MODULE 10

CURRENT LIABILITIES AND NOTES RECEIVABLE

BA 99.2 | SECOND SEMESTER, ACADEMIC YEAR 2022-2023
 INTRODUCTION
Users of financial statements are particularly
concerned about a company’s obligations (both
current and non-current) as they affect the company’s
liquidity and stability. The amount and type of
liabilities are significant to the decisions made by
various business stakeholders and the future date on
which they are due or demandable (or maturity date)
is an important feature of these liabilities.

Learning Resource (please read before you proceed

with this slide set): Weygandt, Jerry J, Kimmel, Paul D.,
and Kieso, Donald E., Financial Accounting with
International Financial Reporting Standards, Wiley
Custom Edition, 4th ed. Wiley, 2019. Chapter 10:
Current Liabilities and Chapter 8: Notes Receivable. This Photo by Unknown Author is licensed under CC BY-SA

BA 99.2 | SY2022-2023 2
 LEARNING OBJECTIVES (LO)
1. Explain and know how to account for current liabilities and promissory notes.
2. Discuss how current liabilities are reported and analyzed.

BA 99.2 | SY2022-2023 3
 STUDY GUIDE (1 of 2)
Estimated
No. of LO Task
Hours
3 LO 1 Read through the slides and the related notes under LO 1. Review
Study Checks 1 to 4 and submit Assignment 1. Please refer to LMS
for assignment deadlines.
3 LO 2 Read through the slides and the related notes under LO 2. Review
Study Checks 5 to 6 and submit Assignments 2 and 3. Please refer
to LMS for assignment deadlines.

BA 99.2 | SY2022-2023 4
 STUDY GUIDE (1 of 2)
How to optimize this material:

1. Do not simply read. Understand the concepts that are being introduced.
If there are still things that remain unclear, take note of those so you
could raise it for your consultation with your instructor.
2. To assess your understanding, please perform the Study Check activities
in this handout independently. Do not go to the provided solutions
immediately. Again, accounting is a course that you learn by doing, so it
requires active involvement from you, not just reading. The more you
practice, the more you develop confidence. The same goes for your
assignment. Do not get discouraged if you do not get a perfect score. The
purpose of these activities is to gauge your learning process and
understanding even before the quizzes and exams.

BA 99.2 | SY2022-2023 5
 STUDY GUIDE (2 of 2)
3. Read the notes portion in the lower half of the page, not just the key
points on the upper half. The notes include explanations or
supplementary information to the key points which we normally provide
in face-to-face discussions.
4. At the end of each section, review what you have learned against the
learning outcomes. Assess also how confident you are in performing the
tasks involved in these learning outcomes. If there are outcomes that you
are not confident doing, review the notes and the answers to the
learning activities. If you have an error, understand why you made such
error so you minimize the opportunity to repeat it in the future.
5. There are supplementary materials provided for BSA students for some
of the topics in each section and these would be marked “BSA
Supplementary Materials” on the upper right hand of the page. Those
materials are mandatory for BSA students. Non-BSA students who have
plans to shift may also benefit from those materials.

BA 99.2 | AY 2022-2023 6
 ACCOUNTING FOR CURRENT
LIABILITIES AND PROMISSORY NOTES

BA 99.2 | AY 2022-2023 7
 LIABILITIES
Liabilities are present obligations of an entity to transfer an economic LO 1
resource as a result of past events.
▪ Present obligation – duty or responsibility that an entity has no
practical ability to avoid;

▪ Transfer an economic resource – must pay cash, transfer noncash

asset or provide service at some future time; and

▪ Arises from a past event – not recognized until it is incurred (i.e.,

obligating event in the obligation to repay a loan is the receipt of
loan proceeds from the bank)

BA2022-2023
99.2 | AY 2022-2023
BA 99.2 | AY 8
 CURRENT LIABILITY
LO 1
A debt that
▪ A company expects to pay within one year or the operating cycle,
whichever is longer; and

▪ is held primarily for the purpose of trading.

Current liabilities include notes payable, accounts payable, unearned

revenues, cash dividends declared but not paid, and accrued liabilities
such as taxes payable, salaries and wages payable, and interest payable.

BA 99.2 | AY 2022-2023 9
 ➢ Past Event (Obligating Event) - The
event must have already occurred
which gives rise to the obligation. An
accounting obligation cannot be
created in anticipation of a future LO 1
event.
➢ Legal obligation - Arises from a
contract, legislation or other operation
REQUIREMENTS of law
➢ Constructive obligation - Arises if
past practice creates a valid
expectation on the part of a third party,
i.e., a retail store that has a long-
standing policy of allowing customers
to return merchandise within 30 days

BA 99.2 | AY 2022-2023 10
 PROMISSORY NOTES
LO 1
A written promise to pay a specified amount of money on demand or at
a definite time. Promissory notes may be used
(1) when individuals and companies lend or borrow money,

(2) when the amount of the transaction and the credit period exceed
normal limits, or

(3) in settlement of accounts receivable.

