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Introduction To Liabilities: Topic Overview
Introduction To Liabilities: Topic Overview
INTRODUCTION TO LIABILITIES
TOPIC OVERVIEW:
This chapter discusses liabilities, its characteristics, types and classification, initial
recognition, initial measurement, subsequent measurement, and reclassification,
derecognition and financial statement presentation.
LEARNING OBJECTIVES:
After studying this chapter, you should be able to:
1. Describe the elements in the definition of liabilities.
2. Identify the different categories and classifications of liabilities.
3. Describe the initial recognition, initial measurement, subsequent measurement,
reclassification, derecognition and financial statement presentation of liabilities.
4. Classify liability as current and non-current.
5. Compute the correct amount of liability and its related accounts.
LIABILITIES
Liabilities are present obligation of an entity arising from past transaction or events, the
settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits.
The past event that gave rise to the present obligation is termed as obligating event.
An obligating event creates a legal or constructive obligation because the entity has
no realistic alternative but to settle the obligation.
Under PFRS 9, financial liabilities are recognized on the Statement of Financial Position
when the entity becomes party to the contractual provisions of the instrument.
b. a contract that will or 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 or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entity’s own
equity instruments.
Other liabilities that did not meet the above requirements are non-financial liabilities.
Illustration: Financial vs. Non-financial liability
Required: Classify the following liabilities as to either financial/non-financial liability
Accounts payable SSS Contributions payable
Notes payable PAG-Ibig Contributions payable
Loans payable PhilHealth Contributions payable
Bonds payable Withholding taxes payable
Mortgage payable Income taxes payable
Lease liability Utilities payable
Advances from customers Warranties payable
Unearned revenues Premiums payable
Deferred revenues Cash dividends payable
Unearned rent Property dividends payable
Salaries payable Constructive obligations
Accrued interest expense/Interest payable
SOLUTION:
Financial Non-financial
Accounts payable To be settled thru provision of service or delivery of non-
Notes payable cash assets:
Loans payable Advances from customers
Bonds payable Unearned or deferred revenues
Mortgage payable Unearned rent
Lease liability Warranties payable
Salaries payable Premiums payable
Accrued interest Property dividends payable
expense/Interest payable
Utilities payable Did not arise from a contract:
Cash dividends payable SSS Contributions payable
PAG-Ibig Contributions payable
PhilHealth Contributions payable
Withholding taxes payable
Income taxes payable
Constructive obligations
Transaction costs
Transaction costs are incremental costs that are directly attributable to the acquisition,
issue or disposal of a financial liability. An incremental cost is one that would not have been
incurred if the entity had not acquired, issued or disposed of the financial liability.
Important notes:
For financial liabilities classified at fair value through profit or loss the following are made:
1. Measured at fair value;
2. Transaction costs are recognized as expense; and
3. Changes in fair values are recognized in profit or loss.
Note: For problem solving purposes, if the problem indicates information that will enable
you to compute for present value of all payments, the appropriate initial measurement
would be its present value (short-term payables with no stated interest rates can be
measured at invoice amounts when the effect of discounting is immaterial.)
Below shows the components of amortization table to determine amortized cost using the
effective interest method.
Interest Carrying
Date Payment *Amortization
Expense value
(a) (b)
(c) (d) (e) (f) (g)
a. Issuance date
b. Initial measurement of the liability
c. Date of payment for interest, principal or both. For non-interest bearing note
payable on a lump sum basis, this column shall be represented by the subsequent
reporting date.
d. Amount of payment for interest or principal or both. For interest payment, the
amount is determined as follows:
(Outstanding face amount x Stated/Nominal/Coupon interest rate)
e. Amount of interest expense incurred. This shall be computed as follows: (Previous
carrying value x Effective/Market interest rate)
f. Determine by getting the difference between interest expense and payments made
during the period.
g. Carrying amount or the amortized cost
*Note: Amortization column shows the amount of adjustment to be made to the previously
reported carrying amount. This may represent amortization of premium or discount, or
portion of total payments applicable to principal.
RECLASSIFICATION OF LIABILITIES
PFRS 9, paragraph 4.4.2, states that an entity shall not classify a financial liability.
DERECOGNITION OF LIABILITIES
Gain or loss on derecognition. The difference between the carrying amount of a financial
liability extinguished or transferred to a 3rd party and the consideration paid is
recognized in profit or loss.
FINANCIAL STATEMENT PRESENTATION
Trade payables
Accrual to employees and other
operating costs
Customer’s credit balances
Bank overdraft
Dividends payable (except share
dividends)
Income tax payable
Current portion of long term financial
liabilities
Accounts payable
Short-term notes payable
Liability under trust receipts
Deposits and advances
Deferred or unearned revenue
Provisions expected to be settled
within twelve months
Chapter 25 - Introduction to Liabilities
Under PAS 1, as minimum, the face of the Statement of Financial Position should include
the following line items for current liabilities:
a. Trade and other payables*
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability
*Line items for accounts payable, notes payable, accrued interest on note payable,
dividends payable and accrued expenses.
