Chapter 1- Liabilities
Liabilities- are present obligations of an entity
to transfer an economic resource as a result of
past events.
Essential characteristics are:
a) The entity has present obligation
- An obligation is a duty that an entity
has no practical ability to avoid.
b) The obligation is to transfer an
economic resource
- ER is the asset that represents a right
with a potential to produce economic
benefits.
c) The liability arises from the past
- The liability is not recognized until it is
incurred.
PRESENT OBLIGATION
- May be legal or constructive
Legal- as a consequence of binding contract or
statutory requirement.
Constructive- by reason of normal business
practice, custom and a desire to maintain good
business relations or act in an equitable
manner.
TRANSFER OF ER
* when an entity declares share dividend, there
is no accounting liability.
PAST EVENT
-known as obligating event
-the obligating event creates a present
obligation because the entity has no realistic
alternative but to settle the obligation created by
the event.
MEASUREMENT
- Initially measured at present value and
subsequently measure at amortized cost.
- However, CL or short-term debts are not
discounted but recorded and reported at
their face amount.
CURRENT LIABILITIES
The entity shall classify a liab as current if:
1) The entity expects to settle obligation
w/in the entity’s operating cycle.
2) The entity holds the liability primarily for
the purpose of trading.
3) The liability is due to be settled w/in 12
months after reporting period
4) The entity does not have unconditional
right to defer settlement of the liability for
at least 12 months after the reporting
period.
 Trade payables and accruals
 Held for trading
 Bank overdraft
 Dividends payable
 Current portion of a non-current liab
NON-CURRENT LIABILITIES
-term non-current liabilities is a residual term: all
liabilities not considered as current are non-
current
 Non-current portion of a long-term debt
 Finance lease liability
 Deferred tax liability
 Long-term obligation to officers
 Long-term deferred revenue
LONG-TERM DEBT FALLING DUE WITHIN
ONE YEAR
A liability which is due to be settled within twelve
months after the reporting period is classified as
current even if:
1. The original term was for a period longer
than twelve months.
2. An agreement to refinance or to
reschedule payment on a long-term basis
is completed after the reporting period
and before the financial statements are
authorized for issue.
3. If obligation is completed on or before
the end of the reporting period.
4. If the entity has a discretion to refinance
or roll over an obligation for at least 12
 months after the reporting period under JOURNAL ENTRIES:
an existing loan facility. 1. Cash receipts from contracts sold
5. If the entity has unconditional right Cash xx
under the existing loan facility to defer Unearned Service Revenue xx
settlement of the liability for at least 12 2. Service Contract Cost Paid
months after the reporting period. Service Contract Expense xx
COVENANTS Cash xx
3. Revenue recognized
- Often attached to borrowing Unearned Service Revenue xx
agreements which represent Service contract revenue xx
undertakings by the borrower.
- Restrictions on the borrower. GIFT CERTIFICATE PAYABLE
BREACH OF COVENANTS 1. When gift cert is sold
Cash xx
- If certain conditions relating to the Gift cert payable xx
borrower’s financial situation are 2. When gift cert is redeemed
breached, the liability becomes Gift Cert payable xx
payable on demand. Sales xx
PRESENTATION OF CURRENT LIABILITIES 3. When gift cert expires
Gift cert payable xx
a. Trade and Other Payables Forfeited gift cert xx
b. Current Provisions The Philippine Department of Trade and Industry
c. Short-term Borrowing ruled that gift certificates no longer have an
d. Current Portion of Long-term Debt expiration date.
e. Current Tax Liability BONUS COMPUTATION
ESTIMATED LIABILITIES 1. Before Bonus and Before Tax
Income before bonus and tax xx
- Obligations that exist at the end of the Multiply by bonus rate xx
reporting period although their Bonus xx
amount is not definite.
- Can either be current or non-current. 2. After Bonus but Before Tax
- Premium, Award Points, Warranties, B= Bonus Rate (Income –B)
Gift Certificate, and Bonus.
3. After Bonus and After Tax
DEFERRED REVENUES B= Bonus Rate (Income –B-T)
T= Tax Rate (Income-B)
- Income already received but not yet
earned.
4. After tax but Before Bonus
- May be realizable within one year or
B= Bonus Rate (Income -T)
more
T= Tax Rate (Income-B)
Illustration:
REFUNDABLE DEPOSITS
Company sells contracts for a 2-year period.
- Consist of cash or property received
The following transactions occurred: from customers but which are
refundable after compliance with
Cash receipt from contracts sold 1 000 000 certain conditions.
Service contracts costs paid 500 000
- Example: returnable containers such
Service Contract recognized 800 000
as bottles, drums, tanks and barrels.
 Entry: - Cash register receipts, bar codes,
Cash xx rebate coupons, and other proof of
Containers’ Deposit xx purchase often can be mailed to the
Excess of deposit over the cost of the manufacturer for cash rebate.
containers, the deposit is considered the - To stimulate sales
sale price of the containers. - Recognized both as an expense and
estimated liability.
Chapter 2- Premium Liability Illustration:
Premiums- are articles of value such as toys, 1. To recognize cash rebate program
dishes, silverware, and other goods given to Rebate expense xx
customers as result of past sales or sales Estimated rebate liab xx
promotion activities.
Rebate coupons issued xx
Entry:
Expected to be redeemed xx
1. When premiums are purchased Coupon rebates to be redeemed xx
Premiums xx Cash rebate per coupon xx
Cash xx Estimated rebate liab xx
2. When premiums are distributed to customers
Premiums Expense xx 2. Payment to customers
Premiums xx Estimated rebate liab
3. Premiums are still outstanding Cash
Premiums Expense
Estimated Premium Liability CASH DISCOUNT COUPON
- Another variation of the premium offer
Example: is the cash discount coupon program.
5 wrappers plus 10 php =1 soup bowl - To stimulate sales.
The bowl costs 50php - Recognized both as an expense and
60% of the wrappers will be redeemed estimated liability.