11

BA 99.2 | AY 2022-2023 11
 PROMISSORY NOTES
▪ Maker The one who makes the promise to pay and signs the LO 1
note (Debtor)

▪ Payee The party to whom the promise is made or the instrument

is payable (Creditor)

▪ Maturity date Date on which the obligation becomes due and

demandable

▪ Term of the note Lapse of time between the issuance date of the
note and the maturity date

BA 99.2 | AY 2022-2023 12
 PROMISSORY NOTES
▪ Principal Amount of money borrowed; also called face value or LO 1
face amount

▪ Interest rate Price paid per unit borrowed per year, usually
expressed as a percentage

▪ Interest (in P) = Principal x Interest Rate x Time (expressed in

months or in days)

▪ Maturity value = Principal + Interest payable upon maturity date

▪ If the term of the note is expressed in days, interest must be

calculated using the exact number of days

BA 99.2 | AY 2022-2023 13
 PROMISSORY NOTES
▪ To the Payee, the promissory note is a note receivable. LO 1

▪ To the Maker, the promissory note is a note payable.

BA 99.2 | AY 2022-2023 14
 PROMISSORY NOTES
Determining the Maturity Date LO 1

Note expressed in terms of

▪ Months

▪ Days

Computing Interest

BA 99.2 | AY 2022-2023 15
 DETERMINING MATURITY DATES
▪ Issuance date of note is not counted but the day on which the note LO 1
falls due is included (Exclude issuance date but include last day of
note)

▪ Assume the note is issued Feb 16 (not a leap year) with a term of
45 days
◦ February 28
◦ Less: 16
◦ Days in Feb 12
◦ Days in March 31
◦ Total 43
◦ Plus: 2 days in Apr 2
◦ Maturity Date 45 April 2

BA 99.2 | AY 2022-2023 16
 DETERMINING MATURITY DATES
LO 1

What is the due date of a 90-day note dated March 16?

Days in March 31
Minus issuance date of note 16
Days remaining in March 15
Add days in April 30
Add days in May 31
Add days in June
(due date of June 14) 14
Term of note 90 days

BA 99.2 | AY 2022-2023 17
 DETERMINING MATURITY DATES
LO 1

Alternate approach
Total days in note 90 days
Number of days in March 31
Issue date of note, March 16 (16)
Remaining days in March 15
Number of days in April 30
Number of days in May 31
Residual days in June (14) days

BA 99.2 | AY 2022-2023 18
 STUDY CHECK 1
Indicate the maturity date of each of the following promissory notes: LO 1

Date of Note Terms

(a) March 13 one year after date of note
(b) May 4 3 months after date
(c) June 20 30 days after date
(d) July 1 60 days after date

BA 99.2 | AY 2022-2023 19
 INTEREST
Interest Bearing - one which states the interest rate on the face of the LO 1
note and requires payment of the principal plus interest upon maturity
Non Interest Bearing Notes - note from which the interest has been
deducted in advance

BA 99.2 | AY 2022-2023 20
 RECORDING PROMISSORY NOTES
Orocan Supply Co. has the following transactions related to notes LO 1
receivable during the last 2 months of 2017.

Nov. 1 Loaned P15,000 cash to Sam Garcia on a 1-year, 10%

note.
Dec. 11 Sold goods to Juan Sarte, for a P6,750, 90-day, 8% note.
Dec. 16 Received a P4,000, 6-month, 9% note in exchange for
Bart Sampas’s outstanding accounts receivable.
Dec. 31 Accrued interest revenue on all notes receivable.

Instructions: Journalize the transactions for Orocan Supply Co.

BA 99.2 | AY 2022-2023 21
 RECORDING PROMISSORY NOTES
LO 1

2017 Payee (Notes Receivable) Maker (Notes Payable)

Nov 1 Notes Receivable 15,000 Cash 15,000
Cash 15,000 Notes Payable 15,000
# #
Dec 11 Notes Receivable 6,750 Inventory/Purchases 6,750
Sales 6,750 Notes Payable 6,750
# #
16 Notes Receivable 4,000 Accounts Payable 4,000
Accounts Receivable 4,000 Notes Payable 4,000
# #

BA 99.2 | AY 2022-2023 22
 RECORDING PROMISSORY NOTES
Payee (Notes Receivable) Maker (Notes Payable) LO 1

Dec 31 Interest Receivable 295 Interest Expenses 295

Interest Revenue 295 Interest Payable 295
# #

Amount Rate Time

Garcia note: ₱15,000 x 10% x 60 / 360 = ₱250
Sarte note: 6,750 x 8% x 20 / 360 = 30
Sampas note: 4,000 x 9% x 15 / 360 = 15
Total accrued interest ₱295

BA 99.2 | AY 2022-2023 23
 RECORDING PROMISSORY NOTES
LO 1
On May 1, Banaba Co. (borrower) purchased merchandise on account
from Kasla Co. (creditor), P10,000, 2/10, n/30. The merchandise cost
Kasla Co. P7,500. Both companies use perpetual inventory systems.

Kasla Banaba
Dec 31 Accounts Receivable 10,000 Merchandise Inventory 10,000
Sales 10,000 Accounts Payable 10,000
# #

COGS 7,500
Merchandise Inventory 7,500

24

BA 99.2 | AY 2022-2023 24
 RECORDING PROMISSORY NOTES
On May 31, Banaba Co. issued a 60-day, 12% note for P10,000 to LO 1
Kasla Co. on account.

