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Current Liabilities

The document outlines the accounting treatment for current liabilities, including premiums, customer loyalty programs, warranties, payroll taxes, deferred revenue, and gift certificates payable. It details the recognition and measurement of these liabilities, along with the associated accounting procedures. Key concepts include the accrual and expense as incurred approaches for warranties, and the handling of payroll taxes and deferred revenue based on their realizability.

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10 views21 pages

Current Liabilities

The document outlines the accounting treatment for current liabilities, including premiums, customer loyalty programs, warranties, payroll taxes, deferred revenue, and gift certificates payable. It details the recognition and measurement of these liabilities, along with the associated accounting procedures. Key concepts include the accrual and expense as incurred approaches for warranties, and the handling of payroll taxes and deferred revenue based on their realizability.

Uploaded by

raiolevan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CURRENT LIABILITIES

Mrs. Rosalie Rosales-Makil, CPA, LPT, MBA


Current liabilities
A. Premiums
• Articles of value such as :
1) Toys
2) Dishes
3) Silverware
4) Other goods
5) In some cases cash payments
• Given to customers as result of past sales or sales promotion
activities.
A. Premiums
• Accounting procedures:

1. When premiums are purchased:

Premiums xxx
Cash xxx

2. When the premiums are distributed to customers:

Premium expense xxx


Premiums xxx

3. At the end of the year, if premiums are still outstanding:

Premiums expense xxx


Estimated premium liability xxx
B. Customer loyalty program
• Use by entity to:
a) build brand loyalty
b) retain their valuable customers
c) increase sales volume

• Is generally designed to reward customers for past


purchases and to provide them with incentives to make
further purchases.
Recognition and measurement (customer
loyalty program)
IFRIC 13
• An entity shall account for the award credits as a “separately component of the initial sale transaction.”

• The granting of award credits is effectively accounted for as a “future delivery of goods and services.”

• Fair value of the consideration received with respect to the initial sale shall be allocated between award
credits and the sale.

• Consideration allocated to the award credits is measured at fair value.

• Subsequent recognition of the amount allocated to the award credits as revenue depends on the
following:
a) Entity supplies the awards itself
b) Third party supplies the awards
The entity supplies the awards itself
• Consideration allocated to the award credits:
a) Initially recognized as Deferred revenue
b) Subsequently recognized as revenue when the award credits are redeemed.

• Amount of revenue recognized:


a) Based on the number of award credits that have been redeemed relative to the total number of
expected to be redeemed.
b) Estimated redemption rate is assessed each period
c) Changes in the total number expected to be redeemed do not affect the total consideration for the award
credits.

• Calculation of the revenue to be recognized in any one period is made on a “cumulative basis” in order to
reflect the changes in estimate.
The entity supplies the awards itself (cont’)
• Accounting procedure

1. Initial sale

Cash xxx
Sales xxx
Unearned revenue- points xxx

2. Redemption of points

Unearned revenue- points xxx


Sales xxx
Third party supplies the awards
• Entity shall assess whether it is collecting the
consideration allocated to the award credits on its own
account as:
a) Principal in the transaction
b) On behalf of the third party as agent of the third party

Whether as principal or agent


• Revenue from the award credits is recognized at the point
of initial sale.
Third party supplies the awards
(cont’)
1. If the entity is collecting the consideration as principal in the transaction
• Amount of revenue is equal to the gross consideration allocated to the
award credits.

2) If the entity is collecting the consideration as agent of the third party


• Amount of revenue is equal to the net amount of retained on its own
account.
• Net amount is the difference between the consideration allocated to the
award credits and the amounts payable to the third party for supplying the
awards.
C. Warranty
• Provide free repair service or replacement during a
specified period if the products are defective.

• At the point of sale, a liability is incurred.

Two approaches followed in accounting for the warranty


cost:
1. Accrual approach
2. Expense as incurred approach
Accrual approach
• Proper matching of cost with revenue.

• Accounting approach:

1. Estimated warranty cost

Warranty expense xxx


Estimated warranty liability xxx

2. Actual warranty cost is subsequently incurred and paid

Estimated warranty liability xxx


Cash xxx
Accrual approach (cont’)
• Any difference between the estimate and actual cost is a change in estimate and therefore treated
currently or prospectively, if necessary.

1. If the actual cost exceeds the estimate, difference is charged to warranty expense:

Warranty expense xxx


Estimated Warranty liability xxx

Subsequent payment of the warranty cost is then charged to the estimated liability account.

2) If the actual cost is less than the estimate, difference is an adjustment to warranty expense:

Estimated Warranty liability xxx


Warranty expense xxx
Expense as incurred approach
• Is the approach of expensing warranty cost only when
actually incurred.

• Accounting procedure

1. Actual warranty cost

Warranty expense xxx


Cash xxx
Sale of warranty
• Warranty is sometimes sold separately from the product sold

• When products are sold, the customers are entitled to the usual manufacturer’s warranty during a certain period.

• Seller may offer an “extended warranty” on the product sold but with additional cost.

• Sale of the product with the usual warranty is recorded separately from the sale of the extended warranty.

• Amount received from the sale of the extended warranty is recognized:


1. Initially as deferred revenue
2. Subsequently amortized using straight line over the life of the warranty contract.

• If the cost are expected to be incurred in performing services under the extended warranty contract;
a) Revenue is recognized in proportion to the costs to be incurred annually.
Sale of warranty
• Accounting procedure:

1. Sale

Cash xxx
Sales xxx
Unearned Warranty revenue xxx

2) Amortization of unearned warranty revenue

Unearned Warranty revenue xxx


Warranty revenue xxx
D. PAYROLL TAXES
• Under our law, the entity as an employer is required to
withhold from the salaries of each employee the following:

1. Income tax payable by the employee (Withholding tax


payable)
2. Employee’s contribution to the Social Security System or
SSS (SSS payable)
3. Employee’s contribution for Philhealth (Philhealth payable)
4. Employee’s contribution to the Pag-ibig Fund (Pag-ibig
payable)
D. PAYROLL TAXES
• In additions to the amount withheld from the salaries of
the employees, the entity is required to make a
contribution for SSS, Philhealth, Pag-ibig fund
representing its share in the benefits of the employees.
D. PAYROLL TAXES
(journal Entries)
1. Gross Payroll

Salaries xxx
Withholding tax payable xxx
SSS payable xxx
Philhealth payable xxx
Pag-ibig payable xxx
Cash xxx

2. Employers additional contribution

Payroll tax expense xxx


SSS payable xxx
Philhealth payable xxx
Pag-ibig payable xxx

3. Remittance of the amounts withheld and the payment of the additional contribution

Withholding tax payable xxx


SSS payable xxx
Philhealth payable xxx
Pag-ibig payable xxx
Cash xxx
DEFERRED REVENUE/UNEARNED
REVENUE

• Income already received but not yet earned


• Realizable within 1 year=current liability
• Realizable more than a year=noncurrent liability

EXAMPLES of NONCURRENT
1. Unearned revenue from long-term service contracts
2. Long-term leasehold advances
ILLUSTRATION
Cash receipts from service contracts sold 1 000 000
Service contract costs paid 500 000
Service contract revenue recognized 800 000
GIFT CERTIFICATES PAYABLE

1. When gift certificates are sold


Cash xxx
GC Payable xxx
2. When redeemed
GC Payable xxx
Sales xxx
3. When expired or not redeemed
GC Payable xxx
Forfeited GCs xxx

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