-~~:_l!ln~t~ro~d:!!u~ct~io~n~t~o~Li~a:::'.b~ili~t~ie:..

::s~ - - - - - - - - - - -
Chapte,:_ 26 ---... chapter 26 - Introductio n to Liabilities
~

from actions where :

cHAPTER26 a. Contract ;
a. The entity indicated to other parties that it
INTRODUCTION TO LIABILITIES will accept certain responsibilities by

-TO PIC OVERVIEW: . - ·

. usses liabilities, its cha racte ristics, types and cl assifi cauo 11
d ,sc
b. Legjs lation; or
c. Othe r operations of
law.
reason of an established pattern of past
p ractice, published policy, o r a s ufficiently
curre nt statement.
Th i·c:,., chapter 'ti b
n 1·niti al measureme nt, s u sequent measurement and
, b. And as a result, the entity has created a
• · · I recogn1
miti a . .
°, dcrecognition and finan cia l statement presentation .
• valid expectation on the part of other
reclass1ficat1on. parties th at it will discharge those I
responsibilities.
LEARNING OBJECTIVES: .
. d ·ng thi s chapter, you should be a ble to.
Y' the elements in the d e,in1t1on
After stu ibe " · · ofl'1a bT · 3. The se ttlement of liabil ity requi res a n ou tflow of resou rces e mbodying
1 1t1es.
1· Descr · d I ·11 t · f 1· b ·1· · e conomic b ene fi ts.
2 Identify th e diffe rent. categon~s.an ~ a_s~ 111ca 10n o 1a 1 1t1es
Settlement of a present ob ligatio n normally results in giving up
3· Describe the initial reco~mt10dn, 1n1t1~ . measdurefiment, su bsequent
· measurement, reclassificat1on, erecogmt1on an inancial statement resources em bodying econo mic benefits in order to satisfy the claim of
resentation of liabilities. the other party.
~I ssify liability as current and non-current. Settlement may occur in a number of ways, for example, by:
4 · Coampute the correct amount of liability and its related accounts.
5. a. payment of cash;
b. trans fer of othe r assets;
LIABILITIES c. provis ion of services;
d. replacement of that obligation with another obligation: or
Liabllitie£ are present obligatio~ o~ an entity a r isfag fro m past transact:io'n
e. conversion of the obligation to eq uity.
or events, the settlement of wh tch 1s expected to result in a n outflow frorn
the entity of resources embodying economic benefits. However, an obligation may also be extingu is hed by other means, such
as a creditor wa iving or forfeiting its rights.
Elements in the definition of liability
1. Li.;lbility is a present ob liga tion o f an e ntity. Common accounts used to describe liabilities:
The entity liable should acknowledge its existing obligation to a Accounts payable SSS Contributions payable
particular payee, whether the latter is identified or not. Notes payable PAG -lb ig Contributions payable
Loans payable Phil Health Contributions payable
An obligation is a duty or responsibility to act or perform in a certain
Bonds payable Withholdin g taxes payable
way. This may be legally enforceable as a consequence of a binding
Mortgage payable Income taxes payable
contract or statutory requirement.
Lease liability Utilities paya ble
2. Liability arises from pas t t ransactions or (:lvents. Advances from customers Warranti es payable
A transaction or event that will give rise to a liability should occur first Unearned revenues Premiums payab le
prior to the recognition of an item as liability. Deferred revenues Cash dividends payabl e
Unearned rent Property dividends payable
The past event that gave rise to th e present obligation is termed as
Salaries payable Constru ctive obligations
obJigating event. An obligating event creates a legal or constructive Accrued interest expense/Interest payable
obligatjon because the entity has no realistic alternative but to settle the
obligation. INITIAL RECOGNITION OF LIABILITIES
Le al ob ctive obli ation A liability is recognized in the stateme nt of financi al position when
Constructive a. it is probable that a n outflow of resources e mbody ing economic
An obli ation that is derived from an enti 's be ne fits will result from the se ttl e me nt of a prese nt o bligatio n; and

994 995
 - I troduction to Liabilities
Chapter 26 - Introduction to Liabilities
~ - n
Chapter 26
Definition of relevant terms
-----
Note: For problem solving purposes, if the p roblem indicates 1nformat1on
that will e nab le you to compute for present value of all paym ents, th e
fair vJlue . that would be received to sell an asset or paid to transfer
T his·. is appro pri ate initial measurement would be its present value (short-term
. the
. price rderly transaction between mar k et participants
. . at th a
liability in an o e payabl es with no stated interest rates can be measured at invoice amo11nts
measurement date. [PFRS 13] when the effect of discounting is immaterial.)
Transaction costs .
. costs are incremental costs that are directly attnbut<1hle to th
. Illustration of Amortization of Liabilities
Below s hows the co mponen ts of amortization table to determine amortized
. . . nn issue or disposal o f a fimanc1a
Transactio . 11 1a
· b'l1 1'ty. An incremental
. cost 1.e
cost usi n the effective interest method .
t would not have been mcurre I t e entity a not acqu ired, issueds
acqu1s1t10 , . d 'f h . h d .
one t h a . 11 . b. 1. Interest Carrying
or disposed of the financ1a ,a • ity. Date Payment • Amortization value
Ex ense
Transaction costs include: (a) (h)
F es and commissions paid to agents, advisers, brok ers and dealers (c) (d) (e) (g)
(~
~- L:vies by regulatory agencies and securities exchanges
· Transfer taxes and duties
c.
+ + + +
a. Issuance date
Important no~es:_. . . b. Initial measurement of the liability
For financial 1tab1ht1es classified at fair value throug h profit or loss, the
c. Date of payment for interest, principal or both. For non -interest
following are made: bearing note payable on a lump sum basis, this column s hall be
1. Measu red at fai r va lue; .
. Transaction costs a r e recogmzed as expense; and represented by the subsequ ent reporting date.
2 d. Amount of payment for interest or principal o r both . For inte rest
3 _ Changes in fair va lues are recognized in profit QT loss. payment, the amount is determined as follows :
(Ou tstanding face a mount x Stated/Nominal/Coupon interest rate)
Non-availability of fair value for financial liabilities
e. Amount of interest expense incurred. This shall be computed as
For liabilities, in the absence o f a quotation in a market, face amount and
follows :
present value of related cash flows m ay be used as basis in determining f(lir
(Previous carrying value x Effective/Market interest rat£')
valu e. f. Determine by getting the difference between interest L·x pense and
Short-term liabilities are normally measured at fa ce amount . payments made during the period
g. Carrying a mount or th e a mortized cost
On the other hand, long-term liabilities shall be valued as follows:
Category Characteristics Measurement *Note: Amortization colu mn shows the amount of adjustment to be 111c1dc lo
._,. the previously reported carryi ng amou nt. Thi s may represe nt amo,-rization

---
Interest bearing Nominal interest rate is Face amount
not substantially different of premium or discount, or portion of total payments applicab le to principal
liabihtie~
with market rate
RECLASSIFICATION OF FINANCIAL LIABILITIES
Nominal interest rate 1s Present valu e of PFRS 9, paragraph 4.4.2, states that an entity shall not reclassify a financial
-
substantially d lfferent -. principal and
liability.
with market rate interest payments
DERECOGNlTION OF LIABILITIES
--·· ------- ........... -- r ina ncia l li a bility is dcrecognized on ly wh en ex t ingu is h ed
a) t he ob liga ti o n speci fi ed in the contract is d ischa rged , cance ll e d o r il
Non -intere~t I-+ Long-term liabilities ---+ Prese nt valut- uf e xpires
bearing (maturity of more than 12 principal payments
liabllltie~ months)

