ACYFARP: Estimated Liabilities

Premiums

Are items given to customers as a result of previous sales or sales promotion activity such as toys, dishes, silverare, and other items.

Premiums

Are offered to customers in exchange for product labels, box tops, wrappers, and coupons in order to encourage the sale of of their items. As a result, when the product is sold, an accounting liability for future premium distribution occurs, which should be recognized.

Accounting Entry - Premiums Purchased

(DR) Premiums

(CR) Cash

Accounting Entry - Premiums are Given to Customers

(DR) Premiums Expense

(CR) Cash

Accounting Entry - Premiums are Still Outstanding at the End of the Year

(DR) Premiums Expense

(CR) Estimated Premiums Liability

Warranty

Pertains to after-sale services provided by the company to command sales. This is a promise to render free services such as repair or replacement in connection to the sold items which commonly include, but are not limited to various home appliances, vehicles, equipment, machine and others. If the products sold prove to be defective in the future within the stipulated period of time, such an entity policy may result in significant cost for the entity.

Warranty

Is recognized as a liability in the financial statements if the following conditions are met:

a. As a result of past event, the entity has a present legal or constructive obligation.

b. It is probable that an outflow of resources representing economic benefits will be required to settle the obligation.

c. The amount of the obligation can be measured reliably.

Accrual Approach - Accounting for Warranty

It has the best theoretical approach in recognizing warranty liability because it properly matches cost and revenue.

Estimated Warranty Cost is Recorded - Accrual Approach

(DR) Warranty Expense

(CR) Estimated Warranty Liability

Actual Warranty Cost is Subsequently Incurred and Paid

(DR) Estimated Warranty Liability

(CR) Cash

Accrual Approach - Accounting for Warranty

In this approach, the estimate is examined at a later period to determine its reasonableness and accuracy. To verify the original estimate, the actual warranty cost is evaluated.

Accrual Approach - Accounting for Warranty

Any discrepancy between the estimate and the actual cost is a change in estimate, which should be treated prospectively, if necessary.

True

(True or False) If the actual cost exceeds the estimate, the difference is charged to warranty expenditure.

(DR) Warranty Expense

(CR) Estimated Warranty Liability

True

(True or False) If the actual cost is less than the estimate, the difference is an adjustment to warranty expense.

(DR) Estimated Warranty Liability

(CR) Warranty Expense

True

(True or False) The warranty cost expected to be incurred within one year is classified as current and the balance is noncurrent.

Expense as Incurred Approach

Pertains to the approach of expensing warranty cost only when actually incurred. This approach is justified on the grounds of expediency. When the warranty cost is not substantial or the warranty period is short.

Sale of Warranty

An instance where a separate warranty is sold from the product. Customers are entitled to the standard manufacturer's warranty for a specified amount of time after purchasing products.

Sale of Warranty

It is an additional cost for the customer, on the product sold. In this case, the sale of standard warranty product is recorded separately from the sale of the extended warranty period.

Sale of Warranty

Is initially recorded as deferred revenue and then amortized over the term of the warranty contract using a straight line method. If, on the other hand, costs are expected to be incurred in performing services under the extended warranty contract, revenue is recognized in proportion to those costs.

Unearned Revenue/Deferred Revenue

When income is received (e.g., cash) but not yet earned.

True

(True or False) Income is earned if the seller already performed its function as a seller.

Unearned Revenue/Deferred Revenue

Is classified as current liability because it is realizable within one year. Typical examples include: current deferred revenue, unearned interest income, unearned rental income, and unearned subscription revenue,

Noncurrent Unearned Revenue

Unearned Revenue realizable beyond one year. It is a rare circumstance. Examples include: long-term service contracts and long-term leasehold advances.

Customer Loyalty Program

Is used by many businesses to build brand loyalty, retain valuable customers, and increase sales volume.

Customer Loyalty Program

Is generally intended to reward customers for previous purchases and to provide incentives for future purchases.

Customer Loyalty Program

When a customer purchases goods or services, the entity gives the customer award credits, which are commonly referred to as points. The points can be redeemed by distributing free or discounted goods or services to the customer. Customers may be required to accumulate a certain number of award credits or points before redeeming them.

Measurement of Customer Loyalty Program

The award credits must be accounted for as a separate component of the initial transaction by the entity. In other words, award credits are effectively accounted for as "future delivery of goods or services".

Measurement of Customer Loyalty Program

According to IFRS 15, an entity must allocate the transaction price on a relative stand-alone selling price basis to each performance obligation identified in a contract. Based on the relative stand-alone selling price, the fair value of the consideration for the initial sale shall be allocated between the award credits and the sale.

Stand-Alone Selling Price

Is the price at which a company would sell a promised good or service to a customer separately.

Recognition of Customer Loyalty Program

When the award credits are redeemed, the consideration allocated to them is initially recognized as deferred revenue and then recognized as revenue.

Recognition of Customer Loyalty Program

The amount of revenue recognized is based on the number of award credits redeemed relative to the total number expected to be redeemed.

Recognition of Customer Loyalty Program

For each period, the estimated redemption rate is calculated. The total consideration for the award credits is unaffected by changes in the total number expected to be redeemed. Rather, changes in the total number of award credits expected to be redeemed will be reflected in the revenue recognized in the current and subsequent periods. The revenue to be recognized in any given period is calculated on a cumulative basis to account for changes in estimate.

Gift Certificates

Indicates an exchange for future delivery of goods. It entails a liability on the part of the issuing entity.

Gift Certificates are Sold:

(DR) Cash

(CR) Liability for Gift Certificates

Gift Certificates are Redeemed:

(DR) Liability for Gift Certificates)

(CR) Sales

Gift Certificates Expired or Not Redeemed

(DR) Liability for Gift Certificates

(CR) Forfeited Gift Certificates (Other Income)

True

(True or False) According to the Philippine Department of Trade and Industry, gift certificates should not have an expiration date.

Accrued Liabilities

Pertains to the concept that is already incurred but not yet paid, in other words, an entity already consumed, used or benefited from others' services but are yet to be paid or settled. Include the following: accrued interest payable, accrued salaries payable, and bonuses.

Bonus Before Bonus and Before Tax

Bonus = Profit x Bonus (%)

Bonus After Bonus but Before Tax

Bonus = Profit [(Profit÷(1+Bonus (%))]

Bonus After Tax but Before Bonus

Bonus = Profit x [(1-Tax Rate)/((1/Bonus (%)) - Tax Rate)]

Bonus After Bonus and After Tax

Bonus = Profit x [(1-Tax Rate)/((1/Bonus (%)) - Tax Rate + 1))]

Refundable Deposits

Pertains to cash or property that is received but is refunded after specific conditions are met.

Refundable Deposits

Is normally classified as a current liability. It is simply refunded if the buyer returns the containers. If the customer fails to return, the deposit is considered the container's sale price.

True

(True or False) The excess of the deposit over the cost of the containers is considered a gain.

Interest Payable

Interest payable due to the entity borrowing money. It will be paid in addition to the principal amount borrowed.

Dividend Payable

Is accrued if an entity declares dividends (other than stock dividends). It is initially recognized on the date of declaration.