COLLEGE OF BUSINESS AND ACCOUNTANCY

Topic: ACCRUED AND DEFERRED REVENUE

PAYROLL TAXES
Under the law, employer required to withhold from salaries of each employee the following:

• Income tax payable by the employee

• Employee contribution to SSS
• Employee contribution for Philhealth
• Employee contribution to Pag-ibig Fund (HDMF)
Such amount withheld from employee, recognized as current liability until remitted by entity to government
authority entity is required by law to make contribution for SSS, Pagibig, Philhealth represent its share in
benefits of employees.
Gross payroll – withheld from employee (contribution)= Net Payroll

ILLUSTRATION:
An entity reported the following payroll of the employees for the month of January.
Gross Payroll 500,000
Withholding tax withheld 20,000
SSS contribution 4,000
Philhealth contribution 2,000
Pag-ibig contribution ___1,000
NET PAYROLL 473,000

In relation to the payroll for the month of January, the entity is required to make additional contribution:
SSS 6,000
Pagibig 3,000
Philhealth 2,000
TOTAL CONTRIBUTION 11,000

The journal entry to record the gross payroll is as follows:

Salaries 500,000
Withholding tax payable 20,000
SSS payable 4,000
Philhealth payable 2,000
Pag-ibig payable 1,000
Cash 473,000

The journal entry to record the employer’s additional contribution is as follows:

Payroll Tax Expense 11,000
SSS payable 6,000
Philhealth payable 3,000
Pag-ibig payable 2,000

Entry to record remittance of amount withheld & payment of additional contribution:

Withholding tax payable 20,000
SSS 10,000
Pag-ibig 3,000
Philhealth 5,000
Cash 38,000

VALUE ADDED TAX

Under National Internal Revenue Code, entity required to collect VAT from customers on sales of property,
goods, services. It shall be remitted monthly to BIR.
ILLUSTRATION:
During a month, an entity sold goods on account for 5,600,000 including value added tax of 600,000.
The journal entry to record the sale is:
Accounts Receivable 5,600,000
Sales 5,600,000
Output Vat 600,000

The entity also purchased goods on account from suppliers for 2,240,000 including vat of 240,000.
The journal entry to record the sale is:
Purchases 2,000,000
Input Vat 240,000
Accounts Payable 2,240,000

Subsequently, when net liability is paid in the succeeding month, the journal entry is:
Vat payable 360,000
Cash 360,000

GIFTS CERTIFICATE PAYABLE

Malls, departments, supermarket sell gift certificate which are redeemable in merchandise. The accounting
procedures are:

When gift certificates are sold:

Cash xx Computation for Unearned Revenue related
Gift Certificate Payable xx to Gift Certificate:

When gift certificates are redeemed: Unearned Revenue, beginning xx

Gift Certificate Payable xx Add: Gift Certificate Sold xx
Sales xx Total xx
Less: Gift Certificate redeemed xx
When gift certificates expire/not redeemed: GCs expected not to be redeemed xx
Gift Certificate Payable xx Unearned Revenue, ending XX
Forfeited gift certificate xx

ILLUSTRATION:
Cobb department store sells gift certificates redeemable only when merchandise is purchased. These gift
certificates have no expiration date. Upon redemption or expiration, the entity recognizes the unearned
revenue as realized. The entity provided the following information for the current year:

Unearned Revenue, January 1 650,000

Gift Certificate Sold 2,250,000
Gift Certificate redeemed 1,950,000
Gift Certificate expected not to be redeemed 100,000
Cost of Goods Sold 60%

On December 31, what amount should be reported as unearned revenue? Prepare the necessary journal entries.

When gift certificates are sold:

Cash 2,250,000 Computation for Unearned Revenue related to Gift
Gift Certificate Payable 2,250,000 Certificate:

When gift certificates are redeemed: Unearned Revenue, beginning 650,000

Gift Certificate Payable 1,950,000 Add: Gift Certificate Sold 2,250,000
Sales 1,950,000 Total 2,900,000
Less: Gift Certificate redeemed (1,950,000)
When gift certificates are not redeemed: GCs expected not to be redeemed (100,000)
Gift Certificate Payable 100,000 Unearned Revenue, ending 850,000
Forfeited gift certificate 100,000
REFUNDABLE DEPOSITS

It consists of cash or property received from customers but refundable after compliance with certain
conditions.
Examples are customer deposits required for returnable containers like bottles, drums, tanks, and barrels.
Containers' deposits are usually classified as Current Liability.

