HOMEWORK ON CURRENT LIABILITIES

1. Presented below are the selected transactions of Edwardson Corporation. The Company uses the periodic
inventory system.

• On February 2, the corporation purchased goods from Martin Company for P70,000 subject to cash
discount terms of 2/10, n/30. Purchases and accounts payable are recorded by the corporation at net
amounts after cash discounts. The invoice was paid on February 26.

• On April 1, the Corporation bought a truck for P50,000, paying P4,000 in cash and signing a one-year,
12% note for the balance of the purchase price.

• On August 1, the Board of Directors declared a P300,000 cash dividend that was payable on September
10 to shareholders of record on August 31.

Prepare all journal entries necessary to record the above transactions.

2. The CFO for Hendricks Corporation is discussing with the company’s chief executive officer issues related
to the company’s short-term obligations. Presently, both the current ratio and the acid-test ratio for the
company’s are quite low, and, the chief executive officer is wondering if any of these short-term obligations
could be reclassified as long-term. The financial reporting date is December 31, 2018. Two short-term
obligations were discussed, and, the following action was taken by the CFO.

Short-term obligation A. Hendricks has a P500,000 short-term obligation due on March 1, 2019. The CFO
discussed with its lender whether the payment could be extended to March 1, 2021, provided Hendricks agrees
to provide additional collateral. An agreement is reached on February 1, 2019, to change the loan terms to
extend the obligation’s maturity to March 1, 2021. The financial statements are authorized for issuance on
April 1, 2019.

Short-term obligation B. Hendricks also has another short-term obligation of P120,000 due on February 15,
2019. In its discussion with the lender, the lender agrees to extend the maturity date to February 1, 2020. The
agreement is signed on December 31, 2018. The financial statements are authorized for issuance on April 1,
2019.

Indicate how these transactions should be reported at December 31, 2018 on Hendricks’ statement of financial
position.

3. Iowa Company sells its products with reusable expensive containers. The customer is charged a deposit for
each container delivered and receives a refund for each container returned within two years after the year of
delivery. Information for 2018 is as follows:
Containers held by customers in 2018 from deliveries in
2016 P 75,000
2017 215,000
2018 390,000
Containers returned in 2018 from deliveries in
2016 P 45,000
2017 125,000
2018 143,000
 Prepare all required entries in 2018 in connection with the containers assuming that the amount charged as
deposit is equivalent to 120% of the cost of each returnable container and compute the liability for containers
on December 31, 2018.

4. Georgia Company sells major household appliance service contracts for cash. The service contracts are for a
one-year, two-year, and three-year period. Cash receipts from contracts are credited to Unearned Service
Contract Revenue. This account had a balance of P720,000 at December 31, 2018 before year-end adjustment.
Service contract costs are charged as incurred to the Service Contract Expense account which had a balance
of P180,000 at December 31, 2018. Outstanding service contracts at December 31, 2018 expire as follows:
During 2018 P395,000
During 2019 225,000
During 2020 100,000
What amount should be reported as Unearned Service Contract Revenue in the company’s December 31, 2018
Statement of Financial Position?

5. Florida Company sells office equipment service contracts agreeing to service equipment for a two-year period.
Cash receipts from contracts are credited to Unearned Service Contract Revenue and service contract costs
are charged to Service Contract Expense as incurred. Revenue from service contracts is recognized as earned
when services have been actually rendered. Additional information for the year ended December 31, 2018
are as follows:
Unearned Service Contract Revenue, 1/1/2018 P 600,000
Cash receipts from service contracts sold 980,000
Service contract revenue recognized 860,000
Service contracts expense 520,000
What amount should the company report as Unearned Service Contract Revenue at December 31, 2018?

6. Connecticut Department Store sells gift certificates redeemable only when merchandise is purchased. These
gift certificates have an expiration date of two years after issuance date. Upon redemption or expiration, the
store recognizes the unearned revenue as realized. Information for 2018 are as follows:
Unearned Revenue from Gift Certificates, 1/1/2018 P 650,200
Gift certificates sold 2,251,800
Gift certificates redeemed 1,975,300
Expired gift certificates 250,400
On December 31, 2018, what amount should the store report as Unearned Revenue from Gift Certificates?

