LIABILITIES g. Notes payable amounting to 5,000,000.

Equally payable for 5 years,

starting end of 2023.
 present obligations
 arising from past transactions or events
1. Compute the total current liability of A company as of December
 outflow of economic benefits.
31, 2022?
CURRENT LIABILITIES
SOLUTION
 recorded and reported at face amount.
Beginning current Liability balance 3,000,000
 settle the liability within the entity’s operating cycle.
Accrued salaries payable 100,000
 purpose of trading.
Income tax payable 50,000
 settled within twelve months.
Accounts payable at selling price 100,000
 doesn’t have an unconditional right to defer settlement.
Notes payable 45,000
NON-CURRENT LIABILITIES
Notes payable (Installment) 1,000,000
 measured at face amount or present value.
TOTAL 4,295,000
 Liabilities to be settled in more than twelve months.
2. Compute the total non-current liability of A company as of
Noncurrent interest-bearing liabilities - measured at face amount since
December 31, 2022?
the face amount is already indicative of its present value.
SOLUTION
Noncurrent noninterest-bearing liabilities - measured at present value.
Bonds payable 350,000
This requires amortization of the discount or premium on the liability.
Notes payable (for 4 years) 4,000,000
SAMPLE PROBLEM
TOTAL 4,350,000
The balance of A company for its current liability before adjustment is
Other terms to remember
3,000,000 Below items are present during the year 2022.
FOB Shipping Point – transfers ownership on the date of shipment
a. Accrued Salaries Payable 100,000
FOB Destination – transfers ownership on the date received
b. Income tax payable of 50,000
COVENANTS
c. Bonds payable 350,000
 are restrictions on the borrower
d. Goods in transit going to A company under FOB destination. The
Breach of Covenant
goods were shipped by the vendor last December 23, 2022, and
 will result in the reclassification of a noncurrent liability as
received by A company on December 27, 2022, with a cost of 75,000
current.
and 100,000 selling price.
 upon breach of covenant, the liability becomes due and
e. Goods in transit from A company under FOB Shipping point. The
demandable on demand.
goods were shipped by A company last January 2, 2023, and received
by the customer on January 5, 2023, with a cost of 80,000 and 110,000  is classified as current even if the lender has agreed, after the
selling price. reporting period and before the statements are authorized for
f. Notes payable amounting to 45,000 issue, not to demand payment because of the breach.
  is classified as noncurrent if the lender has agreed on or before • October 2020 another 1,000 pcs of bottle cups has been returned to
the end of the reporting period to provide a grace period ending Among A-ss corporation
at least twelve months after that date.
• November 2020 another 2,100 pcs of bottle cups has been returned to
Non-Adjusting Event
Among A-ss corporation.
 end of the reposting period and the date of the financial
statement • December 15, 2020, Among A-ss corporation sold another 5,000 pcs
 Refinancing on a long-term basis of soft drinks, estimated percentage for this sale to be returned is 60%
 Rectification of a breach of a long-term loan agreement • December 20, 2020, buyers able to be returned 900 pcs of bottle
cups.
 The granting of the lender a grace period to rectify a breach of
a long-term loan arrangement ending at least twelve months Questions:
after the reporting period.
1. How much is the balance of estimated premium liability as of
ESTIMATED LIABILITIES September 2020? 10,000
 considered as a provision that is both probable and measurable. 2. How much is the cost of Premium Asset initially – 40,000
ESTIMATED PREMIUM LIABILITIES 3. How much is the balance of estimated premium Liability as of
October 2020? 7,500
Premium - things of value and in some cases cash payments given to
the customers as a result of past sales 4. How much is the balance of estimated premium Liability as of
November 2020? 2,250
SAMPLE PROBLEM
5. How much is the balance of estimated premium liability as of
Among A-ss corporation is offering a bag for every return of two
December 15, 2020? 9,750
bottle cups and P5.
6. How much is the balance of estimated premium liability as of
Total Sales of Among A-ss corporation for his soft drink store is
December 20, 2020? 7,500
10,000 pcs amounting to P100,000 for 2020. The price of the bag is
P10 and Among A-ss purchased 4,000 pcs of bag. Among A-ss ESTIMATED WARRANTY LIABILITIES
corporation expected that 70% of the total sales will be redeemed.
