Chapter 1:

LIABILITIES

Characteristics
Present obligation
o Borrower must be identified or particular
o It may be Legal Obligation or Constructive Obligation

Past events/transactions
o Arises from past transactions/events
o Not recognized until it is incurred/acquired

Outflow of future economic benefits

o To pay cash, to transfer noncash assets or to provide service
o After settlement of liabilities, there will be an effect in Asset or in Capital

Classification
Current Liabilities
o Expect to settle within the operating cycle
o Held for the purpose of trading (refinancing/repay/retirement/repurchase)
o Due date within 1 year after the reporting period
o No unconditional right to defer settlement for at least 1 year after the reporting period (No
refinancing arrangement)
o Examples:
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

Noncurrent Liabilities
o Residual definition; liabilities not classified as current
o Examples:
Bonds Payable (noncurrent portion)
Notes Payable (noncurrent portion)
Long term deferred income
Deferred tax Payable

Measurement

Initial
o

If not designated at fair value through P/L, Fair/Market Value minus Transaction Cost
- Fair/Market 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. If initially
designated at fair value through P/L, recognized as expense.

Subsequent
o Amortized Cost, using effective interest method
- Face Value Present Value/Fair Value = Discount or Premium
o Fair Value through Profit or Loss

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

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

Chapter 2:

Initial

Subsequent

Present value/Fair value

Amortized cost

Present value/Fair value

Amortized cost

Face amount

Face amount

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.

Accounting for Premiums

To record purchases of premiums

Premiums
Cash

xx

To record redeemed premiums

Premiums Expense
Premiums

xx

xx

xx

To record unredeemed premiums

Premiums Expense
Est. Premium Liability

xx
xx

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

Accounting for Warranty

To record sales:
o Sales = Increase
o Cash/Accounts Receivable = Increase

To record expected warranty from sales:

o Warranty Expense = Increase
o Warranty Liability = Increase

To record actual warranty costs:

o Warranty Liability = Increase
o Cash = Decrease

Sample problem:
Given:
Sales
2015 = 2,500,000
2016 = 4,750,000
Warranty period
2 years
Expected warranty
2015 = 3% of Sales
2016 = 8% of Sales
Actual warranty
2015 = 53,000
2016 = 184,500
Solution:

To compute expected warranty:

For 2015
o 2,500,000 x 11% = 275,000
For 2016
o 4,750,000 x 11% = 522,500
To compute remaining expected warranty:
For 2015
o 275,000 53,000 = 222,000
For 2016
o 522,500 184,500 = 338,000
Total remaining expected warranty:
o 222,000 + 338,000 = 560,000

Extended warranty

Recognized as Unearned Income (Liability account)

Amortized using Straight Line Method

Chapter 3:

ACCRUED LIABILITIES AND DEFERRED/UNEARNED REVENUE

Payroll Taxes

Recognized as current liability until remitted by the entity/employer to the government authorities
o Contribution to SSS
o Contribution to PHILHEALTH
o Contribution to PAGIBIG
o Income tax

Accounting for Payroll

To record PAYROLL EXPENSES including CONTRIBUTION:
Payroll Expense
SSS Payable
PAGIBIG Payable
PHIL Payable
Tax Payable

To record REMITTANCE OF CONTRIBUTION:

xx
xx
xx
xx
xx

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

Accounting for GC

To record the sales of GC:

CASH
GC PAYABLE

xx

To record the sales paid using GC:

GC PAYABLE
SALES

xx

To record unused/unredeemed GC:

GC PAYABLE
GC Forfeited

Refundable Deposits

Cash or properties received which is subject for return.

Accounting for Refundable deposits

To record deposits received for borrowed items:

To record refund deposits for returned borrowed items:

xx

xx

xx
xx

To record gain on unreturned items:

Bonuses

Before Bonus/Before Tax

o B = Bonus % x Net Income

After Bonus/Before Tax

o B = Bonus % x (Net Income B)

Before Bonus/After Tax

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

After Bonus/After Tax

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

Chapter 4:

PROVISION AND CONTINGENT

Chapter 5:

BONDS PAYABLE

Bonds

Formal unconditional promise

Made under seal
To pay specified amount on a determinable future date
To pay stated interest rate periodically until principal amount is paid
Evidenced by bond certificate consists the amount of loan; and bond indenture contract
between issuer and investor
Issuer of bonds = borrower
Investor = payor
Entity/Issuer sells the bond to Underwriter/Investment firm then resell it to the Investor
Entity/Issuer sells the bond directly to Investor

Types of bonds

Term it has single maturity/final payment date.

