CHAPTER 1

CURRENT LIABILITIES, PROVISIONS AND CONTINGENCIES

PROBLEMS

1-1. (Epson Company)

Accounts Payable, 12/31/09, before adjustments P 1,000,000

Unrecorded checks in payment to creditors (350,000)
Unrecorded purchases (150,000 x 98%) 147,000
Accounts Payable, 12/31/09, as adjusted P 797,000

1-2. (Gay Company)

Accounts Payable, 12/31/09, before adjustments P1,500,000

Goods purchased FOB shipping point, lost in transit 240,000
Returned to supplier (80,000)
Accounts Payable, 12/31/09, as adjusted P1,660,000

1-3. (Megabytes Corporation)

(a) (1) Gross Method

Dec. 16 Purchases 66,000
Freight in 1,400
Accounts Payable – Intel Company 66,000
Cash 1,400

19 Purchases 72,000
Accounts Payable – Celeron Corporation 72,000

26 Accounts Payable- Intel Company 66,000

Purchase Discount (2% x 66,000) 1,320
Cash 64,680

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 64,680
Cash 1,400

19 Purchases 69,840
Accounts Payable – Celeron Corporation 69,840

26 Accounts Payable – Intel Company 64,680

Cash 64,680

31 Accounts Payable – Celeron Corporation 69,840

Chapter 1 – Current Liabilities, Provisions and Contingencies

Purchase Discounts Lost 720

Cash 70,560

(b)
Dec. 31 Purchase Discounts Lost 720
Accounts Payable – Celeron Corporation 720

1-4. (Blue Bird Company)

(a)
10/01/09 Automobiles (1,747,200 ÷ 112%) 1,560,000
Discount on Notes Payable 187,200
Notes Payable 1,747,200
12/31/09 Interest Expense 46,800
Discount on Notes Payable 46,800
1,560,000 x 12% x 3/12
10/01/10 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, 2009:

Current Liabilities:
Notes Payable, net of P140,400 Discount P1,606,800

1-5. (Matagumpay Corporation)

(a)
06/01/09 Cash 1,080,000
Discount on Notes Payable 120,000
Notes Payable 1,200,000

12/31/09 Interest Expense 70,000

Discount on Notes Payable 70,000
120,000 x 7/12

05/31/10 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, 2009:

Current Liabilities:
Notes Payable, net of P50,000 Discount P 1,150,000

1-6. (Goliath Company)

Amount to be accrued on 12/31/09 (the best estimate of the obligation) P800,000

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Chapter 1 – Current Liabilities, Provisions and Contingencies

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 2009 by Pasig City government since it is probable the
Pasig City government will be successful.

1-7. (Graphics 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

1-8. (Alcatel 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 2009 (see a) P126,000

1-9. (Adventure Company)

2009 2010 2011
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

1-10. (Ever 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 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
Less revenue earned in 2008 27,778
Revenue in 2009 as a result of redemption P 35,380

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Chapter 1 – Current Liabilities, Provisions and Contingencies

(b)
Liability as of 12/31/08 (100,000 – 27,778) P 72,222
Liability as of 12/31/09 (100,000 – 63,158) P 36,842

1-11. (Packard Company)

(a)
2008 2009
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 2008 sales (4,200,000 x 5% x ½) P105,000
On 2009 sales [(1/2 of 3%) + 5%] x 6,960,000 452,400
Warranty Liability, December 31, 2009, as analyzed P557,400

1-12. (Smart 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 revenues at the
date of actual expiration.

1-13. (Robinson)
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

1-14. (Francesca Royale)

Refundable Deposits, January 1, 2009 P250,000
Deposits received during 2009 200,000
Deposits refunded during 2009 (267,000)
Deposits forfeited during 2009 (100,000 – 82,000) (18,000)
Refundable Deposits, December 31, 2009 P165,000

1-15. (DOS Company)

(a) 2009 2010
Cash 720,000 864,00
0
Unearned Service Contract Revenue 720,00 864,00
0 0

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Chapter 1 – Current Liabilities, Provisions and Contingencies