 Under accrual approach, recognition of liability for estimated
Entry of Among A-ss upon sales of 10,000 pcs is Debit Premium warranties arises each time a sale transaction occurs.
Expense P17,500 Credit Estimated Premium Liability P17,500
 Under expense as incurred approach, warranty expenses shall
• September 2020 certain buyers able to return a 3,000 pcs of bottle only be given accounting recognition when such warranties
cups. occur.
SAMPLE PROBLEM 7. How much is the estimated warranty liability as of June 2023?
243,000
T-Napkin Company is a Chinese company selling multiple type of
laptop. For the year of 2020 the total sales of T-Napkin is P2,500,000 8. How much is the estimated warranty liability as of December 2023?
and in 2021 is P2,700,000, the sales are happening all through out of 121,500
every year, evenly. T-Napkin is offering a 3-year warranty coverage
9. How much is the estimated actual warranty expense for 2024?
for its laptop unit, for the first year of coverage 3%, second year is 6%
121,500
and third year is 9%.
Questions: 2020 2021 2022 2023 2024
20 2.5 37. 37. 75 75 112,. 112.
1. How much is the estimated warranty liability as of December 2020? 20 M 5K 5K K K 5K 5K
898,500 20 2.7 40. 40. 81K 81K 121. 121.
2. How much is the estimated actual warranty expense for 2020? 21 M 5K 5K 5K 5K
37,500
10. How much is the estimated warranty liability as of December
3. How much is the estimated warranty liability as of December 2021? 2024?0
745,500
Gift Certificates Payable - Many megamalls, department stores and
4. How much is the estimated actual warranty expense for 2021? supermarkets sell gift certificates which are redeemable in
153,000 merchandise.
5. How much is the estimated warranty liability as of June 2022? SOLUTION
630,000
Sales 2,000,000
6. How much is the estimated actual warranty expense for 2022?
309,000 10% of sales (200,000)
TOTAL 1,800,000
2015 redemption of current sales (1,400,000)
TOTAL UNEARNED REVENUE (2015) 400,000
Refundable Deposits - consist of cash or property received from
customers, but which are refundable after compliance with certain
conditions.
 RBonus 1,920,000
Corporation’s income excess (600,000)
Income before bonus 1,320,000
(1,320,000 / 1.10) x 10% = 120,000 (BONUS)
1,320,000 – 120,000 = 1,200,000 (Net income after bonus)
Deferred Revenue - income already received but not yet earned
PROVISION
SOLUTION
 existing liability of uncertain timing or uncertain amount
Customer advances 885,000
 It is the uncertainty of a provision that distinguishes it from
Advances received with orders in 2014 1,380,000 other liabilities since all other liabilities are certain as to timing
or amount
Advances applied to orders shipped in 2014 (1,230,000)
Recognition of provision
TOTAL CURRENT LIABILITY 1,035,000
 A legal obligation is an obligation arising from contract,
BONUS COMPUTATION
legislation, or other pattern of law.
Bonus - usually given for compensation of key officers and employees  A constructive obligation exists when the entity from an
by way of bonus for superior income realized during the year. established pattern of practice or stated policy has created a
valid expectation that it will accept certain responsibilities.
Bonus computation usually has four variations:
 An event is probable if it is more likely to occur than not.
 Bonus as a percent of income before bonus and before tax. Simply stated, an event is probable if the happening of such
event is greater than the probability that such event will not
 Bonus as a percent of income after bonus but before tax. occur. In practice, probable means more than 50% likely.
 Bonus as a percent of income before bonus but after tax.  When no reliable estimate can be made, no liability shall be
recognized.
 Bonus as a percent of income after bonus and after tax.  All of the requirements set under PAS 37 must be met in order
for a provision to be recognized in the financial statements.

Measurement of provision
  The amount recognized as a provision shall be the best estimate  A contingent liability shall not be recognized in the financial
of the expenditure required to settle the present obligation at statements rather, necessary disclosures are enough. The
the end of the reporting period. necessary disclosures include:
 When there is a continuous range of possible outcomes and
a. Brief description of the nature of contingent liability
each point in that range is as likely as any other, the midpoint
range shall be the best estimate. b. An estimate of its financial effects
Onerous contract - unavoidable costs of meeting the obligation under c. An indication of the uncertainties that exist
the contract exceed the economic benefits expected to be received
d. Possibility of any reimbursement
under it
 Remote contingent liability does not require any disclosure.
