davao City
Phone No.: (082)300-5456 Local 137

3) Warranty
- Home appliances are often sold under guarantee or warranty to provide free repair service or replacement
during a specified period if the products are defective.
- At the point of sale, a liability is incurred
2 approaches:
a) Accrual b) Expense as incurred
Warranty expense xx Warranty expense xx
Estimated warranty liability xx Cash xx

Estimated warranty liability xx

Cash xx

Example: (1)
In 2019, Share Company began selling a new calculator that carried a two-year warranty against defects. Share
projected the estimated warranty cost (as a percent sales) as follows:
1st year of warranty4%
2nd year of warranty 10%
Sales and actual warranty repairs were:
2019 2020
Sales 5,000,000 9,000,000
Actual warranty repairs 200,000 560,000
a. expense as incurred
b. accrual approach - What is the estimated warranty liability on 12/31/20?
Accrual Expenses as incurred
2019 2019
Cash 5m Cash 5m
Sales 5m Sales 5m

Warranty expense 700,000 -

Est. Warranty liability 700,000
(5m x14%)

Est. Warranty Liability 200,000 Warranty expense 200,000

Cash 200,000 Cash 200,000

2020 2020
Cash 9,000,000 Cash 9,000,000
Sales 9,000,000 Sales 9,000,000

Warranty expense 1,260,000 -

Est. Warranty liability 1,260,000
(9 x14%)

Est. Warranty liability 560,000 Warranty expense 560,000

Cash 560,000 Cash 560,000

Page 7 Competency Appraisal mgsombilon

 College of Accounting Education
3nd Floor, Dr. Florencio T. Facundo Hall, Business
& Engineering Bldg., Matina, Davao City
Phone No.: (082)300-5456 Local 137

4) Payroll taxes
- Under our law, employer is required to withhold from the salaries of each employee the following:
a. income tax payable
b. Employee’s contribution to the SSS
c. Employee’s contribution for Philhealth
d. Employee’s contribution to the Pag-ibig Fund
- Recognized as current liability until remitted…

Example:
Ian Company reported gross payroll of P600,000 for the month of January. Ian paid the payroll net of the
following deductions:
Income tax 70,000
SSS 10,000
Philhealth 5,000
Pagibig 7,500

Salaries 600,000
Income tax payable 70,000
SSS payable 10,000
Philhealth payable 5,000
Pagibig payable 7,500
Cash 507,500

In addition, Ian recognized its additional contributions for the following in relation to January payroll:
SSS 15,000
Phillhealth 6,000
Pagibig 8,000

Payroll tax expense 29,000

SSS payable 15,000
Philhealth payable 6,000
Pagibig payable 8,000

Income tax payable 70,000

SSS payable 25,000
Philhealth payable 11,000
Pagibig payable 15,500
Cash 121,500= Payroll tax liability

5) VAT
- Under NIRC, an entity is required to collect VAT from customers on sales of tangible personal property and certain
services.

Example:
During the month of February, Star Company sold goods to customers on account for P560,000 including value
added taxes. In the same month, Star purchased goods on account from suppliers for P224,000 including value
added taxes. The following month, Star paid its net liability to BIR.

February
Accounts receivable 560,000
Sales(560t/1.12) 500,000
Output vat 60,000

Purchases(224t/1.12) 200,000
Input vat 24,000
Accounts payable 224,000

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 College of Accounting Education
3nd Floor, Dr. Florencio T. Facundo Hall, Business
& Engineering Bldg., Matina, Davao City
Phone No.: (082)300-5456 Local 137

Output vat 60,000

Input vat 24,000
Vat payable 36,000

6) Gift Certificates Payable

1. When the gift certificates are sold:
Cash xx
Gift certificates payable xx
2. When the gift certificates are redeemed:
Gift certificates payable xx
Sales xx
3. When the gift certificates are not redeemed:
Gift certificates payable xx
Forfeited gift certificates xx

Example:
SM Department Store sells gift certificates redeemable only when merchandise is purchased. These gift certificates
have an expiration date of two years after issuance date. Upon redemption or expiration, SM recognizes the
unearned revenue as realized. Information for 2019 is as follows:
Gift certificates payable, January 1 260,000
Gift certificates sold 900,000
Gift certificates redeemed 780,000
Gift certificates unredeemed for a long time 50,000
Cost of goods sold 60%

Gift Certificates Payable

780,000 260,000
50,000 900,000
330,000

Cash 900,000
GCP 900,000

GCP 780,000
Cash 780,000

GCP 50,000
Forfeited gift certificates 50,000

7) Cash Rebate Program

-to stimulate sales
Cash rebate is recognized as expense and estimated liability on the date of sale.

