REVIEWER IN AUDITING

PROBLEMS 2 Note!!!
Refinancing Agreement
LIABILITY - NCL maturing within 12 months is CL IF
Definition: RA is completed AFTER RP and BEFORE
- present obligation of the entity arising issuance of FS.
from past transaction or events (legal vs - NCL maturing within 12 months is NCL IF
constructive), the settlement of which RA is completed ON or BEFORE RP and
expected to result in an outflow from the BEFORE issuance of FS.
entity or resources embodying economic “Intention” and “Plan” – wala pang
benefits refinancing.

Current vs Non-current Liability Breach of Covenants

Current: - if a contract is breached, the liability
1. expects to settle the liabilities in its becomes payable on demand
normal operating cycle - once breached, the liability is CL even IF
2. purpose of trading agreement not to demand payment
3. the liability due is to be settled within 12 happened AFTER RP and BEFORE
months after the reporting period issuance of FS.
4. the entity does not have an unconditional - the liability is NCL IF the agreement not
right to defer the settlement of the to pay happened BEFORE RP and BEFORE
liability for at least 12 months after the the issuance of FS given that the lender
reporting period gives GP (grace period) at least 12
Current of Liability Basis: months.
- Current if maturing 12 months after the - if breached after RP, no effect.
reporting period.
Examples of CL: Recognition of Liability
 accounts payable 1. meets the definition of the liability
 short term notes payable 2. probable that an outflow of resources
 deposits and advances (advances
payment) Measurement of CL and NCL
 accrued liability - incurred but not yet  CL is measured at face amount.
paid  NCL is initially measured at PV and
 credit balances in customer accounts subsequently measured at amortized
(sobra binayad ni CX) costs.
 income tax payable (deferred tax –
always NCL) PROVISIONS
 dividends payable (only cash, property, - liability is uncertain of timing and
and scrip dividends payable, share amount
dividends payable is SHE) - measure reliably
 deferred revenue - Recognition: CL
 bank overdrafts (over withdrawal)
Non-current: CONTINGENCY
1. beyond 12 months - possible obligation whose existence may
2. residual definition be confirmed by occurrence or non-
occurrence of a future event beyond
company's control
 - present obligation its either not ESTIMATED WARRANTY LIABILITY, BEG XXX
probable/measurable (not measure WARRANTY EXPENSE + XXX
reliably) ACTUAL WARRANTY COST INCURRED - (XXX)
- Recognition: Disclosed to FS ESTIMATED WARRANTY LIABILITY, END XXX,XXX
BONUSES
Actual Cost exceeds Estimated Costs
4 Ways to Compute for Bonuses
Entry:
1. Bonus is based on Net Income Before
1. Sales
Bonus and Tax
D-Cash
B=Bonus Rate x Net Income
C-Sales
2. Bonus is based on Net Income After
2. Setting up Estimated Warranty Liab
Bonus but Before Tax
D – Warranty Exp
B= BR x (Net Income – Bonus)
C – Warranty Liab
3. Bonus is based on Net Income After
3. Payment of Actual Costs
Bonus and After Tax
D – Warranty Liab
B=BR x (Net Income – Bonus – Tax)
C – Cash
4. Bonus is based on Net Income Before
Bonus but After Tax
PREMIUMS
B=BR x (Net Income – Tax)
Premiums – articles of value such as toys, dishes,
Tax = TR x NI
silverware, and other goods given to cx as result
Net Income after Tax = TR x (NI – T)
of past sales or sales promotion.
BONUS Computatio
Shortcut
COMPUTATION n
same Estimated Premium Claims
Case 1 B=BRxNI
B=BRxNI/1+BR Outstanding/Premium Liability
Case 2 B=BRx(NI-B)
Est. Premium Liab., beg xx
Case 3 B=BRx(NI-B-T) B=BRxNIAT/1+BRAT
B=BRxNIAT/1-BRTR
Premium Expense xx
Case 4 B=BRx(NI-T)
Tax= TRx(NI-B) Actual Redemption (xx)
AT means after tax (1 – tax rate) Est. Premium Liab., end xx
Actual Redemption
REFUNDABLE DEPOSITS No. of Premiums Distributed x Net Cost
- Just like how deposit works when buying
Kasalo. Premium Expense
- You receive cash or property from CX and UNIT SOLD XXX
then you give it back when they return REDEMPTION RATE X %
the bottle. NUMBER OF UNITS TO GET THE PREMIUM / XXX
- If does not return, the amount becomes COST OF PREMIUMS X XXX
PREMIUM EXPENSE XXX,XXX
sale of the containers
- Excess deposit over costs is considered Cost of Premium (binayad ng CX)
GAIN. Cost minus payment of cx.
Add other costs.
WARRANTIES
Warranty – post-sale obligations, guarantees, or NOTES PAYABLE
repair for free. Definition of Notes:
Warranty Expense (Temporary Account) A promissory note is a financial instrument, in
Units Sold XX which a party called the maker or issuer promises
Cost of Warranty Multiply by: XX in writing to pay the sum certain of money to the
Warranty Expense XX other party called the payee either on demand of
the latter or at a fixed or determinable future
Estimated Warranty Liability time.
 RECOGNITION OF NOTES PAYABLE 2. Types of Problem
When the entity becomes a party to a contract or 3. Analyze the mode of payment (Lumpsum
when the transfer of resources transpired. or Installment)
4. Initial Measurement
5. Determining Premium or Discount
6. Subsequent Measurement
PRESENTATION 7. Find requirements.
NP is a liability. It is either a current or non-
current portion.
ACCOUNTING FOR INCOME TAX
PV-FACE V=Premium or (Discount) on NP
PV – CV = Gain or (Loss) on Sale Asset on NP Accounting Profit VS Taxable Profit
-computed using -computed using Tax
MEASUREMENT PFRS Laws
1. Initial Measurement – FACE AMOUNT (Fair -equal to the profit or -equal to Taxable
Value less Transaction Costs) loss for a period Income less Tax-
2. Subsequent Measurement – AMORTIZED before deducting deductible expenses
COST USING EFFECTIVE INTEREST METHOD income tax expense
AKA: pretax income, AKA: taxable income
financial income,
CATEGORY AND TREATMENT OF NOTES
accounting income
PAYABLE