CONTINGENT LIABILITY
BONDS
 possible obligation that arises from past event and whose
existence will be confirmed only by the occurrence or  a formal unconditional promise, made under seal, to pay a
nonoccurrence specified sum of money at a determinable future date, and to
 a present obligation that arises from past event but is not make a periodic interest payment at a stated rate until the
recognized because it is not probable principal sum is paid.
Contingent liability and provision Effective rate = market rate, yield rate, prevailing rate
 Both a contingent liability and a provision are present Nominal rate = stated rate, coupon rate
obligations, the difference lies between the probability and the
Coupon rate – usually used for interest
measurability of such obligation.
Premium = effective rate is lower than nominal rate
 In order for a provision to be recognized, settlement must be
probable and the amount of settling the obligation must be Discount = effective rate is higher than nominal rate
measurable in a reliable way. While in a contingent liability, it
Accounting for income tax
is either that the settlement of the obligation is probable or that
the amount of settling the obligation can be measured reliably  Difference between assets and tax standard
however, both probability and measurability must not exist.
Accounting income
 net income before deducting income tax expense
 Accrual - record earned regardless when receive
Accounting for contingent liability Taxable income-
 income for the period
  excess of taxable revenue tax deducting expense and  normally the carrying amount less the amount that will be
exemption deductible for tax purpose in the future
Permanent difference TAXABLE INCOME
 revenue and expense Current tax expense = taxable income X tax rate
 non taxable
Deferred tax liability = temporary difference X tax rate
Temporary difference
Deferred tax asset = Deductible temporary difference X tax rate
 can be both accounting and taxable income
Total income tax expense = accounting income X tax rate
 Basic income tax
 Final tax not included (life insurance, premiums, dividends, LEASE
interest income)
Leases
 carrying amount
 10 years up; Long-term; rent to own
Deferred tax liability
 Always installment
 future taxable liability
Rent
Equal taxable temporary difference
 short-term
 equal to future taxable amount
Operating lease

 no transfer of ownership (owned by Lessor)
Deductible temporary asset difference
Ordinary finance Lease
 deductible temporary difference is equal to future deductible
amount  with transfer (owner can be lessee)
Tax base of an asset Lessor : Nag papa-upa
 book value Lessee : na-upa
 amount that will deductible for tax purpose
Sales type lease
 unique;
 record profit
Tax base of liability Sales and lease
 sell and rent at the same time
Useful life : hanggang kelan gagamitin Advance
Economic life : hanggang kelan magagamit  early payment that can be apply on next
Legal life Security deposits
 apply in tangible asset  an amount given to the landlord to guarantee that you will
 fulfill the terms of the rental agreement and that you will leave
the unit in good condition.
Annual payment x ordinary annuity = PV of lease payment
Lease bonus
All payment = gross
 An amount paid by a lessee to a lessor as consideration for
Major part – 75% USA GAAP
granting a lease, usually as a lump sum
- 51% IFRS
UNEQUAL RENTAL PAYMENT
Lessee record
Direct financing Lease
 Loss or gain
 Lease payment, unearned income
 Transfer of ownership
Sales lease
Lessor record
 Interest and profit
 Loss or gain no transfer
FV cost asset is equal; Net dealer is recognize.
Land
ACCOUNTING CONSIDERATION
 Depreciation - decrease in asset
a) Gross investment = gross rental for the entire lease term +
Goodwill
absolute amount of the residual value whether guaranteed or
 not amortized; Tangible asset; controllable, measurable, not unguaranteed
identifiable.
b) Net investment in the lease=Cost of asset + initial direct cost
Operating Lease
paid by the lessor
 lessor record depreciation
c) Unearned interest income (a-b) = Gross investment – net
Initial direct cost
investment in lease
 incremental costs of obtaining a lease that would not have
been incurred if the lease had not been obtained
 d) Initial direct cost = Direct cost paid + cost of the asset to get POST EMPLOYMENT BENEFIT
the net investment the lease paid by the lessor
 Employee benefits are employee benefits, other than
Cost of machinery – FV of residual value = PV of 1 x residual value/ termination benefits and short term benefits which are payable
prof of annuity after completion of employment.
