INTERMEDIATE ACCOUNTING II (AE 16)

LEARNING MATERIAL

UNIT NUMBER/ HEADING: ACCOUNTING FOR CURRENT LIABILITIES,

WARRANTY LIABILITIES, PROVISIONS
AND CONTINGENCIES

LEARNING OUTCOMES:
At the end of the unit, the students will be able to:
1. Identify liabilities by explaining their essential characteristics;
2. Differentiate provisions from contingent liabilities by applying the recognition criteria
for liabilities;
3. Differentiate current liabilities from non-current liabilities;
4. Apply accounting for different current liabilities;
5. Illustrate current liabilities on the face of the financial statements and identify
required disclosures in the notes; and
6. Explain the nature of contingent assets and identify disclosure requirements relating
to contingent liabilities and contingent assets

INTRODUCTION:
The second element of financial statements is liabilities which encompasses the
present obligations arising from past events and transactions of the entity. These liabilities
can be current or noncurrent depending on its maturity.
This module will help you understand more on current liabilities, provision and
contingencies and the accounting principles that apply to such.

Topic 1: LIABILITIES

Learning Objectives:
At the end of the topic, the students will be able to:
a. Understand the concept of liabilities;
b. Describe the nature and type of current and noncurrent liabilities;
c. Know the measurement of current and noncurrent liabilities;
d. Explain the issue of long-term debt falling due within one year and breach of
covenants attached to a long-term debt;
e. Describe and apply formulas in computing bonus to officers and employees.

Presentation of Content

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 Application
These activities are assessment if you understand that discussions we had. Though this
will not be recorded, it will still form part of your class standing so make sure to accomplish
the tasks given to you. 

Your tasks:
Choose the correct answer among the choices.

1. The most common type of liability is

a. One that comes into existence due to a loss contingency
b. One that must be estimated
c. One that comes into existence due to a gain contingency
d. One to be paid in cash and for which the amount and timing are known
2. Which is not a characteristic of a liability?
a. It represents a transfer of an economic resource
b. It must be payable in cash
c. It arises from present obligation to other entity
d. It results from past transaction or even
3. Classifying liabilities as either current or noncurrent helps creditors assess
a. Profitability
b. The relative risk of an entity’s liabilities
c. The degree of an entity’s liabilities
d. The amount of an entity’s liabilities
4. Short-term obligations are reported as noncurrent if
a. The entity has a long-term line of credit
b. The entity has tentative plan to issue long-term bonds payable
c. The entity has the discretion to refinance as long-term
d. The entity has the ability to refinance on a long-term basis
5. Which situation would not require that noncurrent liabilities be reported as current?
a. The long-term debt is callable by the creditor
b. The creditor has the right to demand payment due to a contractual violation
c. The long-term debt matures within the upcoming year
d. All of these require the current classification

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 6. Among the short-term obligations at year-end are 90-day notes, renewable for another
90-day period. What is the classification of the notes payable?
a. Current liabilities c. Deferred credits
b. Noncurrent liabilities d. Intermediate debt

7. Which of the following is not considered a characteristic of a liability?

a. Present obligation
b. Arises from past event
c. Results in a transfer of economic resource
d. Liquidation is reasonably expected to require use of current assets
8. Advance payments from customers represent
a. Liabilities until the product is provided
b. A component of shareholders’ equity
c. Assets until the product is provided
d. Revenue upon receipt of the advance payment
9. Which does not meet the definition of a liability?
a. The signing of an employment contract at fixed salary
b. An obligation to provide goods or services in the future
c. A note payable with no specified maturity date
d. An obligation that is estimated in amount
10. Which of the following is a characteristic of a current liability but not a
noncurrent liability
a. Unavoidable obligation
b. Present obligation to transfer an economic resource
c. Settlement is expected within the normal operating cycle or within 12 months,
whichever is longer
d. The obligating event has already occurred.

Feedback
The items below will be checked and recorded as your seatwork and quiz. Do well and
enjoy!

Compute the following problems.

Problem #1:

In an effort to increase sales, Mills Company inaugurated a sales promotional campaign on

June 30, 2019. Mills Company placed a coupon redeemable for a premium in each package
of cereal sold. Each premium cost P20 and five coupons must be presented by a customer to
receive a premium. Mills Company estimated that only 60% of the coupons issued will be
redeemed. For the six months ended December 31, 2019, the following information is
available:
Packages of cereals sold 160,000
Premiums purchases 12,000
Coupons redeemed 40,000
What is the estimated liability for premium claims outstanding on December 31, 2019?

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Problem #2:

On January 1, 2018, Bea Company began marketing a ne soft drink named “GHOSTo ko to”.
To help promote the soft drink, the management is offering a special gift, a T-shirt, to each
customer who returns 10 bottle cups. Bea Company estimates that out of the 250,000 bottles
sold in 2018, only 80% will be redeemed. On December 31, 2018, the following information
was collected:
T-shirts purchased, P100 each 18,000 units
T-shirts distributed 15,000 units
What is the estimated premium liability on December 31, 2018?

