BERTILLO, JORIZ JAMES M.

BSA 2
College of Mary immaculate
Summary of Intermediate Accounting 2
Chapter 1: Liabilities
present obligation of an entity to transfer an
economic resources as a result of PAST EVENTS (Revise PFRS)

1. PRESENT OBLIGATION

a. Legal obligation- legally enforceable as a consequence in t

of binding contract or statutory requirement

b. Constructive obligation - give rise to liability by reason of normal business practice, custom
and desire to maintain good business relations or act in an equitable manner.

2. Transfer of an economic resource - Out Flow of Future economic benefits

3. Past Event - must arise from a past transaction or event

Obligating Event - Past event that leads to a legal or constructive obligation

- Creates a present obligation

CURRENT LIABILITIES NON-CURRENT LIABILITIES

1. Current Liabilities (PASI par. 69) 2. Non Current Liabilities

1.1. the entity expects to settle the
liability within the entity's operating cycle.
1.2. The entity holds the liability is
primarily for the purpose of trading
1.3. The liability is due to be settled
within twelve months after the reporting date
1.4. the entity does not have the right at the
end of the reporting period to defer
settlement of the liability for atleast 12
months after the reporting date.
2.1 The form noncurrent liabilities is a
residual definition.
2.2 Labilities are not classified as current
liabilities are non current Liabilities
Liabilities include:
a. Non current portion of Long term
debt
b. Finance lease liability
c. Deferred Tax liability
d. Long term obligation to officers
e. Long term deferred Revenue.

Measurement of Current Liabilities

Conceptually all liabilities are initially measured at PRESENT VALUE.
Subsequent AMORTIZED COST
Current Labilities IS NOT DISCOUNTED- the difference between the Face Amount and Present
Value is NOT MATERIAL therefore IGNORED
measured at FACE AMOUNT

Long term debt due within 1 year:

General Rule: Current Liability

Exemptions:
1. The entity has the DISCRETION to refinance or roll over atleast 12 months
After the reporting date atleast 12 months after the reporting date/ period.

2. Refinancing Agreement on a long term basis is completed on or before

the reporting period.

Measurement op Noncurrent Liabilities

1. Bonds Payable and Noninterest bearing note payable.

Initially measured at PRESENT VALUE
Subsequent at AMORTIZED COST
2. Long Term note payable is interest bearing,
Initially & subsequently at FACE AMOUNT

FACE AMOUNT= PRESENT VALUE OF NOTE PAYABLE

Liability due beyond 12 months.

General Rule: Non- Current Liability

Exemptions:
1. BREACH OF COVENANT (COVENANT= restriction to the borrower) it will
be CURRENT LIABILITY because the Liab will be PAYABLE ON DEMAND.

Exemptions TO THE EXEMPTIONS:

1. If the lender agreed to give GRACE PERIOD.
- must be GIVEN on or before the reporting date.
-The duration must be 12 months after the reporting period.

2. If LENDER AGREED TO WAIVE the breach of Covenant.

-must “happen” on or before the reporting period.

. BONUS COMPUTATION:
 BONUS – the main purpose of this scheme is to motivate officers and employees by
directly relating their well being to the success of the entity -compensation plan result in
liability

Legends:
Br- Bonus Rate
NI- Net Income
ATR- After tax Rate
(Example: tax rate=30% then ATR= 70%)
TR= Tax Rate
Before bonus= 1- Br
After Bonus= 1+Br
Case 1: Before Bonus and Before tax

B= Br( NI)

Case 2: After Bonus and Before tax

B= Br x NI
1+Br

Case 3: After Bonus and After tax

B= BR (NIAT)
1+(BR x ATR)

Case 4: Before Bonus but After tax

B= Br (NIAT)
1-(BR x TR)
 Chapter 2: Premium Liabilities

I. Premium Liability
Premiums-articles of value such as toys, dishes, silverware and other goods
given to customer as o recult of Pad sales or sales promotion activities -entfiec
offer promiums to customers in return for.product labels, boxtops, wrappers and
coupons.

