CHAPTER 1
CURRENT LIABILITIES, PROVISIONS AND CONTINGENCIES
PROBLEMS1-1. (Washington Company)
Accounts Payable, 12/31/13, before adjustments P 1,000,000
Unrecorded checks in payment to creditors (350,000)
Unrecorded purchases (150,000 x 98%)
Unrecorded goods purchased FOB shipping point 147,000 120,000
Accounts Payable, 12/31/13, as adjusted P 917,000
1-2. (Adams Company)
Accounts Payable, 12/31/13, before adjustments P1,500,000
Goods purchased FOB shipping point, lost in transit 240,000
Returned to supplier (80,000)
Accounts Payable, 12/31/13, as adjusted P1,660,000
1-3. (Jefferson Corporation)
(a) (1) Gross Method
Dec. 16 Purchases 66,000
Freight in 1,400
Accounts Payable – Intel Company 67,400
19 Purchases 72,000
Accounts Payable – Celeron Corporation 72,000
26 Accounts Payable- Intel Company 67,400
Purchase Discount (2% x 66,000) 1,320
Cash 66,080
31 Accounts Payable – Celeron Corporation 72,000
Purchase Discount (2% x 72,000) 1,440
Cash 70,560
(a) (2) Net Method
Dec. 16 Purchases 64,680
Freight in 1,400
Accounts Payable – Intel Company 66,080
19 Purchases 69,840
Accounts Payable – Celeron Corporation 69,840
26 Accounts Payable – Intel Company 66,080
Cash 66,080
31 Accounts Payable – Celeron Corporation 69,840
Purchase Discounts Lost 720
(b)
Dec. 31 Purchase Discounts Lost 720
Accounts Payable – Celeron Corporation 720
1-4. (Madison Company) (a)
10/01/13 Automobiles (1,747,200 ÷ 112%) 1,560,000
Discount on Notes Payable 187,200
Notes Payable 1,747,200
12/31/13 Interest Expense 46,800
Discount on Notes Payable 46,800
1,560,000 x 12% x 3/12
10/01/14 Interest Expense 140,400
Discount on Notes Payable 140,400
187,200 – 46,800
Notes Payable 1,747,200
Cash 1,747,200
(b) At December 31, 2013: Current Liabilities:
Notes Payable, net of P140,400 Discount P1,606,800
1-5. (Monroe Corporation) (a)
06/01/13 Cash 1,080,000
Discount on Notes Payable 120,000
Notes Payable 1,200,000
12/31/13 Interest Expense 70,000
Discount on Notes Payable 70,000
120,000 x 7/12
05/31/14 Interest Expense 50,000
Discount on Notes Payable 50,000
120,000 – 70,000
Notes Payable 1,200,000
Cash 1,200,000
(b) At December 31, 2013: Current Liabilities:
Notes Payable, net of P50,000 Discount P 1,150,000
1-6. (Unison Company)
(a) Market interest rate is 5%
Principal P8,000,000
Stated interest (8,000,000 x 9%) 720,000
Maturity value P8,720,000
PV factor at 5% for 1 period 0.9524
Present value at May 1, 2012 P8,304,928
Face value of the note 8,000,000
05/01/13 Equipment 8,304,928
Notes Payable 8,000,000
Premium on Notes Payable 304,928
12/31/13 Interest Expense 276,715
Premium on Notes Payable (304,928 x 8/12) 203,285
Interest Payable(8,000,000 x 9% x 8/12) 480,000
4/30/14 Interest Expense 138,537*
Premium on Notes Payable (304,928 – 203,285) 101,643
Interest Payable 480,000
Notes Payable 8,000,000
Cash 8,720,000
*balancing figure (difference is due to rounding off of present value factor) Carrying value as of December 31, 2013
Notes Payable P8,000,000
Premium on Notes Payable 101,643
Interest Payable 480,000
Total (or 8,304,928 + 276,715) P8,581,643
b. Market rate of interest is 12%.
Principal P8,000,000
Stated interest (8,000,000 x 9%) 720,000
Maturity value P8,720,000
PV factor at 12% for 1 period 0.8929
Present value at May 1, 2012 P7,786,088
Face value of the note 8,000,000
Discount on Notes Payable P 213,912
05/01/13 Equipment 7,786,088
Discount on Notes Payable 213,912
Notes Payable 8,000,000
12/31/13 Interest Expense 622,608
Discount on Notes Payable (213,912 x
8/12) 142,608 Interest Payable(8,000,000 x 9% x 8/12) 480,000 4/30/14 Interest Expense 311,304* Interest Payable 480,000 Notes Payable 8,000,000
Discount on Notes Payable 71,304
Cash 8,720,000
*balancing figure (difference is due to rounding off of present value factor) Carrying value as of December 31, 2013
Notes Payable P8,000,000
Discount on Notes Payable (71,304)
Interest Payable 480,000
1-7. (Harrison Company)
Amount to be accrued on 12/31/13 (the best estimate of the obligation) P800,000
No obligation is recognized for the suit filed in September 2013 nor for the suit filed in October. However, disclosure is necessary in the notes to the financial statements for the suit filed in October 2013 by Pasig City government since it is reasonably possible the Pasig City government will be successful.