7. Cedarville Company pays its office employee payroll weekly. Below is a partial list of employees and their
payroll data for August. Because August is their vacation period, vacation pay is also listed –

Employee Earnings to July 31 Weeekly Pay Vacation Pay to be

Received in
August
Mark Halili P4,200 P200 ---
Karen Robles 3,500 150 P300
Brent Cruz 2,700 110 200
Alex Sarmiento 7,400 250 ---
Ken Santos 8,000 330 660
 Assume that the income tax withheld is 10% of wages. Union dues withheld are 2% of wages. Vacations are
taken the second and third weeks of August by Robles, Cruz and Santos. The Social Security rate is 8% on
employee and employer.

Make the journal entries necessary for each of the four August payrolls. The entries for the payroll and for
the company’s liability are made separately. Also make the entry to record the monthly payment of accrued
payroll liabilities.

8. Kasten Inc. provides paid vacations to its employees. At December 31, 2018, 30 employees have each earned
2 weeks of vacation time. The employees’ average salary is P700 per week. Prepare Kasten’s December 31,
2018, adjusting entry.

9. Kansas Company has an incentive compensation plan under which a branch manager receives a bonus of
10%. Branch income for 2018 is P1,650,000 before bonus and tax. The tax rate is 32%.

Compute the bonus received by the branch manager under the following cases:
(a) Bonus is 10% of branch income before bonus and tax.
(b) Bonus is 10% of branch income after bonus but before tax.
(c) Bonus is 10% of branch income before bonus but after tax.
(d) Bonus is 10% of branch income after bonus and after tax.

10. On December 31, 2018, Illinois Company was a defendant in a pending lawsuit. The suit arose from the
alleged defect of a product that the firm sold in 2017. In the opinion of the company’s attorney, it is probable
that Illinois will have to pay P600,000 and it is reasonably possible that the firm will have to pay P800,000 as
a result of this lawsuit. What amount of estimated liability should the firm report in its December 31, 2018
Statement of Financial Position?

11. During 2018, Indiana Company became involved in a tax dispute with the BIR. At December 31, 2018, the
Company’s tax advisor believed that an unfavorable outcome was probable and a reasonable estimate of
additional tax was P500,000 but could be as much as P750,000. After the 2018 financial statements were
issued, the firm received and accepted a BIR settlement offer of P550,000. What amount of estimated liability
would the company report in its December 31, 2018 Statement of Financial Position?

12. Arkansas Company sells washing machines that carry a three-year warranty against manufacturer’s defects.
Based on Company experience, warranty costs are estimated at P450 per machine. During 2018, the company
sold 1,400 washing machines and paid warranty costs of P170,000. What amount of warranty expense should
the firm report in its income statement for the year ended December 31, 2018?

13. On April 1, 2018, California Company began offering a new product for sale under a one-year warranty. Of
the 5,000 units in inventory as of April 1, 2018, 3,000 units had been sold by June 30, 2018. Based on its
experience with similar products, the company estimated that the average warranty cost per unit sold would
be P80. Actual warranty costs incurred from April 1 through June 30, 2018 were P120,800. At June 30, 2018,
what amount should the entity report as estimated warranty liability?

14. In an effort to increase sales, Alabama Company inaugurated a sales promotional campaign on June 30, 2018.
The company placed a coupon redeemable for a premium in each package of cereal sold. Each premium cost
the firm P18. To receive a premium, a customer must present five (5) coupons. The company estimates that
only 45% of the coupons issued will not be redeemed. For the six months ended December 31, 2018, the
following information are available:
Packages of cereal sold 170,000
Premiums purchased 25,000
 Coupons redeemed 80,000
(a) How much is the premium expense for the year ended December 31, 2018?
(b) How much is the estimated liability for premium claims as of December 31, 2018?
(c) How much is the inventory of premium items as of December 31, 2018?

15. On January 1, 2018, Alaska Company began marketing a new soft drink. To help promote the soft drink,
management is offering a special gift, a T-shirt, to each customer who returns 10 bottle caps. The firm
estimates that out of the 250,000 bottles sold in 2018, only 70% will be redeemed. On December 31, 2018,
the following information were collected:
Units Amount
T-shirts purchased 20,000 P1,800,000
T-shirts distributed 15,000
(a) How much is the premium expense for the year ended December 31, 2018?
(b) How much is the premium liability on December 31, 2018?