LIABILITIES

JEROME O. MENDIOLA, CPA

A= L + OE
A= L + OE
Liabilities
- Arise from the borrowing of funds
by an entity’s or by a person.
- Conceptual Framework, a liability
is a present obligation of the entity
to transfer an economic resource
as a result of past events

4
Liabilities
Liabilities
- - Arise
Arisefrom
fromthe
theborrowing
borrowingofoffunds
funds
by an entity’s or by a person.
by an entity’s or by a person.
- - Conceptual
ConceptualFramework,
Framework,aaliability
liability is
isa apresent
presentobligation
obligation of
of the
the entity
entity
tototransfer
transferananeconomic
economicresource
resource
as a result of past events
as a result of past events

5
OBLIGATION
• Duty or responsibility which an
entity has no practical ability to
avoid
• Legal obligation
• Constructive Obligation

6
 Liabilities
- - Arise
Arisefrom
fromthe
theborrowing
borrowingofoffunds
funds
by an entity’s or by a person.
by an entity’s or by a person.
- - Conceptual
ConceptualFramework,
Framework,aaliability
liability is
isa apresent
presentobligation
obligation of
of the
the entity
entity
tototransfer
transferananeconomic
economicresource
resource
as a result of past events
as a result of past events

7
Liabilities
Liabilities
- - Arise
Arisefrom
fromthe
theborrowing
borrowingofoffunds
funds
by an entity’s or by a person.
by an entity’s or by a person.
- - Conceptual
ConceptualFramework,
Framework,aaliability
liability is
isa apresent
presentobligation
obligation of
of the
the entity
entity
tototransfer anan economic resource
transfer economic resource
as a result of past events
as a result of past events

8
To transfer an
economic resources
• Obligation to pay cash
• Obligation to deliver goods or
services
• Conditional obligations

9
 Liabilities
- - Arise
Arisefrom
fromthe
theborrowing
borrowingofoffunds
funds
by an entity’s or by a person.
by an entity’s or by a person.
- - Conceptual
ConceptualFramework,
Framework,aaliability
liability is
isa apresent
presentobligation
obligation of
of the
the entity
entity
tototransfer anan economic resource
transfer economic resource
as a result of past events
as a result of past events

10
 Liabilities
- - Arise
Arisefrom
fromthe
theborrowing
borrowingofoffunds
funds
by an entity’s or by a person.
by an entity’s or by a person.
- - Conceptual
ConceptualFramework,
Framework,aaliability
liability is
isa apresent
presentobligation
obligation of
of the
the entity
entity
tototransfer anan economic resource
transfer economic resource
as a result of past events
as a result of past events

11
Present obligation as
a result of past events
• Obligation that will be incurred in
the future shall not be recognized
• A present obligation exists as a
result of past events only if
1. The entity has already obtained
economic benefits
2. Will transfer an economic
resources

12
2 TYPES OF LIABILITIES

FINANCIAL LIABILITY NON-FINANCIAL LIABILITY

• A/P • UNEARNED INCOME
• N/P • Warranty Liability
• B/P
• L/P

9/3/20XX Presentation Title 13

Accounting for Financial Liabilities
• PFRS 9
• INITIALLY MEASURED AT FV less TC
• SUBSEQUENTLY MEASURED AT AMORTIZED COST

9/3/20XX Presentation Title 14

Accounting for Non-Financial Liabilities
• PAS 37
• PFRS 16
• PAS 19A

9/3/20XX Presentation Title 15

FINANCIAL REPORTING OF LIABILITIES

CURRENT NON-CURRENT
1. It expects to settle the liability
within its normal operating cycle
2. Due to be settled within 12
months after the reporting period

9/3/20XX Presentation Title 16

 Rosario Company had the following non-trade payables as of December 31, 2023

7-Year bonds payable with maturity of July 1, 2024 P4,000,000

3-Year bonds payable maturity Dec 31, 2025 2,000,000
5-Year loans payable borrowed last October 1, 2019 5,000,000
4-Year Loans payable borrowed last April 1, 2022 1,000,000
10-Year loan payable borrowed last June 30, 2023
Principal is payable in 10 equal installments starting
On June 30, 2024 10,000,000
6-Year loan payable with 400,000 semi annual principal
payments every Jan 1 And July 1 each year 8,000,000
Accrued interest payable 625,000

9/3/20XX Presentation Title 17

FINANCIAL REPORTING OF LIABILITIES

CURRENT NON-CURRENT
1. It expects to settle the liability • Not met
within its normal operating cycle
2. Due to be settled within 12
months after the reporting period
3. It does not have unconditional
right to defer settlement of the
liability for at least 12 months
after the reporting period