998 999
 ct ·o n to Liabilities Chapter 26 - Introduction to U a~
b _,1_
, t_1e_s_ _ _ _ _ __
6 1ntrodu 1 -
Chapter 2 - existing borrower a nd IPnder of dr!ht
betwee n an • ~~ ✓ Long te rm not es fldydblc
b) a n e.J!'.cha n ge . b stanti a lly d iffe re nt ~ ms or c;u bstaati;iJ
l·nstrum.ents wi th s u f a n existi ng fi na n cial liabi lity nf part th e re('f ✓ Bond s pJyahlC'
- . f tt,e terms O ·
✓ Liab ility undN finance leases not duC' w ithin 12 months
modificatw n ° ·tion The difference betwee n th e carryin
derecogna . . . i ti ~
Gain or loss on . I liability exti nguish e d or t ra n s crre to a 3rd party and cu rr e nt Liabilities in the Statement or Financial Position
amount of a fin anc1a .d . recognized in profit or loss. Under PAS 1. as a minimum, rh c face of the StJtement of Financia l Pos i tion
.
the cons1dera t·o n pa • 1s
J s hould includ e tht' following lin e itC'ms for cu rre nt lid b1h ti es .
,1 . Trad e a nd other po1y.ihles •
-~~~~~~A~T~E~M~E~N~T~P~R~E~SfrE~N~T~A~T;.-
!INANCIAL ST s10tN~~ntPr4;;m:;;~n-
bTties for Financial. Statement Prese ntation - b. Curre nt provis io n s
Classification ofL.~l_a_ • -•- - - - - , c. Short-term harrowing
Current L1abll 1ties A li ability 1s classifiedJ,
cu rrent if d . Curren t portion of lon g- te rm debt
Liabilities a. it is expected to be settl ed within e. Current tax liabi li ty
the entity's normal operating
cycle. •une item s fo r accou nts pay.1blc, notes payable. accrued interes t o n note
b . it is expected to be settled within payable. di vide nd s payable an d accrued expenses.
12 months.
Add ition al It ems s hall be presented o n the face o f the State m e nt o f Financial
c. it is held for trading.
Posi t io n when such presentation is re levant to an understanding of t h e
d . th e entity has no unconditional
right to de fer paymen t for a t least e ntity's finan cial positio n.
12 months from the reporting
date . Illustration: Classification of li a bilities - current vs. non-current
Non-current Kobe Co. has th e followi ng liabilities dS o f Decembe r 3 1, 2018.
Noncurrent liabilities a re items
Liabilities ~ Trade acco unts payable P 600.000
a. Other than cu rrent liabilities
b . Specifically requ ired by a ,,,. -Bond s payable 500,000
particula r sta nd a rd to be classified l \. Trade notes payable 100,000
in this category. r-..U security d e posit 100,000
_ l Cas h dividend s payable 80 ,000
Examples of Current liabilities l Prope rty di vide nd s payable 75.0 00
✓ Trade payables ✓ Accounts payable ·\, Held for tradi n g financia l liabilities 6 0 .000
✓ Accrual to employees and ✓ Short-term notes payables cl Income tax payable 5 0 .000
other operating costs ✓ Liability under trust receipts \I C\. Advances from affi liates
50,000
✓ Customer's credit balances ✓ Deposits and advances i:, L Trad e accounts payable granted to officers 30 ,000
✓ Bank o,v erdraft ✓ Deferred or unearned U. Salaries and wages payable 25.000
✓ Dividends payable (except revenue ' t SSS premium s paya ble
22,500
share dividends) ✓ Provisions expected to be (. L Deferre d revenue
20 ,000
✓ Income tax payable settled within twelve months C.1_ Unearned rent
15,000
✓ Current portion of long-term Share dividend paya ble
15,000
financial liabilities L \.. Ban k overdra lt
10,000
(. \. Credit balance in customer's acco unts
Examples of Non-current Liabilities j.J{..L De ferred tax liability 8,000
✓ Noncurrent portion of longterm debt 5 ,00 0
Q Accru ed expenses
✓ Deferred revenue - noncurrent portion 5,00 0
✓ Finance lease liability Additio n a l inform ation :
✓ Deferred tax liability • Deduc~ed from the trade accounts paya ble are
✓ Long-term obligations to company officers Debit balance in suppliers' account
PZ0,000
✓ Long-t e rm deferred revenue Undel ive re d checks
1 6,0 00
1000 1001
 6 - Introduction to Liabilities Chapter 26 - Introduction to Liabi lities
~ 8,000
Postdated checks Defe rred tax liability 5,00.0
d fro m the trade accounts payable are
•1s o Total non -c urren t liabilities
• Excluded eceived •
on consignment r , 00
Goods: transit. shipped FOB Shipping point 17,500 The following item shall be presented as part of equity:
Goods ~n t nsit shipped FOB Destination
Goo sin ra in five
' equal semi-annual
. .mstallments
15,000 Share dividend paya ble r. lSJ)Q_O
Bonds mature Note: The deferred reve nue is just like unearned revenue, it shall be
• . d posit was received from a lessee. The amount will b
• Security e e presumed current liability unless otherwise stated in th e prohlem.
refunded on Decemb~r- 31, 2_023. .
• The deferred tax hab1hty anses from a temporary difference which Will Classification of Long-Term Debt Falling Due Within One Year
reverse in 2019. The following rules shall be applied fo r long-term liabilities which are due
. d· Determine the amount to be reported in the December 31 2018 to be settled within twelve months from the reporting date.
~~n• I