Kasla Banaba
Dec 31 Notes Receivable 10,000 Accounts Payable 10,000
Accounts Receivable 10,000 Notes Payable 10,000
# #

25

BA 99.2 | AY 2022-2023 25
 RECORDING PROMISSORY NOTES
On July 30, Banaba Co. paid Kasla Co. the amount due on the note of LO 1
May 31, the face amount of P10,000 plus interest of P200 (P10,000 x
12% x 60/360).
Kasla Banaba
Dec 31 Cash 10,200 Notes Payable 10,000
Interest Revenue 200 Interest Expense 200
Notes Receivable 10,000 Cash 10,200
# #

26

BA 99.2 | AY 2022-2023 26
 “BSA Supplementary Materials”

NON INTEREST BEARING NOTES

LO 1
A discounted note (non interest bearing note) has the
following characteristics:
1. The interest rate on the note is called the discount rate.
2. The amount of interest on the note, called the discount, is
computed by multiplying the discount rate times the face
amount of the note.
3. The debtor (borrower) receives the face amount of the note
less the discount, called the proceeds.
4. The debtor must repay the face amount of the note on the
due date.
27

BA 99.2 | AY 2022-2023 27
 “BSA Supplementary Materials”

NON INTEREST BEARING NOTES

Assume that Y borrows money from Bank of Commerce by LO 1
issuing a P150,000, 6%, 90-day note. Bank of Commerce’s
policy is to deduct interest in advance. Determine the
maturity value, discount and cash proceeds from discounting.
◦ Maturity Value = P150,000
◦ Discount = P150,000 x 6% x 90/360 = P2,250
◦ Cash Proceeds = P150,000 – P2,250 = P147,750

BA 99.2 | AY 2022-2023 28
 “BSA Supplementary Materials”

NON INTEREST BEARING NOTES

LO 1
On August 10, Caprice Company issues a P20,000, 90-day discounted
note to Iloilo Provincial Bank. The discount rate is 15%, and the amount
of the discount is P750 (P20,000 x 15% x 90/360).

Caprice Iloilo Provincial Bank

Aug 10 Cash 19,250 Notes Receivable 20,000
Discount on Notes Payable 750 Unearned Interest Revenue 750
Notes Payable 20,000 Cash 19,250
# #

BA 99.2 | AY 2022-2023 29
 “BSA Supplementary Materials”

NON INTEREST BEARING NOTES

LO 1
The entry when Caprice Company Company pays the discounted note
on November 8 is as follows (assuming that the company did not make
adjusting entries during the term of the note):

Caprice Iloilo Provincial Bank

Aug 10 Notes Payable 20,000 Cash 20,000
Interest Expense 750 Unearned Interest Revenue 750
Cash 20,000 Notes Receivable 20,000
Discount on Notes Payable 750 Interest Revenue 750
# #

BA 99.2 | AY 2022-2023 30
 VALUING NOTES RECEIVABLE
▪ Like accounts receivable, companies report short-term notes LO 1
receivable at their net realizable value.
▪ Estimation of cash realizable value and bad debts expense are
done similarly to accounts receivable.
▪ Allowance for Doubtful Accounts is used.
▪ May either be combined with or separated from accounts
receivable.

BA 99.2 | AY 2022-2023 31
 DISPOSING NOTES RECEIVABLE
1. Notes may be held to their maturity date. LO 1

2. Maker may default and payee must make an adjustment to

the account.
3. Holder speeds up conversion to cash by selling the note
receivable (discounting).

BA 99.2 | AY 2022-2023 32
 DISPOSING NOTES RECEIVABLE
Honor of Notes Receivable LO 1

▪ A note is honored when its maker pays it in full at its maturity

date.
Dishonor of Notes Receivable
▪ A dishonored note is not paid in full at maturity.
▪ A note is dishonored by nonpayment when it is duly presented
for payment and payment is refused or cannot be obtained
(Sec 83, Negotiable Instruments Law)
▪ A dishonored note receivable is no longer negotiable.

BA 99.2 | AY 2022-2023 33
 DISPOSING NOTES RECEIVABLE
On May 2, Kilim Company lends P7,600 to Endo, Inc., issuing a 6- LO 1
month, 9% note. At the maturity date, November 2, Endo
indicates that it cannot pay.
Instructions:
(a) Prepare the entry to record the issuance of the note.
(b) Prepare the entry to record the dishonor of the note,
assuming that Kilim Company expects collection will occur.
(c) Prepare the entry to record the dishonor of the note,
assuming that Kilim Company does not expect collection in the
future.

BA 99.2 | AY 2022-2023 34
 DISPOSING NOTES RECEIVABLE
(a) Notes receivable 7,600 LO 1
Cash 7,600
#

(b) Interest = P7,600 x 9% x 6/12 = P342

Accounts receivable 7,942
Notes Receivable 7,600
Interest Revenue 342
#

BA 99.2 | AY 2022-2023 35
 DISPOSING NOTES RECEIVABLE
LO 1
(c) Allowance for doubtful accounts 7,600
Notes Receivable 7,600
#

When there is no hope of collection, the note holder would

write off the face value of the note. No interest revenue
would be recorded because collection will not occur.

BA 99.2 | AY 2022-2023 36
 STUDY CHECK 2
Refer to E8.14 Vandiver Company p. 8-31 in your textbook. Prepare the LO 1
entries to record the transactions in both the maker and payee’s books.

