Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
LESSON 2: CURRENT LIABILITIES
✓ Premiums
✓ Customer Loyalty Program
✓ Warranty
✓ Payroll Taxes
✓ Value Added Taxes
✓ Gift Certificates Payable
✓ Refundable Deposits
✓ Bonus Computation
✓ Deferred Revenue
PREMIUMS
Definition
These are articles of value such as toys, dishes, silverware and other goods and in some cases, cash payments, given
to customers as result of past sales or sales promotion activities. In order to stimulate the sale of their products, entities
offer premiums to customers in return for product labels, box tops, wrappers and coupons.
Accordingly, when the merchandise is sold, an accounting liability for the future distribution of the premium arises
and should be given accounting recognition.
The journal entries for transactions related to premiums are as follows:
1. When the premiums are purchased:
GENERAL JOURNAL
Descriptions
Date
PR
Page Number
Debit
Premiums
Cash
To record….
01
Credit
xxx
xxx
2. When the premiums are distributed to customers:
GENERAL JOURNAL
Descriptions
Date
PR
Page Number
Debit
Premiums Expense
Premiums
To record….
01
Credit
xxx
xxx
3. At the end of the year, if the premiums are still outstanding:
Date
GENERAL JOURNAL
Descriptions
PR
Page Number
Debit
Premiums Expense
Estimated Premium Liability
To record….
01
Credit
xxx
xxx
Illustrative Problem:
An entity manufactures a certain product and sells it at Php 600 per unit. A pair of slippers is offered to customers on
the return of 10 wrappers plus a remittance of Php 20.
The bowl costs Php 100, and it is estimated that 60% of the wrappers will be redeemed.
The data for the first year concerning the premium plan are summarized below:
Sales, 20,000 units at Php 600 each
Slippers purchased, 2,000 pairs at Php 100
Wrappers redeemed
Php 12,000,000
200,000
8,000
1|Page
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
The entries that would be made in the first year to record the sales, premium purchases and redemption, and year-end
adjustment are:
1. To record the sales:
GENERAL JOURNAL
Descriptions
Date
PR
Cash
Sales
To record the sales during the year.
Page Number
Debit
12,000,000
01
Credit
12,000,000
2. To record the purchase of the premiums:
GENERAL JOURNAL
Descriptions
Date
PR
Premiums – Slippers
Cash
To record the purchase of slippers at Php 100
per pair.
Page Number
Debit
200,000
01
Credit
200,000
3. To record the redemption of 8,000 wrappers:
GENERAL JOURNAL
Descriptions
Date
PR
Cash (800 x Php 20)
Premium expense (800 x Php 80)
Premiums – Slippers (800 x Php 100)
To record the redemption of 800 pairs of
slippers.
*(8,000 wrappers/10 = 800 pairs of slippers distributed)
Page Number
Debit
16,000
64,000
01
Credit
80,000
4. To record the liability for the premiums at the end of the first year:
GENERAL JOURNAL
Descriptions
Date
PR
Premium expense
Estimated premium liability
To record the liability for the premiums at the
end of the year.
Page Number
Debit
32,000
01
Credit
32,000
Wrappers to be redeemed (60% x 20,000 wrappers)
Less: Wrappers redeemed
Balance
12,000
8,000
4,000
Premiums to be distributed (4,000/10)
400
Estimated Liability (400 x Php 80)
Php 32,000
Financial Statement Classification:
At the end of the year, the accounts related to the premium plan are classified as follows:
Current Asset:
Premiums – Slippers
Current Liability:
Estimated Premium Liability
Distribution Cost:
Premium Expense
Php 120,000
32,000
96,000
2|Page
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
CUSTOMER LOYALTY PROGRAM
Definition
This is generally designed to reward customers for past purchases and to provide them with incentives to make further
purchases, i.e. if the customer buys goods or services, the entity grants the customer award credits often described as
“points”.
The entity can redeem the “points” by distributing to the customer free or discounted goods or services.
A custom loyalty program operated in a variety of ways. Customers may be required to accumulate a specified
minimum number of award credits or “points” before they can be redeemed.