Cost of Service Contract 25,000 100,00

0
Cash, Accounts Payable, etc. 25,000 100,00
0

Unearned Service Contract Revenue 72,000 266,40

0
Service Contract Revenue 72,000 266,40
0
2009: 720,000 x 20% x ½=72,000
2010: 720,000 x 20% x ½=72,000
720,000 x 30% x ½=108,000
864,000 x 20% x ½=86,400
72,000+108,000+86,400=266,400

(b) 2009 2010

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, 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)
Subscriptions sold in 2007 and 2008
(5,000,000 + 4,500,000) P9,500,000
Expired subscriptions in
2007 P1,000,000
2008 (2,800,000 + 1,200,000) 4,000,000 5,000,000
Unearned subscriptions, Jan. 1, 2009 P4,500,000

(b) 2009
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) 2010
Cash 7,000,000
Unearned Subscription Revenue 7,000,000

Unearned Subscription Revenue 5,700,000

Subscription Revenue 5,700,000

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Chapter 1 – Current Liabilities, Provisions and Contingencies

1,300,000 + 2,400,000 + 2,000,000

(c) 2009 2010

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

1-17. (Ace Co.)

Property Taxes Payable
Property tax expense July 1 to Dec. 31 P 36,000
(72,000 x 6/12)
Payment in 2009 (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
2009 payments for 2009 income tax (480,000 –
190,000) (290,000) 195,100
VAT Payable
Output VAT (12% x 9,000,000) P 1,080,000
2009 payments of VAT (725,000) 355,000
Total current liabilities P562,100

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

1-19. (San Roque Corporation)

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Chapter 1 – Current Liabilities, Provisions and Contingencies

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

1-20. (Globe, 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

1-21. (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% P110,000
Vacation pay earned by employees in 2009 unused 200,000
Liability for vacation pay, 12/31/09 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 1 . James, Inc.
3,600,000 x 80% P2,880,000
3,000,000 – 2,880,000 P 120,000

Case 2. James, Inc. 2,000,000 0

Current Non-current
Case 3. Sylvester Corporation

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Chapter 1 – Current Liabilities, Provisions and Contingencies

Situation A -0- 6,000,000

Situation B 6,000,000 0
Situation C -0- 6,000,000
Situation D -0- 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 P2,400,500
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 C
MC2 A MC12 B
MC3 C MC13 D
MC4 B MC14 B
MC5 A MC15 A
MC6 B MC16 B
MC7 B MC17 A
MC8 C MC18 B
MC9 C MC19 B
MC10 D MC20 D

Problems
MC21 D 540,000 + 30,000 + 15,000 = 585,000
MC22 C 100,000 + (100,000 x 0.3 x 9/12) = 102,250 x .944 = 96,524
MC23 A Proceeds = 100% - 10% = 90% ; Effective interest = 10%/90% = 11.11%
MC24 D Given
MC25 C Given

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Chapter 1 – Current Liabilities, Provisions and Contingencies

MC26 A 65,000 + 815,000 – 780,000 = 100,000

MC27 D 6% ( 4,500,000-2,500,000) = 120,000 + (8,500 x ½ ) + 2,500 = 126,750
MC28 D 540,000 + 960,000 – 780,000 = 720,000
MC29 D 1,000 x 750 = 750,000
MC30 B 42,000 + (750,000 x 3/10) = 267,000
MC31 B {(500,000 x 80%) – 300,000} = 100,000; 100,000 x (50+5-40) = 1,500,000
MC32 A { (3,000,000 x 60%) / 10 } – 42,000 = 138,000; 138,000 x P0.50 = 69,000
MC33 A (400,000 x 70%) – 100,000 = 180,000 ; ( 180,000 /5) x 20 = 720,000
MC34 B (180,000 x 50%) – 75,000 = 15,000
MC35 D 24,000 x 300 = 7,200,000
MC36 C 7,200,000 – 1,700,000 = 5,500,000
MC37 D 1,500,000 x 4% = 60,000
MC38 C B = 0.45 {2,000,000 – B - .30 (2,000,000 – B}) ; B = 479,087
MC39 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
MC40 B B = 0.10 {2,500,000 - .30 (2,500,000 – B)} = 180,412
MC41 C 600,000 + 900,000 + 400,000 = 1,900,000
MC42 A 2,400,000 – 1,900,000 = 500,000
MC43 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