Additional items shall be presented on the face of the Statement of Financial Position when
such presentation is relevant to an understanding of the entity’s financial position.
Additional information:
Deducted from trade accounts payable are
Debit balance n supplier’s account ₱20,000
Undelivered checks 16,000
Postdated checks 8,000
Excluded from the trade accounts payable are
Goods received on consignment 18,000
Goods in transit, shipped FOB Shipping point 17,500
Goods in transit, shipped FOB Destination 15,500
Bonds mature in five equal semi-annual instalments
Security deposit was received from lessee. The amount will be refunded on December
31, 2021.
The deferred tax liability arises from a temporary difference which will reverse in
2017.
Required: Determine the amount to be reported in the December 31, 2016 financial
statements as
a. Current liabilities
b. Non-current liabilities
SOLUTION:
a. The following items shall be presented as current liabilities:
Trade accounts payable – unadjusted ₱ 600,000
Add/(Deduct):
Debit balance in supplier’s account 20,000
Undelivered checks 16,000
Postdated checks 8,000
Goods in transit, shipped FOB
Shipping point 17,500
Trade accounts payable - adjusted ₱ 661,500
Bonds payable – current portion (500,000/5 x 2) 200,000
Trade accounts payable 100,000
Cash dividends payable 80,000
Property dividends payable 75,000
Held for trading financial liabilities 60,000
Income tax payable 50,000
Trade accounts payable granted to officers 30,000
Salaries and wages payable 25,000
SSS premiums payable 22,500
Deferred revenue 20,000
Unearned rent 15,000
Bank overdraft 10,000
Credit balance in customer’s accounts 8,000
Accrued expenses 5,000
₱ 1,362,000
Note: The deferred revenue is just like unearned revenue, it shall be presumed current
liability unless otherwise stated in the problem.
Additional information:
1) The 8%, ₱2,000,000 Note payable is due on January 1, 2017 and is to be settled by
delivery of merchandise to the holder.
2) The 10%, ₱1,500,000 Note payable matures on June 30 and December 31. On
December 15, 2016, Rajon Co. entered into refinancing agreement with a bank to
refinance the note on a long-term basis. The refinancing and roll over transaction was
completed on December 31, 2016.
3) The 11%, ₱1,250,000 five-year Note payable was obtained by Rajon from a bank. The
agreement requires Rajon to maintain current ratio of 3:1. If the current ratio falls
below 3;1, the note becomes payable on demand. As of December 31, 2016, Rajon’s
current ratio is 1:5:1. On December 31, 2016, the bank agreed not to collect the note in
2017.
4) The 10%, ₱ 1,000,000 Loan Payable is payable on demand. However, on December 31,
2016, there is no indication that the payee on the loan will demand payment over the
next 12 months.
5) The 12%, ₱750,000 Loan payable is maturing on July 1, 2017. Interest on the loan is
due every July 1 and December 31. On January 15, 2017, Rajon Co, entered into a
refinancing agreement with a bank to refinance the loan on a long-term basis. Both
parties are financially capable of honouring the agreement’s provisions. Rajon has the
discretion to refinance or roll over the loan for at least twelve months from December
31, 2016 under an existing loan facility.
6) The 15%, Loan payable is due on June 30, 2017. Interest on the loan is payable every
June 30 and December 31. On December 15, 2016, Rajon and the creditor agree to
settle the obligation by giving the latter Rajon’s long-term investment in another
corporation.
Rondo’s financial statements were authorized for issue on March 15, 2017.
SOLUTION:
The following items shall be presented as current liabilities:
8% Note payable (to be settled in 2017) ₱ 2,000,000
10% Loan payable (payable on demand) 1,000,000
15% Loan payable (to be settled in 2017) 500,000
Total current liabilities ₱ 3,500,000
Characteristic
Description Present obligations that are not supported by formal promises to pay
by the debtor. These obligations normally arise from acquisitions of
inventories to be used in the normal operating cycle of the entity.
Recognition When ownership of goods are transferred to the buyer.
Measurement Fair value, which is normally the invoice price of goods acquired and
may or may not be affected by related freight and cash discounts
Presentation Normally included in the current liabilities section under the heading
“Trade and other payable”
Initial Measurement
List or quoted price XX
Less: Trade discounts, rebates and other similar items XX
Initial measurement (gross method of recording purchases) XX
Less: Purchase discount XX
Initial measurement (net method of recording purchases,
whether discount is taken or not) XX
made FOB shipping point. Angelica prepaid ₱200,000 of delivery cost for Ash as an
accommodation.
SOLUTION:
1. Amount to recorded as part of accounts payable
List price ₱ 5,000,000
Less: Trade discount
[(₱5M x 20%) + (₱5M x 80% x 10%)] 1,400,000
Initial measurement under gross method –
this is also the invoice price of the merchandise
Less: Cash discount (₱3,600,000 x 5%) 180,000
Initial measurement under net method ₱3,420,000
The invoice price the merchandise may also be computed as follows:
(₱5M x (100%-20%) x (100% -10) = ₱3,600,000
d) Goods in transit from a vendor to Bryant on December 31, 2016 with an invoice cost of
₱ 40,000 purchased FOB destination was not yet recorded. The goods were received in
January 2017.
e) Goods with invoice cost of ₱ 60,000 was recorded and included in the year-end
physical count as “goods in transit.” It was found out that the goods were shipped from
a vendor under FOB destination.