Award credits may be linked to individual purchases or group of purchases or to a continued custom over a specified
period.
The entity may operate a customer loyalty program itself or participate in a program operated by a third party.
The awards offered may include goods or services supplied by the entity itself or rights to claim goods or services
from a third party.
Recognition and Measurement
An entity shall account for the award credits as a separately component of the initial sale transaction (IFRIC 13);
thus, the granting of the award credits is effectively accounted for as a future delivery of goods or services.
Note:
1. The fair value of the consideration received with respect to the initial sale shall be allocated between the
award credits and the sale.
2. The consideration allocated to the award credits is measured at fair value, meaning, the amount for which
the award credits could be sold separately.
The subsequent recognition of the amount allocated to the award credits as revenue depends on the following:
a. The entity supplies the awards itself.
b. A third party supplies the awards.
•
The entity supplies the award itself
The consideration allocated to the award credits
is initially recognized as deferred revenue and
subsequently recognized as revenue when the
award credits are received.
Note:
1. The amount of revenue recognized shall be based
on the number of award credits that have been
redeemed relative to the total number expected to
be redeemed.
2. The estimated redemption rate is assessed each
period. Changes in the total number expected to
be redeemed do not affect the total consideration
for the award credits. Instead, the changes in the
total number of award credits expected to be
redeemed shall be reflected in the amount of
revenue recognized in the current and future
periods. The calculation of the revenue to be
recognized in any one period is made of a
cumulative basis in order to reflect the changes
in the estimate.
A third part supplies the award itself
If a third party supplies the awards, the entity shall assess
whether it is collecting the consideration allocated to the
principal in the transaction, or on behalf of the third party
as agent of the third party.
Note:
1. Whether as principal or agent, the revenue from
the award credits is recognized at the point of
initial sale. The reason is that at this point, the
entity has already fulfilled its obligation to the
customer by granting the award credits and the
third party is obliged to supply the awards and of
course entitled to receive consideration for doing
so.
2. If the entity is collecting the consideration as
principal in the transaction, the amount of
revenue is equal to the gross consideration
allocated to the award credits.
3. If the entity is collecting the consideration as
agent of the third party, the amount of revenue is
equal to the net amount retained on its own
account. This net amount is the difference
3|Page
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
between the consideration allocated to the award
credits and the amount payable to the third party
for supplying the awards.
Illustrative Problem – THE ENTITY SUPPLIES THE AWARDS ITSELF
An entity, a grocery retailer, operates a customer loyalty program. The entity grants program members loyalty points
when they spend a specified amount on groceries.
Program members can redeem the points for further groceries. The points have no expiry date.
During 2020, the entity granted 20,000 points. Management expects that 80% or 16,000 of these points will be
redeemed.
The fair value of each loyalty point is estimated at Php 200.
The sales during 2020 amounted to Php 16,000,000 including the loyalty points. On December 31, 2020, 8,000 points
have been redeemed in exchange for groceries.
In 2021, the management revised its expectations and now expects that 90% or 18,000 points will be redeemed
altogether. During 2021, the entity redeemed 8,200 points.
In 2022, a further 1,800 points are redeemed. Management continues to expect that only 18,000 points will ever be
redeemed, meaning, no more points will be redeemed after 2022.