a. Retirement benefit, such as pensions and lumpsum payment on
SALES TYPE
retirement
a) Gross investment = gross rentals for entire lease term + b. Post-employment life insurance
absolute amount of the residual value whether guaranteed or c. Post-employment medical care
unguaranteed
CONTRIBUTORY PLAN
b) Net investment in the lease = PV of gross rentals + PV of
residual value whether guaranteed or unguaranteed  The employer and employee make contributions to the
c) Unearned interest income (a-b) = Gross investment – net retirement benefit plan but they do not necessarily contribute
investment in the lease equal amount
d) Sales = net investment in the lease or FV of asset which is
NON CONTRIBUTORY PLAN
lower
 Only the employer makes contributions to the retirement
Cost of Good Sold (COGS) = PV of Unguaranteed Residual value
benefit plan
+ Initial direct cost paid by the lessor
FUNDED PLAN
INITIAL INDIRECT COST
 The entity sets aside funds for future retirement benefits by
 Expensed immediately in a sales type lease as component of making payments to a funding agency, such as trustee, bank or
COGS insurance company
Employee benefit FUNDING
 all forms of consideration given by an entity in exchange for  transfer assets to an entity, called retirement fund, which is
services rendered by employees or for termination of separate from reporting entity for the purpose of meeting
employment obligations arising from retirement benefit plan.
EMPLOYEE BEFITS INCLUDE:
A. Post-employment benefit
B. Short-term employee benefit
UNFUNDED PLAN
C. Other long term benefit
D. Termination benefit
  The entity retains the obligation for the payment of retirement a. Social security system – a defined contribution plan because
benefits without the establishment of a separate plan. the entity’s obligation is limited to specified contributions to
the plan as a percentage of salary
DEFINED CONTRIBUTION PLAN
b. R.A 7641 – defined benefit plan because the entity’s obligation
 Postemployment plan under which entity pay fixed is to provide specific level of benefit for every year of service
contributions into a separate entity known as the fund
INSURED BENEIFTS
 The contribution is definite but the benefit is indefinite
 The entity makes the contribution to a trustee which  An entity may pay insurance premiums to funds a
administers, manages and invests the fund postemployment benefit plan. Such postemployment benefit
 When an employee retires, the accumulated fund in the hands plan shall be treated as defined contribution plan
of the trustee determines his retirement benefits
ACCOUNTING FOR DEFINED CONTRIBUTION PLAN
 Once the defined contribution is paid, the employer has no
more obligation under the plan.  straightforward because the obligation of the entity is
determined by the amount contributed for each period.
DEFINED BENEFIT PLAN
ACCOUNTING PROCEDURE
 Simply defined as postemployment plan other than a defined
contribution plan. a. the contribution shall be recognized as expense in the period it
 An entity’s obligation is to provide the agreed benefits to is payable
employees b. any unpaid contribution at the end of the period shall be
 If the plan is exceptionally good, the entity may take a recognized as accrued expense
“contribution holiday”, meaning stop paying the contribution c. any excess contribution shall be recognized as prepaid expense
for a while but only to the extent that the prepayment will lead to a
reduction in the future payments or a cash refund.
MULTIEMPLOYER PLAN
CURRENT SERVICE COST
 A defined contribution plan or defined benefit plan that pools
the assets contributed by various entities that are not under  an increase in the present value of the defined benefit
common control and uses those assets to provide benefit to obligation resulting from employee service in the current
employees of more than one entity period
NET INTEREST
 changed in the defined bnefit obligation, plan assets and effects
of asset ceiling as a result of the passage of time.