Required:
Compute for the adjusted accounts payable on December 31, 2016.
SOLUTION:
Unadjusted balance ₱4,000,000
(a) Unrecorded purchases 200,000
(b) Unrecorded payable on purchases lost in transit 80,000
(e) Purchases that should be recorded in the next
Accounting period (60,000)
Total ₱4,220,000
Required:
Compute for the adjusted accounts payable on December 31, 2016.
SOLUTION:
Unadjusted balance – accounts payable ₱2,000,000
(a) Unreleased and postdated checks 68,000
(b) Purchase return (100,000)
(c) Unrecorded freight shouldered by seller 12,000
(d) Freight paid on behalf of the seller (20,000)
Total adjusted accounts payable ₱1,960,000
ESTIMATED LIABILITIES
Estimated liabilities are items that involve a present obligation and satisfy the rest if the
definition but can only be measured only by using a substantial degree of estimation.
BONUS PAYABLE
Bonus is a gratuity given by entities to their employees as a gift or compensation earned as
reward upon achieving a goal such as exceeding budgeted income during the year, meeting
quotas, and having a superior performance in a project or activity. The primary purpose of
this is to encourage performance from officers and employees by directly associating their
success to company’s success.
Bonus expense xx
Bonus Payable xx
Bonus calculation
Bonus may be derived based from the following:
1. Net income before bonus and tax 4. Net income after tax but before
bonus
B = NY x BR B = BR x (NY – T)
OR
BR x [NY x (1 – TR)]
B=
1 + [BR x (1-TR)]
Required: Determine the amount of Riel’s bonus and the appropriate provision for income
tax for the year under the following independent scenarios.
1) Bonus is calculated based on net income before bonus and income tax.
2) Bonus is calculated based on net income after bonus but before income tax.
3) Bonus is calculated based on net income after bonus and income tax.
4) Bonus is calculated based on net income after income tax but before bonus.
SOLUTION:
For (1) and (2) requirements:
To compute for the amount of bonus, it is imperative to compute for the basis of bonus.
To compute for the basis, we must first determine the equivalent percentage of the given
net income before bonus and income tax with the assumption that the basis has an
assigned value of “100%”. From there we can compute for the basis by dividing net income
before bonus and income tax with the percentile computed.
Chapter 25 - Introduction to Liabilities
Requirement No. 2
For requirement no. 2, bonus is calculated as follows:
Calculation of basis
NY before B and T (squeeze) 110%
Less: Bonus 10%
NY after B but before T 100%
Calculation of bonus
Bonus = NY after B but before T x Bonus rate
Bonus = ₱5,000,000 x 10%
Bonus = ₱500,000
Requirement No. 3
NY after B but before T (squeeze) = 100% / (1 – Tax rate)
Alternative Solution:
BR x [NY x (1 – TR)]
B=
1 + [BR x (1-TR)]
₱ 385,000
B=
1.07
B= ₱359,813
Chapter 25 - Introduction to Liabilities
Requirement No. 4
Alternative Solution:
BR x [NY x (1 – TR)]
B=
1 – BR + [BR x (1-TR)]
₱ 385,000
B=
97%
B= ₱396,907
(3) (4)
NY before B and T ₱5,500,000 153% ₱5,500,000 139%
Less: Bonus 359,813 10% 396,907 10%
NY after B but before T ₱5,140,187 143% ₱5,103,093 129%
Less: Income tax (30%) 1,542,056 43% 1,550,928 39%
NY after B and T ₱3,598,131 100% ₱3,572,165 90%
Add: Bonus 396,907 10%
NY before B but after T ₱3,969,072 100%
Summary of answers:
Bonus Tax
a. Net income before bonus and tax ₱550,000 ₱1,485,000
b. Net income after bonus but before tax ₱500,000 ₱1,500,000
c. Net income after bonus and tax ₱359,813 ₱1,542,056
d. Net income after tax but before bonus ₱396,907 ₱1,530,928
Jordan Co., requires advance payments for its products. The records of Jordan shoe the
following:
Required: Compute for the amount to be reported as unearned revenue assuming the
advance payments received are non-refundable.
SOLUTION:
Unearned Revenue
₱ 500,000 Balance, Beg.
Advances Applied to Cash Received
shipments/Sale
s ₱ 1,800,000 2,500,000 from advances
*Orders Cancelled 200,000
₱ 3,000,000 ₱ 3,000,000
Balance, End (squeezed) 1,000,000
₱ 3,000,000 ₱ 3,000,000
Note: If the cash received in advance is refundable, the amount applicable to orders
cancelled is still presented as part of liabilities.
SOLUTION:
Unearned service contract
₱ 200,000 Balance, Beg.