1-8. ( Tyler Corporation)
a. Premium Inventory 225,000
Cash / Accounts Payable 225,000
b. Premium Expense 100,000
Cash (1,000 x 50) 50,000
Premium Inventory (1,000 x 150) 150,000
c. Premium Expense 300,000
Estimated Liability for Premium Claims Outstanding 300,000 (40% x 1,000,000)/ 100 = 4,000
4,000 – 1,000 = 3,000; 3,000 x (150 – 50) = 300,000 1-9. (Polk Company)
(a) Premium Expense (300,000 x 30%)/20 x 28 P126,000
Cost of mugs already distributed (4,000 x 28) 112,000
Estimated liability for premium claims outstanding P 14,000
(b) Premium Expense for 2013 (see a) P126,000
1-10. Taylor Company
(a) 2012 2013
Expected future redemption, beg - (30,000)
Redeemed during the year 40,000 90,000
Expected future redemption, end 30,000 80,000
Total 70,000 140,000
÷ 5 ÷ 5
14,000 28,000
Net cost of premium (120 – 50) x P70 x P70
Premium expense P980,000 P1,960,000
(b) Provision for premium claims outstanding
12/31/12 (30,000/5) x P70 P 420,000
1-11. (Van Department Store) (a)
Allocation of original consideration received:
Sales revenue (98% x P5,000,000) P4,900,000
Liability for Customer Loyalty Awards (2% x P5,000,000) P 100,000 Revenue in 2012 as a result of redemption
100,000 x 25/90 P 27,778
Revenue in 2013 as a result of redemption
Total accumulated revenue from redemption as of
12/31/12 (100,000 x 60/95) P 63,158
Less revenue earned in 2012 27,778
Revenue in 2013 as a result of redemption P 35,380
(b) Liability as of 12/31/12 (100,000 – 27,778) P 72,222 Liability as of 12/31/13 (100,000 – 63,158) P 36,842 1-12. (Jackson Company) 2011 2012 2013 Sale of product Accts. Receivable/Cash 1,000,000 2,500,000 3,500,000 Sales 1,000,000 2,500,000 3,500,000 Accrual of repairs Warranty Expense 60,000 150,000 210,000 Warranty Liability 60,000 150,000 210,000 6% x 1M 6% x 2.5M 6% x 3.5M Actual repairs Warranty Liability 8,000 38,000 112,500
Cash/ AP, etc. 8,000 38,000 112,500
1-13. (Fillmore Company) (a)
2012 2013
Warranty Liability, January 1 P 0 P187,200
Warranty expense (8% x 4,200,000)/(8% x 6,960,000) 336,000 556,800
Actual repair costs incurred (148,800) (180,000)
Warranty liability, December 31 P187,200 P564,000
(b)
On 2012 sales (4,200,000 x 5% x ½) P105,000
On 2013 sales [(1/2 of 3%) + 5%] x 6,960,000 452,400
Warranty Liability, December 31, 2013, as analyzed P557,400
1-14. (Pierce Corporation)
Cash 2,000,000
Unearned Revenue from Gift Certificates Outstanding 2,000,000
Unearned Revenue from Gift Certificates Outstanding 1,280,000
Sales 1,280,000
Note: The gift certificates estimated to expire will be recognized as revenue at the date of actual expiration.