BA 99.2 | AY 2022-2023 37
 ASSIGNMENT 1
Instructions: In your assignment workbook, answer the following problems LO 1
from your textbook, Weygandt, etal (IFRS, 4th ed):
1. P8.6 Anping Enterprises, p.8-34
2. P8.7 Harter Wholesalers, p. 8-34
3. E10.1 Ang Hsu Enterprise, p. 10-18
4. P10.2 Deok-moon Group, p10-22

Due date: Refer to LMS for assignment deadline.

BA 99.2 | AY 2022-2023 38
 “BSA Supplementary Materials”

DISCOUNTING NOTES RECEIVABLE

▪ Way of financing where Notes Receivable held by a company LO 1
could be discounted to a bank
▪ Process is called as Note Discounting
▪ Bank Discount Amount deducted in advance by the bank
upon issuance of the loan
▪ Face Value = Maturity Value
▪ Proceeds Amount which the borrower actually receives after
deducting the bank discount (Face Value - Bank Discount)
▪ Same process applies to Non Interest Bearing Notes

BA 99.2 | AY 2022-2023 39
 “BSA Supplementary Materials”

DISCOUNTING NOTES RECEIVABLE

Assume that a 90-day, 8% interest bearing note receivable of LO 1
P3,500 dated on April 1 is discounted with a bank on May 1 @
12%.
▪ Interest Income = P3,500 x 8% x 90/360 = P70
▪ Maturity Value = P3,500 + P70 = P3,570
▪ Discount (MV x DP x DR) = P3,570 x 60/360 x 12% = 71.40
▪ Cash Proceeds from Discounting = P3,570 - P71.40 = P3,498.60
▪ Net Interest Expense = Discount - Interest Income = 1.40

BA 99.2 | AY 2022-2023 40
 “BSA Supplementary Materials”

DISCOUNTING NOTES RECEIVABLE

Assume that a 90-day non-interest bearing note receivable of LO 1
P3,500 dated on April 1 is discounted with a bank on May 1 @
12%.

▪ Maturity Value = P3,500

▪ Discount (MV x DR x DP) = P3,500 x 60/360 x 12% = 70
▪ Cash Proceeds from Discounting = P3,500 - P70 = P3,430

BA 99.2 | AY 2022-2023 41
 ACCOUNTS PAYABLE
▪ Accounts payable transactions arise from purchasing goods or LO 1
services for use in a company’s operations or from purchasing
merchandise for resale.
▪ Opposite of accounts receivable
▪ Subject to credit terms

BA 99.2 | AY 2022-2023 42
 VALUE ADDED TAX (VAT)
LO 1
VAT (Value Added Tax) – 12% tax imposed by the government for
all goods and services sold by registered VAT businesses;
expressed as a stated percentage of the sales price. The selling
company (retailer)
▪ collects tax from the customer;
▪ records tax separately; and
▪ remits the collections to the BIR.

43

BA 99.2 | AY 2022-2023 43
 VALUE ADDED TAX (VAT)
LO 1
Illustration: On June 1, the company purchased merchandise
worth P10,000 (exclusive of VAT) for cash (assume perpetual
system).

June 1 Merchandise Inventory 10,000

VAT Input Tax 1,200
Cash 11,200
#

BA 99.2 | AY 2022-2023 44
 VALUE ADDED TAX (VAT)
Illustration: On June 2, the company sold the merchandise LO 1
purchased on June 1 for P15,000 (exclusive of VAT) for cash.

June 2 Cash 16,800

Sales 15,000
VAT Output Tax 1,800
#
2 COGS 10,000
Merchandise Inventory 10,000
#

BA 99.2 | AY 2022-2023 45
 VALUE ADDED TAX (VAT)
Illustration: Assuming that this is the only transaction for LO 1

the period, the company will make the following adjusting

entry on June 30

June 30 VAT Output Tax 1,800

VAT Input Tax 1,200
VAT Payable 600
#

BA 99.2 | AY 2022-2023 46
 STUDY CHECK 3
Refer to BE10.4 Dillons AS p10-17 in your textbook. LO 1

BA 99.2 | AY 2022-2023 47
 UNEARNED REVENUE
Revenues received before the company LO 1

▪ delivers goods or
▪ provides services.

BA 99.2 | AY 2022-2023 48
 STUDY CHECK 4
Refer to BE10.6 Sport Pro Magazine and BE10.7 Derby University, both in p10- LO 1
17 of your textbook.

BA 99.2 | AY 2022-2023 49
 CURRENT MATURITIES OF LONG-
TERM DEBT
▪ Long-term liabilities are often paid back in periodic LO 1
payments, called installments. Installments that are due
within the coming year from the date of the statement of
financial position must be classified as a current liability. The
installments due after the coming year are classified as a
long-term liability.
▪ No adjusting entries needed if there are no specific accounts
separating the current and long-term portion of the
company’s long term debt.

BA 99.2 | AY 2022-2023 50
 PAYROLL ACCOUNTING
LO 1
“Payroll” pertains to both:
▪ Salaries - managerial, administrative, and sales personnel (monthly or
yearly rate).
▪ Wages - store clerks, factory employees, and manual laborers (rate per
hour).

Determining the Payroll involves computing three amounts:

▪ gross earnings,
▪ payroll deductions, and
▪ net pay.