Cash Receipts from
Service contract service contracts
revenue recognized ₱ 560,000 440,000 sold
₱ 560,000 ₱ 640,000
Balance, End 80,000
₱ 640,000 ₱ 640,000
₱ 10,000 ₱ 15,000
Balance, End (squeezed) 5,000
₱ 15,000 ₱ 15,000
Required: Compute for the amount of unearned revenue to be reported as current liability
related to these magazine subscriptions on December 31, 2016.
Chapter 25 - Introduction to Liabilities
XSOLUTION:
Current Liability:
To expire in 2017 ₱ 1,200,000
Non-current Liability:
To expire in 2018 ₱ 1,000.000
To expire in 2019 800,000
To expire in 2020 400,000
Total Non-current 2,200,000
DEPOSITS REVEIVED
Deposits received represent cash received and held in behalf of other entities such as
clients and customers. These items are recognized as liabilities and classified as to either
current or non-current depending on their settlement dates. Examples include deposit in
escrow accounts and refundable deposit on returnable containers.
SOLUTION:
Escrow Liability
₱ 200,000 Balance, Beg.
Cash payments nine Cash receipt for
months ₱ 2,625,000 2,700,000 Nine months
₱ 2,625,000 ₱ 2,900,000
Balance, End
(squeezed) 275,000
₱ 2,900,000 ₱ 2,900,000
are accounted as regarded as proceeds from sale of the containers. Information for 2016 is
as follows:
SOLUTION:
Liability for Deposits
₱ 165,000 Balance, Beg.
Cash refunds for
container returned in Cash deposits
2016 ₱ 180,000 140,000 from deliveries
*Proceeds from sale of
containers 25,000
₱ 205,000 ₱ 305,000
Balance, End (squeezed) 100,000
₱ 305,000 ₱ 305,000
*This represents the balance from 2014 deliveries not returned as of December 31, 2016.
This is computed as follows:
(₱75,000 minus ₱25,000)
Such amount is treated as proceeds from sale of containers and not as liability.
The “contingent liability” is used for liabilities that do not meet the recognition criteria.
Gain
Contingencies
Virtually
certain Yes X Treated as an asset
Virtually
certain No X Categorized as
Probable Yes/No X contingent assets
Possible/Remote Yes/No X
Basic rule: No contingent items shall be recognized on the face of the financial
Measurement of Provision
The amount recognized as a provision shall be the best estimate of the expenditure
required to settle the present obligation at the end of the reporting period. Best estimate is
determined as follows :
a) The estimates of outcome and financial effect are determined by the judgment of the
management of the entity, supplemented by experience of similar transactions and, in
some cases, reports from independent experts.
b) Where the provision being measured involveds a large population of items, the
obligation is estimated by weighting all possible outcomes by their associated
probabilities. The name for this statistical method of estimation is ‘expected value’.
c) Were there is continuos range of possible outcomes, and each point in that range is
as likey as any other, the mid-point of the range is used.
2. Future events
a. forecast reasonable changes in applying existing technology
b. ignore possible gains on sale of assets
c. consider changes in legislation only if virtually certain to be enacted
3. Discontinued present value using a pre-tax discount rate the reflects the current
market assessments of the time value money and the risks specific to the liability.
4. Reimbursement by another party
If some or all of the expenditure required to settle a provision is expected to be
reimbursed byanother party, the reimbursement should be recognized as a
separate assetprovided it is virtually certain that reimbursement will be received if the
entity settles the obligation.
The amount recognized as an asset shoulb not exceed the amount of the provision and
its should not be treated as a reduction of the required provision.
Chapter 25 - Introduction to Liabilities
7. Reaeasurement of provisions
The following shall be performed when measuring provision subsequent initial
recognition
a. Review and anjust provision at each reporting date.
b. If an outflow no longer probable, provision is reversed.
8. Use of provisions
If it is no longer probable that an outflow of resources will be required to settle the
obligation, the provision should be reversed.
Examples of Provision
Circumstance Recognized a provision?
Restructuring by sale of Only when the entity is committed to a sale, i.e. there
an operation is a binding sale of agreement
Restructuring by closure Only when a detailed form plan is in place and the
or reorganization entity has started to implement the plan, or
announced its main features to those affected. A Board
decision is insufficient
Warranty When an obligating event occurs (sale of product with
a warranty and probable warranty claims will be
made)
Land contamination A provision is recognized as contamination occurs for
any legal obligations of clean up, or for constructive
obligations if the company’s published policy is to
clean up even if there is no legal requirement to do so
(past event is the contamination and public
expectation created by the company’s policy)
Customer refunds Recognize a provision if the entity’s established policy
is to give refunds (past event is the sale of the product
together with the customer’s expectation, at the time
of purchase, that a refund would be available)
Offshore oil rig must be Recognize a provision for removal costs arising from
removed and sea bed the construction of theoil rig as it is constructed, and
restored add to the cost of the asset. Obligations arising from
the production of oil are recognized as the production
occurs.
