INTERMEDIATE ACCOUNTING 2

TOPIC

Current Liabilities – Unearned revenue, gift certificates payable, bonus payable and refundable deposits

OBJECTIVES

At the end of this topic, the students should be ableto:

1. Explaintheconceptsofvariousliabilitiesaccountsuchasunearnedrevenues,giftcertificatepayable,
bonus payable and refundable deposits
2. Discuss the recognition and measurement principles of the saidaccounts
3. Compute the correct balances of the abovementionedliabilities

DISCUSSION

Unearned revenues
Unearned revenue is income already received but not yet earned, meaning cash is already received but
the related services are not yet rendered or the goods are not yet delivered.

Unearnedrevenuethatarerealizablewithinoneyearisclassifiedascurrentliability;ifmorethanoneyear,
noncurrentliability.

Unearned revenues are initially recorded in an unearned revenue account. As the revenue is earned, a
transfer from unearned revenue to earned revenue occurs.

Example
Apo King has a large consulting practice. New clients are required to pay one-half of the consulting fees
up front. The balance is paid at the conclusion of the consultation. Following are the transactions for the
year 2020:
Unearned consulting revenue, January 1, 2020 P350,000
Cash received up front from new clients 400,000
Cash received from completed services 220,000
Consulting revenue earned during the year 300,000

Journal Entries
Accounts and Explanation Debit Credit
Cash P400,000
Unearned consulting revenue P400,000
To record up front fees from new clients

Cash 220,000
Consulting revenue 220,000
To record final payment for completed services

Unearned consulting revenue 300,000

Consulting revenue 300,000
To record earned revenue

To compute the balance of Unearned Consulting Revenue as of December 31, 2020

Unearned consulting revenue, Jan 1, 2020 P350,000

Cash received in advance during the year 400,000
Earned revenue (300,000)
Unearned consulting revenue, December 31, 2020 P450,000

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 To compute the amount of Consulting Revenue for the year 2020

Cash received as final payment from clients P220,000

Earned revenue 300,000
Consulting revenue for the year P520,000

Gift Certificate Payable

Gift certificates sold by business establishments give rise to unearned revenue. These gift certificates are
redeemable in goods or services of a specified value. In accordance with RA 10962 or the Gift Check Act
of 2017, gift checks or gift certificates will have no expiration dates.

Example:
Super Store sells gift certificates that are redeemable by merchandise. Information on gift certificates are
shown below:
Unearned revenue – gift certificates, January 1, 2020 P100,000
Gift certificates sold during the year 180,000
GCs sold in prior years and redeemed in 2020 70,000
GCs sold in current year and redeemed in 2020 100,000

Super Store past experience indicates that 5% of gift certificates sold will not be redeemed.

Journal Entries
Accounts and Explanation Debit Credit
Cash P180,000
Unearned revenue – gift certificates P180,000
To record gift certificates sold

Unearned revenue – gift certificates 70,000

Sales ** 70,000
To record redeemed gift certificates

Unearned revenue – gift certificates 100,000

Sales *** 100,000
To record redeemed gift certificates

Unearned revenue – gift certificates 9,000

Forfeited gift certificates 9,000
To record 5% estimated gift certificates not to be
redeemed

Note: If the problem did not indicate the inventory system that an entity is adopting, we may assume
“Periodic inventory system”.

Whatif,SuperStore,isusingperpetualinventorysystemanditsgrossprofitis40%basedonsales.Then, the
additional journal entries after the related sales wouldbe:

Accounts and Explanation Debit Credit

Cost of Sales (P70,000*60%) ** 42,000
Merchandise Inventory 42,000
To record related cost of goods sold

Cost of Sales (P100,000*60%)*** 60,000

Merchandise Inventory 60,000
To record related cost of goods sold

To compute the balance of Unearned Revenue – Gift Certificates as of December 31, 2020

Unearned revenue – gift certificates, Jan 1, 2020 P100,000

Gift certificates sold during the year 180,000
Redeemed gift certificates (P70,000+P100,000) (170,000)
Estimated not to be redeemed (9,000)
Unearned revenue – gift certificates, December 31, 2020 P101,000
Bonus Payable
Bonus in private entities are usually given to key officers and employees in addition to their salary to
motivatethemtoperformwell.Suchbonusisusuallytiedtotheincomeoftheentityandpaidaftertheend of the
entity’s calendar or fiscalyear.

The following are the most common method of determining the amount of bonus:

1. Bonus is expressed as a certain percent of income before bonus and beforetax.

2. Bonus is expressed as a certain percent of income after bonus but beforetax.
3. Bonus is expressed as a certain percent of income after bonus andtax.
4. Bonus is expressed as a certain percent of income after tax and beforebonus.

Example:
Riza Mae, president of the Star Company, has a bonus arrangement with the company under which she
receives 5% bonus each year. For the current year, the net income before deducting either the provision
for income taxes or the bonus is P5,000,000. The bonus is deductible for tax purposes, and the tax rate is
30%.