BA 99.2 | AY 2022-2023 51
 PAYROLL ACCOUNTING
LO 1
As applied to payrolls, the objectives
of internal control are
▪ to safeguard company assets
against unauthorized payments of
payrolls, and
▪ to ensure the accuracy and
reliability of the accounting records
pertaining to payrolls.

This Photo by Unknown Author is licensed under CC BY-SA-NC

BA 99.2 | AY 2022-2023 52
 PAYROLL ACCOUNTING
LO 1

Weygandt, Kimmel and Kieso. Accounting Principles (10th and 12th

edition), International Student Version. Wiley, 2016

BA 99.2 | AY 2022-2023 53
 PAYROLL ACCOUNTING
LO 1
Gross earnings: Total earnings
inclusive of basic and overtime pay
and allowances.

Payroll deductions: Includes

mandatory deductions for
withholding taxes, SSS/GSIS, Pag-
ibig and Philhealth

Net Pay: Gross Earnings – Payroll

deductions

54

BA 99.2 | AY 2022-2023 54
 PAYROLL ACCOUNTING
J. Labrador, CPA calculated gross salaries of P32,500 to employees for the month LO 1
of September 30, 2018. Deductions were made for the following: SSS, P966.75;
Philhealth, P343.75; Pag-ibig, P650 and withholding taxes, P2,850.
October 10, 2018: Remitted to Bureau of Internal Revenue (BIR) the tax withheld
from employees’ salaries for the period Sept. 1-30
October 20, 2018: Remitted the amount due to SSS and Philhealth and Pag-ibig
computed as follows:
Employer’s share Employees’ share
SSS 3,048.50 966.75
Philhealth 687.50 343.75
Pag-ibig 950.50 650.00
Total 4,686.50 ,960.50

BA 99.2 | SY2019-2020 55

BA 99.2 | AY 2022-2023 55
 PAYROLL ACCOUNTING
2018 LO 1
Sept. 30 Salaries And Wages Expense 32,500.00
SSS Premiums Payable 966.75
Philhealth Contributions Payable 343.75
Pag-Ibig Contribution Payable 650.00
Withholding Taxes Payable 2,850.00
Cash 27,689.50
To record payment of salaries for the period Sept. 1-30, 2018

56

BA 99.2 | AY 2022-2023 56
 PAYROLL ACCOUNTING
2018 LO 1
Sept. 30 SSS Contributions Expense 3,048.50
Philhealth Contributions Expense 687.50
Pag-ibig Contributions expense 950.50
SSS Premiums Payable 3,048.50
Philhealth Contributions Payable 687.50
Pag-Ibig Contribution Payable 950.50
To record employer’s share in mandatory deductions

57

BA 99.2 | AY 2022-2023 57
 PAYROLL ACCOUNTING
2018 LO 1
Oct. 10 Withholding Taxes Payable 2,850
Cash 2,850
To record remittance made to BIR

20 SSS Premiums Payable 4,015.25

Philhealth Contributions Payable 1,031.25
Pag-ibig Contributions payable 1,600.50
Cash 6,647.00
To record remittances made to SSS, Philhealth,and Pag-ibig.

58

BA 99.2 | AY 2022-2023 58
 LEARNING OUTCOMES FOR THIS
SECTION
At the end of this section, you should have learned the LO 1
following:
❑ Identify and account for current liabilities.
❑ Account for promissory notes from both the maker’s and
payee’s perspective.
❑ Properly account for unearned revenue and the current
portion of long term liabilities.
❑ Record both input and output VAT.
❑ Record payroll related entries.

BA 99.2 | AY 2022-2023 59
 REPORTING AND ANALYZING CURRENT
LIABILITIES

BA 99.2 | AY 2022-2023 60
 REPORTING UNCERTAINTY
LO 2
Provision - Potential liability that may become an actual
liability in the future (IAS 37).
Three levels of probability:
▪ Probable
▪ Reasonably possible
▪ Remote

BA 99.2 | AY 2022-2023 61
 REPORTING UNCERTAINTY
LO 2
In accordance with IAS 37, provisions are liabilities of
uncertain timing or amount. A provision should only be
recognized when and only when:
▪ a present obligation (legal or constructive) has arisen as a
result of a past event (the obligating event);
▪ an outflow of economic benefit to settle the obligation is
probable (“more likely than not”); and
▪ the amount of the obligation can be estimated reliably.

BA 99.2 | AY 2022-2023 62
 PROBABLE
LO 2
▪ An outflow of resource is
probable if the event is more
likely than not to occur. As a
rule of thumb, probable
means more than 50% likely
or substantially more.
▪ Possible: 50% or less likely to
occur.
▪ Remote: 10% or less likely to
occur or very slight
occurrence

BA 99.2 | AY 2022-2023 63
 REPORTING UNCERTAINTY -
MEASUREMENT
LO 2
▪ Provision for one-off events (i.e. settlement of a
lawsuit) – measured at most likely amount
▪ Provisions for large populations of events (i.e.
warranties, customer refunds) – measured at
probability weighted expected value
▪ Where no reliable estimate can be made, no liability
is recognized.

BA 99.2 | AY 2022-2023 64
 STUDY CHECK 4
Refer to BE10.6 Sport Pro Magazine and BE10.7 Derby University, both in p10- LO 2
17 of your textbook.