Problem #3:

Toyang Company started a new promotional program. For every 10 box tops returned to
Toyang, customers receive a basketball. Toyang estimates that only 80% of the box tops
reaching the market will be redeemed. Additional information is as follows:
Sales, 100,000 units P30,000,000
Basketball purchased, 5500 units P 4,125,000
Basketball distributed 4000 units
What is the amount of year-end estimated liability associated with this promotion?

Problem #4:

Cardo Company manufactures ‘Walang Katapusan’, a very special product. To promote the
sale of the product, a premium is offered to customers who send in three wrappers and
remittance of P25. The distribution cost per premium is P5. Data for the premium are:
Sales P5,000,000
Premium purchase at P80 each P 416,000
Number of premiums distributed 5,500
Number of premiums to distribute 500
in next period
What amount should be reported as premium expense for the year?

Problem #5:

Dina Ma. Hall Company inaugurated a sales promotion campaign on June 30, 2019, whereby
Dina Ma. Hall Company placed a coupon in each package of the product sold. Each premium
costs P75 and five coupons must be presented by a customer plus a remittance of P15 to
receive a premium. Dina Ma. Hall Company estimated that only 65% of the coupons issued
will be redeemed. The following information is available:
Packages sold 400,000
Premiums purchased 30,000
Coupons redeemed 100,000
How much is the estimated liability for the premium claims at the end of the year?

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Problem #6:

Thor Phe Company includes one coupon in each box of laundry soap it sells. A towel is offered
as a premium to customers who send in 10 coupons and a remittance of P20. data for the
premium offer are:
2018 2019
Boxes of soap sold 500,000 800,000
No. of towels purchased, P100 each 20,000 25,000
Coupons redeemed 150,000 200,000

The company’s experience indicates that only 30% of the coupons will be redeemed. What
amount should be reported as estimated liability for each year?

Topic 2: PROVISION (WARRANTY LIABILITY)

Learning Objectives:
At the end of the topic, the students will be able to:
a. Explain the nature and purpose of warranty
b. Ascertain the recognition of an estimated warranty liability
c. Apply the measurement of an estimated warranty liability
d. Test the reasonable accuracy of an estimated warranty liability

Presentation of Content

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 Application
These activities are assessment if you understand that discussions we had. Though this
will not be recorded, it will still form part of your class standing so make sure to accomplish
the tasks given to you. 

Your tasks:
Choose the correct answer among the choices.

1. The accrual approach in accounting for warranty

a. Is required for income tax reporting
b. Is frequently justified on the basis of expediency
c. Finds the expense account being charged when the seller performs in compliance
with the warranty
d. Represents accepted practice and should be used whenever the warranty is an
integral an inseparable part of the sale
2. Which of the following best describes the accrual approach of accounting for warranty
cost?
a. Expensed when paid
b. Expensed when warranty claims are certain
c. Expensed based on estimate in year of sale
d. Expensed when incurred
3. Which of the following best describes the expense as incurred approach of accounting
for warranty cost?
a. Expensed based on estimate in year of sale
b. Expensed when liability is accrued
c. Expensed when warranty claims are certain
d. Expensed when incurred
4. What is the classification of the estimated warranty liability in a three-year warranty?
a. Noncurrent
b. Current
c. Partly current and partly noncurrent
d. No need for disclosure
5. Which of the following is a characteristic of the accrual of warranty but not the sale of
warranty?
a. Warranty liability
b. Warranty expense
c. Unearned warranty revenue
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 d. Warranty revenue

Feedback
The items below will be checked and recorded as your seatwork and quiz. Do well and
enjoy!

Compute the following problems.

Problem #1:

On April 1, 2018, Keem Both Company began offering a new product for sale under a one-
year warranty. Of the 5,000 units in inventory at April 1, 2018, 3,000 had been sold by June
30, 2018. Based on its experience with similar products, the entity estimated that the average
warranty cost per unit sold would be P80. Actual warranty costs incurred from April 1
through June 30, 2018 were P70,000. On June 30, 2018, what amount should be reported
as estimated warranty liability?

Problem #2:

Keri Bells Company sells its product under a one-year warranty. For the year, it sold 20,000
units. Based on its experience with similar products, the entity estimated that 35% of the
units sold will be returned for repair. The average warranty cost per unit sold would be P120.
Actual warranty costs incurred were P470,000. On December 31, 2018, what amount should
be reported as estimated warranty liability?

Problem #3:

During 2018, Beshie Company introduced a new product carrying a two-year warranty
against defects. The estimated warranty costs related to peso sales are 6%. Sales are
P6,000,000 for 2018 and P10,000,000 for 2019. actual warranty expenditures are P90,000
for 2018 and P300,000 for 2019. On December 31, 2019, what is the estimated warranty
liability?

