FINANCIAL ACCOUNTING 2 LIABILITIES Essential Characteristics: Present Obligation of the entity Arises from past transaction or event (not

(not recognized until incurred) Requires outflow of resources Measurement: GENERAL o Initially - at FAIR VALUE + Transaction Cost Fair Value - Present Value of future cash payment to settle obligation. o Subsequently at Amortized Cost CURRENT LIABILITIES o Measurement at FACE AMOUNT. NON-CURRENT LIABILITIES o Interest-bearing at FACE AMOUNT o Noninterest-bearing at PRESENT VALUE Amortized at the difference between the FACE AMOUNT and PRESENT VALUE.

Covenants Definition Attached to borrowing agreements which represent undertakings by the borrower; restrictions on the borrower. Breach of Covenant the liability becomes payable on demand. o Liability becomes current even if the lender has agreed, after the reporting period and before the statements are authorized for issue, not to demand payment as a consequence of the breach. o Liability is non-current if the lender agreed on or before the end of the reporting period to provide a grace period ending at least 12 months after that date.

Non-adjusting Events - occurring between the end of the reporting period and the date the FS are authorized for issue. Long-term refinancing Rectification of a breach of a long-term agreement Granting of grace period ending at least 12 months after reporting period.

Premiums - articles of value given to customers as a result of past sales or promotion activities.

Premium Liability: (Assume wrappers) Wrappers Estimated to be Redeemed Less: Wrappers redeemed Balance Divide: Wrappers needed for 1 premium Result Multiply: (Cost of Premium Less Remittance) Estimated Liability

xx xx xx xx xx xx xx

Customer Loyalty Program The entity supplies the awards itself recognize initially as deferred revenue and recognized as revenue when the awards are redeemed. Unearned Revenue (Initial) = Amount of Points Granted x Fair Value Recognition of Revenue (Year 1): Redeemed Points Divide: Estimated Points to be redeemed Result Multiply: Initial Unearned Revenue Earned Revenue for Year 1 J/E: Unearned Revenue Sales xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx

Recognition of Revenue (Year 2): Redeemed Points (Year 1) Add: Redeemed Points (Year 2) Total Divide: Estimated Points to be redeemed Result Multiply: Initial Unearned Revenue Total Earned Revenue Less: Earned Revenue for Year 1 Earned Revenue for Year 2

Third party supplies the awards revenue recognized at the point of initial sale. o Collecting as principal the amount of revenue is equal to the gross consideration allocated to the award credits. (Points Given x Fair Value) J/E: Cash xx Sales xx Revenue from points xx o Collecting as agent record liability for initial sale and recognize as revenue at the payment to the principal.

J/E:

Cash

Sales Liability for points

xx

xx xx xx xx

Liability for points xx Cash Revenue from points Warranty - at the point of sale, a liability is incurred.

Accrual Approach the soundest approach. Any change between the estimate and actual cost is treated currently or prospectively. The excess between the actual and the estimate, and vice versa is adjusted to Warranty Expense and Warranty Liability. Warranty Liability (1-year Warranty): Estimated sets to be returned for repair Multiply: Estimated warranty cost per set Estimated Warranty Cost (Expense & Liability) ---------------------------------------------------xx xx xx

Warranty Liability (2-year Warranty) (Sales made evenly) Estimated % of Warranty 1st year xx% nd year Add: Estimated % of Warranty 2 xx% Total % of Warranty xx% --------Sales xx Multiply: Total % of Warranty xx% Warranty Expense & Liability for the year xx --------Warranty Expense 1st year xx Warranty Expense 2nd year xx xx st year Actual Warranty Expense 1 xx Actual Warranty Expense 2nd year xx (xx) nd year end Estimated Warranty Liability 2 xx Note: The warranty cost expected to be incurred within 1 year is classified as current and the balance as non-current. Expenses as Incurred Approach expensing warranty cost only when actually incurred. This is the one recognized for income tax purposes.

Bonuses Before bonus and before tax: Income before bonus and tax Multiply: Bonus % Bonus

xx xx% xx

After bonus but before tax: Income before bonus and tax Divide: (100% + Bonus %) Result Multiply: Bonus % Bonus

xx xx% xx xx% xx

After bonus and after tax: Bonus = Bonus% [(Income before bonus and tax) Bonus Tax] Tax = Tax % [(Income before bonus and tax) Bonus] After tax but before bonus: Bonus = Bonus% [(Income before bonus and tax) Tax] Tax = Tax % [(Income before bonus and tax) Bonus]

Provisions - an existing liability of uncertain timing or amount. There is uncertainty about the timing or amount of the future expenditure required for settlement. Probable and measurable.