The initial sale in 2020 is recorded as follows:
GENERAL JOURNAL
Descriptions
Date
PR
Cash
Sales
Unearned Revenue – points
Page Number
Debit
16,000,000
01
Credit
12,000,000
4,000,000
Total consideration
Fair value of points (20,000 points x Php 20)
Fair value of initial sale
Php 16,000,000
(4,000,000)
Php 12,000,000
In 2020, the redemption of 8,000 points is recorded as follows:
GENERAL JOURNAL
Descriptions
Date
PR
Unearned Revenue – points
Sales
Page Number
Debit
2,000,000
01
Credit
2,000,000
Revenue to be recognized in 2020
(8,000/16,000) x Php 4,000,000
Php 2,000,000
In 2021, the redemption of 8,200 points is recorded as follows:
GENERAL JOURNAL
Descriptions
Date
PR
Unearned Revenue – points
Sales
Points redeemed in 2020
Points redeemed in 2021
Total points redeemed in 2021
Page Number
Debit
1,600,000
01
Credit
1,600,000
8,000
8,200
16,200
4|Page
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
Cumulative revenue on December 31, 2021
(16,200/18,000 x 4,000,000)
Revenue recognized in 2020
Revenue to be recognized in 2021
3,600,000
(2,000,000)
1,600,000
In 2022, the redemption of 1,800 points is recorded as follows:
GENERAL JOURNAL
Descriptions
Date
PR
Unearned Revenue – points
Sales
Page Number
Debit
400,000
01
Credit
400,000
Points redeemed in 2020
Points redeemed in 2021
Points redeemed in 2022
Total points redeemed in 2022
8,000
8,200
1,800
18,000
Cumulative revenue on December 31, 2022
(18,000/18,000 x 4,000,000)
Cumulative revenue – December 31, 2021
Revenue to be recognized in 2022
4,000,000
(3,600,000)
400,000
Illustrative Problem – A THIRD PARTY SUPPLIES THE AWARDS
An entity a retailer of electrical goods, participates in a customer loyalty program operated by an airline. The entity
grants program members one air trave point for every Php 1,000 spent on electrical goods. Program members can
redeem the points for travel with the airline subject to availability.
The entity pays the airline Php 90 for each point. During the current year, the entity sold electrical goods for Php
5,000,000 and granted 5,000 points. The fair value of a point is Php 100.
If the entity has collected the consideration allocated to the points on its own account, the entry to record the
initial sale and the fair value of the point is:
Date
GENERAL JOURNAL
Descriptions
PR
Cash
Sales
Revenue from points
Page Number
Debit
5,000,000
01
Credit
4,500,000
500,000
Total consideration
5,000,000
Fair value of points (5,000 x Php 100)
(500,000)
Consideration for the initial sale
4,500,000
Note: The gross amount allocated to the award credits is recognized as revenue immediately and not deferred
anymore.
The payment to the airline of Php 450,000, 5,000 points times Php 90, is separately accounted for as expense as
follows:
Date
GENERAL JOURNAL
Descriptions
PR
Loyalty program expense
Cash
Page Number
Debit
450,000
01
Credit
450,000
5|Page
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
If the entity has collected the consideration on behalf of the airline, the entry to record the initial sale is as follows:
Date
GENERAL JOURNAL
Descriptions
PR
Cash
Sales
Liability for points
Page Number
Debit
5,000,000
01
Credit
4,500,000
500,000
Subsequently, the entry to record the payment to the airline is as follows:
Date
GENERAL JOURNAL
Descriptions
PR
Liability for points
Cash
Revenue from points
Page Number
Debit
500,000
01
Credit
450,000
50,000
Note: If the entity has collected the consideration on behalf of the airline (third party), the revenue of the entity is
equal to the net amount it retains on its own account.
Another Illustrative Problem – A THIRD PARTY SUPPLIES THE AWARDS
An airline sells travel points to a credit card entity for issue to cardholders when they make purchases using their
credit card.
During the current year, the airline sells 100,000 air travel points to the credit card entity for a total consideration of
Php 7,000,000. The fair value of the travel points is reliably measured at Php 6,500,000, and the balance of 500,000
is effectively a marketing fee. This type of transaction is a direct sale of the points to a third party (credit card entity).
The cardholders can redeem the air travel points directly with the airline and therefore, the airline has an obligation
that must be recognized which is the future delivery of services in exchange for the travel points.
Accordingly, the fair value of air travel points is deferred and recognized as the points are redeemed.
If the marketing fee is not refundable in any circumstances and the airline has no obligation to provide any further
services to the credit card entity, the marketing fee is recognized in profit or loss immediately.
