Premium and Warranty Liability

1 In an effort to increase sales, Mill Company inaugurated a sales promotional campaign on June 30, 2015. The entity placed a co
1 cereal sold. Each premium cost P20 and five coupons must be presented by a customer to receive a premium. The entity estimate
redeemed. For the six months ended December 31, 2015, the following information is available

Packages of Premiums
cereal sold Purchased Coupons redeemed
160,000 12,000 40,000

What is the estimated liability for premiums on December 31, 2015?

Coupons to be redeemed 96000

Less: Coupons redeemed 40000
Balance 56000

Number of premiums (56,000/5) 11200

Estimated Liability 224,000.00

2 During the current year, Day Company sold 500,000 boxes of cake mix under a new sales promotional program. Each box conta
2 baking pan upon remittance of P40.The entity paid P50 per pan and P5 for handling and shipping and estimated that 80% of the
300,000 coupons had been processed during the year.

What amount should be reported as liability for unredeemed coupons at year-end?

Net premium expense (50+5-40) 15

Coupons to be redeemed 400000

Less: Coupons redeemed 300000
Coupons outstanding 100000

Liability for unredeemed coupons 1,500,000.00

3 Mill Company sells washing machines that carry a three year warranty against manufacturer's defects. Based on the entity's expe
13 machine. During the current year, the entity sold 2,400 washing machines and paid warranty costs of P170,000

What amount should be reported as warranty expense for the current year?
 Warranty expense 720,000.00

How much is theremaining liability after year end 550,000.00

4 On April 1, 2015, Ash Company began offering a new product for sale under a one-year warranty. Of the 50,000 units in invento
13 30, 2015. Based on its experience with similar products, the entity estimated that the average warranty cost per units sold would
through June 30, 2015, amounted to P700,000.

On June 30, 2015, what is the estimated warranty liability?

Warranty expense 2,400,000.00

Actual warranty cost 700,000.00
Warranty liability 1,700,000.00

E.W.L. at the start of the year 2,400,000.00

June 30, 2015. The entity placed a coupon redeemable for a premium in each package of
eceive a premium. The entity estimated that only 60% of the coupons issued would be
able

ireredeem
naredeem Expense
remaining * cost =
liability

promotional program. Each box contained one coupon, which entitled the customer to a
ipping and estimated that 80% of the coupons would be redeemed, even though only

r's defects. Based on the entity's experience, warranty costs are estimated at P300 per
y costs of P170,000

W.E 720,000.00
 E.W.L 720,000.00

arranty. Of the 50,000 units in inventory on April 1, 2015, 30,000 had been sold by June
ge warranty cost per units sold would be P80. Actual warranty costs incurred from April 1

all products warranty Warranties expense

Est w. L @ YE
 Deferred Revenue

1 Regal Department Store sells gift certificates, redeemable for store merchandise and with no expiration date. The entity has the f
22 gift certificate sales and redemptions:

Unearned revenue on January 1, 2015 750,000

2015 Sales 2,500,000
2015 redemption of prior year sales 250,000
2015 redemption of current year sales 1,750,000

On December 31, 2015, what amount should be reported as unearned revenue?

Unredeemed, January 1, 2015 750,000

Sales on GC - 2015 2,500,000
Total 3,250,000
Redemptions of prior year sales 250,000
Redemptions of current year sales 1,750,000
Unearned revenue - December 31, 2015 1,250,000

2 Dunne Company sells equipment service contracts that cover a two-year period. The sale price of each contract is P600. The pas
27 spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second co
contracts evenly throughout 2015.

What amount should be reported as deferred service revenue on December 31, 2015?

First contract year 40% 240,000.00

Second contract year 60% 360,000.00
Total contracts sold in 2015 600,000.00

3 Ronald Company has an incentive compensation plan under which a branch manager received 10% of the branch income after d
44 deduction of income tax. Branch income for the current year before the bonus and income tax was P1,650,000. The tax rate is 30

What is the bonus for the current year?

