CHAPTER CURRENT LIABILITIES, PROVISIONS AND CONTINGENCIES PROBLEMS 1-1 (Washington Company) Accounts Payable, 12/31/12, before adjustments Unrecorded checks in payment to creditors Unrecorded purchases (150,000 x 98%) Accounts Payable, 12/31/12, as adjusted 1-2 P 1,000,000 (350,000) 147,000 P 797,000 (Adams Company) Accounts Payable, 12/31/12, before adjustments Goods purchased FOB shipping point, lost in transit Returned to supplier Accounts Payable, 12/31/10, as adjusted 1-3 P1,500,000 240,000 (80,000) P1,660,000 (Jefferson Corporation) (a) (1) Dec 16 19 26 31 (a) (2) Dec 16 19 26 31 Gross Method Purchases Freight in Accounts Payable – Intel Company Cash 66,000 1,400 66,000 1,400 Purchases Accounts Payable – Celeron Corporation 72,000 Accounts Payable- Intel Company Purchase Discount (2% x 66,000) Cash 66,000 Accounts Payable – Celeron Corporation Purchase Discount (2% x 72,000) Cash 72,000 Net Method Purchases Freight in Accounts Payable – Intel Company Cash 72,000 1,320 64,680 1,440 70,560 64,680 1,400 64,680 1,400 Purchases Accounts Payable – Celeron Corporation 69,840 Accounts Payable – Intel Company Cash 64,680 Accounts Payable – Celeron Corporation Purchase Discounts Lost Cash 69,840 720 69,840 64,680 70,560 Chapter – Current Liabilities, Provisions and Contingencies (b) Dec 31 1-4 Purchase Discounts Lost Accounts Payable – Celeron Corporation (Madison Company) (a) 10/01/12 Automobiles (1,747,200 ÷ 112%) Discount on Notes Payable Notes Payable 12/31/12 10/01/13 720 720 1,560,000 187,200 1,747,200 Interest Expense Discount on Notes Payable 1,560,000 x 12% x 3/12 46,800 Interest Expense Discount on Notes Payable 187,200 – 46,800 140,400 Notes Payable Cash 46,800 140,400 1,747,200 1,747,200 (b) At December 31, 2012: Current Liabilities: Notes Payable, net of P140,400 Discount 1-5 (Monroe Corporation) (a) 06/01/12 Cash Discount on Notes Payable Notes Payable 12/31/12 05/31/13 1,080,000 120,000 1,200,000 Interest Expense Discount on Notes Payable 120,000 x 7/12 70,000 Interest Expense Discount on Notes Payable 120,000 – 70,000 50,000 Notes Payable Cash 70,000 50,000 1,200,000 1,200,000 (b) At December 31, 2013: Current Liabilities: Notes Payable, net of P50,000 Discount 1-6 P1,606,800 (Unison Company) (a) Market interest rate is 5% Principal Stated interest (8,000,000 x 9%) Maturity value PV factor at 5% for period Present value at May 1, 2012 Face value of the note Premium on Notes Payable P 1,150,000 P8,000,000 720,000 P8,720,000 0.9524 P8,304,928 8,000,000 P 304,928 Chapter – Current Liabilities, Provisions and Contingencies 05/01/12 12/31/12 Equipment Notes Payable Premium on Notes Payable Interest Expense Premium on Notes Payable (304,928 x 8/12) Interest Payable(8,000,000 x 9% x 8/12) 8,304,928 8,000,000 304,928 276,715 203,285 480,000 4/30/13 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, 2012 Notes Payable Premium on Notes Payable Interest Payable Total (or 8,304,928 + 276,715) P8,000,000 101,643 480,000 P8,581,643 b market rate of interest is 12% Principal Stated interest (8,000,000 x 9%) Maturity value PV factor at 12% for period Present value at May 1, 2012 Face value of the note Discount on Notes Payable P8,000,000 720,000 P8,720,000 0.8929 P7,786,088 8,000,000 P 213,912 05/01/12 12/31/12 Equipment Discount on Notes Payable Notes Payable Interest Expense Discount on Notes Payable (213,912 x 8/12) Interest Payable(8,000,000 x 9% x 8/12) 7,786,088 213,912 8,000,000 622,608 142,608 480,000 4/30/13 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, 2012 Notes Payable Discount on Notes Payable Interest Payable Total (or 7,786,088 + 622,608) P8,000,000 (71,304) 480,000 P8,408,696 Chapter – Current Liabilities, Provisions and Contingencies 1-7 (Harrison Company) Amount to be accrued on 12/31/10 (the best estimate of the obligation) P800,000 No obligation is recognized for the suit filed in September 2012 nor for the suit filed in October However, disclosure is necessary in the notes to the financial statements for the suit filed in October 2012by Pasig City government since it is reasonably possible the Pasig City government will be successful 1-8 ( Tyler Corporation) a b c 1-9 Premium Inventory Cash / Accounts