CHAPTER CURRENT LIABILITIES, PROVISIONS AND CONTINGENCIES PROBLEMS 1-1 (Epson Company) Accounts Payable, 12/31/09, before adjustments P 1,000,000 (350,000) 147,000 P 797,000 Unrecorded checks in payment to creditors Unrecorded purchases (150,000 x 98%) Accounts Payable, 12/31/09, as adjusted 1-2 (Gay Company) Accounts Payable, 12/31/09, before adjustments P1,500,00 240,000 (80,000) P1,660,00 Goods purchased FOB shipping point, lost in transit Returned to supplier Accounts Payable, 12/31/09, as adjusted 1-3 (Megabytes Corporation) (a) (1) Dec 16 Gross Method Purchases Freight in Accounts Payable – Intel Company Cash Purchases Accounts Corporation 66,000 1,400 66,000 1,400 72,000 Payable – Celeron Accounts Payable- Intel Company 72,000 66,000 Purchase Discount (2% x 66,000) Cash Accounts Payable – Celeron Corporation 1,320 64,680 72,000 Purchase Discount (2% x 72,000) Cash (a) (2) Dec 16 Net Method Purchases Freight in Accounts Payable – Intel Company Cash 1,440 70,560 64,680 1,400 64,680 1,400 Chapter – Current Liabilities, Provisions and Contingencies Accounts Corporation 69,840 Payable – Celeron Accounts Payable – Intel Company 69,840 64,680 Cash (b) Dec 31 1-4 Purchases 64,680 Accounts Payable – Celeron Corporation 69,840 Purchase Discounts Lost Cash 720 Purchase Discounts Lost 720 Accounts Corporation Payable – Celeron 70,560 720 (Blue Bird Company) (a) 10/01/09 12/31/09 10/01/10 Automobiles (1,747,200 ÷ 112%) Discount on Notes Payable Notes Payable Interest Expense Discount on Notes Payable 1,560,000 x 12% x 3/12 Interest Expense Discount on Notes Payable 187,200 – 46,800 Notes Payable Cash 1,560,000 187,200 1,747,200 46,800 46,800 140,400 1,747,200 1,747,200 (b) At December 31, 2009: Current Liabilities: Notes Payable, net of P140,400 Discount 1-5 140,400 P1,606,800 (Matagumpay Corporation) (a) 06/01/09 Cash Discount on Notes Payable Notes Payable 1,080,000 120,000 12/31/09 Interest Expense Discount on Notes Payable 120,000 x 7/12 70,000 05/31/10 Interest Expense Discount on Notes Payable 120,000 – 70,000 50,000 1,200,00 70,000 50,000 Chapter – Current Liabilities, Provisions and Contingencies Notes Payable Cash 1,200,000 1,200,00 (b) At December 31, 2009: Current Liabilities: Notes Payable, net of P50,000 Discount 1-6 P 1,150,000 (Goliath Company) Amount to be accrued on 12/31/09 P800,000 (the best estimate of the obligation) No obligation is recognized for the suit filed in September 2009 nor for the suit filed in October However, disclosure is necessary in the notes to the financial statements for the suit filed in October 2009by Pasig City government since it is probable the Pasig City government will be successful 1-7 (Graphics Corporation) a Premium Inventory 225,00 Cash / Accounts Payable b Premium Expense 100,00 50,000 Cash (1,000 x 50) Premium Inventory (1,000 x 150) c Premium Expense (Alcatel Company) (a) Premium Expense (300,000 x 30%)/20 x 28 Cost of mugs already distributed (4,000 x 28) Estimated liability for premium claims outstanding (b ) 1-9 150,00 300,00 Estimated Liability for Premium Claims Outstanding (40% x 1,000,000)/ 100 = 4,000 4,000 – 1,000 = 3,000; 3,000 x (150 – 50) = 300,000 1-8 225,00 Premium Expense for 2009 (see a) 300,00 P126,00 112,000 P 14,000 P126,00 (Adventure Company) 2009 Sale of product Accts Receivable/Cash Sales 1,000,000 2010 2,500,000 1,000,0 2011 3,500,000 2,500, 3,500,0 Chapter – Current Liabilities, Provisions and Contingencies 00 Accrual of repairs Warranty Expense Warranty Liability 000 60,000 00 150,000 60, 000 210,000 150,0 00 210,0 00 6% x 1M 6% x 2.5M 6% x 3.5M Actual repairs Warranty Liability Cash/ AP, etc 8,000 38,000 8, 000 112,500 38,0 00 112,5 00 1-10 (Ever Department Store) (a) Allocation of original consideration received: Sales revenue (98% x P5,000,000) P4,900,00 P 100,000 Liability for Customer Loyalty Awards (2% x P5,000,000) Revenue in 2008 as a result of redemption 100,000 x 25/90 P 27,778 Revenue in 2009 as a result of redemption Total accumulated revenue from redemption as of 12/31/09 (100,000 x 60/95) P 