Liabilities

Essential Characteristics of accounting liability:

1) Entity has present obligation
2) Obligation to transfer economic resources
3) Arises from the past transaction

Measurement of current liabilities

All liabilities are initially measured at present value and subsequently measured at amortized cost

Current Liabilities, in practice, are not discounted but measured, recorded and reported at FACE AMOUNT.

Classification as to current or non-current

In general all liabilities that fall due within a year are classified as current.

Liabilities arising from TRADING ACTIVITIES are classified as current if they fall due with in one year or operating cycle
whichever is longer. (Trade Payables, Accruals for employees and other operating cost)

Non-Trade liabilities are classified as current only if they fall due within one year from the reporting date.

Long-term Liability Falling Due Within a Year

In general it is classified as Current Liability

Non-current Liability if:

a) Refinancing on a long-term basis is completed on or before the reporting period.
b) The entity has the discretion to refinance or roll over the liability for at least twelve (12) months after the
reporting period

Covenants
- agreements that represent undertakings by the borrower. This are actually restrictions on the borrower.
- Breach of the Covenant will render the liability to be classified as current liabiltiy. (Liability on demand)
- the liability may still be classified as Non-Current if the lender agreed on or before the end of the
reporting period to provide a GRACE PERIOD ending at least twelve months after that date.

Estimated Liabilities
Obligation which exist at the end of the reporting period although their amount are not definite.
This includes:
Estimated Premium Liability
Estimated Warranty Liability
Gift Certificates Payable
Bonus given to officers and employees
Provisions or contingent liabilities

Miscellaneous topics
Deferred Revenue
Refundable Deposits

Problem 1:
Easy Company provided the following information on December 31, 2021:
 Notes Payable
Trade 3,000,000.00
Bank Loans 2,000,000.00
Advances from Officers 500,000.00
Accounts Payable - Trade 4,000,000.00
Bank Overdraft 300,000.00
Dividends Payable 1,000,000.00
Withholding Taxes Payable 100,000.00
Mortgage Payable 3,800,000.00
Income Taxes Payable 800,000.00
Estimated Warranty Liability 600,000.00
Estimated Damages payable by reason of breach of contract 700,000.00
Accrued Liabilties 900,000.00
Estimated Premium Liabiltiy 200,000.00
Claim for Increase in wages by Employees covered in pending lawsuit 3,500,000.00
Contract entered into for the construction of building 5,000,000.00

Compute for the total current liabilities on December 31, 2021.

Problem 2:
Multinational Company provided the following information on December 31, 2021:
Accounts payable after deducting debit balances in suppliers' accounts of P100,000 500,000.00
Accrued liabilites 50,000.00
8%, 1-year Note Payable - due March 31, 2022, interest will be paid at maturity 1,000,000.00
2-year, 10% Note Payable - due May 1, 2022, interest is paid every May 1 800,000.00
10%, 5-year Bonds Payable - due December 31, 2023 2,000,000.00

On March 1, 2022 before the financial statement were issued, the note payable of P1,000,000 was replaced
by an 18-month note for the same amount.

The entity is considering similar action on the P800,000 note due on May 1, 2022. The financial statement
were issued on March 31, 2022.

Compute for :
1) Total current liabilties
2) Total non- current liabilties

Problem 3:
On December 31, 2021, Country Company reported the following liabilites:
9% Note Payable 3,000,000.00
8% Note Payable 6,000,000.00
10% Note Payable 4,000,000.00
11% Note Payable 5,000,000.00

The 9% note payable is noncancelable and matures on July 1, 2022. Sufficient cash is expected to be available
to retire the note at maturity.
The 8% note payable matures on May 31, 2027 but the creditor has the option of calling the note or
demanding payment on June 30, 2022.

However, the call option is not expected to be exercised given the prevailing market condition.

The 10% note payable is due on March 31, 2023. debt covenant requires Country Company to maintain
current assets at least equal to 150% of current liabilities.

