DIVINE WORD COLLEGE OF LAOAG

School of Business and Accountancy FAR-1901

Laoag City

INTEGRATED ACCOUNTING 1
CURRENT LIABILITIES
SUBSTANTIVE TEST OF LIABILITIES
Main focus: Completeness assertion (to check for understatements and omissions of disclosures)

FINANCIAL VS. NONFINANCIAL LIABILITIES

 Financial Liability – any liability that is
a) a contractual obligationto deliver cash or other financial asset to another entity andto exchange financial
assets or financial liabilities with another entity under unfavorable conditions; and
b) a contract that may be settled in the entity’s own equity instruments and is
i. a non-derivative for which the entity is or may be obliged to deliver a variable number of the
entity’s own equity instruments; or
ii. a derivative that will be settled other than by the exchange of a fixed amount of cash or another
financial asset for a fixed number of equity instruments
 Nonfinancial Liability – all other liabilities that did not meet the above requirements

MEASUREMENT
Financial Liabilities
Nonfinancial Liabilities
Initial Measurement Subsequent Measurement
Either at: Either at:
1) Fair value (FL @ FVPL) 1) Fair value (trading securities or by
2) Fair value less trans cost irrevocable designation)
2) Amortized cost
Either at: Either at:
1) Best estimate 1) Best estimate
2) Basis required by PFRS 2) Basis required by PFRS

NON-AVAILABILITY OF FAIR VALUES

Short-term liabilities – measured at face amount
Long-term liabilities
 Interest-bearing – measured at face amount (nominal rate = market rate)
 Interest-bearing – measured at pv of principal and interests (nominal rate ≠ market rate)
 Non-interest-bearing – pv of principal payments

LONG TERM DEBT FALLING DUE WITHIN ONE YEAR (SAME RULES WITH BREACH OF
COVENANTS)
 Current – refinancing is done after the reporting period
 Noncurrent – refinancing is done on or before the end of the reporting period or
the entity has the discretion to refinance the debt for at least 12 months

ESTIMATED LIABILITY: PRE-COLLECTION

1. GIFT CERTIFICATES
Receipt of payment Redemption of certificates
Cash xx Gift certificate payable xx
Gift certificate payable xx Sales/Revenues xx

2. UNEARNED OR DEFERRED REVENUE

Receipt of payment in advance Recognition of revenue
Cash xx Unearned revenue xx
Unearned revenue xx Sales/Revenue xx
3. DEPOSITS RECEIVED/RETURNABLE CONTAINERS
Receipt of deposit Return of deposit
Cash xx Deposit liability xx
Deposit liability (CL) xx Cash xx

4. CUSTOMER LOYALTY PROGRAM (PFRS 15)

Allocate cash proceeds to 1) sales and 2) loyalty point revenue based on stand-alone selling price (use est. points
to be redeemed in allocating revenue upon redemption)

BONUS PAYABLE

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Bonus based on:
1. Net income before bonus and tax
2. Net income after bonus but before tax
3. Net income after bonus and tax
4. Net income after tax but before bonus
B = BR x NY
B = BR x (NY – B)
B = BR x (NY – B – T) and T = TR x (NY – B)
B = BR x (NY – T) and T = TR x (NY – B)

ESTIMATED LIABILITIES - AFTER SALE TRANSACTIONS

1. PREMIUMS
Derecognition: delivery of goods or expiration of term

Provision of premiums to customers

Premiums expense xx sales x experience rate x net cost
Premium liability xx

Acquisition of premium inventory Distribution of premiums

Premiums inventory (cost) xx Premium liability xx
Cash or AP xx Cash (remittances) xx
Premiums inventory xx
2. WARRANTY
Reduction to liability: provision of services, expiration of term

 Accrual method – liability and expense @ point of sale

Products with warranties are sold Est. warranties liability xx

Warranties expense xx Cash xx
Est. warranties liability xx
Actual cost > estimate Actual cost < estimate
Warranties expense xx Est. warranties liability xx
Cash xx Warranties expense xx
Disbursement for warranty

 Expensed as incurred method – expensed when actually incurred

 Extended warranty – deferred revenue

3. REBATES (DISCOUNTS)
Reduction to liability: settlement or issuance of certificates, expiration of term

Provision of rebates to customers Distribution of rebates

Rebates expense xx Rebates liability xx
Rebates liability xx Cash xx

PROVISION AND CONTINGENT LIABILITY

Provision Contingent Liability
A present obligation A possible obligation
Both probable and measurable Either probable or measurable, but not both
Recognized in the financial statement Disclosed in the notes to financial statements

Occurrence Meaning Contingent Liability Contingent Asset

Probable Event is more likely than not to occur Provision Disclosure
Possible Event is less likely to occur Disclosure No disclosure
Remote Event is least likely to occur No disclosure No disclosure

Measurement of Provisions – best estimate (judgment of the mgt of the entity)

 Provision involves a large population of items, the obligation is estimated by weighting all possible outcomes by
their probabilities (expected value method)
 If there is a continuous range of possible outcomes, use the mid-point of the range
EXERCISES ON CURRENT LIABILITIES

PROBLEM 1
An entity sells equipment service contracts that cover a two-year period. The sale price of each contract is P800. The
entity sold 1,000 contracts evenly throughout 2018.