Payable 225,000 Premium Expense Cash (1,000 x 50) Premium Inventory (1,000 x 150) 100,000 50,000 225,000 150,000 Premium Expense 300,000 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 (Polk 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) 300,000 P126,000 112,000 P 14,000 Premium Expense for 2012 (see a) P126,000 1-10 Taylor Company (a) Expected future redemption, beg Redeemed during the year Expected future redemption, end Total Net cost of premium (120 – 50) Premium expense (b) Provision for premium claims outstanding 12/31/10 (30,000/5) x P70 12/31/11 (80,000/5) x P70 2011 P40,000 30,000 P70,000 ÷5 P14,000 x P70 P980,000 2012 P(30,000) 90,000 80,000 P140,000 ÷5 P28,000 x P70 P1,960,000 P 420,000 P1,120,000 Chapter – Current Liabilities, Provisions and Contingencies 1-11 (Van Department Store) (a) Allocation of original consideration received: Sales revenue (98% x P5,000,000) Liability for Customer Loyalty Awards (2% x P5,000,000) Revenue in 2011 as a result of redemption 100,000 x 25/90 Revenue in 2012 as a result of redemption Total accumulated revenue from redemption as of 12/31/12 (100,000 x 60/95) Less revenue earned in 2011 Revenue in 2012 as a result of redemption P4,900,000 P 100,000 P 27,778 P 63,158 27,778 35,380 P (b) Liability as of 12/31/11 (100,000 – 27,778) Liability as of 12/31/12 (100,000 – 63,158) P 72,222 P 36,842 1-12 (Jackson Company) Sale of product Accts Receivable/Cash Sales Accrual of repairs Warranty Expense Warranty Liability 6% x 1M 6% x 2.5M 6% x 3.5M Actual repairs Warranty Liability Cash/ AP, etc 2010 2011 2012 1,000,000 1,000,000 2,500,000 2,500,000 3,500,000 3,500,000 60,000 150,000 60,000 8,000 150,000 210,000 210,000 38,000 112,500 112,500 38,000 8,000 1-13 (Filmore Company) (a) 2011 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) P187,200 (b) On 2011 sales (4,200,000 x 5% x ½) On 2012 sales [(1/2 of 3%) + 5%] x 6,960,000 Warranty Liability, December 31, 2012, as analyzed 1-14 (Pierce Corporation) Cash Unearned Revenue from Gift Certificates Outstanding Unearned Revenue from Gift Certificates Outstanding Sales 2012 P187,200 556,800 (180,000) P564,000 P105,000 452,400 P557,400 2,000,000 2,000,000 1,280,000 1,280,000 Note: The gift certificates estimated to expire will be recognized as revenues at the date of actual expiration Chapter – Current Liabilities, Provisions and Contingencies 1-15 (Buchanan Company) Cash Unearned Revenue from Gift Certificates Outstanding 3,000,000 3,000,000 Unearned Revenue from Gift Certificates Outstanding Sales 2,750,000 Unearned Revenue from Gift Certificates Outstanding Revenue from Forfeited Gift Certificates 150,000 2,750,000 150,000 1-16 (Lincoln Company) Refundable Deposits, January 1, 2012 Deposits received during 2012 Deposits refunded during 2012 Deposits forfeited during 2010 (100,000 – 82,000) Refundable Deposits, December 31, 2012 1-17 (Johnson Company) (a) P250,000 200,000 (267,000) (18,000) P165,000 2011 Cash Unearned Service Contract Revenue Cost of Service Contract Cash, Accounts Payable, etc 2012 720,000 864,000 720,000 25,000 864,000 100,000 25,000 Unearned Service Contract Revenue 72,000 Service Contract Revenue 2011: 720,000 x 20% x ½=72,000 2012: 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) Unearned Service Contract Revenue, Jan Sale of contracts during the year Service contracts earned during the year Unearned Service Contract Revenue, Dec 31 100,000 266,400 72,000 266,400 2011 2012 P720,000 (72,000) P648,000 P648,000 864,000 (266,400) P1,245,600 Unearned Service Contract Revenue at December 31, 2012 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) 2011 2012 Revenue from service contracts P72,000 P266,400 Cost of service contracts 25,000 100,000 Profit from service contracts P47,000 P166,400 Chapter – Current Liabilities, Provisions and Contingencies 1-18 (Grant Publication) (a) Subscriptions sold in 2009 and 2010 (5,000,000 + 4,500,000) Expired subscriptions in 2009 2010 (2,800,000 + 1,200,000) Unearned subscriptions, Jan 1, 2011 (b) (b) P9,500,000 P1,000,000 4,000,000 2011 Cash Unearned Subscription Revenue 5,500,000 5,000,000 Unearned Subscription Revenue Subscription Revenue 1,300,000 + 2,400,000 + 