Income after bonus before tax

Bonus

B = 10%(1650000 - B)
B = 165,000 - .10B
1.1B = 165000
B = 150,000
ation date. The entity has the following information pertaining to the

ach contract is P600. The past experience is that, of the total pesos
% evenly during the second contract year. The entity sold 1,000

600,000.00

600,000.00
120,000.00
DSR - 2015 480,000.00

120,000.00
180,000.00
Total service cont 300,000.00
DSR - 2016 180,000.00

% of the branch income after deduction of the bonus but before

P1,650,000. The tax rate is 30%
Liabilities Warranty

Assets = Liabilities + Equity 1. Accrual approach

SSS Warranty Expense

Philhealth Est. warranty liability
Pag iBIG
Est. W.L
withholding taxes Cash

SFP reporting 2. Expense as incurred appro

Current
Noncurrent Warranty expense
Cash
Premium Liability

Premiums xx
Cash xx

Premiums Expense xx
Premiums xx

Premiums expense xx
Est. Prem liability xx

Customer loyalty program

Separately

Allocated between the award credits and the sale

 Accrued liabilities and deferred revenue

1. Accrual approach Payroll taxes

Withholding
SSS
Warranty Expense xx Philhealth
Est. warranty liability xx Pag ibig

xx
xx Gross payroll 500,000.00
Income tax withheld (20,000.00)
2. Expense as incurred approach SSS (4,000.00) employee share
<3 (2,000.00)
Warranty expense xx PHIC (1,000.00)
xx Net Payroll 473,000.00

SSS (6,000.00)
<3 (3,000.00)
PHIC (2,000.00)

Salaries 500,000.00
Withholding tax payable 20,000.00
SSS 4,000.00
<3 2,000.00
PHIC 1,000.00
Cash 473,000.00

Payroll tax expense 11,000.00

SSS 6,000.00
<3 3,000.00
PHIC 2,000.00

Withholding tax paya 20,000.00

SSS 10,000.00
<3 5,000.00
PHIC 3,000.00
Cash 38,000.00
 VAT Bonus Computation

Cash 10,000.00 Before bonus before tax

Sales 8,800.00 After bonus before tax
Output VAT 1,200.00 After bonus after tax
before bonus after tax

Purchases 5,000.00
Input VAT 600.00 Income before bonus and before tax
Cash 5,600.00 Bonus
Tax rate
mployee share Output VAT 1,200.00
employers share Input VAT 600.00
VAT Payable 600.00 Case 1 Before bonus before tax
Income before bonus and before tax
Output VAT 3,000.00
VAT Credit 2,000.00
Input VAT 5,000.00

Case 2 After bonus before tax

Income before bonus and before tax
Cash 10,000.00
Gift Cert payable 10,000.00 B = 10%(4,400,000 - B)
B = 440,000 - .10B
B+.10B = 440,000
GC Payable 6,000.00 1.1B=440000
Sales 6,000.00 B = 400,000

GC Payable 4,000.00 After bonus before tax

Forfeited GC Payable 4,000.00

Case 3 After bonus after tax

B = 10%(4,400,000 - B - T)
T = 30%(4,400,000 - B)

B= 10%(4,400,000 - B - 30%(4,400,000 - B))

B = 10%(4,400,000 - B - 1320,000 + .30B)
B = 440,000 - .10B - 132,000 + .03B
1.07B = 308,000
B = 287,850

T = 30%(4,400,000 - B)
4,112,150.00
1,233,645.00
Case 4 before bonus after tax
Income before bonus and before tax

B = .10(4,400,000 - T)
T = 30%(4,400,000 - B)

B = .10(4,400,000 - 30%(4,400,000 - B))

B = .10(4,400,000 - 1,320,000 +.3B)
B = 440,000 - 132,000 +.03B
.97B = 308,000
B = 317,525.77

rule: 2 decimal places.