Problem #4:

East Company manufactures stereo systems that carry a two-year warranty against defects.
Based on past experience, warranty costs are estimated at 5% of sales for the warranty
period. During 2018, stereo system sales amounted to P5,000,000 and warranty costs of
P100,000 were incurred. What amount should be reported as warranty expense for 2018?
Estimated warranty liability?

Problem #5:

PhaBie Dakha Company estimates its annual warranty expense at 3% of net sales. The net
sales for 2018 amounted to P2,000,000. On January 1, 2018, the warranty liability is
P50,000 and the warranty payments during 2018 totaled P70,000. What is the warranty
liability on December 31, 2018?

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Problem #6:

Forever Shop sells its product under a one-year warranty. For the year, it sold 4,000 units.
Based on its experience with similar products, the entity estimated that 40% of the units sold
will be returned for repair. The average warranty cost per unit sold would be P70. Actual
warranty costs incurred were P95,000. On December 31, 2018, what amount should be
reported as estimated warranty liability?

Topic 3: PROVISION (CONTINGENT LIABILITY)

Learning Objectives:
At the end of the topic, the students will be able to:
a. Explain the nature of a provision
b. Determine the conditions for the recognition of a provision
c. Apply the measurement principle of a provision
d. Identify the measurement considerations for a provision
e. Determine the requirements for the recognition of contingent liability and
contingent asset

Presentation of Content

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 Application
These activities are assessment if you understand that discussions we had. Though this
will not be recorded, it will still form part of your class standing so make sure to accomplish
the tasks given to you. 
I. Enumerate and briefly discuss the three conditions necessary for the recognition
of a provision as a liability.
II. Using a Venn Diagram, explain the terms probable, possible and remote in
relation to a provision

Probable Possible

Remote

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 Feedback
The items below will be checked and recorded as your seatwork and quiz. Do well and
enjoy!

Compute the following problems.

Problem #1:

During 2017 Beal Company became involved in a tax dispute with the BIR. On December 31,
2017, the entity’s tax advisor believed that an unfavorable outcome was probable and the
best estimate of additional tax was P500,000, but could be as much P650,000. after the 2017
Financial Statements were issued, Beal Company received and accepted a BIR settlement
offer of P550,000. what amount of accrued liability should be reported on December 31,
2017?

Problem #2:

On December 31, 2017, Mith Company was a defendant in a pending lawsuit. In the opinion
of the entity’s attorney, it is probable that Mith Company will have to pay P500,000 and it is
reasonably possible that Mith Company will have to pay P600,000 as a result of this lawsuit.
What should be reported in the 2017 financial statements?

Problem #3:

Caress Company carried a provision of P2,000,000 in its draft financial statements on

December 31, 2018 in relation to an unresolved court case. On January 31, 2019, when the
financial statements on December 31, 2018 had not yet been authorized for issue, the case
was settled and the court decided the damages payable by Caress Company to be P2,800,000.
What amount should be adjusted on December 31, 2018 in relation to this event?

Summary of the Unit

Current liabilities are liabilities expected to be settled within its normal operating cycle
or within 12 months after the reporting date.
Typical examples of current liabilities are accounts payable, notes payable, customer
advances, unearned revenues, tax payable, and others.
Warranty liability is recognized when it is evident that an entity has a present obligation
as a result of a past event, it is probable that an outflow of resources embodying
economic benefits would be required to settle the obligation and the amount of the
obligation can be measured reliably.
Provision is a liability of uncertain timing or amount. The amount recognized as a
provision should be the best estimate of the expenditure required to settle the present
obligation.
Contingent liabilities are not recognized because they do not meet the conditions for a
provision

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 A contingent asset is a possible asset that arises from past event and whose existence
will be confirmed by the occurrence or non-occurrence of uncertain future events not
wholly within the control of the company.
For more reading reference for this unit, please visit the link:
https://www.iasplus.com/en/standards/ias/ias37

Student’s Reflection on Learning

This part of the module will be a time for you to look back, and reflect on what you have learned
from this unit. Though, this will not be checked and recorded, I would appreciate if you will do
this wholeheartedly and with all seriousness.

Answer the following questions and put your answers in the space provided.

1. What problems did you encounter while you were working on this module? How did
you solve it?

2. How do you feel about this module? What parts of it do you particularly like? Dislike?
Why?

References:

 Valix, C. T., Peralta, J.F & Valix C. A. M. (2019). Intermediate Accounting Volume 2.
Manila, Philippines: GIC Enterprises & Co.. Inc.
 https://www.iasplus.com/en/standards/ias/ias37
 https://www.slideshare.net/gauravwadhwa37/liabilities-accounting-under-ifrs
 https://www.slideshare.net/kimraeKI/current-liabilities-ppt

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