financial statements_as_ Settlement and Refinancing

Current 1iab1ht1es
b. Non-current liabilities r---"---------- -.j
a. Origlna l term Qf To be settled on matu ri ty date ru rr r n l
a period longer
;::::===========::::!
SOL~::~:i;owing items shall be pr~sented as current liabilities: than twelve l t2)
months
The debtor has the discretion to
refinance for a period of at least
Nsrnnirrent
a. Trade accounts payable - unad1usted P 600,000
12 months from the reporting
Add/(Oeduct): . . , 20,000 date
Debit balance in suppliers account
Undelivered checks 16,000
8,000 To be refinanced AITER the •Current
Postdated checks reporting dare or for a period less
Goods in transit, shipped FOB
17,500 than 12 months from the
Shipping point reoorti ne date
Trade accounts payable - adjusted P 661,500
Bonds payable - current portion (PS00,000/5 x 2) 200,000
100,000 To be refinanced ON OR BEFORE
Trade notes payable the reporting date for a period of
cash dividends payable 80,000 Noncurrent•
at least 12 months from the
Property dividends payable 75,000
re nnrtinP rl atP
Held for trading financial liabilities 60,000
Income tax payable 50,000 Breach of provision ofloan arrangement
Trade accounts payable granted to officers 30,000
25,000 Presence or Required to be settled withln 12 Current
Salaries and wages payable breadtof months
SSS premiums payable 22,500
20,000 covenant/s
Deferred revenue A grace period was granted
15,000 •current
Unearned rent AFTER the reporting date or for a
Bank overdraft 10,000 period less than 12 months from
Credit balance in customer's accounts 8,000 reoorting date
Accrued expenses 5,000
Total current liabilities P 1.362.000 A grace period was granted ON OR
BEFORE the reporting date for a Noncurr,:,nt
b. The following items shall be presented as non-current liabilities: period of at least 12 months from
Bonds payable - noncurrent portion P 300,000 the reporting date
Security deposit 100,000
"Note: Qualify for disc osure as non-a justing events.
Advances from affiliates 50,000
1003
1002
- 26 _ Intro du
ction to Liabilities
~ - Debt Falling Due Within One Year Chapter 26 - Introduction to Liabilities
Illustration: L0
Rajon Co. has th e
"ff~r~ng
O ow
liabilities 0 11 December 31, 20 18:
P 2,000,000
Total cu rrent liabi lities
8% Note payabl e 1,s oo,000 The fo llowing items shall be presented as non-curre nt liabiliti es:
10% Nolr payabl e l 250 000 10% Note paya bl e (refin ancing agreement
Jayablc ' '
11 % Note I l 000 000 was co mpleted on December 31, 2018) P 1,500,000
10% Loan payable '750,000 11% Note payable (grace pe riod was
l Zo/o Loa n payable r. • ' granted on Dece mber 31. 2018) 1,2 50,000
15% Loan paya hie . .)00,000
'1 2% Loa n payable (borrower's discretion) 750,000
Add.tional information: . Total non-current liabilities LJ,5.Q,Q.QM
1 801. , 2 OOO 000 Note payable 1s clue on January 1, 201 9 and is to b
. 1) The 10, ' ' . h I Id e TRADE ACCOUNTS PAYABLE
l settl ed by delivery of merchand1s1e1to t_e '. o cr.
1 3
2) The lo o1.70 , ar 1,500000
'
Note paya J e matu1 es on une 0, 201 9, Interest
. Characteristics
1 , 1
on t11e o · an is due every June
.
30 and Dece
.
mber 31. On December
. 15, Description Present obligations that are not supported by formal
01 8 Rajon Co. entered mto a refinancmg agreement with a bank to promises to pay by th e debtor. These obligations norma lly
~efi n~nce the note on a long-term bas is. The refinancing and roll over arise from acquisiti ons of inve ntories to be used in the
transaction was completed on December 31, 2018. normal operating cycle of the enti tv.
, \ 3) The 11 % Pl,250,000 five-yea r Note payabl e was obtained by Rajan Recognition When ownership of goods are transferred to the buver.
from a bank. The agreement requires Rajon to maintain a current ratio Measurement Fair valu e. which is normally the invoice price of goods
of 3:1. If the current ratio falls below 3:1, th e note becomes payable on acquired and may or may not be affected by related freight
demand . As of December 31, 2018, Rajon's current ratio is 1.5:1. On and cash discounts
December 31, 2018, the bank agreed not to collect the note in 201 9. Presentation NormaJiy incl uded in th e current liabilities section under
t l 4) The 10%, Pl,000,000 loan payable is payabl e on demand. However, on the heading "Trade and other payables"
December 31, 2018, there is no indication that the payee on the loan
will demand payment over the next 12 months. Initial Measurement
\ , \. 5) The 12%, P750,000 Loan payable is maturing on July 1, 20 19. Interest List or quoted price xx
on the loan is due every July 1 and December 31. On January 15, 20 19, Less: Trade discounts, rebates and other si milar items xx
Rajan Co. entered into a refinancing agreement with a bank to refi nance Initial measurement (gross method of recording pu rchases) xx
the loan on a long-term basis. Both parties are financially capable of Less: Purchase discou nt
Initial measurement (net method of recording purchases,
xx
honoring the agreement's provisions. Rajon has the discretion to
refinance or roll over the loan for at least twelve months from whether discount is taken or not)
December 31, 2018 under an existing loan fa cility. Pro-forma journal entries:
, . 6) The 15%, Loan payable is due on June 30, 2019. Interest on the loan is Gross Method Net Method
payable every June 30 and December 31. On December 15, 2018, Rajan 1) To record acquisitions of inventories:
and the creditor agree to settle the obligation by giving the latter Rajon's Purchases xx Purchases xx
long-term investment in another corporation. Accounts payable (gross) xx Accounts Payable (net) xx
Rondo's financial statements were authorized for issue on March 15, 201 9.
2) To record payment made within the discount period:
Required: Determine the amount of liabilities to be reported as current Accounts payable (gross) xx Accounts payable (net) xx
liabilities in the statement of financi al position. Cash (net) xx Cash xx
Purchase discount xx
SOLUTION:
The following items shall be presented as current liabilities: 3) To record payment made beyond the discount period:
8% Note payable (to be settled in 2019) P 2,000,000 Accounts payable (gross) xx Accounts Payable (n et) xx
10% Loan payable (payable on demand) 1,000,000 Cash (gross) xx Purchase discount lost xx
15% Loan payable (to be settled in 2019 500,000 Cash (gross) xx
1004 1005
 t duction to Liab..'ili
..:::;:ti:.::
e::.s _ _ _ _ _ _ _ _ _ __
Chapter 26 ~ ~ro~ :.=.;...- -
~ • t Char es in ~c~nts Pa able ' \ Chapter 26 - Introduction to Uabllitles
i;~c~~reigh Freight shou~l~
d--,-£-;:; gh;-:t:·--.--:F.=-=
Fr~e"--;i~ .1:=re_
- c_t _
on--
z. Amount of remittance by Ash to Angeli ca:
be paid by: paid by: Accounts June 11, 2018
Pa able \ J.ist price P 5,000,000
Buyer Seller Add~ Less: Trade discou nt
~ Shipping
a. h
point. freig t
payable \ rc,sMx 20%) + r,sM x ao% x 10%)1 1,400,000
Invoice price P 3,600,000
re aid Buyer
Buyer No effect Less: Cash discount (P3,600,000 x 5%) 180,000
b. FOR Shipping
Bala nce P 3,420,000
point, freight
Add: Freight prepaid by the seller 200,000
cnllect
Seller Seller No effect Tota l amount due P 3,620,000
c. FOB Destination,
fre i ht re aid June 16, 2018
Seller Buyer Reduction in
d. FOB Destination, a able
List price PS,000,000
frei ht collect Less: Trade discount
[(,SM x 20%) + r,sM x 80 % x 10%)] 1,400,000
·on· Determination of Initial Measurement and Amount to
mustrati .
0_
Of Invoice price P 3,600,000
Remitted . . . . Less: Cash discount
018 Angelica sold merchandise with a list price of PS ooo 00
On Iune 1, 2 • . • , O Balance P 3,600,000
A h Angelica allowed trade discounts of 20% and 10% Credit ter Add: Freight prepaid by the seller 200,000
to s . . . · mi
were S/10. n/30 and _the sale was made FOB shipping point AngeliQ Total amount due P" 3,800,000
prepaid P200,000 of delivery cost for Ash as an accommodation.
Required: Using the data above, a~swer the following: Illustration: Determination ofAccounts Payable Balance
1. What amount shal l be recogmzed _as Accounts Payable assuming As! On December 31, 2018, Bryant Co. has accounts payable of 1'4,000,000
records purchases under the followmg methods: before possible adjustment for the following:
a. Gross method b. Net method -t a) Goods in transit from a vendor to Bryant on December 31, 2018 with an
z. How much will be remitted by Ash to Angelica if payments are mad, invoice cost of 1"200,000 purchased FOB shipping point was not yet
under the following independent situations: recorded.
a. June 11, 2018 b. June 16, 2018 + b) Goods shipped FOB shipping point from a vendor to Bryant was lost in
transit. The invoice cost of PB0,000 was not yet recorded.
SOLUTION: c) Goods shipped FOB shipping point from a vendor to Bryant on
1. Amount to recorded as part of accounts payable December 31, 2018 amounting to P32,000 was recorded and included in
List price P 5,000,000 the year-end physical count as "goods in transit."
Less: Trade discount d) Goods in transit from a vendor to Bryant on December 31, 2018 with an
[(PSM x 20%) + (P5M x 80% x 10%)] 1,400,000 invoice cost of P40,000 purchased FOB destination was not yet
Initial measurement under gross method - P 3,600,000 recorded . The goods were received in January 2019.
this is also the invoice price of the - e) Goods with invoice cost of P60,000 was recorded and included in th e
merchandise year-end physical count as "goods in transit." It was found out that the
Less: Cash discount (P3,600,000 x 5%) goods were shipped from a vendor under FOB destination.
180,000
Initial measurement under net method P3.420,000 Required:
Compute for the adjusted accounts payable on December 31, 2018 _
The invoice price the merchandise may also be computed as follows:
(PSM x {100%-20%) x (100% · 10) = P3,600,000 SOLUTION:
Unadjusted balance P4,000,000
(a) Unrecorded purchases 200,0 00
1006 1007
,apter 2_tl
"&i__:-:. . !l!n~tr~o~d~uc~t!_<:
io~n_!t~o..':L~ia~b~ill~tl~es~ ~ ~ - ~
.
- - - - - - - - - - -, Chapter 26 - lntroductl~~1lltles
.:,.:;..,...--- bk on purchases lost in transit 80,ooo
,) Unrecorded payal Id he recorded in the next Pro-forma juurn(J/ entry:
·) PurchJses thJt s iou (60.0nn, Honus expcn,;('
accounting period ~ P4,220, 000 Honus p.1yablc
otal --... Bonus calculation
. Determination of Accounts Payable Balance Bonus may be dcrived based from the lollowm1r . 1 ·i wx lJ ijt
1\ustratlon. 31 2018 Michael Co. has accounts payable of P2,000 0r,, l Nd ini:orne ~eforc bQOU5 and 4. ~r t mcomt ., J.I
Jn December , · . , uv . \' twrcQn:: ~f\JUl')
'ble adjustment for the following:
,cfore possid but not yet released to payees amounted to P48 000 an,
t,,ix;_- - - - - - : : - : - -
l B = NY X BR 7 r a
t_!!_~ ~ -
lNY TJ
) Checks rawn , ·~
1 post-dated checks drawn and releasedhto ~aydeeMs _amh ou1nted to P20,00o 2. N'('t iACOIUl' :i(tcr bnm.is \:1 11t [±__:,_ TR )C J.:'!:!' - 13}
ber 28 2018 a vendor aut onze 1c ae to return for hi~ hr:'fn r~ ta'<: __ _ _ _ ____, OR
b) On dDecetnds ship' ped ~nd billed at Pl00,000 on December 14 201 8
ere ,t goo b ' ts = BR x tNY - BJ ,-- BR lNY >- l t TR \l
Micha~\ shipped the returned goods on Decem er 31, 2018 but tht OR NI::=J I
B = 1 UK+ IBR x ( l
d't memo was received and recorded only on January 3, 2019.
ere d' hipnrd FOB shipping point. freight prepaid from a vendor on [s = BR x 100~ l rn11
c) Goo s ber s 28,i-
2018 was recor ded at ·mvmce
· cost at sh'1pment date. Tht
Net income. after bonus. ;md Where:
Dece_m cost is P56 ooo while the freight cost is P12,000. 3. NY = Net income hl'lnre
invoice ' , . . I
G d shipped FOB dest1nat1on, freight collect were received on
t :ix
r:s = BR X LNY _ 8 _ T) I b0nu<; JIil \.IX
°
d) 0 0 5,ber 29, 2018. The invoice cost of P160,000 was credited tu L; R ; Ho nu..,
a:i:~nts payable on date of receipt and the related freight of P20,00{j [i = TR x (NY - B) ] BR == Bonus R.1 lc
OR T = T,lX
was debited to an expense account.
BR X [NY )( (1 -TRll TR ::: T,IX RdlC
Required:
Compute for the adjusted accounts payable on December 31, 2018.
B =
L-----..._
l + BR x (l-TR)j l
SOLUTION: Illustration: Bonus Calculation
Unadjusted balance - accounts payable ,2,000,000 Riel. president of the CPA Co., h,1s an arrangement with th e comp,rn y under
(a) Unreleased and postdated checks 68,000 which she receives 10%1 bonus each year. For th e current YL'M thl' llL' l
(b) Purchase return (100,000) income before deducting even the provision for income t:ixcs or thl' bonu'> 1s
(c) Unrecorded freight shouldered by seller 12,000 PS,500,000. The bonus is ded uctible for tax purp,1~1-s .,ml thl· t.1x 1.itc 1,
ld) Freight paid on behalf of the seller (20,0001 30%.
Total adjusted accounts payable ftl ,960,000 Required: Determine the amount of Riel's b(J11us and lh t• .,1pprnpri atc
provision for income tax for the yea r under tht• folluw111 g 1mlepe111knt
ESTIMATED LIABILITIES scenarios.
Estimated liabilities are items that involve a present obligation and satisfy 1) Bonus is calculated based on net income before bonus and income tax.
the rest of the definition but can only be measured on1y by using ·a 21 Bonus is calculated based on net income after bonus but bdore itll:Ollll'
substantial degree of estimation. tax.
3) Bonus is cakulatcd based on net income aft er bonus .111d im:ome tJ,.
BONUS PAYABLE 4) Bonu s 1s calculated baseu on net income aftl'r income l J:<. b ul bl' lnrl'
lion.us is a gratuity given by entities to their employees as a gift or bonus.
compensation earned as reward upon achieving a goal such as exceeding
budgeted income during the year, meeting quotas, and having a superior SOLUTION:
performance in a project or activity. The primary purpose of this is to For (1) and (2) requirements:
encourage performance from officers and employees by directly associating To compute tor thl! .1mount of bonus, ,t 1s 1mperJt1vc tu compull.' tor the
their surcess to company's success. basis of bonus.
1008 1009
 Chapter 26 _ Introduction to Liabilities