Abandoned leasehold, A provision is recognized for the unavoidable lease
four years to run, no payments.
reletting possible
Onerous (loss-making) Recognize a provision
contract
Self-insured restaurant, Accrue a provision (the past events is the injury to
people were poisoined, customers)
lawsuits are expected
but none has been filed
yet
A chian of retail stores is No provision until an actual fire (no past event)
Chapter 25 - Introduction to Liabilities
Required: Determine the amount of liability to be accrued on December 31, 2016 ass a
result of these lawsuits.
SOLUTION:
Liability to be accrued ₱2,500,000
In the first lawsuit, since the entity is expecting to settle out of courts, the estimated
settlement shall be accrued in 2016.
In the second lawsuit, since the level of uncertainty involved is only “likely”, which is
equivalent to possible, no liability shall be recognized but disclosure in the note to
financial statements shall be made.
SOLUTION:
Repair
Cost Probability Provision
₱40,000,00
=
0 x 10% ₱ 4,000,000
=
30,000,000 x 20% 6,000,000
=
20,000,000 x 30% 6,000,000
Chapter 25 - Introduction to Liabilities
=
10,000,000 x 40% 4,000,000
₱20,000,00
100% 0
SOLUTION:
Liability to be accrued (₱2,000,000 + ₱10,000,000)/2 ₱6,000,000
Required: Provide all necessary journal entries under the following independent
assumptions.
1) The lawsuit was settled for ₱15,000,000 in 2016.
2) The lawsuit was settled for₱12,750,000 in 2016.
3) Stephen won the lawsuit in 2016.
SOLUTION
Entry to be made in 2014:
Loss on lawsuit ₱10,000,000
Estimated liability ₱10,000,000
Liabilities may also arise after recognition of revenue from sale transactions. These
liabilities may include, but not limited to the following:
a. Premiums liability c. Warranties liability
b. Rebates liability
Premiums liability
Premiums are articles offered free or at a reduced price to make a combined offer more
attractive to the customers. In some cases, cash payments are also given to customers as a
result of past sales promotional activities.
SOLUTION:
Premiums liability
- Balance, Beg.
Net cost of coupons
redeemed ₱ 875,000 1,400,000 Premiums expense
₱ 875,000 ₱ 1,400,000
Balance, End 525,000
₱ 1,400,000 ₱ 1,400,000
Rebates liability
Pro-forma journal entries:
1. To recognized provision for rebates to entitled customers:
Rebates expense XX
Rebates liability XX
During 2016, 500,000 packages of baking pans are sold and 85,000 rebates form where
mailed to customers.
SOLUTION:
Rebates liability
Balance,
- Beg.
Rebates form Rebates
mailed** 850,000 1,000,000 expense*
₱ 850,000 ₱ 1,000,000
Balance, End 150,000
₱ 1,000,000 ₱ 1,000,000
A warranty describes the conditions under, and period during, which the producer or
vendor will repair, replace, or other compensate for, the defective item without cost to the
buyer or user. Often, it also delineates the rights and obligations of both parties in case of a
claim or dispute.
Warranty is recorded at the time of sale based on best estimate. Estimate is reviewed at a
certain date and difference between estimate and actual cost is accounted as change in
accounting estimate to be treated as currently and prospectively.
Pro-forma journal entries for transactions involving warranty under accrual approach
a. When products with warranties are sold
Warranties expense XX
Estimated warranties liability XX
SOLUTION:
Warranties liability
- Balance, Beg.
Cost incurred for *Warranties
warranties ₱ 3,400,000 5,000,000 expense
₱ 3,400,000 ₱ 5,000,000
Balance, End 1,600,000
₱ 5,000,000 ₱ 5,000,000
*(₱5,000 x 1,000 units)
2015 2016
Computer sales in units 1,000 1,200
Chapter 25 - Introduction to Liabilities
Carmelo Co. has estimated based on the available past records that the pattern of repairs
has been:
44% Year of sale
38% 1st year of sale
18% 2nd year of sale
Required:
1) How much unearned service contract would be recognized in year 2016?
2) How much profit on service contract would be recognized in year 2016?
3) How much is unearned service contract on December 31, 2016?
4)
SOLUTION:
Pattern of Realized Revenues:
2015 SALES
From sales in: 2015 2016 2017 2018 Total
st
1 (44% x 1/2) 0.22 0.22 0.44
nd
2 (38% x 1/2) 0.19 0.19 0.38
3rd (18% x 1/2) 0.09 0.09 0.18
Total 0.22 0.41 0.28 0.09 1
2016 SALES
From sales in: 2015 2016 2017 2018 Total
st
1 (44% x 1/2) 0.22 0.22 0.44
2nd (38% x 1/2) 0.19 0.19 0.38
rd
3 (18% x 1/2) 0.09 0.09 0.18
Total 0.22 0.41 0.28 0.09 1
Requirement No. 1
Warranty Sales in 2015 earned in 2016 (41% x 800 x ₱1,000) 328,000
Warranty Sales in 2016 earned in 2016 (38% x 900 x ₱1,000) 198,000
Total warranty sales revenue earned in 2016 526,000
Notes:
The 41% represents the realized revenue in 2016 from 2015 sales.