Premium Expense:

Expected Number of Premiums to be distributed during the Year ( Unit Sold X

Expected % / Required Coupon)
x Net Premium Cost per Unit.( Cost of Premium - Remittance + Other Cost )
Premium Expense

Formula #1: Estimated Premium Liability:

Beg, Est. Premium Liability
Add: Premium expense
Less: Premiums Actually distributed (Actually distributed x Net Prem Cost/ Per Unit)
Ending Est Liab/ Estimated Liab

Formula #2: Estimated Premium Liability:

Beg, Est. Premium Liability
Add: Outstanding Premium Liab ( ex: 1k issued less: 500 redeemed= 500 outstanding)
X Cost of Premium per Unit ( ex: 45)
Ending Est Liab/ Estimated Liab

Ending Inventory of Premium Liability:

Beg,Inventory
Add: Cost of Purchase
Less: Cost of Premium distributed
Ending Est Liab/ Estimated Liab
 Free Product Coupon, Discounts and Rebate
IFRS 15, paragraph 22. Provides that of contract Inception, an entity shall assess
the goods Promised in contract with customers and Shall identify as a
performance obligation each promise to transfer to the customer either

A. Distinct Goods

B. A distinct goods that are substantially the same and that have the same
pattern of transfer to the customer

IFRS I5 paragraph 74, an entity is required to allocate the transaction price of good sold
between the product cold and the customer options based on relative stand alone selling
price. The Allocated transaction price of the customer option shall be deferred and
recognized ac income when betons are exerused or when options expire.

Stand Alone Selling Price:

Number of free additional product

X Actual Selling Price
Selling Price of free product
X Expected Redemption( %)
Stand Alone Selling Price

Allocation:
Allocation:
Product Sold / Total X Product Sold Allocated Sales
+ SASP / Total x Product Sold Allocated Deferred / Unearned Revenue
TOTAL

Ending Deferred Revenue:

Beg, Deferred Revenue

Less: Sales
Ending Deferred Revenue
 III. Discount Coupon

Stand Alone Selling Price of Coupons:

Average of Future Purchase

X Number of Discounted coupons
Total amount of Future Purchase
X Percentage of Discount ( %)
Total discount of Future Purchases
X Percentage of expected Redemption
Stand Alone Selling Price of Coupons

Allocation:
Allocation:
Product Sold / Total X Product Sold Allocated Sales
+ SASP / Total x Product Sold Allocated Deferred / Unearned Revenue
TOTAL

Redemption:
Total Amount of Future Purchase
X Total discount
Net Price
X Expected Percentage of Redemption ( %)
Cash Received From Customer

IV.Cash Rebate

Stand Alone Selling Price of Cash Rebate:

# Product Sold
X Discount per Coupon
Total amount of Discount
X Percentage of expected Redemption
Stand Alone Selling Price of Cash Rebate

Allocation:
Allocation:
Product Sold / Total X Product Sold Allocated Sales
+ SASP / Total x Product Sold Allocated Deferred / Unearned Revenue
TOTAL
Estimated Rebate Liability:
Rebate Coupons issued
X Expected to be redeemed
Coupon rebate to be redeemed
X Cash rebate per coupon
Estimated Rebate Liability

IV.Loyalty Program/ Points

Stand Alone Selling Price:

Total Points earned or Customer earned pts.
X Selling Price Each
Stand Alone Selling Price

Allocation:
Allocation:
Product Sold / Total X Product Sold Allocated Sales
+ SASP / Total x Product Sold Allocated Deferred / Unearned Revenue
TOTAL

Redemption:

Revenue to be Recognized:

Year 1:
Actual Redeemed
/ Estimated to be redeemed
x Unearned revenue- pts
Revenue to be Recognized yr 1

Year 2:
Total pts redeemed ( YR 1 PTS + YR 2)
/ Estimated to be redeemed or REVISED estimated to be redeemed
x Unearned revenue- pts
Cummulative rev for yr 2
Cummulative rev for yr 2
Less: Revenue to be Recognized yr 1
Revenue to be recognized in Yr 2