POST EMPLOYMENT BENEFIT PLAN UNDER THE LAW
 a. Interest expense on defined benefit liability – computed by COMPONENTS OF FAIR VALUE OF PLAN ASSETS
multiplying the defined benefit obligation at the beginning of
1. Contribution plan
the reporting period by the discount rate
2. Interest income on plan asset
b. Interest income – computed by multiplying the fair value of
3. Remeasurement gain or loss on plan asset
plan asset at the beginning of the reporting period by the same
4. Benefits paid upon retirement
discount rate
5. Settlement price of plan settlement before retirement
c. Interest expense on effect of the asset ceiling – computed by
multiplying the effect of asset ceiling at the beginning of the BASIC ACCOUNTING CONSIDERATIONS
reporting period by the same discount rate
 The projected benefit obligation or defined benefit obligation is
PAST SERVICE COST the present value of expected future payments requires to settle
the obligation arising from employee service in the current and
 Is the change in the present value of defined benefit obligation
prior periods.
for employee service in prior periods resulting from a plan
 The FVPA is an analogue to an off statement of financial
amendment or curtailment
position asset with a debit balance and the PBO is a analogous
PLAN ASSET to an off statement of financial position liability with a credit
balance.
 Comprise assets held by a long term benefit plan and
qualifying insurance policies CORPORATION
QUALIFYING INSURANCE POLICIES  A corporation is an artificial being created by operation of law,
having the rights of succession, and the powers, attributes, and
 An insurance policy issued by an insurer that is not a related
properties expressly authorized by law or incident to its
party of the reporting entity
existence.
MEASUREMENT OF PLAN ASSET
Pre-incorporation Subscription Requirement
 Plan assets are measured at fair value
 The Corporation Code provides that the SEC shall not register
REMEASUREMENT OF PLAN ASSET any stock corporation unless 25% of its authorized number of
shares has been subscribed, and at least 25% of the subscription
 The amount of remeasurement is equal to the actual return on
has been paid. However, in no case shall the paid in capital be
plan asset minus the interest income on the fair value of the
less than P5,000.
plan asset at the beginning of the reporting period
Costs incurred in forming/organizing a corporation (Organization 4) Callable and Redeemable Preference Shares
Cost):  If Redemption Price > Original Issue Price, the
difference shall be charged to Retained Earnings
a. Legal Fees in connection with the incorporation
 If Redemption Price < Original Issue Price, the
b. Incorporation Fees
difference shall be an addition to Share Premium
c. Share Issuance Costs
5) Convertible Preference Share
Accounting for Share Capital  If Par Value > Original Issue Price, the difference shall
be charged to Retained Earnings
 Memorandum method – no entry is made for authorization of
 If Par Value < Original Issue Price, the difference shall
share capital. Only when share capital is issued that it is
be an addition to Share Premium
credited to Share Capital account
6) Rights issue
 Journal entry method – authorization for share capital is
 Only upon exercise of the share warrants that entry for
recorded by debiting Unissued Share Capital and crediting
the issuance of new shares is necessary.
Authorized Share Capital. Once issued, Authorized Share
7) Share Warrants Issued with Preference Share
Capital is credited to Unissued Share Capital account.
Allocation of consideration for issuance:
Accounting treatment for:  Based on fair value of both
 First to preference share when only preference share
1) Shares issued at discount
has a determinable fair market value and the residual
 Share capital is credited at par
amount shall be assigned to share warrants
 The deficiency shall be debited to Discount on Share
 Base on intrinsic value if both has no determinable fair
Capital account. Discount on Share Capital account is a
value
deduction from total shareholders’ equity
8) Share Warrants Issued With Bonds Payable
2) Shares issued for noncash consideration
 Amount must be the residual value between the
Order of priority for measurement of equity:
consideration received and the liability’s valuation
 Fair Value of goods/services
9) Treasury shares
 Fair value of equity shares issued
 Must be accounted for using the cost method
 Par or stated value
3) Delinquent Subscription Reissuance at: Retirement:
 Sold in public auction to the highest bidder for a price Cost, just credit treasury shares Equal to cost of treasury, share
that normally includes the balance due on subscription, at cost capital account is debited at par
interest accrued on subscription due and expenses of or stated value and the treasury
advertising and other costs of sale. shares shall be credited at cost.