XYZ Corporation offered P400 cash rebate on a particular model of Bluetooth Speaker. The customer must present a
rebate coupon enclosed in every package sold plus the official receipt. Past experience indicates that 60% of the
coupons will be redeemed. During 2021, the entity sold 8,000 Bluetooth Speakers and total payments to customers
amounted to P1,450,000.

Rebate expense 1,920,000

Estimated rebate liability 1,920,000
(8,000x60%=4,800x400)

Estimated rebate liability 1,450,000

Cash 1,450,000

Page 9 Competency Appraisal mgsombilon

 College of Accounting Education
3nd Floor, Dr. Florencio T. Facundo Hall, Business
& Engineering Bldg., Matina, Davao City
Phone No.: (082)300-5456 Local 137

8) Cash discount Coupon

-Similar to premium and cash rebate, an expense and estimated liability for the expected cash discount on the date of
sale.

During 2021, ABC Company issued coupons with face amount of P2,000,000 and the total amount paid to retailers
amounted to P600,000. The retailers are reimbursed for the face amount of the coupons plus 12% for handling.
Previous experience indicates that 40% of the coupons will be redeemed.

Cash discount coupon expense 896,000

Estimated coupon liability 896,000
(2m x .40=800t x1.12)

Estimated coupon liability 600,000

Cash 600,000

9) Refundable Deposits
- Consist of cash or property received from customers but which are refundable after compliance with certain
conditions.

Containers’ deposit – current liability

Purchases 8
Containers 2
Cash 10

Cash 13
Sales 10
Container’s deposit 3

Container’s deposit 3
Cash 3
-----------------
Container’s deposit 3
Containers 2
Gain on sale of CD 1 other income

Example:
Coke Company sells its products with reusable, expensive containers. The customer is charged a deposit for each
container delivered and receives a refund for each container returned within two years after the year of delivery.
Information for 2020 is as follows:
Containers held by customers on January 1, 2020 from deliveries in:
2018 75,000
2019 215,000 290,000

Containers delivered in 2020 390,000

Containers returned in 2020 from deliveries in:

2018 45,000-75t=30t
2019 125,000
2020 143,000
313,000

Page 10 Competency Appraisal mgsombilon

 College of Accounting Education
3nd Floor, Dr. Florencio T. Facundo Hall, Business
& Engineering Bldg., Matina, Davao City
Phone No.: (082)300-5456 Local 137

Container’s deposit
313,000 290,000
30,000 390,000
337,000

Cash 390,000
Container’s deposit 390,000

Container’s deposit 313,000

Cash 313,000

Container’s deposit 30,000

Containers xx
Gain on sale of CD xx

10) Deferred Revenue/Unearned Revenue

- Income already received but not yet earned.
Realized within 1 year: current liability
Realized more than 1 year: noncurrent liability

Example:
Green Company sells office equipment service contracts agreeing to service equipment for a two-year period. Cash
receipts from contracts are credited to unearned service contract revenue and service contract costs are charged to
service contract expense as incurred. Revenue from service contracts is recognized as earned over the lives of the
contracts. The following transaction occur in the first year:
Service contract revenue recognized 600,000
Cash receipts from service contracts sold 1,000,000
Service contract cost paid 700,000

unearned service contract revenue

600,000 1,000,000

400,000

Cash 1,000,000
unearned service contract revenue 1,000,000

unearned service contract revenue 600,000

service contract revenue 600,000

service contract costs 700,000

Cash 700,000

11) PAS 37 Provisions, Contingent Liabilities and Contingent Assets

LIABILITY (Timing/amount?)
Certain Uncertain
Both Probable & Measured Either probable or Remote
reliably measured
reliability
“other liabilities” “Provision” Contingent liability -
Ex. Accounts payable, notes Ex. Estimated warranty, Not on face but on No disclosure
payable.. premium.. liability the notes to FS
(disclosure)
PFRS 9: Measurement: FV-TC PAS 37: Reliable estimate:
Page 11 Competency Appraisal mgsombilon
 College of Accounting Education
3nd Floor, Dr. Florencio T. Facundo Hall, Business
& Engineering Bldg., Matina, Davao City
Phone No.: (082)300-5456 Local 137

Continuous range: midpoint

Large population:
“weighting”; expected value

ASSET (Realization of Income?)