 Provisions
Uncertain timing
Uncertain amount

Expected Value Method

70% no defects
20% minor
bonus and before tax 4,400,000.00 5% major
10%
30%
minor defects 1,000,000
Major defects 5,000,000
Before bonus before tax
bonus and before tax 4,400,000.00 30% 4,000,000
10% 70% 2,000,000
440,000.00 Provision

60% chance guilty

After bonus before tax 40% dismiss
bonus and before tax 4,400,000.00

B = 10%(4,400,000 - B) Provisions shall not be recognized for future operating losses

B = 440,000 - .10B
B+.10B = 440,000
1.1B=440000
B = 400,000 400,000.00

4,000,000.00
10%
400,000.00

After bonus after tax

000 - B - 30%(4,400,000 - B))

000 - B - 1320,000 + .30B)
10B - 132,000 + .03B
before bonus after tax
bonus and before tax 4,400,000.00

00 - 30%(4,400,000 - B))
00 - 1,320,000 +.3B)
32,000 +.03B
 Contigent Liability

-
200,000.00
250,000.00
450,000.00

1,200,000.00
1,400,000.00
2,600,000.00

1,560,000.00

ed for future operating losses

Contingent Liability Con/ Liab
Probable Recognize in the FS
Nature Possible Disclose
Recognition Remote Not disclose
Disclosures
Recognition of a decommissioning liability

possible Decommisssioning Liability

not probable Mining Industries

Disclosed Only 1/1/2017 25,000,000

Nature straight line method
Estimate Decommissioning cost 5,000,000
indication of uncertainties
Reimbursement Present value 1,610,000.00

Remote Drilling Platform 26,610,000.00

Cash
Deco. Liability

Depreciation 2,661,000.00
Accumulated Depn

Int exp 193,200.00

Deco Liab

2018

Depreciation 2,661,000.00
Accumulated Depn

Int exp 216,384.00

Deco Liab

Carrying Amount 2,019,584.00

CA, 2017 1,803,200.00
CA, beg 1,610,000.00

5,500,000

Deco Liab 5,000,000

loss 500,000
Cash
Con Asset
Disclose
Not disclose
Not disclose

10 years

0.322

25,000,000
1,610,000.00

2,661,000.00

193,200.00

2,661,000.00

216,384.00

5,500,000
 Bonds Payable
Bond Certificate - entitles payments of interest

TERM single date of maturity

SERIAL Installments

Mortgage real properties

Collateral shares of another corporation
Debenture unsecured bonds

Registered bonds registered

Coupon or bearer bonds unregistered

Convertible Bonds Exchanged for shares

Callable Bonds called in for redemption
Guaranteed Bonds another party guarantees payment of the bonds
Junk Bonds high risk and high yield bonds

PFRS 9 Initial measurement of bonds payable

Bonds not classified as FV PL Fair Value minus transaction costs

Bonds are classified as FVPL Fair Value (transaction costs are expe
Present value of future cash paymen

Bonds Payable 1,000,000.00

PFRS 9 Subsequent measurement of bonds payable

Amortized cost method (effective interest method)
FV PL

Amortized cost method (effective interest method)

Principal minus principal repayments +/- amortization (face value - present value)