1-15. (Buchanan Company)
Cash 3,000,000
Unearned Revenue from Gift Certificates Outstanding 3,000,000
Unearned Revenue from Gift Certificates Outstanding 2,750,000
Sales 2,750,000
Unearned Revenue from Gift Certificates Outstanding 150,000
Revenue from Forfeited Gift Certificates 150,000
1-16. (Lincoln Company)
Refundable Deposits, January 1, 2013 P250,000
Deposits received during the year 200,000
Deposits refunded during the year (267,000)
Deposits forfeited during the year (100,000 – 82,000) (18,000)
Refundable Deposits, December 31, 2013 P165,000
1-17. (Johnson Company)
(a) 2012 2013
Cash 720,000 864,000
Unearned Service Contract Revenue 720,000 864,000
Cost of Service Contract 25,000 100,000
Cash, Accounts Payable, etc. 25,000 100,000
Unearned Service Contract Revenue 72,000 266,400
Service Contract Revenue 72,000 266,400
2012: 720,000 x 20% x ½=72,000 2013: 720,000 x 20% x ½=72,000 720,000 x 30% x ½=108,000 864,000 x 30% x ½=86,400 72,000+108,000+86,400=266,400 (b) 2012 2013
Unearned Service Contract Revenue, Jan. 1 --- P648,000
Sale of contracts during the year P720,000 864,000
Service contracts earned during the year (72,000) (266,400)
Unearned Service Contract Revenue, Dec. 31 P648,000 P1,245,600
Unearned Service Contract Revenue at December 31, 2013 may also be computed as:
720,000 x 65% 468,000
864,000 x 20% x ½ 86,400
864,000 x 80% 691,200
Total 1,245,600
(c) 2012 2013
Revenue from service contracts P72,000 P266,400
Cost of service contracts 25,000 100,000
Profit from service contracts P47,000 P166,400
1-18. (Grant Publication)
(a)
Subscriptions sold in 2010 and 2011
(5,000,000 + 4,500,000) P9,500,000
Expired subscriptions in
2010 P1,000,000
2011 (2,800,000 + 1,200,000) 4,000,000 5,000,000
Unearned subscriptions, Jan. 1, 2012 P4,500,000
(b) 2012
Cash 5,500,000
Unearned Subscription Revenue 5,500,000
Unearned Subscription Revenue 5,000,000
Subscription Revenue 5,000,000
1,200,000 + 2,000,000 + 1,800,000
(b) 2013
Cash 7,000,000
Unearned Subscription Revenue 7,000,000
Unearned Subscription Revenue 5,700,000
Subscription Revenue 5,700,000
1,300,000 + 2,400,000 + 2,000,000
(c) 2012 2013
Unearned Subscription Revenue, January 1 P4,500,000 P5,000,000
Subscription received during the year 5,500,000 7,000,000
Subscription revenue for the year (5,000,000) (5,700,000)
Unearned Subscription Revenue, December 31 P5,000,000 P6,300,000 1-19. (Hayes Co.)
Property Taxes Payable
Property tax expense July 1 to Dec. 31
(72,000 x 6/12) P 36,000
Payment in 2013 (Nov. payment = 72,000/3) (24,000) P 12,000
Income Tax Payable
Pretax income before accrued property taxes P1,629,000
Less accrued property tax 12,000
Income subject to tax P1,617,000
Income tax rate 30%
Income tax expense P 485,100
2013 payments for 2013 income tax
(480,000–190,000) (290,000) 195,100
VAT Payable
Output VAT (12% x 9,000,000) P 1,080,000
2013 payments of VAT (725,000) 355,000
Total current liabilities for taxes P562,100
1-20. (Garfield Company)
b. B = 8% (8000,000 – B ) B = 640,000 - .08B B = 640,000/1.08 = 592,593 c. B = .08 (8,000,000 – T ) T = .30 (8,000,000 – B ) B = .08 {8,000,000 - .30 (8,000,000 – B ) } B = .08 {8,000,000 – 2,400,000 + .30B} B = 448,000 + .024B B = 448,000/0.976 = 459,016 d. B = .08 {8,000,000 – B – T } T = .30 (8,000,000 – B) B = .08{8,000,000 – B - .30 (8,000,000 – B)} B = .08 {8,000,000 – B – 2,400,000 + .30B} B = 448,000 - .056B B = 448,000/1.056 = 424,242 1-21. (Arthur Corporation)
a. Bonus to sales manager = .08 x 3,000,000 = 240,000
Bonus to each sales agent = .06 x 3,000,000 = 180,000 b. Total Bonus = .36 {3,000,000 – B – T ) T = .30 {3,000,000 – B } B = .36 {3,000,000 – B - .30 (3,000,000 – B)} B = .36 {3,000,000 – B – 900,000 + .30B} B = 756,000 - .252B B = 756,000/1.252 = 603,834 (total) B (Each): 603,834 / 3 = 201,278 c. B = .32 {3,000,000 – B } B = 960,000 - .32B B = 960,000/1.32 = 727,273 (total) B (Sales Manager): 727,273 x 12/32 = 272,727
B (Each Sales Agent): 727,273 x 10/32 = 227,273 1-22. (Cleveland, Inc.) B = .06 {9,000,000 – B – T } T = .30 (9,000,000 – B) B = .06 (9,000,000 – B - .30 (9,000,000 – B ) } B = .06 { 9,000,000 – B – 2,700,000 + .30B } B = 378,000 - .042B B = 378,000 / 1.042 = 362,764 T = .30 (9,000,000 – 362,764) T = 2,591,171 1-23. (Roosevelt Corporation)
The full amount of P2,000,000 is classified as current liability because on December 31, 2013 (the reporting date), the enterprise has no unconditional right to defer the settlement of the obligation for a period of at least 12 months.