BA 99.2 | AY 2022-2023 65
 REPORTING UNCERTAINTY
LO 2

BA 99.2 | AY 2022-2023 66
 CONTINGENT LIABILITIES
Contingent liabilities should not LO 2
be recognized but should be
disclosed. A contingent liability is:
▪ A possible obligation that arises
from past events and whose
existence will be confirmed only
by the occurrence or non-
occurrence of one or more
uncertain future events not
wholly within the control of the
entity; or
This Photo by Unknown Author is licensed under CC BY-SA

BA 99.2 | AY 2022-2023 67
 CONTINGENT LIABILITIES
▪ A present obligation that arises from past events but is not LO 2
recognized because:
▪ (i) it is not probable that an outflow of resources embodying economic benefits
will be required to settle the obligation; or
▪ (ii) the amount of the obligation cannot be measured with sufficient reliability.
▪ Hence, a contingent liability is either probable or measurable but
not both.

BA 99.2 | AY 2022-2023 68
 ACCOUNTING FOR PROVISIONS
& CONTINGENT LIABILITIES LO 2

BA 99.2 | AY 2022-2023 69
 REPORTING UNCERTAINTY –
QUIZ YOURSELF
LO 2
Angel Peak Company has been sued by a group of disgruntled
employees who have charged the company with discriminatory
promotion practices. Angel Peak ’s legal experts believe that it
is possible that the company will lose the lawsuit and be
required to pay damages of about P200 million.

Disclosure. Because the likelihood of occurrence is possible, Angel

Peak will be required to describe the details of the possible liability in the
notes to the financial statements

BA 99.2 | AY 2022-2023 70
 REPORTING UNCERTAINTY –
QUIZ YOURSELF
LO 2
Bacolod Bank violated federal banking regulations. Bacolod
Bank’s attorneys have concluded that it is probable that the
bank will be required to pay a fine of about P50 million.

Recognition in the financial statements. Because the likelihood is

probable, Bacolod Bank will be required to debit a loss and credit a
liability for P50 million. The details must also be described in a note.

BA 99.2 | AY 2022-2023 71
 REPORTING UNCERTAINTY –
QUIZ YOURSELF
LO 2
Dagway Company has been sued by a group of LGBT
troubadours who object to the company’s dress code, which
bans cross-dressing during work hours. The troubadours are
seeking damages of P75 million. The chances that Dagway will
have to pay anything on this lawsuit are remote

Nothing. Because the likelihood is remote, no accounting action is

needed.

BA 99.2 | AY 2022-2023 72
 STUDY CHECK 5
Refer to E10.13 Gallardo Industries p.10-20 in your textbook. LO 2

BA 99.2 | AY 2022-2023 73
 PRODUCT WARRANTIES
▪ Promise made by a seller to a buyer to make good on a deficiency LO 2
of quantity, quality, or performance in a product.
▪ Estimated cost of honoring product warranty contracts should be
recognized as an expense in the period in which the sale occurs.
Two approaches for recording:
1. Accrual approach - preferred
2. Expense as incurred approach

BA 99.2 | AY 2022-2023 74
 PRODUCT WARRANTIES -
ACCRUAL
Entry to accrue LO 2
Warranty expense xxx
Estimated warranty liability xxx
#
When actual warranty cost is subsequently incurred and paid:
Estimated warranty liability xxx
Cash xxx
#
At a certain date, the estimate is reviewed to determine the reasonableness
and accuracy. The actual warranty cost is then used to validate the original
estimate.

BA 99.2 | AY 2022-2023 75
 PRODUCT WARRANTIES -
ACCRUAL
If the actual cost > estimate LO 2

Warranty expense xxx (difference)

Estimated warranty liability xxx
#

If the actual cost < estimate

Estimated warranty liability xxx
Warranty expense xxx
#

BA 99.2 | AY 2022-2023 76
 PRODUCT WARRANTIES -
ACCRUAL
Illustration 1: An entity sells 1,000 units of television for P9,000 LO 2
cash per unit with a standard warranty of one year. Based on
experience, the warranty cost is estimated to be an average of
P500/unit and 60% of the units sold would be returned for repair.
The entity incurred P180,000 for actual repairs during the year.
Make the journal entries to record the transaction.

Entry to record the sale

Cash 9,000,000
Sales 9,000,000
#

BA 99.2 | AY 2022-2023 77
 PRODUCT WARRANTIES -
ACCRUAL LO 2

Entry to accrue
Amount reported in SCI
Warranty expense 300,000
Estimated warranty liability 300,000*
# *(1,000 units * 60% * P500)

When actual warranty cost is subsequently incurred and paid:

Estimated warranty liability 180,000
Net balance of P120k
Cash 180,000 will be reported as CL in
the SFP
#
If the warranty runs over a period of one year, the warranty cost expected to be
incurred within one year is current and the remaining portion as non current liability.

BA 99.2 | AY 2022-2023 78
 PRODUCT WARRANTIES -
EXPENSE AS INCURRED LO 2

When actual warranty cost is subsequently incurred and paid:

Amount reported in SCI

Warranty expense 180,000

Cash 180,000
#

Justified on the basis of convenience when the warranty cost is not

material or when the warranty period is relatively short.