Accounting for issuance of bonds

memorandum approach
JE approach

Cash xx
Bonds Payable xx

Bonds Payable 1,000,000.00

Selling price 900,000.00
1,200,000.00

Discount/Premium
 SP > Face Value Premium
SP < FV Discount

Face value 5M
105

SP 5250000

Premium

Cash 5,250,000.00
Bonds Payable 5,000,000.00
Premium 250,000.00

Premium xx
Interest expense xx

Face value 5M
95
SP 4,750,000.00

Cash 4,750,000.00
Discount 250,000.00
Bonds Payable 5,000,000.00

Interest expense xx
Discount xx

Normal balance of income is Credit

Normal balance of expense is Debit

Presentation of discounts and premiums

deduction/addition to the bonds payable

Bonds payable

Bond issue cost

Discount Added
Premium Netted

Recording interests in bonds

Payment
Accrual of interest

03.01.2017 5,000,000.00 12% 100

 semi-annual inte 3.01 9.01

03.01.2017 Cash 5,000,000.00

Bonds Payable 5,000,000.00

09.01.2017 interest expense 300,000.00

Cash 300,000.00

12.31.2017 interst expense 200,000.00 (5,000,000 * 12% * 4 months / 12 mo

Accrued interest payable 200,000.00

01.01.2018 Accrued interest payable 200,000.00

Interest expense 200,000.00

03.01.2018 interest expense 300,000.00

Cash 300,000.00

09.01.2018 interest expense 300,000.00

Cash 300,000.00

12.31.2018 Accrued interest payable 200,000.00

Interest expense 200,000.00

06.01.2017 5,000,000 @97 12%

06.01 and 12.01

06.01.2017 Cash 4,850,000.00

Discount 150,000.00
Bonds Payable 5,000,000.00

12.01.2017 Int Exp 300,000.00

Cash 300,000.00

12.31.2017 Int exp 50,000.00

AIP 50,000.00

int exp 17,500.00 (150,000 / 5 years * 7 m

Discount 17,500.00

01.01.2018 AIP 50,000.00

Int Exp 50,000.00

06.01.2018 int exp 300,000.00

Cash 300,000.00

12.01.2018 int exp 300,000.00

 Cash 300,000.00
Presentation
12.31.2018 Int exp 50,000.00 Accrued Int. Payable
AIP 50,000.00
BP
Int exp 30,000.00 Discount
Discount 30,000.00 CA

Face Value Selling price

04.01.2017 5,000,000 5,228,000.00

bonds are issued on 01/01/2017 which have a term of 5 years at 12% interest payable semiannually every 01/01 and 07/01

04.01.2017 Cash 5,378,000.00

BP 5,000,000.00
Premium 228,000.00
Interest Expense 150,000.00

07.01.2017 IE 300,000.00
Cash 300,000.00

12.31.2017 IE 300,000.00
AIP 300,000.00

Premium 36,000.00
IE 36,000.00

Amortize only beginning on the date of issuance.

Retirement of Bonds

Bonds payable xx
Interest expense xx
Cash xx

03.01.2017
Bonds are retired prior to the maturity date 5 years
Cancelled/permanently retired 12% interest
3.01
1 amortize int up to the date of retirement 9.01
Retired at 97
Retired on July 01, 2020

Int exp 27,000.00

discount 27,000.00

2 balance of discount should be cancelled

 Initial recognition 270,000.00
03.01.2017 to 12.31.2017 45,000.00
2018 54,000.00
2019 54,000.00
2020 27,000.00
Balance 90,000.00

3 accrued interest should be determined

Face 5,000,000.00
rate 12%
600,000.00
03/01 to july 01 200,000.00

4 Cash payment

retirement price 4,850,000.00

AIP 200,000.00
Cash payment 5,050,000.00

5 CA bonds Face plus unamortized premium minus unamortized discount

BP 5,000,000.00
Discount (90,000.00)
CA 4,910,000.00

6 Gain or loss
Retirement price > Carrying Amount Loss
Retirement price < Carrying Amount Gain

Retirement 4,850,000.00 Do not include interest paid

CA 4,910,000.00
Gain (60,000.00)

7 Recognize/retire the Bonds

BP 5,000,000.00
Int exp 200,000.00
Cash 5,050,000.00
Discount 90,000.00
Gain 60,000.00

Amortization discounts and premium

 Straight line method number of period
Bond outstanding method Serial bonds principal
PFRS 9 Effective interest method

Face amount of the bonds 5,000,000.00

Issue Price 5,300,000.00
Date of bonds 01.01.2017
Date of issue 01.01.2017
interest rate 12%
semiannual interest dates 06.30 and 12.31

The bonds mature every december 31 at the rate of P1 Million each for 5 years

Bond Premium
Year outstanding Fraction amortization
2017 5,000,000.00 0.33 100,000.00
2018 4,000,000.00 0.27 80,000.00
2019 3,000,000.00 0.20 60,000.00
2020 2,000,000.00 0.13 40,000.00
2021 1,000,000.00 0.07 20,000.00
15,000,000.00 300,000.00

01.01.2017 Cash 5,300,000.00

BP 5,000,000.00
premium 300,000.00

06.30.2017 IE 300,000.00
Cash 300,000.00

12.31.2017 IE 300,000.00
Cash 300,000.00

Premium 100,000.00
IE 100,000.00

Face amount of the bonds 5,000,000.00

Issue Price 4,700,000.00
Date of bonds 04.01.2017
Date of issue 04.01.2017
interest rate 12%
semiannual interest dates 04.01 and 10.01