To compute for the basis. we must first dete_nnine the eq~ivalent percenta
of the given net income before bonus and income tax with the assu
-----
_&!
Chapter 26 - Introduction to Lla bihtles
I 1 + [10% x (I -30%)!
that the basis has an assigned value of • 100%•. From there, we can cornPtion
for the basis by dividing net income before bonus and income tax wi~~i
percentile computed. '
I
.
B = _ _ _____;1'__;;_3AS,OOO
1.07

To illustrate, let us compute for (1} and (2} requirements: Is= P359,813
Requirement No. 1
• For requirement no. 1, NY before B and T is the basis. Thus, bonus~, Requirement No. 4
be simply computed as follows: • NY after Rand T (squeeze) == 100% - I 0% :: 90%
calculation of bonus • NY a fter B but before T {squeeze} :: 90 % / (1 - Tax rate)
Bonus: NY before Band T x Bonus rate Alternative Solution:
Bonus: PS ,500,000 x 10%
Bonus == tS5QJ20,0 IB = BR [NY x (1 -TR)]
1 - BR+ (BR x (1-TR)]
Requirement No. 2 . 10% x PS.S M x 1-3 0%
• For requirement no. 2, bonus 1s calculated as follows: B = 1 - 10% + 10% X 1-30%
Calculation of basis
NY before Band T (squeeze} 110% P385,000
Less: Bonus ~
Is = 97%
NY after B but before T ~ IB = P396,907
NY after 8 but before T
(PS,S00,000/110%) PS,000,000 • For (3) and (4) reau irements:
(3) (4 )
Calculation of bonus NY before Band T PS ,500,000 153% PS,500,000 139%
Bonus== NY after B but before T x Bonus rate Less: Bonus 359,8 13 ~ 396,907 ...1!l.%
Bonus== PS,000,000 x 10% NY after B but before T PS ,140.187 143% PS,103,093 129%
Bonus == t5~,JUW Less: Income tax (30%) 1,542,056 ...1.3.?fo 1,530,928 _3.2?.1i
NY after B and T P3,598,131 lili2% P3,572,165 90%
• For ( 1) and (2) requirements:
Add: Bonus 396,907 ...1.0..%
'1) (2) NY before B but after T P3,969,072 l.filrYg
NY before B dnd T P'S,500,000 100% P'S,500,000 110%
Less: Bonus 550,000 _.lQ!Mi 500,000 _.lfilh
Summary of answers:
NY after B but before T 1'4,950,000 2.o.cMt. P'S,000,000 lODi Bonus Tax
Less: Income tax (30%) 1,485,000 1.500,000 a. Net income before bonus and tax PSS0,000 Pl.485,000
NY after Band T P3,465,000 P3,500,000 b. Net income after bonus but before tax PS00,000 Pl ,500,000
c. Net income after bonus and tax P359,813 Pl ,542,056
d. Net income after tax but before bonus P396,907 Pl ,530,928
Requirement No. 3
NY after 8 but before T (squeeze)::: 100% / (1 - Tax rate)
UNEARNED OR DEFERRED REVENUE
Nternative Solution: This represents income already collected but not yet earned. This item shall

E =_ BRx [NY x (l-TRP

_ _ __ l + [BR x (1 -TR)
be presented d S pa rt of entity's liabilities and normally classified as current
liabilities. Examples include advances received from customers for goods
yet to be delivered, services yet to be provided, gift certificates sold, and
1B = 10%_x{P5,500,000x(l-30%)J I subscriptions.
1010 1011
 Chapter 26 Introduction to Liabilities
Chapter 26 - Introduction to Liabilities
Pro-forma journal entries:
Unearned se rvice co ntract at January 1 P200,000
1. Tore cord receipt of cash from advance orders:
xx cash receipts from service co ntracts sold 440,000
Cash service co ntract revenue recog ni zed 560,000
Unearned revenue xx 280,000
Service contract expense
2 _ To record application of advances to service provided or orders unearned service
Requir-e d : Compu t e f or t h e amo unt to h e repo rt e d ..~ s_
L

shipped: contract revenue at December 31 , 2018 by Scottie.