On December 31, 2021, Country Company is in violation of this covenant.

However, Country Company obtained a waiver from the creditor until June 2022 having convinced the
creditor that Country's normal 2 to 1 ratio of current assets to current liabilties will be reestablished during
the first half of 2022.

The 11% note payable matures on June 30 ,2022. On January 31, 2022 before the issuance of the 2021
financial statements, the note payable was refinance on a long-term basis.

Compute for the current liabilities.

Problem 4:
Cavs Corporation provided the following information on December 31, 2021:
Accounts Payable 6,500,000.00
Notes Payable - bank 8,000,000.00
Interest payable 150,000.00
Mortgage Note Payable - 10% 2,000,000.00
Bonds Payable 4,000,000.00

Bank notes payable include two separate notes payable to Far East Bank.
A P3,000,000, 10% note issued on March 1, 2020, payable on demand. Interest is payable every six
months.
A 3-year, P5,000,000, 11% note issued January 1, 2019. On December 31, 2021, the entity negotiated a
written agreement with Far East Bank to replace the note with a 2-year, P5,000,000, 10% note to be
issued on January 2, 2022.

The 10% mortgage note was issued on October 1, 2020 with a term of 10 years.
Term 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 of payment is due.

On December 31, 2021, the entity is three months behind in paying the required interest payment.

The bonds payable are 10-year, 8% bonds, issued June 30, 2012. Interest is payable semiannually on June 30
and December 31.

Compute for the total current liabilities on December 31, 2021.

Problem 5:
Cubs Company sells appliances service contracts agreeing to repair appliances for two-year period.

The past experience is that, of the total amount spent for repairs on service contracts, 40% is incurred evenly
during the first contract year and 60% is evenly incurred during the second contract year.

Receipts from service contracts sales are P500,000 for 2021 and P600,000 for 2022.

Receipts from contracts are credited to unearned service revenue. All sales are made evenly during the year.

Compute for the following:

1) Contract revenue for 2021
2) Unearned Revenue as of December 31, 2021
3) Contract revenue for 2022
4) Unearned Revenue as of December 31, 2022

Problem 6:
Bulls Company sells gift certificates redeemable only when merchandise is purchased. Upon redemption, Bulls
recognizes the unearned revenue as realized.

Information for the current year:

Unearned Revenue, January 1 800,000.00
Gift Certificates sold 3,650,000.00
Gift Certificates redeemed 3,340,000.00
Gift Certificates unredeemed for a long time 240,000.00
Cost of Goods Sold 60%

Compute for the unearned revenue at year end. 870,000.00

Problem 7:
Fear Company sell products with reusable and 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.

Containers held by customers on January 1, 2021 from deliveries in:

2019 75,000.00
2020 215,000.00 290,000.00
Containers delivered in 2021 390,000.00

Containers returned in 2021 from deliveries in:

2019 45,000.00
2020 125,000.00
2021 143,000.00 313,000.00

Compute for the liability for deposits on December 31, 2021.

Problem 8:
Newt Company has an agreement to pay a bonus of 5% of the entity's earnings. The income for the year
before bonus and tax is P5,250,000. The income tax rate ist 30% of income after bonus.

Compute for the bonus assuming bonus is computed:

Bonus Income Tax
1) Before Before
2) After Before
3) After After
4) Before After
ACE AMOUNT.

ne year or operating cycle

porting date.

ve (12) months after the

ns on the borrower.
ability on demand)
or before the end of the
r that date.
Bonus Computation
Income Tax Bonus Formula
1) Before Before B = OI X BR

2) Before After OI
B= BR X
1 + BR

3) After After BR X [OI X (1 - TR)]

B=
1 + [BR X ( 1 - TR)]

4) After Before BR X [OI X (1 - TR)]

B=
(1-BR) + [BR X ( 1 - TR)]

