Chapter 1:

LIABILITIES

Characteristics
A. Present obligation
Borrower must be identified or particular
It may be Legal Obligation or Constructive Obligation
B. Past events/transactions
Arises from past transactions/events
Not recognized until it is incurred/acquired
C. Outflow of future economic benefits
To pay cash, to transfer noncash assets or to provide service
After settlement of liabilities, there will be an effect in Asset or in Capital
Classification
A. Current Liabilities
Expect to settle within the operating cycle
Held for the purpose of trading (refinancing/repay/retirement/repurchase)
Due date within 1 year after the reporting period
No unconditional right to defer settlement for at least 1 year after the reporting period (No refinancing arrangement)

Trade and other payables

- Accounts Payable
- Notes Payable
- Accrued interest on notes payable
- Dividends Payable
- Accrued Expenses

Current provisions
Short term borrowing
Current portion of long term debt
Income tax Payable
Warranty Payable

Long term deferred income

Deferred tax Payable

B. Noncurrent Liabilities
Residual definition; liabilities not classified as current

Bonds Payable (noncurrent portion)

Notes Payable (noncurrent portion)

Measurement
Measurement

Liabilities

Initial

Current
Noncurrent: Bonds Payable
Notes Payable (noninterest bearing)
Notes Payable (interest bearing)

Subsequent

Present value/Fair value

Amortized cost

Present value/Fair value

Amortized cost

Face amount

Face amount

A. Initial
Fair Value Transaction Cost (not designated at fair value through P/L)
**Fair Value = Present Value of future cash payment to settle the liability
**PV = discounted amount of future cash outflow using the market/effective interest rate
**Transaction cost = cost directly attributable to the issue of liability
- recognized as expense if initially designated at fair value through P/L
B. Subsequent
B1. Amortized Cost, using effective interest method
**Face Value Present Value/Fair Value = Discount or Premium
B2. Fair Value through Profit or Loss

Covenants included in the borrowing agreement which borrower is restricted for further borrowings, paying dividends and etc.

Chapter 2:

PREMIUM AND WARRANT LIABILITY

Premiums
-

Articles of value such as toys, cash payments, and other goods given to the customers as result of past sales
or promotion activities.
In other words, these are promotional items that can be received for a small fee when redeeming proofs of
purchase that come with or on retail products.
Premiums

xx
Cash

xx
**Entity purchased PREMIUMS**

Premiums Expense
Premiums

xx
xx

**Entity distributed PREMIUMS / Customer redeemed PREMIUMS**

Premiums Expense
Est. Premium Liability

xx
xx

**PREMIUMS not redeemed at the end of accounting period**

Customer Loyalty
-

Designed to reward customers for past purchases and to provide them with incentives to make further
purchases
Entity grants customer award credits or points

Warranty
-

To provide free repair service or replacement during specified period if the products are defective
At the point of sale, LIABLITY IS INCURRED once product sold prove to be defective.
Accrual Approach and Expense as incurred Approach
To record sales
Sales

Cash
xx

xx

To record estimated warranty

Warranty Expense
xx

Warranty Liability
xx

To record actual warranty cost

Cash
xx

Chapter 3:

Warranty Liability
xx

Extended warranty
- Recognized as Unearned Income (Liability account)
- Amortized using Straight Line Method

ACCRUED LIABILITIES AND DEFERRED REVENUE (UNEARNED)

Payroll Taxes
Recognized as current liability until remitted by the entity/employer to the government authorities

Contribution to SSS
Contribution to PHILHEALTH

Contribution to PAGIBIG
Income tax

To record PAYROLL EXPENSES including CONTRIBUTION:

PAYROLL EXPENSES
SSS PAYABLE
PAGIBIG PAYABLE
PHIL PAYABLE
TAX PAYABLE

xx
xx
xx
xx
xx

To record REMITTANCE OF CONTRIBUTION:

TAX PAYABLE
SSS PAYABLE
PAGIBIG PAYABLE
PHILHEALTH PAYABLE
CASH

xx
xx
xx
xx
xx

Value Added Tax

Tax from the sales of tangible assets or certain services

Collected from customers
Remitted to BIR
VAT Output VAT Input = VAT Payable
**VAT Output: VAT collected from customer
**VAT Input: VAT paid from purchases/expenses

Gift Certificates

No expiration date
Can be used in an exchange of merchandise

To record the sales of GC:

CASH
GC PAYABLE

xx

To record the sales paid using GC:

GC PAYABLE
SALES

xx

xx
xx

To record unused/unredeemed GC:

GC PAYABLE
GC Forfeited

Refundable Deposits

xx
xx

Cash or properties received which is subject for return

To record deposits received for borrowed items:

To record refund deposits for returned borrowed items:

To record gain on unreturned items:

Bonuses

Before Bonus/Before Tax

B = Bonus % x Net Income

After Bonus/Before Tax

B = Bonus % x (Net Income B)

Before Bonus/After Tax

B = Bonus % x [Net Income Tax % (Net Income B)]

After Bonus/After Tax

B = Bonus % x [Net Income B Tax % (Net Income B)]