IA 2 REVIEWER

CHAPTER 1: LIABILITIES
- Liability is a Present Obligation to PAY CASH, TRANSFER NON-CASH
ASSETS, and/or PROVIDE SERVICE at some future time that an entity has
no practical way to avoid.
- Liable entity must be identified but the payee is not that necessary to be
identified
- SHARE DIVIDEND PAYABLE is NOT A LIABILITY but instead a PART OF
EQUITY because share capital is an EQUITY ITEM
- Estimated Liabilities are still liabilities. Can either be current or non-
current.
- Example of Current Liabilities
o Bank Overdraft
o Financial Liabilities held for trading
o Dividends Payable
o Income Tax Payable
o Non-trade Payables due within one year.
o Interest Payable (Ka double entry ng Interest Expense)
o Deferred Tax Liability
o Premium Liability
o Container’s Deposit
o Refundable Deposit
o Escrow Liability
o NOTE: Claims for pending lawsuit and Possible obligations are
examples of contingent Liability. Different from Estimated Liability
which means they are not considered as Current Liabilities.
- Debit Balances in Supplier’s Account
o Treated as Accounts Receivable
o Considered as Current Asset
o Cannot be offset with other Accounts Payable
- Example of Non-Current Liabilities
o Long-Term Loans
o Bonds Payable (Usually)
o Mortgage Payable
- Non-current liabilities may turn Current Liabilities if after the reporting
period, it is to be settled within 12 months
- Refinancing or rescheduling
o Current Liability
 Agreement happened after reporting period and before
financial statement are issued.
 Right to defer settlement for at least 12 months doesn’t
exist or else there is no potential to refinance.
 Refinancing/rescheduling are within 12months after the
reporting period
o Non-current Liability
 Agreement happened on or before the reporting period.
 Will be treated like an adjustment in account.
 Right to defer settlement for at least 12 months doesn’t
exist or else there is no potential to refinance.
 Refinancing/rescheduling must be at least 12 months after
the reporting period.
- Covenants represent the undertaking/pledge of the borrowers.
o These are actually restrictions for further borrowings, paying
dividends and so on.
o If there is a breach then the liability is Payable on Demand and it
becomes a Current Liability even if the lender does not want to
demand payment after the breach.
 The entity now has no right to defer settlement that’s why it
is classified as Current Liability.
o If the lender agreed on or before the reporting period to provide
grace period to settle payment
 Ending at least twelve months then it is classified as Non-
Current.
o If the lender agreed on or before the reporting period to provide
grace period to rectify breach
 Ending within 12 months but the original term is more than
12 months after the reporting period then it is still classified as
Current Liability
 Grace Period is a period which the entity can Rectify the
breach or Settle payment during which the lender cannot ask
for an immediate payment.
- Bonus Computation (Refer to Valix 2021 after reading each variation)
o AFTER MEANS NEED TO BE SUBTRACTED BEFORE COMPUTING
THE BONUS
o Before Bonus, Before Tax
 Bonus Rate x Income = Bonus
o After Bonus, Before Tax
 B = BR(Income – B)
 Apply Rule of Transposition
 (Shortcut)
 Add 100% to given rate then divide to Income before bonus
and before tax = Income After Bonus Before Tax
 The goal is to separate the bonus from the given income
 Income After Bonus Before Tax multiplied by Bonus Rate =
Bonus.
o After Bonus, After Tax
 B = BR(Income – B – TR(Income – B)
 Apply Rule of Transposition
 (Shortcut)
 Bonus Rate less bonusrate% of Tax Rate + 100% then divide to
Income before bonus and before tax = Income after Bonus but
before tax
 Income after Bonus but before Tax multiplied to tax rate = Tax
 Income after Bonus but before Tax less tax = Income after
bonus after tax
 The goal is to separate the bonus and the tax from the
given income
 Income after bonus after tax multiplied by Bonus rate =
Bonus
o After Tax, Before Bonus
 B = BR(Income – TR(Income – Bonus)
 Apply Rule of Transposition
o NOTE: In division of percentage, Below 100% the quotient will result
to an increase in the dividend while above 100% will result to a
decrease in dividend
- Refundable Deposits
o Cash or Property from customers that is refundable after meeting
certain conditions like returnable bottles, etc.
o Containers’ deposit is classified as current liability which is simply
refunded if the container is returned.
o If the customer fails to return then it would be considered as Gain on
the container’s deposit.
- Terms
o Defer – To postpone
o Evenly – To part equally, yearly or monthly. Depending on situation.
o Forfeited – Cancelled or Surrendered
o Escrow Deposits – Payment for real estate taxes
CHAPTER 2: PREMIUM LIABILITY
- Premiums or Promos
- Additional transfer of benefit to promote marketing and to help sales
growth.
o Account Titles Used
 Premiums – Premiums redeemed
 Premium Expense –
 Capital Cost to buy the premium less
remittance/reimbursement if there’s any.