2,000,000 5,700,000 Unearned Subscription Revenue, January Subscription received during the year Subscription revenue for the year Unearned Subscription Revenue, December 31 1-19 (Hayes Co.) Property Taxes Payable Property tax expense July to Dec 31 (72,000 x 6/12) Payment in 2012 (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 2012 payments for 2012 income tax(480,000– 190,000) VAT Payable Output VAT (12% x 9,000,000) 2012 payments of VAT Total current liabilities for taxes 1-20 (Garfield Company) a B = 8,000,000 x 8% = 640,000 b 5,500,000 Unearned Subscription Revenue Subscription Revenue 1,200,000 + 2,000,000 + 1,800,000 2012 Cash Unearned Subscription Revenue (c) B = 8% (8000,000 – B ) B = 640,000 - 08B 5,000,000 P4,500,000 5,000,000 7,000,000 7,000,000 5,700,000 2011 P4,500,000 5,500,000 (5,000,000) P5,000,000 P 36,000 (24,000) 2012 P5,000,000 7,000,000 (5,700,000) P6,300,000 P 12,000 P1,629,000 12,000 P1,617,000 30% P 485,100 195,100 (290,000) P 1,080,000 (725,000) 355,000 P562,100 Chapter – Current Liabilities, Provisions and Contingencies 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 Bonus to each sales agent = 06 x 3,000,000 b c = = 240,000 180,000 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 B B B B B = = = 727,273 (total) 272,727 227,273 = 32 {3,000,000 – B } = 960,000 - 32B = 960,000/1.32 (Sales Manager): 727,273 x 12/32 (Each Sales Agent): 727,273 x 10/32 1-22 (Cleveland, 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 1-23 (McKinley Company) a Vacation earned by employees in 2012 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 2012 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 2012 unused P110,000 200,000 Chapter – Current Liabilities, Provisions and Contingencies Liability for vacation pay, 12/31/12 P310,000 1-24 (Roosevelt Corporation) The full amount of P2,000,000 is classified as current liability because on December 31, 2012 (the reporting date), the enterprise has no unconditional right to defer the settlement of the obligation for a period of at least 12 months 1-25 Current Non-current Case Taft, Inc 3,600,000 x 80% 3,000,000 – 2,880,000 P 120,000 Case Taft, Inc 2,000,000 Current Non-current 6,000,000 6,000,000 -0- 6,000,000 6,000,000 P2,880,000 Case Wilson Corporation Situation A Situation B Situation C Situation D 1-26 (Harding Company) Current Liabilities 14% Notes Payable, refinanced on March 10, 2013 Current portion of 16% notes payable Total current liabilities P2,500,000 800,000 P3,300,000 1-27 (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 Chapter – Current Liabilities, Provisions and Contingencies MULTIPLE CHOICE QUESTIONS Theory MC1 MC2 MC3 MC4 MC5 MC6 MC7 MC8 MC9 MC10 D B C B B A B C C C Problems MC23 D MC24 C MC25 A MC26 D MC27 C MC28 A MC29 D MC30 D MC31 D MC32 C MC33 A MC34 A MC35 MC36 MC37 MC38 MC39 MC40 MC41 MC42 MC43 MC44 MC45 D B B A A B D C D C C MC46 MC47 MC48 MC49 MC50 B C A D A MC11 MC12 MC13 MC14 MC15 MC16 MC17 MC18 MC19 MC20 MC21 MC22 D B D B B A B A B C D D 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% P500,000, which is the reasonable estimate Given 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 [(1/2 x 35%) + 50% x 2,100,000] + 92.5%(2,730,000) = 3,942,750 [½ (15% + 35%) x P2,100,000] + (1/2 x 15% x 2,730,000) = 729,750 ½ (15% + 35%) x P2,730,000 = 682,500 (½ x 50% x 2,100,000) + (67.5% x 2,730,000) + (92.5% x 2,475,000) = 4,657,125 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 3,800,000 + 2,000,000 – 5,000,000 = 800,000 decrease in profit 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 ... 2 010 2 011 2 012 1, 000,000 1, 000,000 2,500,000 2,500,000 3,500,000 3,500,000 60,000 15 0,000 60,000 8,000 15 0,000 210 ,000 210 ,000 38,000 11 2,500 11 2,500 38,000 8,000 1- 1 3 (Filmore Company) (a) 2 011 ... MC 11 MC12 MC13 MC14 MC15 MC16 MC17 MC18 MC19 MC20 MC 21 MC22 D B D B B A B A B C D D 540,000 + 30,000 + 15 ,000 = 585,000 10 0,000 + (10 0,000 x 0.3 x 9 /12 ) = 10 2,250 x 944 = 96,524 Proceeds = 10 0%... Dec 31 1- 4 Purchase Discounts Lost Accounts Payable – Celeron Corporation (Madison Company) (a) 10 / 01/ 12 Automobiles (1, 747,200 ÷ 11 2%) Discount on Notes Payable Notes Payable 12 / 31/ 12 10 / 01/ 13