The 22% represents the realized revenue in 2016 from 2016 sales.
Requirement No. 2
Total warranty sales revenue earned in 2016 (see no. 1) ₱526,000
Expenses relating to computer warranties 50,000
Profit from sales warranty 476,000
Requirement No. 3
Unearned sales warranty from 2015 [(28% + 9% x 800 x ₱1,000)] ₱526,000
Unearned sales warranty from 2016 [(100%-22%) x 900 x ₱1,000)] 50,000
Profit from sales warranty 476,000
Notes:
The 28% and 9% represent the unrealized revenues in 2016 from 2015 sales.
Chapter 25 - Introduction to Liabilities
The 22% represents the realized revenue in 2016 from 2016 sales. So 100% minus 22%
realized is equal to 78% unrealized revenue in 2016 from 2016 sales.
Total liabilities to be reported in the company’s December 31, 2016 statement of financial
position is:
a. ₱8,835,000 c. ₱7,545,000
b. ₱8,665,000 d. ₱7,325,000
The deferred tax liability is based on temporary differences that will reverse in 2017.
Additional information:
Chapter 25 - Introduction to Liabilities
On January 31, 2017, the entire ₱10,000,000 note was refinanced through issuance of a
long-term obligation payable lump sum.
For the ₱6,000,000 note, under the loan agreement, the entity has the discretion to
refinance the obligation for at least 12 months after December 31, 2016.
The annual sinking fund requirement on the guaranteed debentures is ₱500,000 per
year.
The 2016 financial statements were issued on March 31, 2107.
Assuming all accruing interest for 2106 were paid, the amount to be reported as current
liabilities on December 31, 2016 is
a. ₱19,300,000 c. ₱10,500,000
b. ₱16,500,000 d. ₱6,500,000
How much is presented as current liability in relation to the loan in Tim’s 2016 year-end
financial statements?
a. ₱2,000,000 c. ₱100,000
b. ₱200,000 d. Nil
All merchandise was acquired on credit and no payments have been made on accounts
payable since the inception of the company. All merchandise is marked to sell at 50% above
invoice cost before time discounts of 2/10, n/30. No sales were made in 2016. How much
cash is required to eliminate the current balance in accounts payable?
a. ₱6,400,000 c. ₱5,900,000
b. ₱6,000,000 d. ₱5,750,000
Tony Co. provides an incentive compensation plan under which its chief executive officer
receives a bonus equal to 10% of the company’s income in excess of ₱800,000 before bonus
and income tax. If income before bonus and income tax for 2016 amounted to ₱2,200,000
and income tax is 30%, the amount of bonus would be
a. ₱220,000 c. ₱132,000
b. ₱200,000 d. ₱120,000
In Manu’s December 31 balance sheet, what amount should be reported as current liability
for advances from customers?
a. ₱1,400,000 c. ₱1,200,000
b. ₱1,300,000 d. Nil
a. ₱2,300,000 b. ₱1,700,000
Chapter 25 - Introduction to Liabilities
c. ₱900,000 d. ₱300,000
How much is the liability for deposits on returnable containers on December 31, 2016?
a. ₱118,000 c. ₱108,000
b. ₱115,000 d. ₱100,000
Debit Credit
October - ₱ 1,120,000
November 120,000 784,000
December - 896,000
On December 31, 2016, the amount to be reported as valued added tax payable is:
a. ₱180,000 c. ₱300,000
b. ₱216,000 d. ₱336,000
An entity is the defendant in a patent infringement lawsuit. The entity’s lawyers believe
there is a 30 percent 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 percent chance that the entity will be required to pay
damages of ₱200,000 (the amount sought by the claimant) and an 80 percent chance that
the entity will be required to pay damages of ₱100,000 (the amount that was recently
awarded by the same judge in a similar case). Other outcomes are unlikely that the
claimant will settle out of court.
In Fisher’s December 31, 2016 financial statements, which were issued on April 30, 2017,
how much should item be reported?
a. An accrual of ₱3,000,000
b. No disclosure or accrual is necessary
c. A disclosure indicating a possible loss of ₱3,000,000
Chapter 25 - Introduction to Liabilities
d. If the payment can be estimated, a liability should be recognized, but if the amount
of expected payment cannot be estimated, only a note disclosure would be required.