The entry to record the total consideration received by the airline from the sale of air travel points to the credit card
entity is as follows:
Date
GENERAL JOURNAL
Descriptions
PR
Cash
Unearned revenue – points
Other Income
Page Number
Debit
7,000,000
01
Credit
6,500,000
500,000
If during the year, 20,000 points are redeemed by the airline, the entry is:
Date
GENERAL JOURNAL
Descriptions
PR
Unearned revenue points
Revenue from points
(20,000/100,000) x 6,500,000)
Page Number
Debit
1,300,000
01
Credit
1,300,000
WARRANTY
Home appliances like television sets, stereo sets, radio sets, refrigerators and the like are often sold under guarantee or
warranty to provide free repair service or replacement during a specified period if the products are defective.
6|Page
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
Such entity policy may involve significant costs on the part of the entity if the products prove to be defective in the future
within the specified period of time.
Note: A liability is already incurred at the point of sale.
Accounting approaches for warranty costs:
1. Accrual approach
2. Expense as incurred approach
Accrual Approach
✓ The soundest theoretical support because it properly matches cost with revenue.
➢ To record the estimated warranty cost
GENERAL JOURNAL
Descriptions
Date
PR
Page Number
Debit
Warranty expense
Estimated warranty liability
01
Credit
xxx
xxx
➢ To record incurrence and payment of actual warranty cost
GENERAL JOURNAL
Descriptions
Date
PR
Page Number
Debit
Estimated warranty liability
Cash
01
Credit
xxx
xxx
Note:
1. Any difference between the estimate and the actual cost is a change in estimate and therefore treated currently
or prospectively, if necessary. Thus, if the actual cost exceeds the estimate, the difference is charged to warranty
expense as follows:
GENERAL JOURNAL
Descriptions
Date
PR
Page Number
Debit
Warranty expense
Estimated warranty liability
01
Credit
xxx
xxx
The subsequent payment of the warranty cost is then charged to the estimated liability account.
2. If the actual cost is less than the estimate, the difference is an adjustment to warranty expense as follows:
GENERAL JOURNAL
Descriptions
Date
PR
Estimated warranty liability
Warranty expense
Page Number
Debit
01
Credit
xxx
xxx
Illustrative Problem
An entity sells 1,000 units of television sets at Php 10,000 each for cash. Each television set is under warranty for one
year and the entity has estimated from past experience that warranty cost will probably average Php 750 per unit and
that only 60% of the units sold will be returned for repair. The entity incurs Php 200,000 for repairs during the year.
The related entries are:
1. To record the sales:
GENERAL JOURNAL
Descriptions
Date
PR
Cash
Sales
Page Number
Debit
10,000,000
01
Credit
10,000,000
7|Page
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
2. To set up the estimated liability on the warranty:
GENERAL JOURNAL
Descriptions
Date
PR
Warranty expense
Estimated warranty liability
Page Number
Debit
450,000
01
Credit
450,000
Estimated sets to be returned for repair (60% x 1,000 sets)
Multiply by estimated warranty cost per set
Estimated warranty cost
600 sets
Php 750
Php 450,000
3. To record the payment of the actual cost
GENERAL JOURNAL
Descriptions
Date
PR
Estimated warranty liability
Cash
Page Number
Debit
200,000
01
Credit
200,000
The statement of financial position at the end of the year would report estimated warranty liability of Php 250,000 as a
current liability, and the income statement for the year would show warranty expense of Php 450,000.
If the warranty runs over a period of more than one year, a portion of the estimated warranty liability shall be reported
as current liability and the remaining portion as non-current liability. In other words, the warranty cost expected to be
incurred within one year is classified as current and the balance as non-current.
Expense as incurred approach
✓ The approach of expensing warranty cost only when actually incurred.
✓ Popular in practice because it is the one recognized for income tax purposes and frequently justified on the basis
of expediency when warranty cost is not very substantial or when the period is relatively short.