BA 99.2 | AY 2022-2023 79
 PRODUCT WARRANTIES -
ACCRUAL
Illustration 2: An entity sells refrigerators that carry a 2 year warranty LO 2
against defects. The sales and warranty repairs are made evenly
throughout the year. Based on past experience, the entity projects an
estimated warranty cost as a percentage of sales as follows:
First year of warranty 4%
Second year of warranty 10%
2020 2021
Sales P5 million P6 million
Actual warranty repairs 140,000 300,000

Required: Journalize the related entries.

80

BA 99.2 | AY 2022-2023 80
 PRODUCT WARRANTIES -
ACCRUAL
Entry to record the sale LO 2
2020 Cash 5,000,000
Sales 5,000,000
To record sales

Warranty expense 700,000

Estimated warranty liability 700,000
To record accrual of estimated warranty (P5M x 14%)

Estimated warranty liability 140,000

Cash 140,000
To record actual warranty expense incurred

81

BA 99.2 | AY 2022-2023 81
 PRODUCT WARRANTIES -
ACCRUAL
Entry to record the sale LO 2
2021 Cash 6,000,000
Sales 6,000,000
To record sales

Warranty expense 840,000

Estimated warranty liability 840,000
To record accrual of estimated warranty (P6M x 14%)

Estimated warranty liability 300,000

Cash 300,000
To record actual warranty expense incurred

82

BA 99.2 | AY 2022-2023 82
 PRODUCT WARRANTIES -
ACCRUAL
Estimated warranty liability LO 2

2020 actual 140,000 2020 accrual 700,000

2021 actual 300,000 2021 accrual 840,000

Balance 1,100,000

BA 99.2 | AY 2022-2023 83
 ASSIGNMENT 2
Instructions: In your assignment workbook, answer the following problems LO 2
from your textbook, Weygandt, etal (IFRS, 4th ed):
1. E10.9 Ting Manufacturing, p10-19 (Assume that the actual costs of
honoring the warranty are paid as incurred)
2. E10.10 Streep Factory, p10-20 (Assume that the actual costs of
honoring the warranty are paid as incurred)
3. P10.1 Chuan-Kwang Luggage, p10-21
◦ Sales Taxes Payable >>> change to VAT Payable (amount is still NT$7,700)
◦ Change 8% sales tax to 12% VAT for all applicable transactions

Due date: Refer to LMS for assignment deadline.

BA 99.2 | AY 2022-2023 84
 ANALYSIS OF CURRENT
LIABILITIES
LO 2
Liquidity refers to
the ability to pay
maturing
obligations and
meet unexpected
needs for cash.

Current ratio permits

us to compare the
liquidity of different-
sized companies and
of a single company at
different times.

BA 99.2 | AY 2022-2023 85
 ANALYSIS AND REPORTING OF
CURRENT LIABILITIES
Tron Cellular has the following account balances at December 31, 2020. LO 2
Notes payable (NTP80,000 due after 12/31/21) NTP200,000
Unearned service revenue 75,000
Other long-term debt (NTP30,000 due in 2021) 150,000
Salaries and wages payable 22,000
Other accrued expenses 15,000
Accounts payable 100,000
In addition, Tron is involved in a lawsuit. Legal counsel feels it is probable Tron
will pay damages of NTP38,000 in 2021.
a. Prepare the current liabilities section of Tron’s December 31, 2020,
statement of financial position.
b. Tron’s current assets are NTP504,000. Compute Tron’s working capital and
current ratio.

BA 99.2 | AY 2022-2023 86
 ANALYSIS AND REPORTING OF
CURRENT LIABILITIES
a. Prepare the current liabilities section of Tron's December 31, 2020, LO 2
statement of financial position.
Current liabilities
Notes payable (NTP200,000 − NTP80,000) NTP120,000
Accounts payable 100,000
Unearned service revenue 75,000
Lawsuit liability 38,000
Long-term debt due within one year 30,000
Salaries and wages payable 22,000
Other accrued expenses 15,000
Total current liabilities NTP400,000

BA 99.2 | AY 2022-2023 87
 ANALYSIS AND REPORTING OF
CURRENT LIABILITIES
b. Tron's current assets are NTP504,000. Compute Tron's working LO 2
capital and current ratio.
Working capital = Current assets − Current liabilities =
NTP504,000 − NTP400,000 = NTP104,000
Current ratio = Current assets ÷ Current liabilities =
NTP504,000 ÷ NTP400,000 = 1.26:1

BA 99.2 | AY 2022-2023 88
 STUDY CHECK 6
Refer to E10.14 Younger Online Company p.10-21 in your textbook. LO 2

BA 99.2 | AY 2022-2023 89
 ASSIGNMENT 3
Instructions: In your assignment workbook, answer the following problems LO 2
from your textbook, Weygandt, etal (IFRS, 4th ed):
1. E10.15 3M Company, p10-21.
2. P10.6 Chen Group, p 10-23.

Due date: Refer to LMS for assignment deadline.

BA 99.2 | AY 2022-2023 90
 LEARNING OUTCOMES FOR THIS
SECTION
At the end of this section, you should have learned the LO 2
following:
❑ Know the proper accounting and reporting treatment for
uncertainties taking into consideration the different levels
of probability.
❑ Account for product warranties.
❑ Report current liabilities in the statement of financial
position
❑ Use working capital and current ratios to evaluate a
company’s liquidity.