Unea rned revenue xx
Sales or any appropriate account xx SOLUTION:
Unearned service contract
Illustration: Unearned Revenue - Delivery ~f Goods P 200,000 Balance, Beg.
Jordan Co. requires a~vance payments for its products. The records of Cas h receipts from
Jordan show the following: Service contract service contracts
revenue recognized p 560,000 440,000 sold
Unearned revenue, January 1, 20~8 P 500,000 p p
560,000 640,000
C h received from advances durmg 2018 2,500,000
Balance, End 80,000
A~:ances applied to orders shipped in 2?18 _ 1,800,000 p p
640,000 640,000
Advances applicable to orders cancelled 111 2018 200,000
Required : Compute for th e amount_ to be reported as unearned revenue Illustration: Unearned Revenue - Gift Certificates
assuming the advance payments received are non-refundable. Pippen Co. has just opened a coffee shop and decided to sell _gi_ft certi_ficates
as part of its marketing and promotional strategy. The validity penod f?r
SOLUTION:
Unearned revenue these certificates is six (6) months. Transaction s relating to the gift
p certificates during the year are shown below:
500,000 Balance, Beg.
to • Sold gift certificates worth PlS,000.
Advances applied Cash received
p 1,800,000 2,500,000
• Gift certificates worth P9,000 were redeemed.
shipments/Sales from advances
200,00 0 • Pl,000 gift certificates expired.
•orders cancelled
p 2,000,000 p 1 000,000 Required : Compute for the amount of unearned revenue to be prese nted as
Balance, End (squeeze) 1,000,000 current liability related to these gift certificates sold.
p 3,0 00,00 0 p 3,000,000
SOLUTION:
*Pro-forma entry to record advances applicable to orders cancelled Unearned revenue
Unearned revenue xx Balance, Beg.
Income from orders cancelled xx Cash receipts
Gift certificate from gift
Note: If the cash received in advance is refundable, the amount applicable to
redeemed p 9,000 p 15,000 certificate sold
orders cancelled is still presented as part of liabilities.
Expired gift certificate 1,000
Illustration: Unearned Revenue - Provision of Services p 10,000 p 15,000
Scottie Company sells office equipment service contracts agreeing to service Balance, End (squeeze) 5,000
equipment for a two-year period . Cash receipts from contracts are credited p 15,000 p 15,000
to unearned service contract and service contract costs are charged to
service contract expense as incurred. Revenue from service contracts is
Illustration: Unearned Revenue - Subscriptions
recognized as earned over the lives of the contracts. Additional information
Erwing Company sells sports magazine subscriptions of one to four year
for the year ended December 31, 2018 is as follows: periods. Cash receipts from subscribers are credited to un earned revenue
1012 1013
 Chapter 26 - Introduction to Liabilities 26 -=~
ln~t~ro~d:u:ct~io~n~ to~L
~i:
ab~il~ti~ie~s:-=--:- - - - - - - -
~
l"hl~
,_., of each month . On January 1 201
and this acco unt had a balance of P4,800,000 on December 31, 20 18 bet · z5'" daYwas P200,000. ' 8, the balance of the e~c row
year-end adjustments. Outstanding subscriptions on Dece mber :il, 20°;e ,,ount .
a d: Determine th e amount Griffin should h
expire as follows : 8 fleCI~:~ thi s custome r on September 30, 20 18_ s ow as escrow liahility in
During 2019 Pl.200,000 During 202 1 r R00,000 bCt,a
During 2020 1,000,000 During 2022 400,000
s0Lur10N: Escrow liabilltv
Required : Compute for the amount of unearnt•d revenue to be reported as
current liability re lated to these magazine subscriptions on December 31 p 200,000
Balance, Beg.
2018. , nine Cash receipts
payrnen ts for nine
c.ish p 2,625.000
SOLUTION: 2.700,000 months
J1l 0 nthS p 2,625,000 p 2,900,000
C11rrent liability:
To expire in 2019 Pl ,200,000 End (squeeze ) 27 5,000
9a1ance, p 2,900,000 p 2,900,000
Non -current liability:
To expire in 2020 Pl,000,000
To expire in 2021 800,000 t 1·on· Returnable Containers
I IIJStra
I . C sells • ·
its products m reusa bl e contatners.
· The customer is charged
To expire in 2022 400,000 l(evan \ when containers are delivered and receive a refund when
Total non-current PZ,200,000 a de~os• 5 are returned with in one year after the year of delivery. Deposits
The difference of Pl,400,000 (P4,800,000 - P3,400,000) between the co ntainer·ners not returne d wit· h.m th e time· 11m1t· · are accounted as regarded
amount before adjustment and total outstanding liabilities as of December 1' or conta•ds from sale of the contamers.
. In format10n
. for 2018 is as follows:
as procee
31, 2018 shall be recognized as earned revenue. . deposits at December 31, 2017, from deliveries in:
container P 75 ooo
DEPOSITS RECEIVED 2016 '
2017 90,.000 P165,000
Depos its received represent cash received and held in behalf of other
entities such as clients and customers. These items are recognized as . for containers delivered in 2018 140,000
oepos1ts
liabilities and classified as to either current or non-current depending on . f r containers returned in 2018 from deliveries in :
their settlement dates. Examples include deposit in escrow accou nts and Deposits O P 50 000
refundab le deposits on returnable containers. 2016 '
2017 60,000
Pro-forma journal entries: 2018 70,000 180,000
1. To record receipt of cash from deposits:
. D termine the amount of liability fo r deposits on returnable
Cash xx Required • e
Deposits (liability account) xx containers on December 31, 2018?
2 To record refunds of deposits:
Deposits (liabil ity account) xx SOLUTION: osits
Liabili
Cash xx 165,000 Balance, Beg.

Cash refunds for

Illustration: Escrow Deposits Cash deposits
On the first day of each month, Griffin Company receives from a customer an {< container returned in 140,000 from deliveries
p 180,000
escrow deposit of P300,000 for value-added tax. Griffin records the "'
,;. 2018
P300,000 in an escrow liability account. The customer's value-added tax for /7 •Proceeds from sale of
the year is estimated at P3,500,000, payable in equal installments on the 25,000
containers p 305,000
p 205,000

1014 1015
 26 _ 1ntrodu ct1on to Llabiht,es
ChBP~ .
SC~h~ae_pt~e:!:r~2~6~-:=__!!ln~t:::ro~d~u~ct
:!_i~o~n~t~o~L~ia~b~i~tit:ie:s:::--i-- - - -- -- - - ~ - :::;;- .it .,s• not probable th.a t da n o utflow of reso urces e mbodying eco no m ic
) 100,000 i. benefits will bef rehqu irebl . to ~ettl c th e obliga tion; or
Balance, End (squeeze p 305,000 p 305,000 we amount O t e O iga tr o n ca nnot be meas ured with s uffi cie nt
ii- r el iability.
f m 2016 deliveries not return ed as Of
*This represents the balance ro .
ip between provision and contJngent liability
December 31 . 2018. This is computed as follows.
l ~t1onsh . . .
I sense, al 1 pn,.1 v1.s10n c; a re con tmgel')t uecau se they are uncertain Jn
1...
(le
(P75 ooo minus PS0.000)
• . d eeds from sale of containe rs and not as lrt genera amoun t . Th e t e rm "ron t mgrn t " ts · used fo r items that a re not
Such amount ts treate as proc riJ111ng _ord, b cnn1c;e th ei r c x.i,;tencc WLII be conftrmed by occurrence o r non -
nJze f
liability. reco g of one or mo.re unrcrt;11n uture evcntc; not within tho control of
rrcnre
oCC tl
Other Examples of Deposits Received and Their Corresponding en tity.
th e "continge nt li a bility" Is used for lia bilities that do not mee t the
Accounting Treatment
1 Security depos its received from lessee in a lease agre e me nt . 'fhe •tion criteria.
· a . lf th e depos.it is refundable, the ? mou nt sha ll ~e recogni zed as recogn1
liability and its classification as to either current 01 non -current will •51011 vs. con tin e nt liabili
be dependent on its settlement date. . proVI provision
b . lf th e depo,;it is non-refundagle, the amount sthhall be re~ogbni:cd as A present obligation • A possible obligation
liability and will be recognized as income over e _te~m o t e ease. • th probabl e and re liably • A prese nt obligation which is
2. De pos its received from s hareholders for future subscnpt1on , _ • Bo ei the r proba ble or reliably
measurabl e
The deposit shall be presented as a line item in shareholde rs equ ity. mea s ura ble but not both
Disclosed in th e notes to fina ncial
Recog nized as a regular liability •
PROVISION AND CONTINGENT LIABILITY • in the financial statements s tateme nts and not recogmzed in
A provision is a lia bility of uncertain amount or unce rtain timing. the financial s tatements
Provisions are actually estimated liability.
A provision is recognized when: Likelihood of occurrence Meanin
a. a n entit)'. h as a g_resent obliga tion (legal or constructive) as a r~s l! lt The future event is more likely than not to
of a past event; probable
occur. (i. e. the probability tha t the event will
b. it is probable that an outflow of reso urces e mbodying econom ic occur is greater than the probability that it will
benefits wi ll be required to settle the obligatio n; and not
c. a r~liab le esti mate can be made of the amo unt of th e obliga tio n. The future event is less like) to occur.
Reasona bl ossible
If these conditions are not met, no provision shall be recognized. The future event is least like! to occur
Remote
Pro-formajournal entry:
fi Contin2enc1es
To reoord the recognition of a provision: Summatry of AccountinJ? Treatments or
.
Expense xx Reliably Accountmt?. Treatment
Estimated liability xx Level .
Uncertainty
of Measurab
le
Accru Disclo
e se
I lgnor
e
I Remarks
A co nting_ent liability is:
a. a possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or Loss
more uncertain future events not wholly within the control of the entity; Contingencies
Treated as
or
Probable Yes X Provision
b. a present obligation that arises from past events but is not 1recogniz•e d
X Categorized as
because:

1016
.J Probable
Possible
Remote
No
Yes/No
Yes/No
X
X
} continge nt
liabilities
1017
(h/lpter 26 - 1~ro~
d ction to Wlbi liUOS -
-
p- ~ !JL l~o?ue:t~o~ to Llabl!!!_lc s

4, ttrlrnbunf'mrnt hy 11n111hrr 11;1rty

If ~nm1• or ,,ti nf th r. 1•,cr,rn,lll ilt r rrqulrc·d 11, ~"'"'' ,J pr1,V,Clf(1n I•,
l;,1111 e><pt•rtrd tr, he 11·1rnh11r..,.,t hy ,in,,t h1·1 p.irt y, 1111· rt1mh11r•f'mf nt
Cv111 111gt·n,ll'' Tn •,1lc•d ,hoUld ht• rrroacnlwd a• •• irp,u ale .. , . ... t f H 11vid«•rl 11 ;, VH f 11Jtly
\'irtu;11lv ,1 ,st•t f(•rL1ln th,tt n•tmhur <.r11tl'nt w.11 hr r,•1 dvr ,l 11 thr· r nt1ty •.dlt,., 1111'
\'t'' X
1'1l.Jlll ohlll<•'' ion.

I
1

V1r1u:1lly X The amou nt rrcol(nl·t rd ,Ht an ,1s <;1:t •,h1111ld n11t r xu·l'll th e ,1inoun1 r,f ll fl'
n•rt.1111 No
X
r:.,t rnnrf'ft•d ~\
\'l'~/ Nu provision ,111,I 11 '> hould not ht• lrc•:itNI a't ,, rrdurllon ol the rl'qult~,t
r1oh,1hk rn nt111nl'fll
" •1~',(•t,.
~

l\ 1ss1hk / Kl't11 provision.

X
Oil' 5, Gains on e"perted dl111>0\al of ;w,uh
Ra sir rulr: Nn nmtrnl(C'lll 1tcms ~hall b1· rrro,:11i1.1·d 011 thl' Ian• 11 t fi n,rn ri~, An ent ity rc<.11J,!11 i1.e'I gai n, 1J11 cx pn l,·«1di \ J.l')"'tl•; ,,( .w,cl\ .11 Ill!' 1,nw nl
disposition ol a'iSl't~.
~,.11c111rnh
6 . rrescnce of onerou.ci contrac,t
Mr,1s11rcmcnt of provision If ,HI cnl ity ha• an orwrou,; cnntrnct, thr~ pre~f'n1 ohllg.itr,,n ,,ntlPr tl w
Tht• ,1111011111 rrrogi111.l'J ,1s ,1 provision .,h.111 hl' lht·. best csllmatc of thr contni<"I shall hi' recognized <1nd me,1 ~11rr d ,,., ,1 prr,Vl'non
rXJJL' lllhlu rr r('quirl'J to , cllk , till' pl'l'Sl'lll ohhg,1!1011 ,Jl 1111' C' tlll of the
rqmrtin~ period. Br~t 1•st1mak 1s dc!N rnmccf a<; follows: 7. Rememmremcnt ol provblons
The tollowlng ~h,tll he performed wh1: n nwa-.unnli( prov111 111n'i
,1) The es tim ates of outrnmr ..i nd fin ,rnri,J I effect a rt' detern1111 ed hy 11
judgment nl 1hr m;111agemrnl nt th e l' 11lity, suppll'tnl'nl« •d
cxpPri1•nce ol srmllar trans,-ictlo ns a1ul, in ,01111• cases, rl'pof'l<; lrn,:i
t subsequent to Ini tia l recognition.
a. l{cvlcw anJ aJ ju'lt rrovl~lon:s at each rq,ortinv, dJII'.
h. II an outlluw nu longer pruhabl,•, prr,Vl'mm •~ n ·v• ned
111rlrpendcnt ci,;perls.
hl Where Lhr prov1s1 . on . IJl'ing. mca-;urcd involws a larJ<t• l>OJ>ul·a ti on or B. 1J5e of provlilons
Items. 11c I obl 1.gatwn .1
1s c~t1m.itt•u by weight 111g all 110ss ibl c out . If It Is nn longN probable th:1t an 1111tOnw ol r C'louru•-; w,ll lw r1•,1ui ri:d
· ,. . . . • wmc,!> 1,y
th t•1r assoc1ateL1 pro 1Jil ul 11t1cs. 111e 11:ime for tl11s statistical method to settle the obligation, the provl1s!on 'ih1Ju h.l he rcvn~•:d
estimation 1s 'expected value'. of
r ) Whl'l'c
, there is ., continuous range or possible out wmv es of Provl oilon
1 . . . comes, and ead,
~0111t 1111 i;-I1 range 1s as likely as any oth er, the mid - olnt r h Circumstance Reco1mlze a orovhloo7 __
,~ used. P O t e range
RestnicturinK hy -..1lP , ir Only when the cnllty 1:. tomm1 1t1·d 10 · •.alt- r"
Consideration in determining best esllmat.c a n opl•ratlon _ _ ._!here ls J hinding ,,111• ·'ii""".,."'
In reaching its best c~timdte, the enlity shou ld I I , . Rl•, trurtu rlng by rln511rc Only when a dct.i1kd l01111 p!J 11 l~ 111 pl.1u• .md lil•
following: · "< e 111 1° .icrount the or rrorgam:,,Jtion cnUty Ila~ •,t.artcd to 1mpli>ml'nt th" pl.in, ,, r
,innou11ccd 1u. m,nn ll'aturl"• to th11!.I' Jfh I rwl /,
l. Risks and uncertainties that surround the u11 ucr
·1., Iy111g CVL'IIIS.
H~rd dcn~lon 1• UL',ufll<.11:ut
2. Future evenL'i "-'Whr n an obllwit1 ng ev«mt ,,nun (~ale nf prml u1 1
Wnmrnt y

-----
a. forecast reasonable cha , . · 1. with ;i warranty ,ind probahh.: WJrrant y • lc11m~ will
b. ignore po~sihll' ' , . ngels 111 app ymg ex isti ng technology
. gams 011 sa e ot as~cts hc madrL
r. consider changes. In 1-eg1s
3 DI
· Ia 110 11 only if virtu,1lly ccrt,11·11 lt> b
c cnactc•d
--
1,and C1J Ol,i)n1Jn11tlnn
A provb 1on L'l rl'C.ognrwd d!t , 1,nt...1mm.ttwn ,,, , ur11o
for any legal obll~J.Jun,; of dc.lri up. 'lr IOI
. scounted present value us, , . . . .
the current markl·t ass, . • ng a Jll e- tax chsrnunl rat e that reflects c~m, tru ctJ vc ublti;tatJOn\ ll rIt•• , 11rnp.tny'• pvbli,hi.rJ
. ks •• essme n1 ~ or the tinie v· I
ns spcrifi c lo the liability. .
r
a ue o rno11 cy and the policy ~ tu ck c111 up cvr•n It tt 1rr<• I\ n11 l••~JI
requirement 1,, do .,,1 (pa'it •:v••nl ,, •h••
contamlnat111n and puhlt1. r•xr nt,1 tion , rvatrd l,y
~ Lhe c~£_any\pohtyJ