B - Bonus
OI - Income Before Bonus and Tax (Operating Income) 4,400,000.00
BR - Bonus Rate 10%
TR - Tax Rate 25%

Using the Illustrative problem given in your book

Income before bonus and tax 4,400,000.00 OI
Bonus 10% BR
Income Tax Rate 25% TR

100% + BR = 110%
1 - TR = 75%
1 - BR = 90%
BR X ( 1 - TR) = 7.5%

1) B = OI X BR 440,000.00

2) OI
B= BR X 400,000.00
100% + BR

3) BR X [OI X (1 - TR)]
B= 306,976.74
1 + [BR X ( 1 - TR)]

4) BR X [OI X (1 - TR)]
B= 338,461.54
(1-BR) + [BR X ( 1 - TR)]
440,000.00

400,000.00

306,976.74

338,461.54
Estimated Liabilities
Accounting for Premium Cash Rebate Program
When premiums are purchased To recognize the cash rebate program
Premiums XXX Rebate Expenses
Cash XXX Estimated Rebate Liability

When premiums are distributed To record the payments to customer

Premium Expense XXX Estimated Rebate Liability
Premiums XXX Cash

Adjustment for estimated premiums to be distributed

Premium Expense XXX
Estimated Premium Liability XXX

Customer Loyalty Program (SMAC, Robinsons Rewards, Metro Rewards…)

Measurement
Award credits shall be accounted separately component of the initial sale transaction.

The fair value of the consideration received with respect to the initial sale shall be allocated between the Award Credi
relative stand alone selling price.

Recognition
The consideration allocated to the award credits is initially recognized as deferred revenue and subsequently recogniz
award credits are redeemed.

Entry to record the initial sale.

Cash/Accounts Receivable XXX
Sales XXX
Unearned Revenue - Points XXX

Entry to record the redemption.

Unearned Revenue - Points XXX
Sales XXX

Third Party Loyalty Program

Entry to record the initial sale.
Cash/Accounts Receivable XXX
Sales XXX
Unearned Revenue - Points XXX

To record the payment to entity operating the program

Loyalty Program Expense XXX
Cash XXX

Problem 1: Premiums

Pop Company sells banana juice. In order to promote the drink, the entity inaugurated in the current year a premium plan call
For every 10 bottle caps and P5 turned in, customers receive an attractive ball-pen and become eligible for a grand prize of P5
every 100 tops turned in.

The entity estimated that only 25% of bottle caps reaching the hands of the customers will be presented for redemption.

During the current year, the entity sold 400,000 bottles of banana juice at P9 each, purchased 10,000 ball-point pens for a to
incurred nonrefundable costs of P30,000 applicable to the premium plan.

A total of 8,000 pens have been redeemed and thirty grand prizes have been awarded.

Prepare the journal entries related to premium plan for the current year.

Problem 2:

Sony Company is a regional music media reseller. As a promotion, it offered P50 cash rebate on specific CDs. Customers
purchase seal from the package plus the cash register receipt to receive the rebate. Experience suggests that 80% of the rebat

Twenty thousand of the CDs were sold in the current year. Total rebates to customers in the current year amounted to P500,0

Prepare the journal entries related to the rebate program for the current year.

Problem 3:
Erika 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 2021, 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 award credits granted is reliably measured at P1,000,000.

In 2021, the entity sold goods to customers for a total consideration of P7,000,000 based on stand-alone selling price.

The award credits redeemed and the total award credits expected to be redeemed each year are as follows:

Year Redeemed Expected to be redeemed

2021 15,000.00 80%
2022 7,950.00 85%
2023 2,550.00 85%
2024 15,000.00 90%
Prepare the journal entries from 2021 to 2024.

Problem 4:
Blake Company mails coupons to customers which may be presented at a stated expiration date at retail food stores to obt
Blake products.