9/3/20XX Presentation Title 18

As of December 31, 2023, DELGADO Company had a loan payable maturing on June
30, 2024. The Company has the sole Discretion to extend the maturity date up to June
30, 2025

Going back to DELGADO, except that maturity date may be extended up to June 30,
2025 provided the lender will agree

At the end of 2023, CANLAS company had a bonds payable maturing on April 1, 2024.
The company has the sole discretion to extend the maturity date up to October 1, 2024

9/3/20XX Presentation Title 19

ACCRUED INTEREST PAYABLES
I= PRT
As of December 31, 2023, TUAZON Company had the
following outstanding interest-bearing liabilities

1. 10-year loan payable dated April 1, 2021 with face amount

P5,000,000 and interest 8%. The interest is payable
annually every march 31 of each year
2. 5-Year loan, 12% interest bearing dated June 1, 2022 with
the face amount of P3M. Interest payable every May 31
and November 30 each year
3. 6-Year loan 9% interest loan payable dated January 1,
2021 with Face amount of P2,000,000. Interest is payable
every December 31, 2023
9/3/20XX Presentation Title 20
ACCOUNTS PAYABLE
• Short term financing

9/3/20XX Presentation Title 21

TRANSACTIONS EFFECT IN A/P JOURNAL ENTRIES

Credit Purchases

Payment to suppliers
beyond discount period

Payment to suppliers within

discount period
Purchase returns from credit
purchases

Issuance of promissory
notes for overdue payable
 CARPIO Company had the beginning balance of P700,000 in its accounts payable
account. During the year, cash purchases and credit purchases amounted to
P300,000 and P2,800,000 respectively. Credit memos received from suppliers
amounted to P150,000 while cash refunds received amounted to P100,000.
Payments to credit suppliers totaled P2.4M which is already net of P80,000
purchase discounts. Determine the ending balance of Accounts payable.

On January 1, 2023, CARREON company had accounts payable balance of

P1,800,000. During 2023, the following transactions were also provided in
aggregate basis:
a. Cash purchases amounted P800,000 which represented 20% of all Company’s
purchases.
b. Payments to suppliers beyond the credit terms amounted to P2,000,000 while
payments to suppliers within the credit terms amounted to P1,358,000. Credit
terms for all of the suppliers is 3/15, n/45.
c. Credit memos received amounted to P200,000 while refunds receive amounted
to P180,000.
d. Due to cash flow issues, the Company issued a note payable for P250,000 of its
overdue accounts payable.

9/3/20XX Presentation Title 23

PREMATURE OR LATE RECORDING OF
INVOICES FROM SUPPLIERS
SHIPPING TERMS INVOICE SHIPMENT DATE DATE OF
RECEIVED AND RECEIPT OF
RECORDED INVENTORY
FOB SP JAN 2, 2024 DEC 27, 2023 JAN 1, 2024
FOB D DEC 30, 2023 DEC 29, 2023 JANUARY 1, 2024

SHIPPING AMOUNT INVOICE SHIPMENT DATE OF

TERMS RECEIVED AND DATE RECEIPT OF
RECORDED INVENTORY

SP 70,000 JAN 4 DEC 30 JAN 6

D 130,000 JAN 3 DEC 29 JAN 4 UNADJUSTED AMOUNT
OF A/P IS P2,260,000
SP 170,000 DEC 28 DEC 27 JAN 5
D 90,000 DEC 30 DEC 28 JAN 2
9/3/20XX Presentation Title 24
WARRANTY
LIABILITY
2 types of warranties
• ASSURANCE TYPE WARRANTY
• SERVICE TYPE WARRANTY

9/3/20XX Presentation Title 26

Accounting for assurance type warranty
• Expense is recognized during the period of sale for the
estimated warranty costs, regardless of the period when these
costs were actually incurred
• ESTIMATED WARRANTY EXPENSE XXXX
ESTIMATED WARRANTY LIABILITY XXX

Actual amount of warranty costs

EST. WARRANTY LIABILITY XXX
CASH XXX

9/3/20XX Presentation Title 27

BEST ESTIMATE OR JUDGEMENT
Warranty cost per unit
Warranty cost as a percentage of revenues or sales
Warranty cost as net costs of providing a replacement product
Cost of replacement XXX
Less: NRV of defective products (XXX)
Loss to be absorbed by entity XXX
Add: Handling costs shouldered XXX
Total warranty cost per unit XXX

9/3/20XX Presentation Title 28

 MALINAO Company sold 100,000 units of its product during 2023, its first year of
operations. It is expected that 5% of these will have defects that need to be rectified
at an estimated warranty cost of P500/unit . Also, actual warranty costs of P1,800,000
were incurred during the year

At the beginning of 2023, FRANCO Company reported estimated warranty liability of

P350,000. During the same year, the Company reported total sales of P15,000,000.
Based on the Company’s past experience, 4% of the related sales amount will be a
reliable estimate of actual warranty costs in the future. Actual warranty costs incurred
P650,000.