ILLUSTRATION:
A deposit of 10,000 is required from the customer for returnable containers. The container cost 8,000.
The journal entry when deposited:
Cash 10,000
Container’s deposit 10,000

The journal entry when customer returns the containers:

Container’s deposit 10,000
Cash 10,000

The journal entry when customer failed to return containers:

Container’s deposit 10,000
Containers 8,000
Gain on sales of Containers 2,000

BONUS COMPUTATION

Large entities compensate key officers and employees by way of bonus for superior income by way of bonus
for superior income realized during the year.
The main purpose is to motivate officers and employees by directly relating their well-being to success of the
entity.

The bonus computation usually has four variations:

1. Bonus is expressed as a certain percent of Income Before Bonus and Tax
B = Income x %B

2. Bonus is expressed as a certain percent Income After Bonus but Before Tax
B = %B (Income – B)

3. Bonus is expressed as a certain percent Income After Bonus and Tax

B = %B (Income – B – T) T = %T (Income – B)

4. Bonus is expressed as a certain percent Income After Tax but Before Bonus
B = %B (Income – T) T = %T (Income – B)

ILLUSTRATION

Income before bonus and before tax 4,400,000

Bonus 10%
Income Tax Rate 30%

CASE 1: Before Bonus and Tax

B = Income x %B
B = 4,400,000 x 10%
B = 440,000
CASE 2: After Bonus but Before Tax
PROOF:
B = %B (Income – B)
B = .10(4,400,000 – B) Income before Bonus and before tax 4,400,000
B = 440,000 - .10B Less: Bonus (400,000)
B + .10B = 440,000 Income after Bonus but before tax 4,000,000
1.10B = 440,000 Multiply by: Bonus 10%____
B = 440,000 / 1.10 BONUS 400,000
B = 400,000

CASE 3: Income After Bonus and Tax

B = %B (Income – B – T) T = %T (Income – B)
T = .30(4,400,000 – B)
PROOF:
B = .10[4,400,000 – B – .30(4,400,000 – B)]
B = .10(4,400,000 – B – 1,320,000 + .30B) Income before Bonus and before tax 4,400,000
B = 440,000 – .10B – 132,000 + .03B Less: Bonus (287,850)
B + .07B = 440,000 – 132,000 Tax (1,233,645)
1.07B = 308,000 Income after Bonus but before tax 2,878,505
B = 308,000 / 1.07 Multiply by: Bonus 10%___
B = 287,850 BONUS 287,850

T = .30(4,400,000 – 287,850)
T = 1,233,645

CASE 4: Income After Tax but Before Bonus

B = %B (Income – T) T = %T (Income – B)
T = .30(4,400,000 – B)
B = .10[4,400,000 – .30(4,400,000 – B)]
B = .10(4,400,000 – 1,320,000 + .30B) PROOF:
B = 440,000 – 132,000 + .03B
B - .03B = 308,000 Income before Bonus and before tax 4,400,000
.97B = 308,000 Less: Tax (1,224,742)
B = 308,000 / .97B Income after Bonus but before tax 3,175,258
B = 317,526 Multiply by: Bonus 10%___
BONUS 317,526
T = .30(4,400,000 – 317,526)
T = 1,320,000 – 95,258
T = 1,224,742
DEFERRED/UNEARNED REVENUE
income already received but not yet earned. It may be realizable within 1 year (CL) or more than a year (NCL)
from the end of reporting period.

Current Deferred Revenue examples:

✓ unearned interest income, unearned rental income, and unearned subscription revenue
Noncurrent Deferred Revenue examples:
✓ unearned from long term services contracts and long-term leasehold advance

ILLUSTRATION
An entity sells equipment service contracts agreeing to service equipment for a 2-year period. Cash receipt
from service contracts are made in the first year:

Cash receipts from services contracts sold 1,000,000

Service Contract costs paid 500,000
Service Contract revenue recognized 800,000

1. To record the cash receipts from services contracts sold:

Cash 1,000,000
Unearned Service Revenue 1,000,000

2. To record the service contract costs paid:

Service contract expense 500,000
Cash 500,000

3. To record the service contract revenue recognized:

Unearned service revenue 800,00
Service Contract revenue 800,000

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Reference: Valix, C. T., Peralta, Jose F., Valix, C A M. (2014). Financial Accounting Volume 2