BA 99.2 | AY 2022-2023 91
 Learning Resource: Module 10 - Cookie Creations
Practice [Link]

PRACTICE SET

Due Date:
Please refer to LMS for the deadline.

BA 99.2 | AY 2022-2023
92
 ANSWER KEY – STUDY CHECKS

BA 99.2 | AY 2022-2023 93
 STUDY CHECK 1
Indicate the maturity date of each of the following promissory notes: LO 1

Date of Note Terms Maturity Date

(a) March 13 one year after date of note March 13 of next year
(b) May 4 3 months after date August 4
(c) June 20 30 days after date July 20
(d) July 1 60 days after date August 30

BA 99.2 | AY 2022-2023 94
 Page 1 of 2

STUDY CHECK 2 LO 1

2020 Payee (Notes Receivable) Maker (Notes Payable)

Apr 1 Notes Receivable 30,000 Accounts Payable 30,000
Accounts Receivable 30,000 Notes Payable 30,000
# #
Jul 1 Notes Receivable 25,000 Cash 25,000
Cash 25,000 Notes Payable 25,000
# #
Dec 31 Interest Receivable 2,600* Interest Expense 2,600
Interest Revenue 2,600 Interest Payable 2,600
# #
*$30,000 X 6% X 9/12 = 1,350
$25,000 X 10% X 6/12 = 1,250
2,600

BA 99.2 | AY 2022-2023 95
 Page 2 of 2

STUDY CHECK 2
LO 1

2021 Payee (Notes Receivable) Maker (Notes Payable)

Apr 1 Cash 31,800 Notes Payable 30,000
Notes Receivable 30,000 Interest Payable 1,350
Interest Receivable 1,350 Interest Expense 450
Interest Revenue 450* Cash 31,800
# *$30,000 X 6% X 3/12 = $450 #
1 Accounts Receivable 26,875 Notes Payable 25,000
Notes Receivable 25,000 Interest Payable 1,250
Interest Receivable 1,250 Interest Expense 625
Interest Revenue 625* Accounts Payable 26,875
# *$25,000 X 10% X 3/12 = $625 #

BA 99.2 | AY 2022-2023 96
 STUDY CHECK 3
(a) Accounts Receivable 31,800 LO 1
Sales Revenue 30,000
Value-Added Taxes Output Tax 1,800
(€30,000 X 6% = €1,800)
#

(b) Cash 20,670

Sales (€20,670 ÷ 1.06 = €19,500) 19,500
Value-Added Taxes Output Tax 1,170
#

BA 99.2 | AY 2022-2023 97
 Page 1 of 2

STUDY CHECK 4
BE 10.6 LO 1

2020
Aug 1 Cash 216,000
Unearned Subscription Revenue 216,000
# (12,000 X €18)

Dec 31 Unearned Subscription Revenue 90,000

Subscription Revenue 90,000
# (€216,000 X 5/12 = €90,000)

BA 99.2 | AY 2022-2023 98
 Page 2 of 2

STUDY CHECK 4
BE 10.7 LO 1

Cash 840,000
Unearned Ticket Revenue 840,000
#

Unearned Ticket Revenue 70,000

Ticket Revenue 70,000
# (840,000 x 1/12)

BA 99.2 | AY 2022-2023 99
 STUDY CHECK 5
(a) Since the provision is probable and a reliable estimate of the amount can LO 2
be made, the liability should be recorded in the accounts. In addition, the
details should be disclosed in the notes to the financial statements.

(b) If a provision probability is 50% or less, it need not be recorded, but must
be disclosed in the notes to the financial statements.

BA 99.2 | AY 2022-2023 100

 Page 1 of 2

STUDY CHECK 6
(a) YOUNGER ONLINE COMPANY LO 2
Partial Statement of Financial Position
MMM DD, YYYY

Current liabilities
Accounts payable $73,000
Mortgage payable 30,000
Unearned ticket revenue 24,000
Warranty liability 18,000
Value-added taxes payable 10,000
Interest payable 8,000
Total current liabilities $163,000

BA 99.2 | AY 2022-2023 101

 Page 2 of 2

STUDY CHECK 6
(b) Younger Online Company’s working capital is $137,000 and its current LO 2
ratio is 1.84:1. Although a current ratio of 2:1 has been considered the
standard for a good credit rating, many companies operate successfully
with a current ratio below 2:1.

BA 99.2 | AY 2022-2023 102

 REFERENCES
◦ Stice, Earl K., Stice, James D., Albrecht, W.
Steve, Swain, Monte R., Duh, Rong-Ruey
and Hsu, Audrey Wenhsin, Financial
Accounting IFRS edition (2nd edition). 2018.
◦ Weygandt, Kimmel and Kieso. Accounting
Principles (10th and 12th edition),
International Student Version. Wiley, 2016.
◦ Weygandt, Kimmel and Kieso. Financial
Accounting with International Financial
Reporting Standards (4th edition). Wiley,
2019.

BA 99.2 | AY 2022-2023 103

 Image from Microsoft stock images

We have reached the end of Module 10. You have done it! May these learnings serve
you well. If you have any questions or need clarification, please do not hesitate to
reach out to your instructor. Thank you!

BA 99.2 | AY 2022-2023
104