PERMANENT DIFFERENCES
INITIAL
TYPE OF NOTES - Non-taxable revenue (NTR) (-)
MEASUREMENT
Interest Bearing Note - Non-deductible expenses (NDE) (+)
1. Short-term Face Amount Example:
If Lumpsum: NDE
- PV of 1 of Principal  fines and penalties for violation of the law
+ PV of OA1 of  charitable contribution in excess of
Interest limitations
(PxSRxPVOA1)  premiums on life insurance where the
2. Long-Term w/ If Installment: company is the beneficiary
Unrealistic Rate - Cumulative x PV NTR
Factor of 1 every year  gain from the settlement of life insurance
or period
where the company is the beneficiary
Interest depends on
 dividend revenue received by domestic or
the balance every
year. nonresident corporations from domestic
3. Long-Term w/ corporation
Face Amount  gains already subjected to final tax
Realistic Rate
Non-interest-Bearing
Note TEMPORARY DIFFERENCES (timing difference)
A. Solely for - Future Taxable Amount (FTA) (-)
Cash price
cash Taxable Temporary Differences (TTD)
1. CPE - Future Deductible Amount (FDA) (+)
2. PV of Principal Deductible Temporary Differences (DTD)
B. NCA Lumpsum – same
Installment – FTA: Income Statement Approach
discount Net Income is Overstated
 Income – A>T
Steps in Answering Notes Payable Problems  Expense – A<T
1. Read the problem.
 Balance Sheet Approach Journal Entry:
Capital is Overstated DTL
 Asset – A>T Income Tax Expense xx
 Liability – A<T DTL xx

FTA x Income Tax Rate = DEFERRED TAX LIABILITY

FDA: Income Statement Approach
DTA
Net Income is Understated
 Income – A<T DTA xx
 Expense – A>T Income Tax Expense xx
Balance Sheet Approach
Capital is Understated CITE
 Asset – A<T Income Tax Expense xx
 Liability – A>T Income Tax Payable xx

FDA x Income Tax Rate = DEFERRED TAX ASSET

ACCOUNTING FOR EMPLOYMENT BENEFITS
income A>T FTA/TTD
income A<T FDA/DTD Types of
expense A>T FDA/DTD
Employment Examples
expense A<T FTA/TTD
asset A>T FTA/TTD Benefits
asset A<T FDA/DTD 1. Short-term Salary, bonuses,
liability A>T FDA/DTD benefits mandatory
liability A<T FTA/TTD contribution, leave
Note: conversion,
allowance, 13th
Accounting Income and Asset > Tax = FTA/TTD
Month pay, maternity
Accounting Income and Asset < Tax = FDA/DTD leave (105), paternity
leave (60)
Accounting Expense and Liability > Tax = FDA/DTD 2. Post-employment After-like
benefits employment benefits
Accounting Expense and Liability < Tax = FTA/TTD 3. Other long-term Sabbatical leave
benefits (religion)
4. Termination Separation leave
Benefits (involuntary)
Formula for Income Tax
Pre-Tax Financial Income xx
Post-employment Benefits Retirement Plan
+/- Permanent Diff erences
1. Contributory VS Non-contributory
NDE xx
NTR (xx) Contributory – employer and employees
Accounting Profit subject to tax xx Non-contributory – only employer
+/- Temporary Diff erences 2. Funded VS Unfunded
FDA/DTD xx Funded – administrator retirement
FTA/TTD (xx) plan=trustee
Taxable Income xx Unfunded=administrative retirement
x Tax Rate (%) % plan=employer
Current Income Tax Expense (CITE) xx 3. Defined Benefit Plan
DTL xx
DTA (xx)
Total Income Tax Expense (TITE) xx
Deferred Income Tax Expense (DITE) = DTL – DTA
ACCOUNTING FOR LEASES