Thus in the preceding example, the actual warranty cost of Php 200,000 is simply recorded as follows:
GENERAL JOURNAL
Descriptions
Date
PR
Warranty Expense
Cash
Page Number
Debit
200,000
01
Credit
200,000
Another Illustrative Problem
An entity sells refrigerators that carry a 2-year warranty 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%
Sales and actual warranty repairs for two years are as follows:
Sales
Actual warranty repairs
2020
5,000,000
140,000
2021
6,000,000
300,000
8|Page
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
The related entries are:
2020
1. To record the sales
GENERAL JOURNAL
Descriptions
Date
PR
Cash
Sales
Page Number
Debit
5,000,000
01
Credit
5,000,000
2. To record the warranty expense:
GENERAL JOURNAL
Descriptions
Date
PR
Warranty expense
Estimated warranty liability (14% x 5,000,000)
Page Number
Debit
700,000
01
Credit
700,000
Note that the total warranty expense each year is 14% to be incurred over a 2-year warranty period.
3. To record the actual warranty repairs:
GENERAL JOURNAL
Descriptions
Date
PR
Estimated warranty liability
Cash
Page Number
Debit
140,000
01
Credit
140,000
2021
1. To record the sales
GENERAL JOURNAL
Descriptions
Date
PR
Cash
Sales
Page Number
Debit
6,000,000
01
Credit
6,000,000
2. To record the warranty expense
GENERAL JOURNAL
Descriptions
Date
PR
Warranty expense
Estimated warranty liability (14% x 6,000,000)
Page Number
Debit
840,000
01
Credit
840,000
3. To record the actual warranty repairs
GENERAL JOURNAL
Descriptions
Date
PR
Estimated warranty liability
Cash
Page Number
Debit
300,000
01
Credit
300,000
At this point, on December 31, 2021, the estimated warranty liability is Php 1,100,000 determined as follows:
Warranty expense:
2020
2021
700,000
840,000
Actual warranty repairs:
2020
2021
140,000
300,000
1,540,000
440,000
1,100,000
9|Page
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
Testing the Accuracy of Warranty of Liability
On December 31, 2021, the estimated warranty liability account may be analyzed based on the 4% and 10%
estimate to determine whether the actual warranty costs approximate the estimate.
Sales made evenly
To have an easier interpretation or understanding of sales accruing evenly during the year, it is fair to assume that half
of the sales were made on January 1 and the other half on July 1.
Thus, the first contract year under a 2-year warranty of the sales made on January 1, 2020 will be within January 1, 2020
to December 31, 2020, and the second contract year will be within January 1, 2021 to December 31, 2021.
The first contract year under a 2-year warranty of the sales made on July 1, 2020 will be within July 1, 2020 to June 30,
2021, and the second contract year will be within July 1, 2021 to June 30, 2022.
Computations
If sales and warranty are repairs are made evenly during the year, the warranty expense for 2020 and 2021, and the
estimated warranty liability on December 31, 2021 are determined as follows:
Warranty expense related to 2020 sales
2020
First contract year of January 1, 2020 sales (Php 2,500,000 x 4%)
First contract year of July 1, 2020 sales (Php 2,500,000 x 4% x 6/12)
100,000
50,000
2021
First contract year of July 1, 2020 sales (Php 2,500,000 x 4% x 6/12)
Second contract year of January 1, 2020 sales (Php 2,500,000 x 10%)
Second contract year of July 1, 2020 sales (Php 2,500,000 x 10% x 6/12)
50,000
250,000
125,000
2022
Second contract year of July 1, 2020 sales (Php 2,500,000 x 10% x 6/12)
125,000
TOTAL WARRANTY EXPENSE for 2020
Php 700,000
Warranty expense related to 2021 sales
2021
First contract year of January 1, 2021 sales (Php 3,000,000 x 4%)
First contract year of July 1, 2021 sales (Php 3,000,000 x 4% x 6/12)
120,000
60,000
2022
First contract year of July 1, 2021 sales (Php 3,000,000 x 4% x 6/12)
Second contract year of January 1, 2021 sales (Php 3,300,000 x 10%)
Second contract year of July 1, 2021 sales (Php 3,000,000 x 10% x 6/12)
60,000
300,000
150,000
2023
Second contract year of July 1, 2021 sales (Php 3,000,000 x 10% x 6/12)
150,000
TOTAL WARRANTY EXPENSE for 2020
Php 840,000
The warranty costs after December 31, 2021 represents the estimated warranty liabilities on December 31, 2021.
