INTERMEDIATE ACCOUNTING 2

CHAPTER 1 Refundable Deposits – consist of cash or property received from

customers but which are refundable after compliance with certain
What is a Liability? conditions.
Liabilities are present obligations of an entity to transfer an CHAPTER 2
economic resource as a result of past events.
Premiums
Essential Characteristics of Liability
Premiums are articles of value such as toys, silverware, and other
 The Entity has a present obligation. goods given to customers as a result of past sales or sales
 The Obligation is to transfer an economic resource. promotion activities.
 The Liability arises from a past event.
Premium Expense = Expected Number of Premiums to be
Examples of Liabilities redeemed X Premiums Net Cost.

 Accounts Payable Estimated Liability MUST be recognized.

 Withholding Tax payable
 Accrued Expenses Accounting Procedures (Journal Entries)
 Dividends Payable
 Unearned Income/Revenue *When the premium are purchased,
 Notes Payable
 Bonds Payable Premiums XX
 Loan Payable
 Income Tax Payable Cash XX
Measurement of Liabilities *When the premiums are distributed to customers,
 Current Liabilities Premiums Expense XX
a. Initial Measurement – Face Amount
b. Subsequent Measurement – Face Amount Premiums XX
 Non-Current Liabilities
a. Initial Measurement – Present Value *At the end of the year, if premiums are still
b. Subsequent Measurement – Amortized Cost (Effective outstanding,
Interest Method)

Current Liabilities
Premiums Expense XX

An entity shall classify a liability as current when: Estimated Premium Liability XX

Cash Discount Coupon
 it expects to settle the liability in its normal operating cycle;
 it holds the liability primarily for the purpose of trading;  The cash discount coupon program is a popular marketing
 the liability is due to be settled within twelve months after tool for the purpose of stimulating sales.
the reporting period; or  Like a premium offer and cash rebate program, an
 the entity does not have an unconditional right to defer expense and an estimated liability for the expected cash
settlement of the liability for at least twelve months after discount should be recognized in the period of sale.
the reporting period.  Same accounting of Premiums.
Currently maturing long-term liabilities Customer Loyalty Program
General rule: Currently maturing long term liabilities are  The customer loyal program is generally designed to
presented as current liabilities. reward customers for past purchases and to provide them
with incentives to make further purchases.
Exceptions:
 If a buyer buys goods or services, the entity grants the
1. Refinancing agreement fully completed on or before the customer award credits often described as “points”.
balance sheet date – non-current liability  The entity can redeem the “points” by distributing to the
2. Refinancing agreement after the balance sheet date but customer free or discounted goods or services.
before the financial statements are authorized for issue –
non-current liability if the refinancing is at the discretion of Accounting of C.L.P?
the entity.  Apply the accounting of PFRS 15 for the allocation of consideration.
Breach of loan agreement  Established “Unearned Income” account for the points given to
customers.
General rule: A liability that is payable on demand is a current  Recognized Income when the points are redeemed (Apply the PAS
liability. 8 – Change Accounting Estimate).
Exception: CHAPTER 3
It is presented as non-current liability if the lender provides the What is a warranty?
entity, on or before the balance sheet date, a grace period
ending at least 12 months after the balance sheet date to rectify a  Home appliances like television sets, stereo sets, ratio
breach of loan covenant. sets, refrigerators, and the like are often sold under a
guarantee or warranty to provide free repair service or
Other Matters replacement during a specified period if the products are
Estimated Liabilities – are obligations that exist at the end of the defective.
reporting period although their amount is not definite.  Such entity policy may involve significant costs on the part
of the entity if the products sold prove to be defective in
Deferred Revenue – is income already received but not yet the future within the specified period of time.
earned.
Recognition of Warranty Provision

 Present Obligation (Past event)

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 Probable outflow of resources recognized in proportion to the costs to be incurred
 Reliable Estimate annually (Matching Concept),
 Accounting for Warranty
CHAPTER 4

What is a Provision?
Accrual Approach
 A provision is an existing liability of uncertain timing or
 More theoretically correct approach. uncertain amount.
 Recording Warranty Expenses based on estimate  The essence of a provision is that there is uncertainty about
(Estimated Liability) and not waiting for the actual the timing or amount of the future expenditure.
incurrence/payment of the said warranty.  It is the uncertainty that distinguishes provision from other
liabilities.
 A provision may be the equivalent of an estimated liability or
Accounting Procedures (Journal Entries)
a loss contingency that is accrued because it is both
probable and measurable.
*Upon initial recording,
 When to recognize a provision?
Warranty Expense XX  Present Obligation (past event)
 Probable outflow of economic benefits (Probable, Possible,
Estimated Warranty XX and Remote)
Liability  Reliable estimate

Measurement of a provision
*Upon actual payment,
 The amount recognized as a provision should be the best
Estimated Warranty Liability XX estimate of the expenditure required to settle the present
obligation at the end of the reporting period.
Cash XX  The best estimate is the amount that an entity would
rationally pay to settle the obligation at the end of reporting
*If there is a need of an adjustment, period or to transfer it to a third party at that time.
 Ways to measure the provision
Estimated > Actual Decrease Warranty
 Most likely outcome adjusted for the effect of other possible
Expense and Liability outcomes – single obligation is being measured.
 Continuous range of possible outcomes – the midpoint of
Estimated < Actual Decrease Warranty
the range
Expense and Liability  If the provision involves a large population of items –
Expected Value Method

Accounting for Warranty Other Measurement Considerations

Expense as Incurred Approach  Risk and Uncertainties

 Present Value of obligation
 Recording Warranty Expenses ONLY WHEN ACTUALLY  Future Events
INCURRED.
 Expected disposal of assets
 This approach is justified on the basis of expediency when  Reimbursements
warranty cost is not very substantial or when the warrant  Changes in Provision
period is relatively short.  Use of Provision
 Future Operating Losses
Accounting Procedures (Journal Entries)  Onerous Contract

Contingent Liability
*Upon initial recording,
 A contingent liability is a present obligation that arises
NO ENTRY from a past event but is not recognized because it is not
probable that an outflow of resources embodying
*Upon actual payment, economic benefits will be required to settle the obligation
or the amount of the obligation cannot be measured
Warranty Expense XX reliably.
 The present obligation is either probable or measurable
Cash XX but not both to be considered a contingent liability.
Sale of Warranty  If the present obligation is probable and the amount can
be measured reliably, the obligation is not a contingent
 A warranty is sometimes sold separately from the product liability but shall be recognized as a provision.
sold.
 When products are sold, the customers are entitled to the Treatment of Contingent Liability
usual manufacturer’s warranty during a certain period.
 A Contingent liability shall not be recognized in the
 The seller may offer an “extended warranty” on the
financial statements but shall be disclosed only.
product sold but with additional cost.
 If a contingent liability is remote, no disclosure is
Accounting of Sale of Warranty? necessary.

 The amount received from the sale of the extended Contingent Asset
warranty is recognized initially as deferred revenue and
 A contingent asset is a possible asset that arises from a
subsequently amortized using a straight-line method over
past event and whose existence will be confirmed only by
the life of the warranty contract.
the occurrence or nonoccurrence of one or more uncertain
 If costs are expected to be incurred in performing services
future events not wholly within the control of the entity.
under the extended warranty contract, revenue is
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 A contingent asset shall not be recognized because this
may result to the recognition of income that may never be
realized.

Treatment of Contingent Asset

 If Virtually Certain – not a contingent asset,

recognized it in the financial statements.
 If the contingent asset is probable – Disclosure only.
 If the contingent assets is possible or remote – no
disclosure is required.
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