Virtually Certain Uncertain
Both Probable & Measured Either probable or Remote
reliably measured
reliability
“other receivable” “Contingent Asset” -
Ex. AR, NR No account -
PFRS 9: Measurement: FV+TC disclosure No disclosures

1. Provision - Liability of uncertain timing or amount.

- Condition: present obligation+ probable + measured reliably

2. Contingent liability – possible obligation depending on whether some uncertain future event occurs, or
- Present obligation but payment is not probable or the amount cannot be measured reliably;
*Disclosed only

-Contingent Liability is remote (no disclosure necessary)

3. Contingent asset - a possible asset that arises from past events, and
- whose existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity.
-only disclosed when it is probable.
-only possible or remote, no disclosure is required.

Some examples of provisions

Circumstance Recognize a provision?

Warranty When an obligating event occurs (sale of product with a warranty and
probable warranty claims will be made)

Land contamination A provision is recognized as contamination occurs for any legal obligations
of clean up, or for constructive obligations if the company's published
policy is to clean up even if there is no legal requirement to do so (past
event is the contamination and public expectation created by the
company's policy)

Offshore oil rig must be removed Recognize a provision for removal costs arising from the construction of the
and sea bed restored the oil rig as it is constructed, and add to the cost of the asset.  Obligations
(Decommissioning or abandoned arising from the production of oil are recognized as the production occurs.
costs)

Court Case When it is probable that the entity would be found liable a provision is
recognized for the best estimate of the damages because there is a present
obligation.

Guarantee A provision is recognized for the best estimate of the guarantee obligation
because there is legal obligation arising from the obligating event which is
the guarantee.

Page 12 Competency Appraisal mgsombilon

 College of Accounting Education
3nd Floor, Dr. Florencio T. Facundo Hall, Business
& Engineering Bldg., Matina, Davao City
Phone No.: (082)300-5456 Local 137

Example: (1)
A Japan-based shipping entity lost an entire shipload of cargo valued at P5million on a voyage to Canada. It is however
covered by an insurance policy. According to the report of the investigator, the amount is collectible, subject to the
deductible clause in the insurance policy. Before year-end, the shipping entity received a letter from the insurance entity
that a check was in the mail for 90% the claim. The international freight forwarding entity that entrusted the shipping
entity with the delivery of the cargo overseas has filed a lawsuit for P5million claiming the value of the cargo that was
lost on high seas, and also consequential damages of P2million resulting from the delay. According to the legal counsel
for the shipping entity, it is probable that the shipping entity would have to pay the P5million. However, it is remote
possibility that it would have to pay the additional P2miilion claimed by the international freight forwarding entity, since
this loss was specifically excluded in the freight forwarding contract.

Example: (2)
Sunrise Company signed as guarantor for P200,000 loan by PNB to Sunset Company, a principal supplier of Sunrise. By
reason of financial difficulties, it is probable that Sunrise Company shall pay the P200,000 loan with only a 60% recovery
anticipated from Sunset Company

Example: (3)
On January 1, 2019, UM Company purchased a mining site that will have to be restored to certain specifications when
the mining production ceases. The cost of the mining site is P8million and the restoration cost is expected to be
P2million. It is estimated that the mine will continue in operation for 10 years. The appropriate rate is 8%. The present
value of 1 at 8% for 10 periods is 0.4632. On December 31, 2028, UM contracted with another entity for the restoration
of the mining site in accordance with specifications at a cost of P1,800,000.
Required:
1. Prepare journal entries in 2019 to record the purchase of the mining site and the recognition of the
decommissioning liability.
2. Prepare journal entry to record the settlement of the decommissioning liability on December 31,2028.

Page 13 Competency Appraisal mgsombilon