2020 sales still under warranty after December 31, 2021:
Second contract year of July 1, 2020 sales (Php 2,500,000 x 10% x 6/12)
125,000
10 | P a g e
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
2021 sales still under warranty after December 31, 2021:
First contract year of July 1, 2021 sales (Php 3,000,000 x 4% x 6/12)
Second contract year of January 1, 2021 sales (Php 3,300,000 x 10%)
Second contract year of July 1, 2021 sales (Php 150,000 + Php 150,000)
60,000
300,000
300,000
Estimated warranty liability – December 31, 2021
Estimated warranty liability per book
Decrease in warranty liability
785,000
1,100,000
(315,000)
The decrease in warranty liability is an adjustment of the warranty expense of 2021 as follows:
GENERAL JOURNAL
Descriptions
Date
PR
Estimated warranty liability
Warranty expense
Page Number
Debit
315,000
01
Credit
315,000
Sale of Warranty
A warranty is sometimes sold separately from the product sold. When products are sold, the customers are entitled
to the usual manufacturer’s warranty during a certain period. However, the seller may offer an “extended warranty”
on the product sold but with an additional cost.
In such a case, the sale of the product with the usual warranty is recorded separately from the sale of the extended
warranty. The amount received from the sale of the extended warranty is recognized initially as deferred revenue and
subsequently amortized using straight line over the life of the warranty contract.
However, if the costs are expected to be incurred in performing services under the extended warranty contract,
revenue is recognized in proportion to the costs to be incurred annually.
Illustrative Problem
An entity sold a product for Php 3,000,000. The regular warranty period for the product is two years. The entity sold
an additional warranty of two years at a cost of Php 60,000.
The sale is to be recorded as follows:
Date
GENERAL JOURNAL
Descriptions
PR
Cash
Sales
Unearned warranty revenue
Page Number
Debit
3,060,000
01
Credit
3,000,000
60,000
The extended warranty contract starts only after the expiration of the regular two-year warranty period.
Accordingly, the unearned warranty revenue is amortized at the end of the third year as follows:
Date
GENERAL JOURNAL
Descriptions
PR
Unearned warranty revenue
Warranty revenue (60,000/2)
Page Number
Debit
30,000
01
Credit
30,000
11 | P a g e
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
PAYROLL TAXES
Under our law, the entity as an employer is required to withhold from the salaries of each employee the following:
a. Income tax payable by the employee
b. Employee’s contribution to the Social Security System or SSS
c. Employee’s contribution for PhilHealth
d. Employee’s contribution to the PAG-IBIG Fund
Note: Other deductions may be made by the employer from the salaries of the employee for union dues and group
insurance as required by the contract. Such amounts withheld from the salaries of the employees shall be recognized as
current liability until remitted by the entity to the appropriate government authority.
In addition to the amounts withheld from the salaries of the employees, the entity is required by law to make a
contribution for SSS, PhilHealth and PAG-IBIG Fund representing its share in the benefits of the employees.
Illustrative Problem
An entity reported the following payroll of the employees for the month of December:
Gross payroll
Income tax withheld
PhilHealth
SSS contribution
PAG-IBIG contribution
Net Payroll
Php 600,000
(24,000)
(4,800)
(2,400)
(1,200)
Php 567,600
In relation to the payroll for the month of December, the entity is required to make the following additional
contribution:
SSS
7,200
PhilHealth
3,600
PAG-IBIG
2,400
TOTAL CONTRIBUTION
Php 13,200
The entry to record the gross payroll is as follows:
GENERAL JOURNAL
Descriptions
Date
PR
Salaries
Withholding tax payable
PhilHealth payable
Page Number
Debit
600,000
01
Credit
24,000
4,800
SSS payable
PAG-IBIG Payable
2,400
1,200
Cash
567,600
The entry to record the employer’s additional contribution is as follows:
GENERAL JOURNAL
Descriptions
Date
PR
Payroll tax expense
SSS payable
PhilHealth payable
PAG-IBIG Payable
Page Number
Debit
13,200
01
Credit
7,200
3,600
2,400
12 | P a g e
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
The entry to record the remittance of the amounts withheld and the payment of the additional contribution is:
GENERAL JOURNAL
Descriptions
Date
PR
Withholding tax payable
SSS payable
PhilHealth Payable
Page Number
Debit
24,000
9,600
8,400
PAG-IBIG Payable
Cash
01
Credit
3,600
45,600
VALUE ADDED TAXES or VAT
Under the National Internal Revenue Code, an entity is required to collect value added taxes from customers on sales
of tangible personal property and certain services. Such value added taxes collected shall be remitted monthly to the
Bureau of Internal Revenue.