QUIJANO Company sold 250,000 units during 2023. The company expects that 3%
of these will have minor defects and that 1% will have major defects. Repair costs are
estimated to average to P200/unit for minor defects while it is P700/unit for major
defects. Actual warranty costs incurred during the year is P3,100,000 while beginning
warranty liability is P800,000. Compute total estimated warranty expense

9/3/20XX Presentation Title 29

 VELASQUEZ Company offers a replacement product in its warranty program as
its products are always beyond repair when they become defective.
Manufacturing costs per unit averaged P300 while net realize value of defective
units from customers averaged P50/unit . In addition, the Company shoulders the
cost of shipment to and from customers which averages P75/unit.

During 2023, the Company sold 150,000 units, 2% of which are expected to be
replaced. Also, during the year, 2,700 units were replaced. Beginning-of-the-
period warranty liability amounted to P162,500.

At the beginning of 2023, Alonzo Company reported P800,000 in its estimated

warranty liability. In addition, the company reported the following information for
2023 and 2024
2023 2024
Sales revenue 25M 32M
Actual warranty costs incurred 1.4M 1,450,000
Estimated warranty costs 5% of sales 5% of sales

9/3/20XX Presentation Title 30

 LAZARO Company provides two-year warranty for the product it sells. The
company started operations in 2022. The following information was provided:

2022 2023 2024

Sales 28M 38M 35M
Actual warranty costs from
2022 sales 750,000 150,000 50,000
2023 sales 900,000 420,000
2024 sales - - 880,000
Estimated warranty costs 4% 4% 4%

9/3/20XX Presentation Title 31

PREMIUMS AND OTHER
DEFERRED REVENUE
ACCOUNTING FOR PREMIUMS UNDER PAS
37
• Recognition of expense and corresponding liability during
the year Expense or Liability
ESTIMATED PREMIUM EXPENSE XXX per unit times Total
number of
ESTIMALTED PREMIUM LIABILITY XXX
premiums expected
to be redeemed
Unit cost of item to be distributed as premiums xxx
Add: Handling costs if any xxx
Less: amounts to be received from redeeming customers (xxx)
Expense or liability per unit of premium xxx

9/3/20XX Presentation Title 33

ACCOUNTING FOR PREMIUMS UNDER PAS
37 • Recognition of expense and corresponding liability during
the year Expense or Liability
ESTIMATED PREMIUM EXPENSE XXX per unit times Total
ESTIMALTED PREMIUM LIABILITY XXX number of
premiums expected
to be redeemed

The total number of premiums expected to be redeemed is computed as follows

Number of coupons or voucher xxx
Multiply by: Total number of sold products xxx
Total number of coupons xxx
Multiply by: Portion expected to be redeemed %
Total number of expected to be redeemed xxx
Divided by: Number of coupons needed for one item xxx
Total number of premium items expected to be redeemed xxx
ACCOUNTING FOR PREMIUMS UNDER PAS
37 Expense or Liability
• Recognition of expense and corresponding liability during
per unit times Total
the year number of
premiums expected
ESTIMATED PREMIUM EXPENSE XXX to be redeemed
ESTIMALTED PREMIUM LIABILITY XXX
During 2023, ABC company’s first year of
operations, it offered a sales promotional
program wherein it included one coupon
for each unit of its product. Five of these
• ACTUAL REDEMPTION OF PREMIUMS coupons plus 20 shall be presented to
ESTIMATED PREMIUM LIABILITY XXX redeem a special wall clock with cost of
P120/unit. Handling costs are estimated to
CASH (from customers, if any XXX be P15/unit. It sells 200,000 units of its
PREMIUM INVENTORY XXXproduct (190.80 SP) but expects 40% of
CASH (for handling costs, if any XXXthe coupons will be presented for
redemption. A total of 16,500 wall clocks
were acquired and by the end of 2023,
12500 of these were distributed.
 ACTIVITY

9/3/20XX Presentation Title 36