FINANCIAL Accounting 2

Conrado T. ValixJose F. PeraltaChristian Aris M. Valix

FINANCIAL Accounting 2Premiums Articles of value such as :ToysDishes Silverware Other goodsIn some cases cash paymentsGiven to customers as result of past sales or sales promotion activities.Chapter 2: Current liabilitiesAccounting procedures:

When premiums are purchased:

PremiumsxxxCashxxx

When the premiums are distributed to customers:

Premium expensexxxPremiumsxxx

At the end of the year, if premiums are still outstanding:

Premiums expensexxxEstimated premium liabilityxxx

a. PremiumsUse by entity to:build brand loyaltyretain their valuable customers increase sales volume

Is generally designed to reward customers for past purchases and to provide them with incentives to make further purchases.

PointsAward credits granted to customers under a customer loyalty program.b. Customer loyalty programIFRIC 13An entity shall account for the award credits as a separately component of the initial sale transaction.

The granting of award credits is effectively accounted for as a future delivery of goods and services.

Fair value of the consideration received with respect to the initial sale shall be allocated between award credits and the sale.

Consideration allocated to the award credits is measured at fair value.

Subsequent recognition of the amount allocated to the award credits as revenue depends on the following:Entity supplies the awards itselfThird party supplies the awards

Recognition and measurement (customer loyalty program)Consideration allocated to the award credits:Initially recognized as Deferred revenueSubsequently recognized as revenue when the award credits are redeemed.

Amount of revenue recognized:Based on the number of award credits that have been redeemed relative to the total number of expected to be redeemed.Estimated redemption rate is assessed each periodChanges in the total number expected to be redeemed do not affect the total consideration for the award credits.

Calculation of the revenue to be recognized in any one period is made on a cumulative basis in order to reflect the changes in estimate.The entity supplies the awards itselfAccounting procedure

Initial sale

CashxxxSalesxxxUnearned revenue- pointsxxx

Redemption of points

Unearned revenue- pointsxxxSalesxxxThe entity supplies the awards itself (cont)Entity shall assess whether it is collecting the consideration allocated to the award credits on its own account as:Principal in the transactionOn behalf of the third party as agent of the third party

Whether as principal or agentRevenue from the award credits is recognized at the point of initial sale.

Third party supplies the awardsIf the entity is collecting the consideration as principal in the transactionAmount of revenue is equal to the gross consideration allocated to the award credits.

If the entity is collecting the consideration as agent of the third partyAmount of revenue is equal to the net amount of retained on its own account.Net amount is the difference between the consideration allocated to the award credits and the amounts payable to the third party for supplying the awards.Third party supplies the awards (cont)Provide free repair service or replacement during a specified period if the products are defective.

At the point of sale, a liability is incurred.

Two approaches followed in accounting for the warranty cost:Accrual approachExpense as incurred approachc. warrantyProper matching of cost with revenue.

Accounting approach:

Estimated warranty cost

Warranty expensexxxEstimated warranty liabilityxxx

Actual warranty cost is subsequently incurred and paid

Estimated warranty liabilityxxxCashxxxAccrual approachAny difference between the estimate and actual cost is a change in estimate and therefore treated currently or prospectively, if necessary.

If the actual cost exceeds the estimate, difference is charged to warranty expense:

Warranty expensexxxEstimated Warranty liabilityxxx

Subsequent payment of the warranty cost is then charged to the estimated liability account.

If the actual cost is less than the estimate, difference is an adjustment to warranty expense:

Estimated Warranty liabilityxxxWarranty expensexxxAccrual approach (cont)Is the approach of expensing warranty cost only when actually incurred.

Accounting procedure

Actual warranty cost

Warranty expensexxxCashxxxExpense as incurred approachWarranty is sometimes sold separately from the product sold

When products are sold, the customers are entitled to the usual manufacturers warranty during a certain period.

Seller may offer an extended warranty on the product sold but with additional cost.

Sale of the product with the usual warranty is recorded separately from the sale of the extended warranty.

Amount received from the sale of the extended warranty is recognized:Initially as deferred revenue Subsequently amortized using straight line over the life of the warranty contract.

If the cost 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.Sale of warrantyAccounting procedure:

Sale

Cash xxxSalesxxxUnearned Warranty revenuexxx

Amortization of unearned warranty revenue

Unearned Warranty revenuexxxWarranty revenuexxxSale of warrantyUnder our law, the entity as an employer is required to withhold from the salaries of each employee the following:

Income tax payable by the employee (Withholding tax payable)Employees contribution to the Social Security System or SSS (SSS payable)Employees contribution for Philhealth (Philhealth payable)Employees contribution to the Pag-ibig Fund (Pag-ibig payable)D. PAYROLL TAXESIn additions to the amount withheld from the salaries of the employees, the entity is required to make a contribution for SSS, Philhealth, Pag-ibig fund representing its share in the benefits of the employees.D. PAYROLL TAXESGross Payroll

SalariesxxxWithholding tax payablexxxSSS payablexxxPhilhealth payablexxxPag-ibig payable xxxCashxxx

Employers additional contribution

Payroll tax expenseSSS payablexxxPhilhealth payablexxxPag-ibig payablexxx

Remittance of the amounts withheld and the payment of the additional contribution

Withholding tax payablexxxSSS payablexxx Philhealth payablexxxPag-ibig payable xxxCashxxx

D. PAYROLL TAXES(journal Entries)