Year 3:
Total pts redeemed ( YR 1 PTS + YR 2 +yr 3 pts)
/ Estimated to be redeemed or REVISED estimated to be redeemed
x Unearned revenue- pts
Cummulative rev for yr 3

Cummulative rev for yr 3

Less: Revenue to be Recognized yr 2
Revenue to be recognized in Yr 3

II:GIFT CERTIFICATES

Department stores may sell gift certificates or gif cards to customers in exchange for future
delivery of goods. The gift certificates are usually nonrefundable and therefore the seller
should consider that some customers might not redeem such certificates.

Under IFRS 15, the nonredemption of the gift certificates is referred to as “breakage”.

The seller shall recognize revenue from breakage based on the value of certificates
redeemed in proportion to the expected value of certificates to be redeemed.

Formula:

Breakage Revenue:
GC redeemed xx / Outstanding GC xx (estimated Breakage xx)

Example:
GC REDEEMED 3.6 M
GC issued 6M
Estimated Breakage 600k

GC redeemed 3.6 M
/ Outstanding GC (6M - 600K) 5.4 M
X estimated Breakage 600 k
Breakage Revenue 400k
Unearned Revenue/ Ending balance:

Unearned Revenue, Beg xx

GC Sold xx
GC redeemed during yr (xx)
GC not expected to be redeemed (xx)
Expired GC (xx)
Unearned Revenue/ Ending balance xx

GC Sold xx
X GC not expected to be redeemed (%) xx
Expected Breakage xx

GC Sold xx
X GC expected to be redeemed (%) xx
Expected GC redeemed xx

GC Sold xx
Actual not redeemed (xx)
X Estimated Breakage (%) xx
Breakage xx
 Chapter 3: Warranty Liabilities

cost that a business expects to or has already incurred for the repair or replacement of
goods that it has sold

Accrual Approach:
-soundest theoretical support because it properly Matches Cost and Revenue
-Estimated warranty cost is accrued and recorded as an expense and estimated liability.

Expense as Incurred Approach:

is the approach of expensing warranty cost only when actually Incurred

Formula:
Estimated Warranty Liability:
Beg, Est. Premium Liability
Add: Warranty expense
Less: Actual Warranty Cost Incurred
Ending Est Liab/ Estimated Liab

Warranty Expense:

Accrual Approach Expense Incurred Approach

Est. set to be returned (% x unit sold) xx Sales xx
X Est. warranty cost per unit xx percentage of warranty( ex: 1%+2% = 3%)
Warranty Expense Warranty Expense

Sales made evenly

To have an easier interpretation or understanding of sales accruing evenly during the year, it is
fair to assume that half of the sales were made on January 1 and the other half on July 1.
 Chapter 4: Provision
Is an Existing Liability of UNCERTAIN TIMING and UNCERTAIN AMOUNT
Recognition of Provision (PAS 37)
1. Present Obligation
2. Probable that an Outflow of Resources
3. Measured Reliably

Measurement of Provision
1. Best Estimate
2. Expected Value Method
3. If best estimate is not available get the MIDPOINT ( highest value+Lowest Value/2)

Weighted Probabilities:
Chance x cost of damages x Chance it will not be dismissed= Expected Cashflow

Risk adjustment Factor:

Expected Cash flow

X Risk Adjustment Factor ( ex: 7% +100%) =1.07
Adjusted cashflow

Present Value:
Adjusted Cash Flow
X Present Value
Present Value of Cash Flow

Liability:

0%-49%- remote- Ignore

50% - Possible - Disclose(Cont, Liab)
51%-95%- Probable- Recognize as Provision
96%-100%- Reasonably Certain- Recognize as Liab

Asset:
0%-49%- remote- Ignore
50% - Possible - Ignored
51%-95%- Disclose- Recognize as Contingent,Asset
96%-100%- Reasonably Certain- Recognize as Assets