63,158 27,778 P 35,380 Less revenue earned in 2008 Revenue in 2009 as a result of redemption (b) Liability as of 12/31/08 (100,000 – 27,778) Liability as of 12/31/09 (100,000 – 63,158) P P 72,222 36,842 1-11 (Packard Company) (a) 2008 Warranty Liability, January Warranty expense (8% x 4,200,000)/(8% x 6,960,000) Actual repair costs incurred Warranty liability, December 31 P 336,000 (148,800 ) P187,20 (b) On 2008 sales (4,200,000 x 5% x ½) P105,00 452,400 P557,40 On 2009 sales [(1/2 of 3%) + 5%] x 6,960,000 Warranty Liability, December 31, 2009, as analyzed 1-12 (Smart Corporation) Cash 2,000,00 2009 P187,20 556,800 (180,000 ) P564,00 Chapter – Current Liabilities, Provisions and Contingencies Unearned Revenue from Gift Certificates Outstanding Unearned Revenue from Gift Certificates Outstanding 2,000,00 1,280,00 Sales 1,280,00 Note: The gift certificates estimated to expire will be recognized as revenues at the date of actual expiration 1-13 (Robinson) Cash 3,000,00 Unearned Revenue from Gift Certificates Outstanding Unearned Revenue from Gift Certificates Outstanding Sales Unearned Revenue from Gift Certificates Outstanding Revenue from Forfeited Gift Certificates 1-14 3,000,00 2,750,00 150,000 150,000 (Francesca Royale) Refundable Deposits, January 1, 2009 P250,00 200,000 (267,000 ) (18,000) P165,00 Deposits received during 2009 Deposits refunded during 2009 Deposits forfeited during 2009 (100,000 – 82,000) Refundable Deposits, December 31, 2009 1-15 2,750,00 (DOS Company) (a) 2009 Cash 720,000 Unearned Service Contract Revenue Cost of Service Contract 2010 864,00 720,00 25,000 Cash, Accounts Payable, etc 864,00 100,00 25,000 Unearned Service Contract Revenue Service Contract Revenue 72,000 266,40 72,000 2009: 720,000 x 20% x ½=72,000 2010: 720,000 x 20% x ½=72,000 100,00 266,40 Chapter – Current Liabilities, Provisions and Contingencies 720,000 x 30% x ½=108,000 864,000 x 20% x ½=86,400 72,000+108,000+86,400=266,40 (b ) Unearned Service Contract Revenue, Jan Sale of contracts during the year Service contracts earned during the year Unearned Service Contract Revenue, Dec 31 2009 2010 - P648,000 P720,000 (72,000) 864,000 (266,400) P648,000 P1,245,600 Unearned Service Contract Revenue at December 31, 2010 may also be computed as follows: 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) 2009 2010 Revenue from service contracts P72,000 P266,400 Cost of service contracts 25,000 100,000 Profit from service contracts P47,000 P166,400 1-16 (Pioneer Publication) (a) (b ) (b ) Subscriptions sold in 2007 and 2008 (5,000,000 + 4,500,000) Expired subscriptions in 2007 2008 (2,800,000 + 1,200,000) Unearned subscriptions, Jan 1, 2009 P9,500,000 P1,000,000 4,000,000 5,000,000 P4,500,000 2009 Cash Unearned Subscription Revenue 5,500,000 Unearned Subscription Revenue Subscription Revenue 1,200,000 + 2,000,000 + 1,800,000 5,000,000 5,500,000 5,000,000 2010 Cash Unearned Subscription Revenue 7,000,000 Unearned Subscription Revenue Subscription Revenue 1,300,000 + 2,400,000 + 2,000,000 5,700,000 7,000,000 5,700,000 Chapter – Current Liabilities, Provisions and Contingencies (c) Unearned Subscription Revenue, January Subscription received during the year Subscription revenue for the year Unearned Subscription Revenue, December 31 1-17 (Ace Co.) Property Taxes Payable Property tax expense July to Dec 31 (72,000 x 6/12) Payment in 2009 (Nov payment = 72,000/3) Income Tax Payable Pretax income before accrued property taxes Less accrued property tax Income subject to tax Income tax rate Income tax expense 2009 payments for 2009 income tax (480,000 – 190,000) VAT Payable Output VAT (12% x 9,000,000) 2009 payments of VAT Total current liabilities 1-17 (Extreme Company) a B = 8,000,000 x 8% = 640,000 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 2009 P4,500,00 5,500,000 (5,000,00 0) P5,000,00 P 36,000 (24,000) 2010 P5,000,00 7,000,000 (5,700,00 0) P6,300,00 P 12,000 P1,629,000 12,000 P1,617,000 30% P 485,100 (290,000) P 1,080,000 (725,000) 195,100 355,000 P562,100 Chapter – Current Liabilities, Provisions