Illustrative Problem
During the month of January 2021, XYZ Company sold goods to customers on account for Php 2,800,000 including
value added taxes of Php 300,000.
The entry to record the sale is:
GENERAL JOURNAL
Descriptions
Date
PR
Accounts Receivable
Sales
Output VAT
Page Number
Debit
2,800,000
01
Credit
2,500,000
300,000
In the same month, the entity purchased goods on account from ABC Company for Php 1,120,000 including value added
taxes of Php 120,000.
The entry to record the purchase is:
GENERAL JOURNAL
Descriptions
Date
PR
Purchases
Input VAT
Accounts Payable
Page Number
Debit
1,000,000
120,000
01
Credit
1,120,000
At the end of every month, the input VAT is offset against the output VAT in order to determine the net liability of the
entity.
The entry to recognize the net liability at the end of the month is as follows:
GENERAL JOURNAL
Descriptions
Date
PR
Output VAT
Input VAT
VAT Payable
Page Number
Debit
300,000
01
Credit
120,000
180,000
Subsequently, when the net liability is paid in the succeeding month, the entry is:
GENERAL JOURNAL
Descriptions
Date
PR
VAT Payable
Cash
Page Number
Debit
360,000
01
Credit
360,000
13 | P a g e
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
GIFT CERTIFICATES PAYABLE
Many megamalls, department stores and supermarkets sell gift certificates which are redeemable in merchandise. The
accounting procedures are:
1. When the gift certificates are sold:
GENERAL JOURNAL
Descriptions
Date
PR
Page Number
Debit
Cash
Gift certificates payable
01
Credit
xxx
xxx
2. When the gift certificates are redeemed:
GENERAL JOURNAL
Descriptions
Date
PR
Page Number
Debit
Gift certificates payable
Sales
01
Credit
xxx
xxx
3. When the gift certificates expire:
GENERAL JOURNAL
Descriptions
Date
PR
Gift certificates payable
Forfeited gift certificates
Page Number
Debit
01
Credit
xxx
xxx
***The forfeited gift certificates account is classified other income.
REFUNDABLE DEPOSITS
Refundable deposits consist of cash or property received from customers but which are refundable after compliance
with certain conditions.
The best example of a refundable deposit is the customer deposit required for returnable containers like bottles, drums,
tanks and barrels.
Illustrative Problem/s
1. A deposit of Php 12,000 is required from the customer for returnable containers. The containers cost Php 10,000.
GENERAL JOURNAL
Descriptions
Date
PR
Cash
Container’s deposit
Page Number
Debit
12,000
01
Credit
12,000
The containers’ deposit account is usually classified as current liability.
2. Assume the customer returns the containers.
GENERAL JOURNAL
Descriptions
Date
PR
Container’s deposit
Cash
Page Number
Debit
12,000
01
Credit
12,000
3. Assume the customer fails to return the containers.
Date
GENERAL JOURNAL
Descriptions
PR
Container’s deposit
Containers
Gain on sale of containers
Page Number
Debit
12,000
01
Credit
10,000
2,000
14 | P a g e
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
BONUS COMPUTATION
Large entities often compensate key officers and employees by way of bonus for superior income realized during a year.
The main purpose of this scheme is to motivate officers and employees by directly relating their well-being to the success
of the entity.