1018 1019
 ► ~--.,t~
6 _ 1ntroduct1on to ~1abilit1es
~ th e seco~? ~awsult, since the le~cl of uncertamry involved Is only
26 Jntroductl~ to Li~~ - - - · . , 111 t~ ,, which 1s equivalent to po5s1hle, no habihty shall be recognized
Ch~pter
_.
. proviswn If th C' rn 11ty 'i..f~L.1!11i,~
RC'cog111zc a c• rdund,; (p,1sl t•ven t 1~ l IH' \ ,111 • ""' • "til<e Y'tosurc in the note to financial statements shall be made
r,,, tonwr rdunoo; 011h a,ut disc .
liohlY 1s to gr v Pr with thl' custorne1,::. l'X pcrtc1tu
ti t Estimate - Expected Value
Ill oduct toge ,
i
(
f purch,isr that a re und would 1
in oon: Bes
at the t 111c o ' lt 11111 stf11 manufactu~es and sells n:iotorcycle helm et~. In 201 8• thr <'nttry \old
,l\l,lll,1hltl_ j t;ove CO· 0 units prior to t_he discovery of a pos~1ble defect c..iw,ed hy
- - provision for rc111Qv,1 .1,.u::.Ls .irt oJi•
h ' Hrcogn1zt• a . I 000,00 . ·ng factory equi pment. The helmets were recalled and will be
Ofhho1t' nI I i1g n11" t t . th t' co n~1,11ctI on nf 1hr o1 rrg ,1 1i.... Jl ~ 1, .. 1(\Jnction• of charge. Love is uncertain whether all helmets recalled will
11 •ruill•r1l .,.Jnt.l ~-.1 b1•'1 fl om id ,dd to the w,;t of Hw 1 1
constructe,,I di · ' rfl"
epa1re· d freeossible defect. However, t he fo11 owing estimate was made by
n,,wn•d ()bl ' ations ans1ng frnrn the production ul oil a,~ r ,;e the P cment and was approved by the board of directors.
ig . ' L1r•·
}la 's manag
nrodu ctIon nee .,
d ~·,s· tilt' ~
rerog_111z£_ ·-' · bl 1
- -:- . •5 recognized for th e un.w n111,1 ,,. IC"asp 1,0V~.,,1r ~ erobability
/\h.md u,wd lc,1,r l1uld, A provision 1

111 11r , 1•,1r, tn run . 1w rc- payments.

~ooo 10%
,,1-0,000.000 20%
11•11 in_g_ r11,,u1lr - -
Ont'rou, (lo5~•m,1 ki ng) ._Hecog~ e a provision 30,00~, ooo 30%
20,000,000 _1Q%
~ llJl •K\ ---
~ ' Accrue a provision (the past event is th e miury to 10,0° I 100%
ht'lf tn~11rrd r~-;t,101,mt.
urnpTi• w-en, pui~oned, customers) d· Determine the amount ofliability to be accrued on December 31,
1:i,,,,1111 ~ an•e.xr<'ClPd byl 1tequtre ·
nnnP. h,i<. hPl' ll hlt;cl ,1rl!:_.-i-- - - -- -::- 201.B.
A ch.1111 of rrtili l <;torr,,.. No provision until ; an actual fi re (no paSl event)
w lf rn<;11r£'ti for fi 1t' !Qs~- - - soLO'fJON: ft2Ybhm
C.11.i\ firm 1:n.us.t staff No provision is recognized (there is n_
o o_b_liga ti on to er2babili1Y
t.J::.! rntng for rt"CCJ)t provide the training, recognize a hab1l1ty rf and ~
,40,000,000
X 10%
20%
=
=
P4,000,000
6,000,000
, 11,,mlit•S,m t.:ix 1.1w when the retraming occurs) X
30,000,000 30% = 6,000,000
l-1:iior ovf."rl.Jau l or No provision is recog nized (no oh ligation ) X
20,000,000 _1.Q% = 4,000,000
rq n~ _ X
No prov1s10n is reco2nized [no obhg.il1on)_ 10,000,000 100% f20,000,000
r u~llC~!;'. l, lli ll& ln~ t•s

Illustration: Best estimate . . Best Estimate - Mid-Point .

Anthony Compa ny sells cars. In 2018, the entity so ld 1,000 units hefore 111ustrati 00 · ·twas filed against Kyrie Co. for patent infrmgement _The
discoveri ng a significant defect in their construction. By December 31, 201 8, In 2018, a law_su'. PS 000 000 in damages. Kyrie's legal counsel believes
two lawsuits had been filed against the entity. Below are the estimates m.:1de plaintt•ff is cla1mmg • will lose the lawsuit and pay damages of not
bl that •Kyrie
by th e entity's management and legal counsel: that it is prob;O ; 00 but not more than Pl0,000,000. The probabili~ ?f any
• First lawsuit • th!! entity has a little chance of winning and is expected to less than P2.0 , . as likely as any other amount also within the
within the range is
he settled out of court for PZ,500.000 in 2018. a.rnoun t
• Seco nd lawsuit - The entity's legal counsel believes that it is likely that
th e enlity will win. The entity is being sued for Pl,000,000. range. . the amount of liability to be accrued on December 31 ,
Required: Determine .
Required : Determine the amount of liability to be accrued on December 31 , 2018 as a result of this lawsuit.
20 18 as a result of th ese lawsuits.
SOLUTION:
SOLUTION:b ccrued (P2 000 000 + Pl0,000,000)/2 P~.000,000
Liability to e a ' '
Liability to be accrued P2.500.000
• In th e firs t lawsuit, si nce the entity is expecting to settle out of court, the
estimated settl ement shall be accrued in 2018.
1021
1020
 ter 26:..--=In=t~ro~d:u:c:
ti:on~to:....:L::.i~ab:'..'.'il~it~ie~s_ _ _ _ _ _ _ _ _ _ __
Chapter 26 - Introduction to Liabilities
~
Jorma journal entries:
Illustration: Provision - Changes in Estimate prorTo recognize
. d prov1s1on
.. for prem iurns to enti I
In 2016, Stephen Co. recognized provisi~n for a prob~ble loss on pendin 1, ret11iums expense t ed customers:
lawsuit of Pl0,000,000. The lawsuit remains unse_ttled in 2017 necessitatin~ p premiums liability (*net cost) XX
a reassessment of the provision. Stephen determined that the probable losg cost is the excess of costs incurred in . .
•Ne t acqumng andXXdistribut' th
on the pending law suit should be P14,000,000. s rniums inventory over any remittances recei
pre ... ve d from customers. mg e
under the follow 1·ng
Required: Provide all necessary journal entries 2, To record acqu1s1t1on
. of premiums inventory to be d'1stnbuted·
.
independent assumptions. premiums inventory (cost) XX ·
1) The lawsuit was settled for PlS,000,000 in 2018. cash or Accounts payable XX
2) The lawsuit was settled for P12,750,000 in 2018.
To record distribution of premiums to customers:
3) Stephen won the lawsuit in 2018. 3• pret11iums liability (net cost) XX
cash (remittance received) XX
SOLUTION: premiums inventory (cost) xx
Entry to be made in 2016:
Loss on lawsuit Pl0,000,000
Pl0,000,000 inustration: Provision - Premiums
Estimated liability During 2018, Curry Company sold 100,000 boxes of cake mix under a new
Entry to be made in 2017: sales promotional program. E~ch box contains one coupon. These coupons
Loss on lawsuit 4,000,000 entitle the cus_tomer to a baking pan upon remittance of ten coupons and
Estimated liability 4,000,000 p3S0. The entity pays PSOO per pan and PZS for handling and shipping. The
1) The lawsuit was settled for PlS,000,000 in 2018. entity estimated that 80% of the coupons will be redeemed even though
Estimated liability 14,000,000 only S0,000 coupons had been presented during 2018.
Loss on lawsuit 1 000 000 Required: Determine the amount of liability to be reported on December
Cash ' ' 15,000,000
31, 2018.
2) The lawsuit was settled for P12,750,000 in 2018. SOLUTION:
Estimated liability 14 000 000 Premiums liability
Cash ' ' 12,750,000 Balance, Beg.
Gain on settlement 1,250,000 Net cost of
3) Stephen won the lawsuit in 2018.
Coupons redeemed _P
=--__8_7,;_;
5,-'-0.00
. :. .-+---=1.!. . :,40.=c
-=- O,~OO=-- Premiums expense
O:::...
p 875,000 P 1,400,000
Estimated liability 14,000,000
Gain on settlement 525,000
Note· Cha y · · 14,000,000 Balance, End 1,400,000
. n es ,n estimate of provision are accounted prospectively. p 1,400,000 P