Sales, 10 000 units @ 300 each 3M Entry:

Bowls purchased, 2000 units 50 each 100K 1. To recognized the cash discount coupon offer:
Wrappers Redeemed 4K
Cash Discount coupon expense xx
1. Premiums- 100K Est. Coupon Liab. xx
2. Redemption:
2. Payment to retailers
Cash (800 x 10)
Est. Coupon Liab xx
Premium Expense (800 x500
Cash xx
4000 wrappers / 5 = 800 soup bowls
3. Wrappers to be redeemed 6000 CUSTOMER LOYALTY PROGRAM
Less: wrappers redeemed 4000 - Build brand loyalty, retain their
Balance 2000 valuable customers and of course,
Prem to be distributed(2k/5) 400 increase sales volume.
Estimated Liability (400 x 40) 16,000 - Reward customers for past
FS Classification purchases and to provide them with
Premium soup bowls(CA) 60 000 incentives to make further purchases.
Est. Premium Liab (CL) 16 000 - The entity grants award credits
Prem Expense (Dist. Cost) 48 000 often described as “points”
CASH REBATE PROGRAM
- Variation of a premium offer
 - The entity can redeem the “points” by Allocation of transaction price
distributing to the customer free or Product Sales 9 000 000
discounted goods or services Points (10K * 100) 1 000 000
Measurement Total 10 000 000
- “separately component of the initial
sale transaction” Product sales (9/10x 9M) 8 100 000
- The fair value of the consideration Points (1/10x9M) 900 000
received with respect to the initial sale Total transaction price 9 000 000
shall be allocated between the award
credits and the sale based on relative Journal Entries
stand-alone selling price. Cash 9 000 000
Recognition Sales 8 100 000
- Recognized as deferred revenue and Unearned revenue-pts 900 000
subsequently recognized as revenue
when the award credits are Unearned revenue-pts 450 000
redeemed. Sales 450 000
- The revenue is based on the number (4000/8000X900000) = 450 000
of awards credits that have been
redeemed relative to the total number Unearned revenue- pts 360 000
expected to be redeemed. Sales 360 000
Illustration: Points redeemed in 2020 4 000
An entity, a grocery retailer, operates a Points redeemed in 2021 4 100
customer loyalty program. Total 8 100
The entity grants program members
loyalty points when they spend a specified Commulative revenue
amount on groceries. (8 100/9000 x 900 000) 810 000
Program members can redeem the Revenue recognized in 2020 (450 000)
points for further groceries. The points have no Revenue for 2021 360 000
expiry date.
The sales during 2020 amounted to 9 Unearned revenue-pts 90 000
000 000 based on stand-alone selling price. Sales 90 000
During 2020, the customers earned
10000 points. Points redeemed in 2020 4 000
But management expects that 8000 of Points redeemed in 2021 4 100
these points will be redeemed. Points redeemed in 2022 900
The stand-alone selling price of each Total 9 000
loyalty point is estimated at 100.
On December 31, 2020, 4000 points Commulative revenue
have been redeemed in exchange for groceries. (9 000/9000 x 900 000) 900 000
In 2021, the management revised the Cumm. Rev. 2021 (810 000)
expectations and now expects that 9000 points Revenue to be recognized 90 000
will be redeemed altogether.
During 2021, the entity redeemed 4100
points. In 2022, 900 points are redeemed.
Management continues to expect that
only 9000 points will ever be redeemed,
meaning, no more points will be redeemed after
2022.
THIRD PARTY OPERATES LOYALTY
PROGRAM
An entity, a retailer of electrical goods,
participates in a customer loyalty program
operated by an airline.

The entity grants program member one air travel

point for every P1 000 spent on electrical goods.

Program members can redeem the points for

travel with the airline subject to availability. The
entity pays the airline P60 for each point.

During the current year, the entity sold electrical

goods for consideration totalling 4 500 000
based on stand-alone selling price and granted
5000 points with stand-alone selling price of
P100 per point.
Selling Price Fraction Allocated
Product Sales 4 500 000 45/50 4 050 000
Points 500 000 5/50 450 000
(5K*100)
5 000 000 4 500 000

Revenue from points 450,000

Payment to airline (300 000)
Net revenue from points 150 000

The entity has fulfilled its obligation by granting

the points.

Therefore, revenue from points is recognized

when the electrical goods are sold.

To record initial sale

Cash 4 500 000
Sales 4 050 000
Revenue from points 450 000

To record payment to airline

Loyalty program expense 300 000
Cash 300 000