2015 2016
Packages or cereal sold 500,000 800,000
No. of towels purchased at ₱40 per towel 30,000 60,000
No. of towels distribtued as premium 20,000 50,000
No. of towels to be distributed as premium next period 5,000 3,000
In its 2016 income statement, Pacquiao Company should be report premium expense at
a. ₱2,400,000 c. ₱2,000,000
b. ₱2,120,000 d. ₱1,920,000
Sales Actual
Expenditures
2015 ₱ 5,000,000 ₱ 150,000
2016 6,000,000 550,000
Vince Co. has estimated based on the available past records that the pattern of repair has
been:
Questions:
Based on the above data, answer the following:
1. How much unearned service contract would be recognized in year 2016?
a. P930,000 c. P1,200,000
b. P1,440,000 d. P2,070,000
COMPREHENSIVE PROBLEM
Questions:
1. Assume that no other data are presented.
a. Nil c. P40,000
b. P2,000,000 d. P2,040,000
2. Assuming both parties are financially capable of honouring the agreement’s provisions
and McGrady Co. has the discretion to refinance or roll over the loan for at least twelve
months from December 31, 2016.
a. Nil c. P40,000
b. P2,000,000 d. P2,040,000
3. Assume that on December 15, 2016. McGrady Co. entered into a refinancing agreement
with a bank to refinance the loan on a long-term basis. The refinancing agreement was
completed on December 31, 2016.
a. Nil c. P40,000
b. P2,000,000 d. P2,040,000
4. Assume that on January 5, 2017, McGrady Co. entered into a refinancing agreement with
a bank to refinance the loan on a long-term basis. The refinancing agreement was
completed on January 31, 2017.
a. Nil c. P40,000
b. P2,000,000 d. P2,040,000
Questions:
Based on the above data, answer the following.
1. Assume that the loan is payable on demand although on December 31, 2016, there is no
indication that the payee on the note will demand payment over the next 12 months.
a. Nil c. P40,000
b. P2,000,000 d. P2,040,000
2. Assume instead that the loan agreement requires Tracy to maintain a current ratio 3:1. If
the current ratio falls this amount, the loan becomes payable on demand. As of December
31, 2016, Tracy’s current ratio is 2:5:1. On December 31, 2016, the creditor agreed not to
collect the loan in 2017 and gave Tracy 12 months to rectify the breach of loan agreement.
a. Nil c. P40,000
Chapter 25 - Introduction to Liabilities
b. P2,000,000 d. P2,040,000
3. Assume instead that the loan agreement requires Tracy to maintain a current ratio 3:1. If
the current ratio falls this amount, the loan becomes payable on demand. As of December
31, 2016, Tracy’s current ratio is 2:5:1. On January 6, 2017, the creditor agreed not to
collect the loan in 2017 and gave Tracy 12 months to rectify the breach of loan agreement.
a. Nil c. P40,000
b. P2,000,000 d. P2,040,000
PROBLEM 25-27Contingencies
Dwayne Company, a manufacturer of Viagra has had a lawsuit filed against in the Vic
Incorporated, another manufacturer of Viagra. The suit alleges patent that infringements
by Dwayne Company and asks for compensatory damages.
For the following likely situations, determine how Dwayne Company should report the
information concerning the lawsuit. The choices are:
a. Accrue and disclose
b. Disclose only
c. Accrue only
d. Neither accrue nor disclose
2. Dwayne Company’s legal counsel estimates that the infringement case may result in a
loss of P2,000,000 but considers the likelihood of losing the case as remote.
3. Dwayne Company’s legal counsel estimates that the infringement case may result in a
loss of P2,400,000 but considers the likelihood of losing the case as reasonably possible.
4. Dwayne Company’s legal counsel is convinced that the likelihood of losing the case is
probable, the potential amount of the loss, however is currently undeterminable.
5. Dwayne Company’s legal counsel is convinced that the likelihood of losing the case is
probable, the potential amount of the loss, based on the reliable evidences would be as
follows: 20% that the liability would be P1,600,000; 50% that the liability would be at
P2,000,000; 30% that the liability would be P2,400,000.
6. Dwayne Company’s legal counsel is convinced that the likelihood of losing the case is
probable, the potential amount of loss, based on reliable evidences would be around
P1,500,000 to P3,000,000.
2. It is probable that Smith would be successful against West for an estimated amount of
P1,500,000.
3. It is probable that Smith would be successful against West for an estimated amount of
P1,500,000, before the financial statements was issued, Smith was awarded P1,000,000
and received full payment thereof.
4.It is probable that Smith would be successful against West for an estimated amount of
P1,500,000, after the financial statements was issued, Smith was awarded P1,000,000 and
received full payment thereof.
5. It is reasonably possible that smith would be successful against West for an estimated
amount of P1,500,000.
6. During the year 2016, Smith won a litigation award for P1,500,000 which was tripled to
P4,500,00 to include punitive damages. The defendant, who is financially stable, has
appealed only the P3,000,000 punitive damages. Counsel is unable to estimate the outcome
of this appeal.
Questions:
Based on the above data, determine the following:
1. How much is the bonus if the bonus is based on the net income before bonus and tax?
a. P360,500 c. P379,474
b. P515,000 d. P618,000
2. How much is the bonus if the bonus is based on the net income after bonus but before
tax?
a. P360,500 c. P379,474
b. P515,000 d. P618,000
3. How much is the bonus if the bonus is based on the net income after bonus and tax?
a. P360,500 c. P379,474
b. P515,000 d. P618,000
PROBLEMS 25-30
Wades music emporium carries a wide variety of music promotion techniques-warranties
and premiums- to attract customers.