Retailers are reimbursed for the face value of coupons redeemed, plus 10% of the coupons face value as a compensation for h

The entity honors requests for coupon redemption by retailers receive up to three months after the consumer expiration da
60% of the coupons issued ultimately are redeemed.
The entity honors requests for coupon redemption by retailers receive up to three months after the consumer expiration da
60% of the coupons issued ultimately are redeemed.

The entity provided the following information with respect to two separate series of coupons issued during 2021:
Series A
Consumer expiration date Jun 30, 2021
Total face value of coupons issued 1,000,000.00
Total payments to retailers on December 31, 2021 605,000.00

What amount should be reported as liability for unredeemed coupons as of December 31, 2021?

Expected to be redeemed (2,000,000 X 60%)

Add 10% handling Cost
Total estimated liability
Less Payment to retailers
Liability for unredeemed coupons
 Cash Discount Coupon
ate program To recognize the cash discount coupon offer:
XXX Cash Discount Coupon Expense
XXX Estimated Coupon Liability

To record payment to retailers:

XXX Estimated Coupon Liability
XXX Cash

ocated between the Award Credits and the Sale based on

enue and subsequently recognized as revenue when the

current year a premium plan called "Drink and Win".

me eligible for a grand prize of P5,000 in cash awarded for

e presented for redemption.

d 10,000 ball-point pens for a total cost of P900,000, and

bate on specific CDs. Customers must mail in a proof of

ce suggests that 80% of the rebates will be claimed.

current year amounted to P500,000.

ds purchased.

nts have no expiry date.

dits shall be redeemed.

stand-alone selling price.

are as follows:

to be redeemed

date at retail food stores to obtain discounts on certain

ace value as a compensation for handling costs.

after the consumer expiration date. Based on experience,

after the consumer expiration date. Based on experience,

issued during 2021:

Series B
Dec 31, 2021
2,000,000
405,000

915,000.0

1,200,000.00
120,000.00
1,320,000.00
405,000
915,000
XXX
XXX

XXX
XXX
Warranty Liability
Accounting for Warranty
a) Accrual Approach
b) Expense As Incurred Approach

Journal Entries Accrual Approach

To record the estimated warranty cost. No entry
Warranty Expense XXX
Estimated Warranty Liability XXX

To record the payment of warranty cost.

Estimated Warranty Liability XXX Warranty Expense
Cash XXX Cash

If actual cost exceed the estimate adjustment is made to warranty expense as follows:
Warranty Expense XXX
Estimated Warranty Liability XXX

If actual cost is less than the estimate adjustment is made to warranty expense as follows:
Estimated Warranty Liability
Warranty Expense

Testing the accuracy of warranty liablity

Sales made evenly
Assume that half of the sales were made on January 1 and the other half on July 1 (applicable to calendar year).

Assume a 2-year warranty contract

Warranty expense related to sales in 20X1 20X1
First Contract Year
January (Basis for warranty X 1st warranty rate) XXX
July (Basis for warranty X 1st warranty rate) / 2 XX
Second Contract Year
January (Basis for warranty X 2st warranty rate)
July (Basis for warranty X 2st warranty rate) / 2
Total warranty expense X,XXX
Using the illustration given:
An entity sells refrigerators that carry a 2-year warranty against defects. The sales and warranty repairs are made evenly throu

Based on past experience, the entity projects an estimated warranty cost as a percetage of sales as follows:
First Year warranty 4% Second year warranty

Sales
Actual warranty repairs

To record the Sale 2021

Cash 5,000,000.00
Sales
To record the warranty expense
Warranty Expense (5M X 14%) : (6M X 14%) 700,000.00
Estimated warranty liability
To record the actual warranty repairs
Estimated warranty liability 140,000.00
Cash

At the end of 2022, the estimated warranty liability balance is(700,000 + 840,000 - 140,000 - 300,000)

Testing the accuracy

2021 5,000,000 / 2 2,500,000.00
First Contract Year Sales in: 2021
January 4% X 2,500,000 100,000.00
July 4% X 2,500,000 / 2 50,000.00
Second Contract Year
January 10% X 2,500,000
July 10% X 2,500,000 / 2