E~T~~~TED LIABILITIES-AFTER SALE TRANSACTIONS

1. The 100,000 coupons are computed as follows :
100,000 boxes x 1 coupon
L1ab1ht1~s may also arise after recognition of reven
transactwns. These liabilities may include, but not limited t ~~
a. Premiu ms liability
t~m .sale
c. Warra nties liabi~ e o owmg:
100,000 coupons 1 box

2. The net cost of coupons is computed as follows

b. Rebates liability ty Cost per pan+ handling and shipping
Premiums liability Net cost = - customer remittance
Premiums are arti~les offered free or at a reduced price to make a co . = PSOO + P25 - P350
offer more attractive to the customers. In some cases cash mbmed P175
also i t t ' payments ar
g ven o cus omers as a result of past sales promotional activities. e

1022
 ~C~ha~p~te~r~2~6~-:._I~n~tr~o~du~c:!!ti~o!!_n~to~U~ab~l~lit~ie~s- = = - : . - - - - - - -
----- ~ Pter =-=-::----...;__::_-=. :.: .: . : : ;:'.______ _____
26 - lntroduct1on to Liabilities

. ted as follows: t . The 5 00,000 forms arc computed as follows :

3. The premium expense is compu 100,000 coupons x 80%
x Pl7S 500,000 forms = S00,000 packages x l form
*Premiums expense = 1Ocoupons l pack
= UiWlM 2.
The ex pense is computed as follows :
d . computed as follows: Rebates expense = 500,000 form s x 20%
4. The number of coupons rc d:eme S~.OOO boxes x 1 coupon l form x PlO
50,000 coupons 1 box = tl►00Q,QQO
The rebates redee med is computed as follows:
s. Net. cost of coupons redeemed S0,000 coupons 3. Rebates redeemed = 85,000 for ms
Netcostofcoupons = - ~~~~-~"--- x Pl75 l form X 11110
redeemed l Ocoupons = P850.0QD
= ~875.00Q
Rebates liability WARRANTY LIABILITY _ .
Pro-forma journal entries: w arranty is a lega lly binding assurance that a product is, among other
1. To recognized provision for rebates to entitled cuS tOmers: things
Rebates expense XX • Fit for use as represented
Rebates liability XX • Free from defective material and workmanship
• Meets statutory an d/o r othe r specifications.
2. To record distribution of rebates to customers:
Rebates liability xx A warranty descri bes the conditions under, and period during, which the
Cash xx roducer or vendor will repair, replace, or other com pensate for, the
~efective item without cost to the buyer or user. Often it also deli neates the
Illustration: Provision - Rebates rights and obligations of both parties in case of a cla im or dispute.
Paul Company offers a cash rebate of PlO on each PS00 of baking pan sold
during 2018. Customers must fill-up a rebate form and mail it to Paul. Paul Warranty is reco rded at tbe time of sale based on best c..s timate. Estimate is
will then mail to customers the approved rebate form which can be used in
future purchases to Paul. Based on entity's experience, only 20% of
customers mail-in the rebate fonn.
~=viewed at a certain date and difference between estimate and actual cost
accounted as change in accounting estimate to be treated as currently and
prospectively.
During 2018, 500,000 packages of baking pans are sold and 85,000 rebates Pro•[orma journal entries for transactions involving warranty under accrual
form were mailed to customers.
approach
Required: Determine the amount of lia bility to be reported on December 1. When products with warranties are sold
31, 2018. Warranties expense XX
Estimated warranties liability XX
SOLUTION:
2. Disbursement for warranty
Rebates liabilitv Estimated warranties liability xx
Rebates form
Balance, Beg. Cash xx
Rebates
mailed••
p
850,000
850,000 , 1,000,000
1,000,000
expense• 3. Actual cost exceeds estimate
Warranties expense xx
Balance, End 150,000 Cash xx
Pl 1,000,000 p 1,000,000
4. Actual cost is less than estimate
Estimated warranties liab ility xx
Warranti es expense xx
1024 1025
 ter 26 - Introduction to Uablhties
SCh
~ape_!t!er~ 26~ -_!In~t~ro~d~u~ct~lo~n~t~o~U~a!!!b~ll~it~1es
=-- -- - - -- - - - -- ~
rn of Realized Rntenues:
Illustration·· Provision - Warranties fll~ SALES
I h I rry a two -year warranty aa z0l01 sates to: 2017 2018
George Co mpany sells motorcyc es I a ca . ,.,a111:1 2019 2020 Total
manufacturer's defect.~- Based on entity's experience, wa rra_n ty coc;ts ar, , , ....% x ½ ) 0.22 0.22
0.44
estimated at PS,000 per untt. During th e current year, the entity sold l,OIHJ 1: (38o/oX 1/z) 0.19 0.19 0.38
units and pa id warranty costs of PJ.400,000 . d ; rd (18% X ½) 0.09 0.09 0.18
0.22 0.41
Required : Determine the amount of lia bil ity to he re porte · rot.al
0.28 0.09 1
oissALES
SOLUTION: 2 01 sales In: 2018 2019 2020
warranties Jiabllfty 2021 Total
Balan ce, Beg. 0.22 0.22
~ ) 0.44
•warranti es 0. 19 0.19 0.38
for
znd(3B% x ½
Co,;t incurred 5,000,000 expen se 0.09 0.09 0.18
3,400,000 3rd 10%" ½)
warranties 0.22 0.41 0.28 0.09 1
p 3,400,000 P 5,000,000 rot.al
Balance, End 1,600,000 utrement No. 1
5,000,000 P s ,00 0,000 ~~nty Sales in 2017 earned in 2018 (41 % x 800 x Pl 000) 328,000
"(f'S,000 x 1,000 units)
w:rranty Sales in 2018 earned in 2018 (22% x 900 x P1:ooo) 198,000
tal warranty sales revenue earned in 2018 526,000
To
Illustration: Warranty• Sales are Made Evenly
Carmelo Co. sells computer to various customers. Carmelo Co. has been Notes:e 1% represents the reahzed
. revenue in 2018 from 2017 c-l
offering a special service warranty on computer units it sold. With the ✓ Th 4 h 1· d es.
✓ The Z2% represents t e rea 1ze revenue In 2018 fro m 2018 Sales.
=
purchase of the computer unit, the customer has the right to purchase 3-
year service contract for additional amount of Pl.000. Data concerning sales Requirement No. 2
of computer and warranty contract follow: 1 tal warranty sales revenue earned in 2018 (see No. 1) PS26,000
E~penses relating to computer warranties 50,000
2017 2018 P476,000
profit from sales warranty
Computer sales in units 1,000 1,200
Sales price per unit P12,000 P14,000 Requirement No. 3
Number of service contracts sold 800 900 Unearned sales warranty from 2017 ((28% + 9% x 000 x,i,ooo)] P296,000
Expenses relating to computer warranties P30,000 PS0,000 Unearned sales warranty from 2018 ((100%-22%) x 900 x Pl.ODO)] 702,000
total unearned sales warranty P998,000
Carmelo Co. has estimated based on the available past records that the
pattern of repairs has been:
44% Year of sale Notes:
✓ The 28% and 9% represent the unreahzed revenues in 2018 from 2017 Sales.
38% 1st year after sale ✓ The 22% represents the realized revenue in 2018 from 2018 Sales. So 100% mi nus
18% 2nd year after sale 22% realized is equal to 78% unrealized revenue in 2018 from 2018 Sales.
Sales of the contracts are made evenly during the year.
Required:
1) How much unearned service contract would be earned in the year
2018?
2) How much ~rofit on service contract would be recognized in year 2018?
3) How much 1s unearned service contract on December 31, 2018?
SOLUTION:

1026 1027