Serial it matures on installment basis.
Secured With collateral such as Mortgage bonds and Collateral trust bonds
Unsecured Without collateral such as Debenture bonds
Registered
Bearer
Convertible this can be exchanged for shares instead of cash
Callable this can be redeemed or pay as early as its maturity
Guaranteed another party will settle the debt if issuer fails to do so
Junk with high interest issued by the entity which on weak financial standing

Initial measurement

If not designated/accounted for at fair value thru P/L, bonds payable must be measured at
Fair/Market/Present Value minus transaction/bond issue cost or Face Value plus or minus
Premium or Discount minus transaction/bond issue cost
o
o

Fair/Market Value = Face Value +/- Premium/Discount

Fair/Market Value = Present Value

** PV amount of cash payment in the future for settlement of liability

If designated/accounted for at fair value thru P/L, the transaction cost must be treated as
expense

Subsequent measurement

Amortized cost using effective interest method

Fair value thru P/L

Fair Value thru P/L measurement

Bonds payable may be irrevocably designated at Fair Value option
No amortization of discount, premium and bond issue cost
Bond issue cost must be treated as expense
Must initially measure at Fair Value and eventually re-measure every end of the year with any
changes in Fair Value
Accounting for Bonds

Issuance of bonds
o Selling/Issue Price = Net Proceeds
o Selling/Issue Price = Face Value +/- Premium/Discount
Premium
- Selling/Issue Price Face Value = xx
- Nominal rate Effective rate = xx

Discount
- Selling/Issue Price Face Value = (xx)
- Nominal rate Effective rate = (xx)

Amortization of discount/premium/bond issue cost

o Bond Issue Cost
Should be amortized using effective interest method
Should be deducted to Premium
Should be added to Discount
Amortization every date of issuance
o

Premium
Gain on part of entity
Amortization every end of the year
Should be amortized using effective interest method
Nominal Interest minus Effective Interest

NI = Nominal Rate x Face Value

EI = Effective Rate x Carrying Value

Discount
Loss on part of entity
Amortization every end of the year
Should be amortized using effective interest method
Effective Interest minus Nominal Interest
**Shall be measured using Straight Line method or Bond Outstanding method or
Effective Interest method
**Bond Outstanding method is only applicable for Serial bonds

Payment of interest
o Payment during the year
o Accrual of the interest
o If bonds are issued in between of bond dates and interest date, interest must be paid by
the investor. Therefore, credit interest expense on the date of bond issuance.

Retirement/Settlement

On maturity date
Before maturity date
o Amortized the premium/discount up to the date of retirement
o Determine the balance of the premium/discount
o Determine the accrued interest up to the date of retirement
o Determine the cash payment
Retirement price plus accrued interest
o

Determine the carrying value

Face Value plus or minus unamortized/outstanding balance of premium or
discount

Determine the Gain or Loss during retirement

Retirement price minus carrying value
- Positive balance = Gain
- Negative balance = Loss

Cancel the bond liability plus the unamortized premium or discount

Accrued interest must be debited under interest expense account

Chapter 6:
Nominal rate

EFFECTIVE INTEREST METHOD

This the rate stated on the bond certificate whereas entity is willing to pay the related interest to
the investor
Other terms: Coupon or Stated rate

Effective rate

Other terms: Market rate, Yield. Discount rate or Desired rate

This is the prevailing market rate which investor may consider as the rate of the bond

Market Value or Issue Price

PV of Principal liability plus PV of Interest payment using effective interest method
o PV of Principal liability:
Face Value x (1 + Effective rate) raised to number interest period
o

PV of Interest payment:
(Face Value x Nominal rate)

(1 100%+Effective rate) raised to number interest period

Chapter 7:

COMPOUND FINANCIAL INSTRUMENT

Chapter 8:

NOTES PAYABLE

Chapter 9:

DEBT STRUCTURE

Chapter 18:

SHAREHOLDERS EQUITY

Effective rate

Corporation
Artificial being created by operation of law
Have the right of succession
Powers, attributes and properties expressly authorized by law or incident to its existence
Components of Corporation
Corporators who compose the corporation; could be a shareholders, members or both.
Incorporators these are the corporators stated in Articles of Incorpation.
Shareholders are the owners of the shares in stock corporation.
Members corporators in nonstock corporation.
Definition of terms

Authorized Share Capital

o Fixed amount to be subscribed and paid in
o May be:
Par Value Share with fixed value
No-Par Value Share without any value but has issued value or stated value
o Two classes:
Ordinary Share Capital
Preference Share Capital

Subscribed Share Capital

o Part of Authorized Share Capital which has been subscribed but not yet fully paid
o Unissued Share
o Subscribed Share Capital minus Subscription Receivable

Share Premium
o Excess over par value or stated value
o Resale of treasure shares at more than to its cost
o Donated capital
o Issuance of share warrants
o Distribution of Stock Dividends
o Quasi-organization or recapitalization

Retained Earnings
o Cumulative balance of periodic earnings, and dividend distributions.

Treasury Shares
o Issued shares then reacquired but not cancelled

Chapter 21:

SHARE-BASED COMPENSATION SHARE OPTIONS

Chapter 22:

SAHRE-BASED COMPENSATION SHARE APPRECIATION RIGHT