The past experience is that, of the total pesos spent for repairs on service contracts, 40% is incurred evenly during the
first contract year and 60% evenly during the second contract year.

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a. What is the contract revenue for 2018? 2019?
b. What is the unearned contract revenue on December 31, 2018? December 31, 2019?

PROBLEM 2
An entity includes one coupon in each box of laundry soap it sells. A towel is offered as a premium to customers who
send in 10 coupons and a remittance of P10. Distribution cost of premium is P5. Experience indicates that only 30% of
the coupons will be redeemed.
2018 2019
Boxes of soap sold 2,000,000 2,500,000
Number of towels purchased at P50 each 50,000 80,000
Coupons redeemed 400,000 700,000

a. What is the premium expense for 2018? 2019?

b. What is the estimated premium liability on December 31, 2018? December 31, 2019?

PROBLEM 3
An entity, a grocery retailer, operates a customer loyalty program. The entity grants program members loyalty points
when they spend a specified amount on groceries. Program members can redeem the points for further groceries. The
points have no expiry date. During 2018, the sales amounted to P7,000,000 based on stand-alone selling price. During the
year, the entity granted 10,000 points. But management expected that only 80% or 8,000 points will be redeemed. The
stand-alone selling price of each loyalty point is estimated at P100.

On December 31, 2018, 4,800 points have been redeemed. In 2019, management revised its expectations and now
expected that 90% or 9,000 points will be redeemed altogether. During 2019, the entity redeemed 2,400 points.

a. What amount should be reported as sales including the revenue earned from points for 2018?
b. What is the revenue earned from loyalty points in 2019?

PROBLEM 4
During 2018, an entity is the defendant in a patent infringement lawsuit. The lawyers believe there is a 30% chance that
the court will dismiss the case and the entity will incur no outflow of economic benefits.

However, if the court rules in favor of the claimant, the lawyers believe that there is a 20% chance that the entity will be
required to pay damages of P200,000 and an 80% chance that the entity will be required to pay damages of P100,000.

Other outcomes are unlikely. The court is expected to rule in late December 2019. There is no indication that the
claimant will settle out of court.

A 7% risk adjustment factor to the probability-weighted expected cash flows is considered appropriate to reflect the
uncertainties in the cash flow estimate. An appropriate discount rate is 5% per year. The present value of 1 at 5% for one
period is 0.95.

a. What is the undiscounted provision before risk adjustment on December 31, 2018?
b. What amount should be reported as provision for lawsuit on December 31, 2018?

PROBLEM 5
On January 15, 2018, an explosion occurred at an entity plant causing extensive property damages to area buildings. By
March 1, 2019, no claims had been asserted against the entity but management and counsel concluded that it is likely that
claims will be asserted and that it is probable that the entity will be responsible for damages. Management believed that
P1,250,000 would be a reasonable estimate of the liability. The entity’s P5,000,000 comprehensive public liability would
be a reasonable estimated of the liability. The liability has a P250,000 deductible clause. The financial statements for
2018 were issued on March 31, 2019. What amount of provision should be reported on December 31, 2018?

PROBLEM 6
During 2018, an entity filed a suit against another entity seeking damages for patent infringement. On December 31,
2018, the legal counsel believed that it was probable that the entity would be successful against the other entity for an
estimated amount of P1,500,000. On April 15, 2019, the entity was awarded P1,000,000 and received full payment
thereof. The 2018 financial statements were issued on March 31, 2019. How should this award be reported in 2018?
a. As receivable and revenue P1,000,000
b. As receivable and deferred revenue P1,000,000

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 c. As disclosure of contingent asset P1,000,000
d. As disclosure of contingent asset P1,500,000

PROBLEM 7
An entity sells magazine subscriptions for 1-year, 2-year or 3-year period. Cash receipts from subscribers are credited to
unearned subscription revenue and this account had a balance of P1,700,000 on January 1, 2018. The entity provided the
following information for the year ended December 31, 2018:

Cash receipts from subscribers 2,300,000

Subscription revenue credited on Dec. 31, 2018 1,500,000

On December 31, 2018, what amount should be reported as unearned subscription revenue?

END

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