1-24. Current Non-current
Case 1 . Taft, Inc.
3,600,000 x 80% P2,880,000
3,000,000 – 2,880,000 P 120,000
Case 2. Taft, Inc. 2,000,000 0
Case 3. Wilson Corporation
Situation A 6,000,000 0 Situation B 0 6,000,000 Situation C 6,000,000 0 Situation D -0- 6,000,000 1-25. (Harding Company) Current Liabilities
14% Notes Payable, refinanced on March 10, 2013 P2,500,000
Current portion of 16% notes payable 1,600,000
Total current liabilities P4,100,000
1-26. (Coolidge Company) Current Liabilities:
Accounts Payable P 270,000
Mortgage Notes Payable 1,300,000
Bank Notes Payable due currently 100,000
Interest Payable 7,500
Value Added Tax Payable 288,000
Income Tax Payable 315,000
Withholding Tax Payable 120,000
Total Current Liabilities P2,400,500
VAT: 2,688,000 / 1.12 = 2,400,000; 2,400,000 x 12% = 288,000
The damages claimed by employees cannot be recognized since the amount is not reasonably estimable.
MULTIPLE CHOICE QUESTIONS Theory MC1 D MC11 D MC2 B MC12 B MC3 C MC13 D MC4 B MC14 B MC5 B MC15 B MC6 A MC16 A MC7 B MC17 B MC8 C MC18 A MC9 C MC19 B MC10 C MC20 C MC21 D MC22 D Problems MC23 D 540,000 + 30,000 + 15,000 = 585,000 MC24 C 100,000 + (100,000 x 0.3 x 9/12) = 102,250 x .944 = 96,524
MC25 A Proceeds = 100% - 10% = 90% ; Effective interest = 10%/90% = 11.11% MC26 D P5,000,000, which is the reasonable estimate
MC27 C Given MC28 A 130,000 + 1,630,000 – 1,560,000 = 200,000 MC29 D 6% ( 4,500,000-2,500,000) = 120,000 + (8,500 x ½ ) + 2,500 = 126,750 MC30 D 1,080,000 + 1,920,000 – 1,560,000 = 1,440,000 MC31 C [(67.5% x 2,100,000] + 92.5%(2,730,000) = 3,942,750 MC32 C [½ (15% + 35%) x P2,100,000] + (1/2 x 15% x 2,730,000) = 729,750 MC33 A ½ (15% + 35%) x P2,730,000 = 682,500 MC34 A (25% x 2,100,000)+(67.5% x 2,730,000)+(92.5% x 2,475,000) = 4,657,125 MC35 D 1,000 x 750 = 750,000 MC36 B 63,000 + (1,125,000 x 3/10) = 400,500 MC37 B {(500,000 x 80%) – 300,000} = 100,000; 100,000 x (50+5-40) = 1,500,000 MC38 A { (3,000,000 x 60%) / 10 } – 42,000 = 138,000; 138,000 x P0.50 = 69,000 MC39 A (400,000 x 70%) – 100,000 = 180,000 ; ( 180,000 /5) x 20 = 720,000 MC40 B (720,000 x 50%) – 300,000 = 60,000 MC41 D 24,000 x 300 = 7,200,000 MC42 C 7,200,000 – 1,700,000 = 5,500,000 MC43 D 1,500,000 x 4% = 60,000 MC44 C B = 0.45 {2,000,000 – B - .30 (2,000,000 – B}) ; B = 479,087 MC45 C Total B = 0.35 {2,000,000 – B} ; total B = 518,519 B to Sales Manager = 518,519 x 15/35 = 222,222 B to Each Sales Agent = 518,519 x 10/35 = 148,148 MC46 B B = 0.10 {2,500,000 - .30 (2,500,000 – B)} = 180,412 MC47 C 600,000 + 900,000 + 400,000 = 1,900,000 MC48 A 2,400,000 – 1,900,000 = 500,000 MC49 D 3,800,000 + 2,000,000 – 5,000,000 = 800,000 decrease in profit MC50 A 472,000+200,000+9,600+64,000+380,000+26,000+100,000+50,000+ 24,000+48,000+57,500= 1,431,100