The bonds mature on April 1 of each year at the rate of P1,000,000

Amortization schedule based on the bond outstanding method

 2017 April 1 2017 to March 31, 2018 5,000,000.00 100,000.00
2018 April 1 2018 to March 31, 2019 4,000,000.00 80,000.00
2019 April 1 2019 to March 31, 2020 3,000,000.00 60,000.00
2020 April 1 2020 to March 31, 2021 2,000,000.00 40,000.00
2021 April 1 2021 to March 31, 2022 1,000,000.00 20,000.00
15,000,000.00 300,000.00

2017 04.01.2017 - 12.31.2017 100000 * 9 /12 75,000.00 75,000.00

2018 01.01.2018 - 03.31.2018 100000 * 3/12 25,000.00

04.01.2018 - 12.31.2018 80000 * 9/12 60,000.00 85,000.00

2019 65,000.00
2020 45,000.00
2021 25,000.00
2022 5,000.00
300,000.00

2017
1-Apr Cash 4,700,000.00
Discount 300,000.00
BP 5,000,000.00

1-Oct IE 300,000.00
Cash 300,000.00

31-Dec IE 150,000.00
AIP 150,000.00

IE 75,000.00
Discount 75,000.00

Bonds not designated FVPL

Bonds payable are designated at FV thru PL

Bond issuance costs expensed immediately

No more amortization
interest expense - nominal rate

5,000,000
12%
5,379,100 10%
annually every December 31
BIC 100,000
12.31.2017 5,300,000 FV
 1-Jan Cash 5,379,100
BP 5,379,100.00

Transaction cos 100,000

Cash 100,000.00

31-Dec Int exp 600000

Cash 600,000.00

31-Dec BP 79,100
Gain 79,100.00

Initial 5,379,100
FV @ YE 5,300,000
Gain 79,100

PFRS 9 40,000.00 Credit risk

Credit risk OCI
remaining amount P/L

BP 79,100
Gain - OCI 40,000.00
Gain - PL 39,100.00
ent of the bonds

nus transaction costs

ansaction costs are expensed immediately)
of future cash payments
12% * 4 months / 12 months)

(150,000 / 5 years * 7 months/12 months)

Presentation
Accrued Int. Payable 50,000.00 Current liability

5,000,000.00
102,500.00
4,897,500.00 Non current liability

ery 01/01 and 07/01

4 years and nine months

48.00
57.00

5,000,000.00
4,730,000.00

Discount 270,000.00
Amortization 54,000.00
EFFECTIVE INTEREST METHOD

Nominal Rate
Effective Rate

Premium Effective rate < Nominal Rate

Discount Effective rate > Nominal Rate

Interest expense effective rate x carrying amount

Nominal interest nominal rate x face amount

Amortization (premium or discount)

1/1/2017 2 year 8% bonds

1,000,000 964,540.00 10% effective rate
06/30 and 12/31

Discount
Date Interest paid Interest expense Amortization Carrying amount
1/1/2017 964,540.00
6/30/2017 40,000.00 48,227.00 8,227.00 972,767.00
12/31/2017 40,000.00 48,638.35 8,638.35 981,405.35
6/30/2018 40,000.00 49,070.27 9,070.27 990,475.62
12/31/2018 40,000.00 49,523.78 9,523.78 999,999.40

Cash 964,540.00
Discount 35,460.00
BP 1,000,000.00

Interest Expense 48,227.00

Cash 40,000.00
Discount 8,227.00

1/1/2017 3 year 12% 1,000,000.00

31-Dec 10% 1,049,740.00

Premium
Date Interest paid Interest expense Amortization Carrying amount
1/1/2017 1,049,740.00
12/31/2017 120,000.00 104,974.00 15,026.00 1,034,714.00
12/31/2018 120,000.00 103,471.40 16,528.60 1,018,185.40
12/31/2019 120,000.00 101,818.54 18,181.46 1,000,003.94

market price/carrying amount

Face amount 4,000,000.00
Nominal rate 6%
Effective rate 8%
1/1/2017 4 years annual