2022 6,000,000 / 2 3,000,000.00

First Contract Year Sales in:
January 4% X 3,000,000
July 4% X 3,000,000 / 2
Second Contract Year
January 10% X 3,000,000
July 10% X 3,000,000 / 2
Total Warranty Expense 150,000.00

Book estimated warranty liability

Estimated warranty liability, per schedule
Adjustment at the end of 2022

Entry to record the adjustment on December 31,

Estimated warranty liability

Problem 1: Warranty Expenses reported in 2022 Profit or Lo

In 2021, Plumpton Company started selling new computer that carried a 2-year warranty against defects.

Based on the manufacture's recommendations, the entity estimated warranty cost as a percentage of sales.

First year warranty - 3% Second year warranty - 9%

Sales and actual warranty repairs are as follows: 2021

Sales 5,000,000.00
Actual warranty repairs 100,000.00

1) Prepare the journal entries for 2021 and 2022

2) Analyze the estimated warranty account on December 31. Assume that sales and repairs occurs evenly.
3) Prepare the adjustment to the estimated warranty liability on December 31, 2022.

Problem 2:
Bold Company estimated annual warranty expense at 2% of annual net sales. The net sales for the current year
amounted to P4,000,000.

At the beginning of the current year, the warranty liability was P60,000 and the warranty payments during the
current year totaled P50,000.

Compute for the warranty expense for the current year.

Compute the year-end balance of the warranty liability.

Problem 3:
Villa Company estimated annual warranty expense at 8% of net sales. The following data relate to the current year:

Warranty Liability, January 1

Before adjustment 100,000.00
After adjustment 540,000.00

Compute for the amount of net sales for the current year.

Problem 4:
In 2021, Dubious Company began selling new line of products that carry a 2-year warranty against defects.

Base upon past experience with other products, the entity estimated warranty costs as a percentage of peso sale.
First year warranty - 2% Second year warranty - 5%
2021
Sales 5,000,000.00
Actual warranty repairs 100,000.00

Compute for the following:

1) Warranty expense for 2021
2) Warranty liability as of December 31, 2021
3) Warranty expense for 2022
4) Warranty liability as of December 31, 2022
 Expense As Incurred Approach

XXX
XXX

1 (applicable to calendar year).

20X2 20X3

XX

XXX
XX XX
X,XXX XX

warranty repairs are made evenly throughout the year

e of sales as follows:
10%
2021 2022
5,000,000.00 6,000,000.00
140,000.00 300,000.00

2021 2022
6,000,000.00
5,000,000.00 6,000,000.00
 840,000.00
700,000.00 840,000.00

300,000.00
140,000.00 300,000.00

000 - 300,000) 1,100,000.00

Still subject to warranty at the end of 2022

2022 2023 2024

50,000.00

250,000.00
125,000.00 125,000.00

120,000.00
60,000.00 60,000.00

300,000.00
150,000.00 150,000.00
605,000.00 635,000.00 150,000.00

k estimated warranty liability 1,100,000.00

mated warranty liability, per schedule 785,000.00
ustment at the end of 2022 315,000.00

cord the adjustment on December 31, 2022

mated warranty liability 315,000.00
Warranty Expense 315,000.00

Expenses reported in 2022 Profit or Loss 525,000.00

y against defects.

percentage of sales.

2022
7,000,000.00
250,000.00
repairs occurs evenly.

sales for the current year

ranty payments during the

a relate to the current year:

Debit
Credit

nty against defects.

a percentage of peso sale.