 Equivalent to total coupons to be redeemed less
remittance.
 Estimated Premium Liability – Outstanding Premium at year-
end.
o Formula
 Estimated Coupons to be redeemed – Coupons distributed x
redemption rate
 Coupons Outstanding = Estimated Coupon to be redeemed -
Coupon Redeemed
 Premiums to be distributed = Coupon
Outstanding/Requirement to redeem
 Premium Expense per product = Premium Cost + Distribution
Cost (If there’s any) – Remittance (If there’s any) x Estimated
Premiums to be Redeemed
 Estimated Premium Liability = Premiums to be distributed x
premium expense per product
 Premium Expense if Redemption Rate is given
 Premium Expense = Premium Cost + Distribution Cost
(If there’s any) – Remittance (If there’s any) x Estimated
Premiums to be Redeemed
 Premium Expense if Redemption Rate is NOT given
 1st Year
o Premium Expense = Premium Cost +
Distribution Cost (If there’s any) – Remittance (If
there’s any) x (Premiums Distributed +
Premiums to be distributed)
 2nd Year
o Premium Expense = Premium Cost +
Distribution Cost (If there’s any) – Remittance (If
there’s any) x (Premiums Distributed +/- Excess
of Premiums to be distributed from first year)
 Estimated Premium Liability if NOT EXPECTED
 Estimated Premium Liability, beginning + Estimated
Premium Liability during the year = Estimated Premium
Liability, Ending
 Estimated Premium Liability if EXPECTED
 Expected Premium to be distributed x Premium
Expense per product
o Financial statement Classification
 Current Assets:
 Premium – Product Name
o Premiums Purchased Less Premiums Redeemed
 Current Liability:
 Estimated Premium Liability
 Distribution Cost
 Premium Expense
- Free Product Coupon (Based on products price)
o Giving rights like this, customer in effect pays the seller in advance for
future deliveries
 Should be satisfied by the delivery or transfer of goods
 Another option is coupons for free products, discount and
rebate.
o Account Titles Used
 Sales – Value of the sold products
 Deferred Revenue – Value of premium
o Formula
 Free Products Outstanding = Coupons distributed/Required
Coupons per product
 Total Selling Price = Free products Outstanding x Selling price
per product
 Stand-Alone Selling Price of free products = Total Selling Price
x Expected Redemption
 Stand-alone selling price of the product = Products sold x
Selling price per product.
 Add the stand-alone selling price of products sold and free
products to be distributed then allocate to get the actual sales
value and value allocated for free products.
 Deferred Revenue = Free products to be distributed – Free
products distributed/ Free products to be distributed x
Allocated price for free products.
o Note: Deferred Revenue of the current period is the sales revenue or
an additional to the sales revenue of the next period when the
delivery/redemption takes place
- Discount Coupon (Based on product discount in percentage)
o Formula
 Amount of future purchase= Average Price of future purchase x
Issued discount Coupons
 Discount on Future Purchase = Amount of future purchase x
Discount Percentage
 Stand-Alone Selling Price of Coupons = Expected Redemption x
Discount on Future Purchases
 Add the stand-alone selling price of products sold and
distributed discount coupon then allocate to get the actual
products sold and allocated value for discount coupons
 Cash Received = Issued Discount Coupons x redemption rate x
average price x (100 – discount percentage)
 Sales Revenue = Cash Received + Allocated value for discount
coupons
o Note: Deferred Revenue of the current period is the sales revenue or
an additional to the sales revenue of the next period when the
delivery/redemption takes place
- Rebate Coupons (Based product rebates [Whole Amount])
o Also known as Refund Liability
o Formula
 Discount on Future Purchase = Amount of future purchase x
Discount Per Coupon
 Stand-Alone Selling Price of Coupons = Expected Redemption x
Discount on Future Purchases
 Add the stand-alone selling price of products sold and
distributed rebate coupons then allocate to get the actual
products sold and allocated value for rebate coupons
 Rebate Liability, End – Stand Alone Selling Price of
Coupons – Reimbursement
o Note: Deferred Revenue of the current period is the sales revenue or
an additional to the sales revenue of the next period when the
delivery/redemption takes place
- Customer Loyalty Program
o Definition
 Sales Promotion
 Loyalty Building
 Retention of Valuable Customers
 Rewards customers from Past Purchases
 Granting Award Credits often described as Points
 Accounted/Treated as Future Delivery of Services/Goods
o Measurement
 Separate Component of initial sale transaction
 Allocation of value of award credits(points) and sales
o Recognition
 Allocated Value are initially Deferred Revenue and
subsequently recognized as Revenue after redemption
 Recognition and Calculation of revenue is a Cumulative Basis.
o Formula
 Stand Alone Selling Price = Points Distributed x Estimated
Value per points
 Add the stand-alone selling price of points and products sold
then allocate to get the actual sales value and allocated value
for points.