and Contingencies 1-19 (San Roque Corporation) a Bonus to sales manager = 08 x 3,000,000 Bonus to each sales agent = 06 x 3,000,000 = = 240,000 180,000 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 = B (Each): 603,834 / = 603,834 (total) 201,278 c B = 32 {3,000,000 – B } B = 960,000 - 32B B = 960,000/1.32 = 727,273 = 272,727 = 227,273 B (Sales Manager): 727,273 x 12/32 B (Each Sales Agent): 727,273 x 10/32 (total) 1-20 (Globe, Inc.) B = 06 {9,000,000 – B – T } T = 30 (9,000,000 – B) B B B B = = = = 06 (9,000,000 – B - 30 (9,000,000 – B ) } 06 { 9,000,000 – B – 2,700,000 + 30B } 378,000 - 042B 378,000 / 1.042 = 362,764 T = 30 (9,000,000 – 362,764) T = 2,591,171 1-21 (Desktop Company) a Vacation earned by employees in 2009 P 200,000 Adjustment in rate for unused vacation pay in previous periods (250,000 – 150,000) x 10% 10,000 Vacation pay expense in 2009 P 210,000 b Unused vacation pay in previous periods, adjusted to current rate (250,000 – 150,000) x 110% Vacation pay earned by employees in 2009 unused Liability for vacation pay, 12/31/09 P110,000 200,000 P310,000 1-22 (Jim Corporation) The full amount of P2,000,000 is classified as current liability because on December 31, 2009 (the balance sheet date), the enterprise has no unconditional right to defer the settlement of the obligation for a period of at least 12 months 1-23 Current Non-current Case James, Inc 3,600,000 x 80% 3,000,000 – 2,880,000 P 120,000 Case James, Inc 2,000,000 Current Non-current Case Sylvester Corporation Situation A -0- 6,000,000 P2,880,000 Chapter – Current Liabilities, Provisions and Contingencies Situation B Situation C Situation D 6,000,000 -0-0- 6,000,000 6,000,000 1-24 (Trey Company) Current Liabilities 14% Notes Payable, refinanced on September 30, 2010 P2,500,000 Current portion of 16% notes payable 800,000 Total current liabilities P3,300,000 1-25 (Internet 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 P2,400,50 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 MC2 MC3 MC4 MC5 MC6 MC7 MC8 MC9 MC10 D A C B A B B C C D MC11 MC12 MC13 MC14 MC15 MC16 MC17 MC18 MC19 MC20 C B D B A B A B B D Problems MC21 MC22 MC23 D C A MC24 MC25 D C 540,000 + 30,000 + 15,000 = 585,000 100,000 + (100,000 x 0.3 x 9/12) = 102,250 x 944 = 96,524 Proceeds = 100% - 10% = 90% ; Effective interest = 10%/90% = 11.11% Given Given Chapter – Current Liabilities, Provisions and Contingencies MC26 MC27 A D MC28 MC29 MC30 MC31 D D B B MC32 A MC33 MC34 MC35 MC36 MC37 MC38 MC39 A B D C D C C MC40 MC41 MC42 MC43 B C A A 65,000 + 815,000 – 780,000 = 100,000 6% ( 4,500,000-2,500,000) = 120,000 + (8,500 x ½ ) + 2,500 = 126,750 540,000 + 960,000 – 780,000 = 720,000 1,000 x 750 = 750,000 42,000 + (750,000 x 3/10) = 267,000 {(500,000 x 80%) – 300,000} = 100,000; 100,000 x (50+5-40) = 1,500,000 { (3,000,000 x 60%) / 10 } – 42,000 = 138,000; 138,000 x P0.50 = 69,000 (400,000 x 70%) – 100,000 = 180,000 ; ( 180,000 /5) x 20 = 720,000 (180,000 x 50%) – 75,000 = 15,000 24,000 x 300 = 7,200,000 7,200,000 – 1,700,000 = 5,500,000 1,500,000 x 4% = 60,000 B = 0.45 {2,000,000 – B - 30 (2,000,000 – B}) ; B = 479,087 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 B = 0.10 {2,500,000 - 30 (2,500,000 – B)} = 180,412 600,000 + 900,000 + 400,000 = 1,900,000 2,400,000 – 1,900,000 = 500,000 472,000+200,000+9,600+64,000+380,000+26,000+100,000+50,000 + 24,000+48,000+57,500= 1,431,100 10 ... 756,000 /1. 25 2 = B (Each): 603,834 / = 603,834 (total) 2 01, 27 8 c B = 32 {3,000,000 – B } B = 960,000 - 32B B = 960,000 /1. 32 = 727 ,27 3 = 27 2, 727 = 22 7 ,27 3 B (Sales Manager): 727 ,27 3 x 12 / 32 B (Each... QUESTIONS Theory MC1 MC2 MC3 MC4 MC5 MC6 MC7 MC8 MC9 MC10 D A C B A B B C C D MC 11 MC 12 MC13 MC14 MC15 MC16 MC17 MC18 MC19 MC20 C B D B A B A B B D Problems MC 21 MC 22 MC23 D C A MC24 MC25 D C 540,000... Payable 1, 560,000 x 12 % x 3 / 12 Interest Expense Discount on Notes Payable 18 7 ,20 0 – 46,800 Notes Payable Cash 1, 560,000 18 7 ,20 0 1, 747 ,20 0 46,800 46,800 14 0,400 1, 747 ,20 0 1, 747 ,20 0 (b) At December 31,