If more than cost, excess in the If par exceeds cost of treasury,
consideration received over the the difference shall be credited
cost of the treasury shares shall to share premium-treasury
be credited directly to share shares.
premium
If below cost, excess of the cost If treasury shares exceed the par
of treasury shall be charged value of the shares to be retired,
directly first to share premium the difference shall be charged to
from treasury shares of same the following accounts:
class and then to retained 1. Share premium to the extent
earnings of the credit when the shares
were originally issued
2. Share premium from treasury
shares
3. Retained Earnings
10) Donated Shares
 don’t affect any account in the financial statements
since recognition of donation requires memorandum
entry only
 reduces no. of shares outstanding
RECAPITALIZATION
 occurs when there is a change in the capital structure of the
entity. The old shares are canceled, and new shares are issued.
The typical recapitalizations are:
a. Change from par to no-par
b. Change from no-par to par
c. Reduction of par or stated value
d. Split up
e. Split down
  represent the cumulative balance of periodic net income or
loss, dividend distributions, prior period errors, changes in
accounting policy, and other capital adjustments.
Unappropriated retained earnings
 portion which is free and can be declared as dividends to
shareholders
Appropriated retained earnings
 portion which has been restricted and therefore is not available
for any dividend declaration
Dividends
 distributions of earnings or capital to the shareholder in
proportion to their shareholdings
Date of declaration
 date in which the directors authorize the payment of dividends
to shareholders

Date of record
 date on which the stock and transfer book of corporation will
be closed for registration
Date of payment
 date on which the dividend liability is to be paid
Types of dividends
1. Cash Dividends
 Distribution of earnings of the entity to the shareholders in the
RETAINED EARNINGS
form of cash.
Date of Declaration: Date of Settlement: DIVIDENDS OUT OF CAPITAL
Retained Earnings xx Dividends Payable xx  Also called liquidating dividends, to be paid to the stockholders
when the entity dissolved/liquidated
Dividends payable xx Cash xx
APPROPRIATION OF RETAINED EARNINGS
2. Property Dividends
 Distribution of earnings of the entity to the shareholders in the Legal appropriation
form of cash/property
 Arises when the legal capital cannot be returned to the
 Measurement must be at the fair value of the property to be
shareholders until the entity is dissolved/liquidated
distributed
 In settlement, the difference between the carrying amount of Contractual appropriation
the dividend payable and the carrying amount of the asset
 Arises when the terms of the bond issue and preference share
distributed shall be recognized in profit or loss.
issue may impose restriction on the payment of dividends
3. Liability Dividends
 These are actually deferred cash dividends. It may be in the Voluntary appropriation
form of bond and scrip
 May arise when the management wishes to preserve the funds
Bond Script for expansion purposes or for covering possible losses or
Long term Short term contingencies
Normally, interest bearing May/may not be interest bearing
RESERVES
 Share premium reserve is the excess over par or stated value
4. Stock Dividends  Appropriation reserve is the earmarking of retained earnings
 Distributions of earnings of the entity in the form of the entity’s for a certain purpose which may be legal, contractual or
own shares voluntary
 If the stock dividend is less than 20%, entities whose shares are
registered with SEC and are listed in stock exchange may
account for stock dividend by transferring from retained
earnings to share capital and share premium the fair value on
the date of declaration (or par or stated value, if higher than fair
value), of the additional shares issued.
 If the stock dividend is 20% or more, the par or stated value is
capitalized because this is conceived to materially effect a
reduction in the share market value.
  Asset revaluation reserve arises from the revaluation of PPE
 Other comprehensive income reserve
QUASI-REORGANIZATION
 It is a permissive but not a mandatory proce3dure under which
a financially troubled entity restates its accounts and
establishes a “fresh start” in accounting sense. It is also called
“corporate readjustment”. It may be done through:
 Recapitalization
 Revaluation of PPE
EARNINGS PER SHARE
 amount attributable to every ordinary share (ONLY)
outstanding during the period
Two Presentations of EPS
 Basic earnings per share
 Diluted earnings per share
Use of EPS
a. determinant of the market price of ordinary share, thus
indicating the attractiveness of the ordinary share as an
investment.
b.”measure of performance” of management in conducting
operation.
c. the basis of dividend policy of the entity.
Examples of potential ordinary shares
a. Financial liabilities or equity instruments, including
preference shares, that are convertible into ordinary shares.
b. Share warrants
c. Share options or employee plan that allow employee to
receive ordinary shares as part of their remuneration.
d. Shares that would be issued upon satisfaction of certain
conditions resulting from contractual arrangements such as
purchase of a business or assets.