 Estimated Points to be redeemed – Points Distributed x
Redemption Rate
 First Year
 Revenue Earned = Points Redeemed/Estimated Points
to be Redeemed x Allocated Value for Points
 Subsequent Year
 If there is no change in Redemption Rate
o Revenue Earned = Points Redeemed this
year/Estimated Points to be Redeemed x
Allocated Value for Points – Distribution Cost (if
there’s any)
 If there is a change in Redemption Rate
o Revenue Earned = Points Redeemed this year +
Points Redeemed Last Year/New Estimated
Points to be Redeemed x Allocated Value for
Points – Revenue recognized Last Year –
Distribution Cost (if there’s any)
- Gift Certificates
o Usually Non-refundable
o Can be sold by stores
o Non-redemption means breakage
 Breakage should be recognized as revenue
o Formula:
 Estimated Redemption = Certificates distributed – Expected
Value of Breakage
 Breakage Revenue = Certificates redeemed/Estimated
Redemption x Value of Breakage
 Deferred Revenue – Estimated Redemption – Breakage
Revenue – Certificates Redeemed
CHAPTER 3: WARRANTY LIABILITY
o Definition
 Guarantee policy if a defective product is proven
 Free Repair Service or Replacement
o Recognition of Warranty Policy/Provision
 Products sold prove to be defective in the future within a
specified period of time
- Warranty Expense Approaches
o Accrual Approach
 Definition
 Matches cost with revenue
 Estimated Warranty Cost is Accrued
 Classification
 If it runs more than 1 year – A portion will be Current
and the rest is non-current as per the condition of the
problem
 If within 1 year – Whole Portion is Current
 Account Titles Used
 Warranty Expense
 Estimated Warranty Liability
 Measurement
 Actual warranty cost is analyzed to validate the original
estimate
 If actual cost exceeds the estimated
o Increase in Warranty Expense
o Charged to warranty Expense if via entry
 If actual cost is less than the estimate
o Decrease in Warranty Expense (Equivalent to
ending Warranty Liability)
 Formula
 Estimated Sets to be returned = Units sold x Return Rate
 Estimated Warranty Cost = Estimated sets to be
returned x estimated warranty cost per set
 Estimated Warranty Liability, Ending = Estimated
Warranty, Beginning + Estimated Warranty Expense –
Warranty Expense Incurred
 Note: Warranty Expense is equivalent to Estimated
Warranty Expense since incurred/expenditure is the
term used for the recognized expense
 Ending Warranty Liability of the first year is the
Beginning Warranty Liability of the subsequent year
 Testing the accuracy of Warranty Liability
 Definition
o Determination whether the actual warranty cost
approximates the estimate
o To Determine the adjustment needed in year-
end
 Formula
o Total Warranty Rate = 1st year warranty rate +
2nd year warranty rate and so on
o Total Warranty Expense = Total Warranty Rate
x Sales
o Estimated Warranty Liability per book =
Warranty Expense – Actual Warranty Expense
 Sales made Evenly
 Definition
o Even portions of sales recorded in subsequent
periods
 Formula
o Warranty Expense per contract year =
Sales/no. of contract years x Warranty Rate of
current year x months covered (Usually 12
months or 6months)
o Estimated Warranty Liability = All Outstanding
warranty liability after the last contract year
o If difference is Positive
 Increase in Warranty Liability =
Estimated Warranty Liability – Estimated
Warranty Liability per book
o If difference is Negative
 Decrease in Warranty Liability =
Estimated Warranty Liability – Estimated
Warranty Liability per book
Expense as Incurred Approach
 Definition
 Recognizing Expense only when incurred
 Justified on the basis of expediency (convenient and
practical yet improper)
 Usually use when warranty cost is not very substantial
 Usually use when warranty period is relatively short
 Classification
 Since it’s only justified on a short-term warranty, it’s
classified as Current Liability
 Account Titles Used
 Warranty Expense
 Cash
 Measurement
 Direct Expense
 Formula
 Warranty Expense = Expense Incurred
- Sale of Warranty
 Definition
 Warranty may be sold separately from product
 Treated as Extended Warranty
 Measurement
 Initially recognized as Deferred Revenue and
subsequently Amortized as Warranty Revenue using
straight line over the life of warrant contract
o Amortization – if costs are expected to be
incurred in performing services.
 Starts after the expiration of regular warranty period.
 Formula
 Warranty Revenue = Warranty Cost/Warranty Life
CHAPTER 4: Provision and Contingent Liability
o Definition
 Existing liability of uncertain timing and uncertain amount.
 May be the equivalent of an estimated liability or a loss
contingency that is accrued
o Recognition of Provision
 There is a separate recognition criterion for provision:
 Present obligation, legal or constructive as a result of
past event.
o Constructive Obligation is a valid expectation on
part of other parties
 Probable outflow of resources embodying economic
benefits
 Obligation can be measured reliably.