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I.A 2 Lecture 2 Liabilities

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67 views18 pages

I.A 2 Lecture 2 Liabilities

Uploaded by

Arong, Jheralgin Arevalo
Copyright
© © All Rights Reserved
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LIABILITIES

BONUS
• A financial compensation that is above and beyond the normal payment
expectations of its recipient.
• Not the bonus prescribe by under the law (ex. 13th month pay)
• Not the bonus under partnership accounting (admission/withdrawal of
a new partner = bonus method)
• Not the bonus given by your professor in quizzes or major exam ex.
Bonus point :P
• BONUS IS DETERMINE AFTER THE END OF THE REPORTING PERIOD
(SUBSEQUENT EVENT) – ADJUSTING ENTRY
• Bonus is a constructive obligation rather that legal obligation
BONUS COMPUTATION VARIATION
% OF INCOME BEFORE BONUS AND BEFORE TAX B=%(I)
% OF INCOME AFTER BONUS BUT BEFORE TAX B=%(I-B)
% OF INCOME AFTER BONUS AND AFTER TAX B=%(I-B-T), T=%(I-B)
% OF INCOME BEFORE BONUS BUR AFTER TAX B=%(I-T), T=%(I-B)
ILLUSTRATIVE PROBLEM 1
• N Company has an agreement to pay the sales manager 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 is 30% of income after bonus.
Requirement:
Determine the bonus under each of the ff independent assumptions:
1. Bonus is a certain percent of the income before bonus and before tax
2. Bonus is a certain percent of the income after bonus but before tax
3. Bonus is a certain percent of income after bonus and after tax
4. Bonus is a certain percent of income after tax but before bonus
SOLUTION:

1. B= 5% x 5,250,000 = 262,500

2. B= 5% (5,250,000 –B )
B = 262,500-.05B
B+.05B = 262,500
1.05B = 262,500
B = 250,000
SOLUTION
3. B = 5% (5,250,000 – B – T)
T = 30% (5,250,000 – B)
B = 5% {5,250,000 – B – [30%( 5,250,000 – B)}
B = 5% (5,250,000 – B – 1,575,000+.30B)
B = 262,500 - .05B – 78,750 + .015B
1.035B = 183,750
B = 177,536
SOLUTION
4. B = 5% (5,250,000 – T)
T = 30% ( 5,250,000 – B)
B = .05 {5,250,000 – [ .30 ( 5,250,000 – B)]}
B = .05 (5 ,250,000 – 1,575,000 + .30B)
B = 262,500 – 78,750 + .015B
B = 186,548
PREMIUMS
• This are articles of value such as toys, dishes, silverware, and other
goods given to customers as a result of past sales or sales promotion
activities.
• Return of product labels, box tops, wrappers and coupons (not point
of sale)
PREMIUMS PURCHASE OF PREMIUMS:

PREMIUMS XX
• Accounting entries CASH XX

ISSUANCE OF PREMIUMS/REDEMPTION:

PREMIUM EXPENSE XX
PREMIUMS XX
RECOGNITION OF EST. LIAB (BASED ON MATCHING PRINCIPLE)

PREMIUM EXPENSE XX
EST PREMIUM LIABILITY XX

• Est. liability – are obligations which exist at the end of reporting


period although their amount is not definite.
ILLUSTRATIVE PROBLEM 2 : Premiums
• M Company manufactures a product that is packaged and sold. A plate is offered
to customers sending in three wrappers accompanied by a remittance of P10.
Data with respect to the premium offer are summarized below.
2023 2024
Sales 3,600,000 4,200,000
Purchase of premium (P50 per plate) 390,000 580,000
Number of plates distributed as premiums 5,000 9,000
Estimated number of plates to be distributed in subsequent 2,000 3,000
period
Distribution cost P20 per plate

• Requirement: Prepare journal entries that would be made in 2023 and 2024 to
record sales, premium purchases and redemptions and year-end adjustments.
Solution
2023 2024
1. Cash 3,600,000 1. Est. premium liability 120,000
Sales 3,600,000 Premium expense 120,000

Cash 4,200,000
Sales 4,200,000
2. Premiums 390,000 2. Premiums 580,000
Cash 390,000 Cash 580,000
3. Cash (5,000x10) 50,000 3. Cash (9,000x10) 90,000
Premium expense (5,000x40) 200,000 Premium expense (9,000x40) 360,000
Premiums (5,000x60) 250,000 Premiums (9,000x50) 450,000
4. Premium expense (5,000 x 20) 100,000 4. Premium expense (9,000 x 20) 180,000
Cash 100,000 Cash 180,000
5. Premium expense (2,000x60) 120,000 5. Premium expense (3,000x60) 180,000
Est. Premium Liability 120,000 Est. Premium Liability 180,000
CASH REBATE PROGRAM
Rebate – retrospective payment which ultimately reduces the overall
cost of a product /service at a later date
Rebate Expense xx Rebate coupon issued xxx
Est. Rebate liability xx
Rebate estimate Multiply x%

Coupon to be rebated xxx

Est. Rebate liability xx Cash rebate /coupon Multiply xx


Cash xx
Rebate Liability xxxx
Cash Discount Coupon (ex. jollibee –
P5)
Cash Discount Expense xx
Est. Cash Discount liability xx

Est. Cash Discount liability xx


Cash xx
CUSTOMER LOYALTY PROGRAM (CLP)
- Many entities use a customer loyalty program to build brand loyalty,
retain their valuable customers and of course increase sales volume
- It generally design to reward customers for past purchases and to
provide them with incentives to make further purchases.
Stand –alone selling price – is the price at which an
entity would sell a promised goods or services separately
to a customer
Recognition: Unearned Revenue – points Sales
- The amount of revenue recognized shall be based on the number of
award credits that have been redeemed relative to the total number
expected to be redeemed
Third party operates loyalty
program
• Ex. Grocery points that can be redeem as miles (airplane tickets)
Entry:
Cash xx
Sales xx
Revenue from points xx

Redeemed points:

Loyalty program expense xx


Cash xx
ILLUSTRATIVE PROBLEM 3 : CLP

• An entity a grocery retailer, operates a customer loyalty program


• The entity grants program member loyalty points when they spend a specified amount on
groceries.
• Program member can redeem the points for further groceries. The points have no expiry date.
• During 2023, the entity granted 10,000 points. Mgt expects that 80% or 8,000 of these points
will be redeemed.
• The stand-alone selling of each loyalty point is P100, stand-alone selling price of groceries
P7,000,000
• The sale during 2023 amounted to P8,000,000 including the loyalty points.
• On December 31, 2023 4,000 points have been redeemed in exchange for groceries.
• In 2024, the mgt revised its expectations and now expects that 90% or 9,000 points will be
redeemed altogether.
• During 2024, the entity redeemed 4,100 points. In 2025 a further 900 points are redeemed
• Mgt. continues to expect that only 9,000 points will ever be redeemed, meaning no more
points will be redeemed after 2025.
2023: Initial sale
Cash 8,000,000
Sales 7,000,000
Unearned Revenue- points 1,000,000
2023: redemption of 4,000 points
Unearned revenue – points 500,000
Sales 500,000

(4,000/8,000)1,000,000 = 500,000
2024: redemption of 4,100 points
Unearned revenue – points 400,000
Sales 400,000

(8,100/9,000)1,000,000 = 900,000 – 500,000 = 400,000


2025: redemption of 900 points
Unearned revenue – points 100,000
Sales 100,000

(9,000/9,000)1,000,000= 1,000,000 – 900,000 = 100,000

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