2022
7,000,000.00
300,000.00
Provision and Contingent Liability

Provision Contingent Liability

A present Obligation A possible obligation
Both probable and reliably measurable A present obligation which is either proba
Recognized as regular liability in the financial statements Disclosed in the notes to financial stateme

Likelihood of occurrence
Probable more than 50% Requires recognition/adjustment and disclosure
Possible 50% or less Only requires disclosure in the notes
Remote 10% or less Ignore

Measurement of Provision
Reliable Estimates
Where there is no reliable estimate can be made , no liability is recognized.

Best Estimate
Single obligation being measured - the individual most likely outcome adjusted for the effect of other possible ou
Continuous range of posible outcomes - the midpoint of the range is used.
Large population of items - expected value method.

Problem 1: Expected Value

Lolo Co., manufactures and sells motorcycle helmets. In 2021, the entity sold 1,000,000 units prior to the discovery of a po
caused by malfunctioning factory equipment. The helmets were recalled and will be repaired free of charge. Lolo is uncertain
helmets recalled will have the possible defect. However, the following estimates was made by Lolo's management and was
the board of directors.
Repair Cost Probability
40,000,000.00 10% 4,000,000.00
30,000,000.00 20% 6,000,000.00
20,000,000.00 30% 6,000,000.00
10,000,000.00 40% 4,000,000.00

Determined the amount of liability to be accrued on December 31, 2021. 20,000,000.00

Problem 2: Midpoint
In 2021, a lawsuit was filed against Kyrie Co., for patent infringement. The plaintiff is claiming P5,000,000 in damages. Kyrie's
believes that it is probable that Kyrie will loss the lawsuit and pay damages of not less than P2,000,000 but not more than P
The probability of any amount within the range is as likely as any other amount also within the range.

Determined the amount of liability to be accrued on December 31, 2021 as a result of this lawsuit.

Problem 3:
On November 25, 2021, an explosion occurred at a Rex Co. plant causing extensive property damage to area buildings. By Ma
claims had been asserted against Rex Co.

The management and counsel concluded that it is probable Rex will be responsible for damages, and that P3,500,000
rasonable estimate of the liability.
The entity's P10,000,000 comprehensive public liability policy has a P500,000 deductible clause. The financial statements fo
issued on March 25, 2022.

What amount of loss from lawsuit should be reported in the income statement of 2021?

What amount of liability from lawsuit should be reported December 31, 2021?

Problem 4:
During 2021, Libya Company is the defendant in a breach of patent lawsuit

The lawyers believe there is an 80% chance that the court will not dismiss the case and the entity will incurr outflow of benefit

If the court rules in favor of the claimant, the lawyers believe that there is 60% chance that the entity will be required to pay
P2,000,000 and a 40% chance that the entity will be required to pay damages of P1,000,000. Other amounts of damages are u

There is no indication that the claimant will settle out of court. The court is expected to rule in late December 2022.

An 8% risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates

The appropriate discount rate is 12%.

What is the amount of undiscounted cash flows for the provision?

What is the measurement of the provision on December 31, 2021?

 Contingent Assets/Gain contingenc
It is Virtually Certain
tion which is either probable or reliably measurable but not both It can be measured reliably
notes to financial statements and not recognized as a regular liability Recognized as assets in the fin

Likelihood of occurrence
Provision Virtually certain
Contingent Liability Probable
Contingent Liability Possible
Remote

ffect of other possible outcome.

to the discovery of a possible defect

f charge. Lolo is uncertain whether all
's management and was approved by

0,000 in damages. Kyrie's legal counsel

,000 but not more than P10,000,000.
.

to area buildings. By March 10, 2022,

es, and that P3,500,000 would be a

he financial statements for 2021 were

500,000.00

3,500,000.00

l incurr outflow of benefits

ty will be required to pay damages of

mounts of damages are unlikely.

ecember 2022.

in the cash flow estimates.

tingent Assets/Gain contingency
It is Virtually Certain
It can be measured reliably
Recognized as assets in the financial statements

lihood of occurrence
Virtually certain 90% or more Recognized and disclosed
more than 50% Disclosed
50% or less Disclosed
10% or less Ignored