Chapter 25 - Introduction to Liabilities
Musical instrument and sound equipment are sold in a one-year warranty for replacement
of parts and labor. The estimated warranty cost, based on past experience, is 4% of sales.
The premium is offered on the recorded and sheet music. Customers receive a coupon for
two pesos spent on recorded music or sheet music. Customers may exchange 200 coupons
and P20 for an AM/FM radio. Wade pays P34 for each radio and estimates that 90% of the
coupons given to customers will be redeemed.
Wades total sales for 2016 were P2,000,000 from recorded music and sheet music.
Replacement parts and labor for warranty work totalled P164,000 during 2016. A total of
6,500 AM/FM radio used in the premium program are purchased during the year and there
were 1,200,000 coupons redeemed in 2016.
The accrual method is used by Wade to account for the warranty and premium costs for
financial reporting purposes. The balance in the accounts related to warranties and
premiums on January 1, 2016, was shown below:
Also on December 31, 2016, the estimated liability from warranties show P212,000
balance.
Questions: (Please assume that the selling price of the recorded music and sheet is an even
number)
Based on the above and the result of your audit, determine the amounts that will be shown
on the 2016 financial statements for the following:
1. Sales from musical instrument and sound production equipment
a. P6,000,000 c. P6,400,000
b. P5,400,000 d. P5,300,000
2. Warranty Expense
a. P240,000 c. P256,000
b. P216,000 d. P212,000
3. Premium expense
a. P75,600 c. P63,000
b. P108,000 d. P126,000
Transactions during 2016 and other information relating to Riley’s liabilities were as
follows:
a) The note is dated May 1, 2015 and is payable in four equal annual instalments of
P700,000 beginning May 1, 2016. The first principal and interest payment was made on
May 1, 2016.
b) The 10% P2,000,000 loan payable will mature on July 1, 2017. Interest on the is due
every July 1 and December 31. On December 1, 2016, the company entered into a
refinancing agreement with a bank to refinance the loan on a long-term basis. The
refinancing and roll over transactions was completed on December 31, 2016.
c) On January 1, 2016, The Company purchased delivery equipment by paying cash of
P200,000 and issuing a non-interest-bearing note payable of P2,000,000 due in 4 equal
annual installments starting December 31, 2016. The prevailing rate of interest of this type
of note is 12%.
Questions:
Based on the above data, determine the following:
1. How much is the carrying amount of the note issued for delivery equipment on initial
recognition?
a. P1,518,650 c. P1,271,000
b. P2,000,000 d. P2,200,000
Additional Information:
Bash Co. sells two products-washing machines and ovens. The washing machines carry
three-year warranty against manufacturer’s defects. Based on the reliable estimate,
warranty costs are estimated at P150 per machine. During 2016, Bosh Co. sold 1,200
washing machines and paid warranty costs of P85,000 which charged to warranty expense.
Premium is offered on the oven. Customers receive a coupon for each peso spent for the
oven. Customers may exchange 400 coupons and P20 for t-shirt. Bosh pays P45 for each t-
shirt and estimates that 60% of the coupons give to customers will be redeemed. Total
sales of the oven amounted to P1,200,000.
A total of 6,000 t-shirts used in the premium program were purchased during the year and
there were 500,000 coupons redeemed during the current year. Premium expense of
P270,000 was charged by the company when it purchased the 6,000 t-shirts.
Questions:
Based on the data, determine the following:
1. Estimated Warranty Payable, December 31, 2016
a. P95,000 c. P85,000
b. P180,000 d. P265,000
4. Assuming a bonus of 20% is given to the president based on net income after bonus and
before tax of 30%, how much is the bonus?
a. P240,917 c. P253,956
b. P344,167 d. P413,000
5. Assuming a bonus of 20% is given to the president based on the net income after bonus
and tax of 30%, how much is the bonus?
a. P240,917 c. P253,956
b. P344,167 d. P413,000
Additional information
Cash in payment of accounts payable to supplier on December 31, 2016 amounting
to P8,000 was not recorded by Chris Company.
The 10% loan payable is due on June 30, 2017. Interest on the loan is due every July
1 and December 31. On December 31, 2016, Chris Co. entered into a refinancing
agreement with a bank to refinance the loan on a long-term basis. The refinancing
and roll over transactions was completed on December 31, 2016.
The 12% payable is due July 1, 2018. The loan agreement requires Chris to maintain
a current ratio of 3:1. If the current ratio falls before the amount, the loan becomes
payable on demand. As of December 31, 2016, the current ration of the company is
2:5:1. On January 5, 2017, the bank agreed not to demand payment giving Chris Co.
one-year to rectify the breach of agreement.
Chapter 25 - Introduction to Liabilities
Questions:
Determine the following as of December 31, 2016:
1. Current liabilities
a. P2,527,500 c. P2,487,500
b. P2,727,500 d. P2,616,500
2. Noncurrent liabilities
a. P1,699,000 c. P1,659,000
b. P2,009,000 d. P1,779,000
3. Total liabilities
a. P4,226,500 c. P4,146,500
b. P4,426,500 d. P4,395,500