This compensation plan results in liability that must be measured and reported in the financial statements. The bonus
computation usually has four variations:
1. Bonus is expressed as a certain percent of income before bonus and before tax.
2. Bonus is expressed as a certain percent of income after bonus but before tax.
3. Bonus is expressed as a certain percent of income after bonus and after tax.
4. Bonus is expressed as a certain percent of income after tax but before bonus.
Illustrative Problem
Income before bonus and before tax
Bonus
Income tax rate
Case 1 – Before bonus and before tax
Income before bonus and before tax
x
Bonus
8,800,000
10%
30%
Php 8,800,000
10%
Php 880,000
Case 2 – After bonus but before tax
B = 10% (8,800,000 – B)
B = 880,000 – 10%B
B + 10%B = 880,000
110%B = 880,000
B = 880,000/110%
B = 800,000
PROOF:
Income before bonus and before tax
Less: Bonus
Income after bonus but before tax
Multiply by: Bonus Rate
Bonus
Php 8,800,000
800,000
8,000,000
10%
Php 800,000
Case 3 – After bonus and after tax
B = 10% (8,800,000 – B – T)
T = 30% (8,800,000 – B)
B = 10% [8,800,000 – B – 30%(8,800,000 – B)]
B = 10% (8,800,000 – B – 2,640,000 + 30%B)
B = 880,000 – 10%B – 264,000 + 3%B
B + 10%B – 3%B = 880,000 – 264,000
107%B = 616,000
B = 616,000/107%
B = 575,700.93
T = 30% (8,800,000 – 575,700.93)
T = 2,467,289.72
15 | P a g e
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
PROOF:
Income before bonus and before tax
Bonus
Tax
Income after bonus and after tax
Multiply by: Bonus Rate
Bonus
Php 8,800,000.00
(575,700.93)
(2,467,289.72)
5,757,009.35
10%
Php 575,700.93
Case 3 – After tax but before bonus
B = 10% (8,800,000 – T)
T = 30% (8,800,000 – B)
B = 10% [8,800,000 – 30% (8,800,000 – B)]
B = 10% (8,800,000 – 2,640,000 – 30%B)
B = 880,000 – 264,000 + 3%B
B – 3%B = 616,000
B = 616,000/97%
B = 635,051.55
PROOF:
Income before bonus and before tax
Tax (8,800,000 – 635,051.75)
Income after bonus and after tax
Multiply by: Bonus Rate
Bonus
Php 8,800,000.00
(2,449,484.54)
6,350,515.46
10%
Php 635,051.55
DEFERRED REVENUE
✓ Income already received but not yet earned
✓ Maybe realizable within one year or in more than one year from the end of the reporting period
Note:
1. If the deferred revenue is realizable within one year, it is a current liability, i.e. unearned interest income,
unearned rental income and unearned subscription revenue.
2. If the deferred revenue is non-current deferred revenue is realizable in more than one year, it is classified as
non-current liability, i.e. unearned revenue from long-term service contracts and long-term leasehold advances.
Illustrative Problem
An entity sells equipment service contracts agreeing to service equipment for a 2-year period. Cash receipts from
contracts are credited to unearned service revenue and service contract costs are charged to service contract expense.
Revenue from service contracts is recognized as earned over the service period of the contracts. The following
transactions are made in the first year:
Cash receipts from service contracts sold
Php 2,000,000
Service contract costs paid
1,000,000
Service contract revenue recognized
1,600,000
The pertinent entries for the first year are:
1. To record the cash receipts from service contracts sold:
Date
GENERAL JOURNAL
Descriptions
PR
Cash
Unearned service revenue
Page Number
Debit
2,000,000
01
Credit
2,000,000
16 | P a g e
rjlangcao,cpa,msac
Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
2. To record the service contract costs paid:
Date
GENERAL JOURNAL
Descriptions
PR
Service contract expense
Cash
Page Number
Debit
1,000,000
01
Credit
1,000,000
3. To record the service contract revenue recognized:
Date
GENERAL JOURNAL
Descriptions
PR
Unearned service revenue
Service contract revenue
Page Number
Debit
1,600,000
01
Credit
1,600,000
Reference/s:
Valix, Conrado T. et. al (2012). Financial Accounting Volume 2. GIC Enterprises and Co. Inc.
17 | P a g e
rjlangcao,cpa,msac