1. What would be the bonus payable to Riza Mae if the 5% bonus is based on income before bonusand
before tax?

Net income before bonus and tax P5,000,000

Multiply by bonus rate 5%
Bonus P250,000

Supporting computation:
Bonus Tax
Amount rate rate
Net income before bonus and tax P5,000,000 100%
Bonus 250,000 5%
Net income after bonus but before tax P4,750,000 95% 100%
Income tax 1,425,000 30%
Net income after tax and bonus P3,325,000 70%

Journal Entry
Accounts and Explanation Debit Credit
Bonus Expense (or Salaries Expense) P250,000
Bonus Payable P250,000
To record the accrual of bonus

2. WhatwouldbethebonuspayabletoRizaMaeifthe5%bonusisbasedonincomeafterbonusbut
before tax?
Net income before bonus and tax P5,000,000
Divide by (100% + bonus rate) 105%
Net income after bonus 4,761,905
Multiply by bonus rate 5%
Bonus P238,095

Supporting computation:
Bonus Tax
Amount rate rate
Net income before bonus and tax P5,000,000 105%
Bonus 238,095 5%
Net income after bonus but before tax P4,761,905 100% 100%
Income tax 1,428,572 30%
Net income after tax and bonus P3,333,333 70%

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3. WhatwouldbethebonuspayabletoRizaMaeifthe5%bonusisbasedonincomeafterbonusand
after tax?

Net income before bonus and tax P5,000,000

Divide by (100% + bonus rate) – less tax rate 103.5%
Net income after bonus 4,830,918
Multiply by bonus rate, net of tax rate 3.5%
Bonus P169,082

Supporting computation:
Bonus Tax
Amount rate rate
Net income before bonus and tax P5,000,000
Bonus 169,082 5%
Net income after bonus but before tax P4,830,918 100%
Income tax 1,449,275 30%
Net income after tax and bonus P3,381,643 100% 70%

4. WhatwouldbethebonuspayabletoRizaMaeifthe5%bonusisbasedonincomeaftertaxbutbefore
bonus?

Sorry but I have not formulated yet a short cut in the computation . Use the formula below to arrive at
the bonus of P177,665.

Bonus = [(I x B%) – (I x B% xT%)]

[1 – (B% x T%)]

Supporting Computation:

Net income before bonus and tax P5,000,000

Bonus 177,665
Net income after bonus but before tax P4,822,335
Income tax 1,446,700
Net income after tax and bonus P3,375,635

Proof
Net income before bonus and tax P5,000,000
Income tax 1,446,700
Net income after tax but before bonus P3,553,300
Multiply by bonus rate 5%
Bonus P177,665

Refundable Deposits
These represent cash receipts that are held in trust for other entities and to be refunded after compliance
with certain conditions. Common examples are deposits received for returnable containers and security
deposits received from lessees.

Example:
Nanay Sari-sari Store sells 8 ounce softdrinks at P10 plus P5 deposit for a bottle. The P5 is refundable
upon return of bottle by the customer. The cost of each bottle is P3. Information during the month of June
are shown below:
Refundable deposits – container, June 1, 2020 P2,000
No. of bottles sold during the month (with deposit) 1,500
No. of bottles returned during the month 1,000
No. of damaged bottles and not returned 50

Journal Entries
Accounts and Explanation Debit Credit
Cash (1,500*P15) P22,500
Sales (1,500* P10) P15,000
Refundable deposits – container (1,500*P5) 7,500
To record sales with bottle deposits
 Accounts and Explanation Debit Credit
Refundable deposits – container (1,000*P5) 5,000
Cash 5,000
To record returned bottles

Refundable deposits – container (50*P5) 250

Container (50*P3) 150
Gain on sale of container 100
To record damaged bottles/forfeited deposits

To compute the balance of Refundable deposits – Containers as of June 30, 2020

Refundable deposits – container, June 1, 2020 P2,000

Deposits for the period 7,500
Returned bottles (5,000)
Forfeited deposits (250)
Refundable deposits – container, June 30, 2020 P4,250

FURTHER READINGS
1. Liabilities; Valix, et. al., et. al. (2020). Intermediate Accounting Volume2
2. Liabilities; Valix, et. al., et. al. (2018). Financial Accounting Volume2
3. Liabilities; Millan (2019). Intermediate Accounting Volume2

ASSESSMENT/OUTPUT

1. Answer problems 1-16 to 1-33 in the book of Valix (Intermediate Accounting, 2020) and be ready
for recitation during our next online discussion via zoom or Google meet or forum in LMS or
messenger or FB account.

REFERENCES

 Valix, C., et. al. (2020). Intermediate Accounting Volume 2

 Robles, N., et al. (2019). The Intermediate Accounting Vol2.
 Millan, Z. (2019). Intermediate AccountingV2
 J. David Spiceland et.al. (2019), IntermediateAccounting

Preparedby: Noted:

(SGD) LUVYSALE-ASIS,CPA MA. ANGELA JOSEFA G. PIOQUINTO,PhD

Asst.Professor2 Dean