PV of 1 of 8% for 4 periods 0.7350

PV of an ordinary annuity of 1 at 8% for 4 periods 3.3121

PV of principal 4,000,000.00 0.74 2,940,000.00

PV of interest 240,000.00 3.31 794,904.00
Issue price of the bonds 3,734,904.00

Face amount 4,000,000.00

Discount 265,096.00

Discount
Date Interest paid Interest expense Amortization Carrying amount
1/1/2017 3,734,904.00
12/31/2017 240,000.00 298,792.32 58,792.32 3,793,696.32
12/31/2018 240,000.00 303,495.71 63,495.71 3,857,192.03
12/31/2019 240,000.00 308,575.36 68,575.36 3,925,767.39
12/31/2020 240,000.00 314,061.39 74,061.39 3,999,828.78

Serial Bond

Face 3,000,000.00
Nominal rate 12%
Effective Rate 10%
Date of issue 1-Jan-17
Annual Payment @ YE 1,000,000.00
Interest is payable annually 31-Dec

PV of 1 one period 0.9091

two 0.8264
three 0.7513

Date Principal Interest Total Payment PV

12/31/2017 1,000,000.00 360,000.00 1,360,000.00 0.9091
12/31/2018 1,000,000.00 240,000.00 1,240,000.00 0.8264
12/31/2019 1,000,000.00 120,000.00 1,120,000.00 0.7513

Premium

Date Interest paid Interest expense Premium amortizaPrincipal payment

1/31/2017
 12/31/2017 360,000.00 310,256.80 49,743.20 1,000,000.00
12/31/2018 240,000.00 205,282.48 34,717.52 1,000,000.00
12/31/2019 120,000.00 101,810.73 18,189.27 1,000,000.00

Bond Issue Cost

1/1/2017 3 year 10,000,000.00
Annual 9,751,210.00
Bond issue cost 239,880.00

Face amount 10,000,000.00

Discount 248,790.00
Issue Price 9,751,210.00
BIC 239,880.00
Net proceeds 9,511,330.00 11%
x - 10%
Discount Effective rate > nominal rate 11% - 10%
Trial and error method
Interpolation method

11%
PV of 1 0.73
PV OA of 1 2.44

7,312,000.00
2,199,330.00
9,511,330.00

Date interst PaymentInterest expense Amortization CA

1/1/2017 9,511,330.00
12/31/2017 900,000.00 1,046,246.30 146,246.30 9,657,576.30
12/31/2018 900,000.00 1,062,333.39 162,333.39 9,819,909.69
12/31/2019 900,000.00 1,080,190.07 180,190.07 10,000,099.76

1/1/2017 5 years 10,000,000.00 95.00 10%

31-Dec
BIC 200,000.00 9,500,000.00

Face amount 10,000,000.00

Discount 500,000.00 10,000,000.00
Issue Price 9,500,000.00 9,300,000.00
BIC 200,000.00
Net proceeds 9,300,000.00 Effective rate

11%
PV of 1 0.59
PV of OA of 1 3.70
PV of 1 5,935,000.00 x - 11%
PV of OA of 1 3,695,900.00 12% - 11%
9,630,900.00
9,300,000.00 9,630,900.00
12% 9,278,800.00 9,630,900.00
PV of 1 0.57
PV of OA of 1 3.60 11.940% Effective rate

PV of 1 5,674,000.00
PV of OA of 1 3,604,800.00
9,278,800.00

Date interst PaymentInterest expense Amortization CA

1/1/2017 9,300,000.00
12/31/2017 1,000,000.00 1,110,420.00 110,420.00 9,410,420.00
12/31/2018 1,000,000.00 1,123,604.15 123,604.15 9,534,024.15
12/31/2019 1,000,000.00 1,138,362.48 138,362.48 9,672,386.63
12/31/2020 1,000,000.00 1,154,882.96 154,882.96 9,827,269.60
12/31/2021 1,000,000.00 1,173,375.99 173,375.99 10,000,645.58
Issue
1,236,376.00
1,024,736.00
841,456.00
3,102,568.00
102,568.00

Carrying Amount
3,102,568.00
 2,052,824.80
1,018,107.28
(81.99)

9%
10%

nominal

10%
>10%
(330,900.00) 0.93979
(352,100.00)