FAR 6831 – CURRENT LIABILITIES Estimated warranty liability xx

A liability is classified as current when:

1. Entity expects to settle the liability within the Estimated warranty liability xx
entity’s operating cycle Cash xx
2. Entity holds the liability for purpose of trading
3. Liability is to be settled within 12 months after the b. Expense as incurred approach – expensing
end of reporting period warranty cost only when actually incurred
4. Entity does not have unconditional right to defer Warranty expense xx
payment for at least 12 months after the period Cash xx

MEASUREMENT NEW – Adequacy Testing for Warranty Liability

 In practice, current liabilities are initially 1. Average the Sales(evenly throughout the year)
measured at their face amount 2. Compute outstanding warranty liability after
reporting date as YE balance
PRESENTATION 3. Adjust excess/deficient amount to warranty
a. Trade and other payables expense and liability
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt ACCRUED LIABILITIES
e. Current tax liability PAYROLL TAXES
a. Income tax payable
PREMIUM LIABILITY b. SSS contributions
 Premiums – are articles of value given to c. PhilHealth contributions
customers as result of past sales or sales d. Pag-ibig contributions
promotion activities Record gross payroll and employee share
When premiums are purchases Salaries xx
Premiums xx Withholding tax payable xx
Cash xx SSS payable xx
PhilHealth payable xx
When premiums are distributed to customers Pag-ibig payable xx
Premium expense xx Salaries payable/cash xx
Premiums xx
Record employer’s share in benefits
At end of year, if premiums still outstanding Payroll tax expense xx
Premium expense xx SSS payable xx
Estimated premium liability xx PhilHealth payable xx
Pag-ibig payable xx
WARRANTY LIABILITY
RECOGNITION Record remittance of amounts
1. Entity has present obligation Withholding tax payable xx
2. Probably that an outflow of resource would be SSS payable xx
required to settle the obligation PhilHealth payable xx
3. Amount of obligation can be measured reliably Pag-ibig payable xx
Cash xx

VALUE ADDED TAX

Record sales on account with VAT
Accounts receivable xx
ACCOUNTING FOR WARRANTY Sales xx
a. Accrual approach – properly matches cost with Output VAT xx
revenue
Warranty expense xx Record purchases on account with VAT
 Purchases xx DEFERRED REVENUE
Input VAT xx  Also called unearned revenue
Accounts payable xx  Income already received but not yet earned

Recognize net VAT liability PROVISIONS

Output VAT xx - An existing liability of uncertain timing or
VAT receivable xx uncertain amount
Input VAT xx - Equivalent of an estimated liability or a loss
VAT payable xx contingency that is accrued because it is both
probable and measurable
GIFT CERTIFICATES PAYABLE
When gift certificates are sold RECOGNITION
Cash xx 1. Entity has present obligation
Gift certificates payable xx 2. Probable that an outflow of resource would be
required to settle the obligation
When gift certificates are redeemed 3. Amount of obligation can be measured reliably
Gift certificates payable xx
Sales xx MEASUREMENT
 Should be the best estimate of the expenditure
When gift certificates expire or not redeemed a. If single obligation, best estimate is the
Gift certificates payable xx outcome adjusted
Forfeited gift certificates xx b. If range of possible outcomes, the
midpoint is the best estimate
REFUNDABLE DEPOSITS c. If a large population if items, the best
 Consist of cash or property received from estimate is by weighing all the outcomes
customers but which are refundable after
compliance with certain conditions CHANGES IN PROVISION
Cash xx  Reviewed at every end of the reporting period and
Containers’ deposit xx adjusted to reflect the current best estimate
EXAMPLES
Container’s deposit xx 1. Warranties
Cash xx 2. Environmental contamination
3. Decommissioning or abandonment costs
Containers’ deposit xx 4. Court case
Containers xx 5. Guarantee
Gain on sale of containers xx PROVISIONS FOR RESTRUCTURING arises
when:
a. The entity has a detailed formal plan
b. The entity has raised valid expectation to those
affected that the entity will carry out the
restructuring
BONUS COMPUTATION
1. Bonus as percent of income before bonus ONEROUS CONTRACT
and before tax  A contract in which the unavoidable costs of
2. Bonus as percent of income after bonus but meeting the obligation under the contract exceed
before tax the economic benefits
3. Bonus as percent of income after bonus  Shall be recognized and measured as a provision
and after tax
4. Bonus as percent of income after tax but CONTINGENT LIABILITY
before bonus
 A possible obligation arising from past event
whose existence will be confirmed by the
 occurrence or nonoccurrence of uncertain future
events
 Differs from provision in the sense that a
provision is both probable and measurable
while contingent liability is either measurable or
probable
 If contingent liability is remote, no disclosure
Level of Reliably Treatment
Uncertainty measurable
Probable Yes Provision
Probable No Contingent
Liability
Possible Yes/No Contingent
Liability
Remote Yes/No Ignore

CONTINGENT ASSET
 A possible asset arising from past event whose
existence will be confirmed by the occurrence or
nonoccurrence of uncertain future events
 Not recognized in FS
 Only disclosed when it is probable

Level of Reliably Treatment

Uncertainty measurable
Probable Yes/No Contingent
Asset
Possible or Yes/No Ignore
remote

DECOMMISSIONING LIABILITY
- An obligation to dismantle, remove and restore an
item of PPE as required by law or contract
CHANGES IN DECOMMISSIONING
LIABILITY
1. A decrease in liability is deducted from the
cost of the asset
2. If decrease in liability > CA = excess in P/L
3. An increase in liability is added to the cost
4. Consider whether CA > Recoverable amount
therefore test for impairment