CHAPTER 1 CURRENT LIABILITIES, PROVISIONS AND CONTINGENCIES PROBLEMS 1-1.
(Epson Company) Accounts Payable, 12/31/07, before adjustments Unrecorded checks in payment to creditors Unrecorded purchases (150,000 x 98%) Goods in transit purchased FOB destination but recorded Accounts Payable, 12/31/07, as adjusted
1-2.
(Gay Company) Accounts Payable, 12/31/07, before adjustments
P1,500,00 0 240,000 (60,000) P1,680,00 0
Goods purchased FOB shipping point, lost in transit Returned to supplier Accounts Payable, 12/31/07, as adjusted 1-3.
P 1,000,000 (350,000) 147,000 (65,000) P 732,000
(Megabytes Corporation) (a) (1) Dec. 16
Gross Method Purchases
66,000
Freight in Accounts Payable – Intel Company Cash 1 9
Purchases Accounts Corporation
2 6
1,400
72,000 Payable
–
Celeron
Accounts Payable- Intel Company
72,000 66,000
Purchase Discount (2% x 66,000) Cash 3
1
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
Purchases
66,000 1,400
1,440 70,560 64,680 1,400
69,840
64,680 1,400
Chapter 1 – Current Liabilities, Provisions and Contingencies
9 Accounts Corporation 6
2
Payable
–
Celeron
Accounts Payable – Intel Company
69,840 64,680
Cash 3 1 (b) Dec. 31
Accounts Payable – Celeron Corporation
720
Purchase Discounts Lost
720
70,560
Payable
–
Celeron
(Blue Bird Company) (a) 10/01/07 Automobiles (1,747,200 ÷ 112%) Discount on Notes Payable Notes Payable 12/31/07
10/01/08
69,840
Purchase Discounts Lost Cash
Accounts Corporation 1-4.
64,680
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
720
1,560,000 187,200 1,747,200 46,800 46,800 140,400
1,747,200 1,747,200
(b) At December 31, 2007: Current Liabilities: Notes Payable, net of P140,400 Discount 1-5.
(Matagumpay Corporation) (a) 06/01/06 Cash Discount on Notes Payable Notes Payable 12/31/06
05/31/07
140,400
P1,606,800
1,080,000 120,000 1,200,00 0
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 1,200,00 0
2
Chapter 1 – Current Liabilities, Provisions and Contingencies
(b) At December 31, 2007: Current Liabilities: Notes Payable, net of P50,000 Discount 1-6.
P 1,150,000
(Goliath Company)
Amount to be accrued on 12/31/07 P800,000
(the best estimate of the obligation)
No obligation is recognized for the suit filed in September 2007 nor for the suit filed in October. However, disclosure is necessary in the notes to the financial statements for the suit filed in October 2007 by Pasig City government since it is probable the Pasig City government will not be successful. 1-7.
(Graphics Corporation) a.
Premium Inventory
225,00 0
Cash / Accounts Payable b.
225,00 0
Premium Expense
100,00 0 50,000
Cash (1,000 x 50) Premium Inventory (1,000 x 150) c.
150,00 0
Premium Expense
300,00 0
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.
(Alcatel Company) (a) Premium Expense (300,000 x 30%)/20
x 28
P126,00 0 112,000 P 14,000
Cost of mugs already distributed (4,000 x 28) Estimated liability for premium claims outstanding (b ) 1-9.
Premium Expense for 2007 (see a)
(Adventure Company) Accts.
1,000,000
Receivable/Cash Sales
2006 2,500,000
1,000,0 00
Accrual of repairs Warranty Expense
P126,00 0
2005
Sale of product
3
2007 3,500,000
2,500, 000
60,000
300,00 0
150,000
3,500,0 00 210,000
Chapter 1 – Current Liabilities, Provisions and Contingencies
Warranty Liability
60, 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
1-10. (Packard Company) (a)
112,5 00
2006
Warranty Liability, January 1 Warranty expense (8% x 4,200,000)/(8% x 6,960,000) Actual repair costs incurred Warranty liability, December 31
P 0 336,000 (148,800 ) P187,20 0
(b) On 2006 sales (4,200,000 x 5% x ½)
P105,00 0 452,400 P557,40 0
On 2007 sales [(1/2 of 3%) + 5%] x 6,960,000 Warranty Liability, December 31, 2007, as analyzed
1-11. (Smart Corporation) Cash
2007 P187,20 0 556,800 (180,000 ) P564,00 0
2,000,00 0
Unearned Revenue from Gift Certificates Outstanding Unearned Revenue from Gift Certificates Outstanding Sales
2,000,00 0 1,280,00 0
1,280,00 0
Note: The gift certificates estimated to expire will be recognized as revenues at the date of actual expiration. 1-12. (Robinson) Cash Unearned Revenue from Gift Certificates Outstanding Unearned Revenue from Gift Certificates Outstanding Sales
3,000,00 0
3,000,00 0
2,750,00 0 2,750,00 0
4
Chapter 1 – Current Liabilities, Provisions and Contingencies
Unearned Revenue from Gift Certificates Outstanding Revenue from Forfeited Gift Certificates
150,000
1-13. (Francesca Royale) Refundable Deposits, January 1, 2007
P250,00 0 200,000 (267,000 ) (18,000) P165,00 0
Deposits received during 2007 Deposits refunded during 2007 Deposits forfeited during 2007 (100,000 – 82,000) Refundable Deposits, December 31, 2007 1-14. (DOS Company) (a)
2007
Cash
2008
720,000
Unearned Service Contract Revenue Cost of Service Contract
864,00 0
720,00 0 25,000
Cash, Accounts Payable, etc. Unearned Service Contract Revenue
150,000
864,00 0 100,00 0
25,000 72,000
Service Contract Revenue
100,00 0 266,40 0
72,000
266,40 0
2007
2008
-----
P648,000
P720,000 (72,000)
864,000 (266,400)
P648,000
P1,245,600
2007: 720,000 x 20% x ½=72,000 2008: 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=266,40 0
(b )
Unearned Service Contract Revenue, Jan. 1 Sale of contracts during the year Service contracts earned during the year Unearned Service Contract Revenue, Dec. 31
Unearned Service Contract Revenue at December 31, 2008 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) 2007 2008
5
Chapter 1 – Current Liabilities, Provisions and Contingencies
Revenue from service contracts Cost of service contracts Profit from service contracts 1-15. (Pioneer Publication) (a) Subscriptions sold in 2005 and 2006 (5,000,000 + 4,500,000) Expired subscriptions in 2005 2006 (2,800,000 + 1,200,000) Unearned subscriptions, Jan. 1, 2007 (b )
(b )
(c)
P72,000 25,000 P47,000
P266,400 100,000 P166,400
P9,500,000 P1,000,000 4,000,000
5,000,000 P4,500,000
2007 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
2008 Cash Unearned Subscription Revenue
7,000,000
Unearned Subscription Revenue Subscription Revenue 1,300,000 + 2,400,000 + 2,000,000
5,700,000
Unearned Subscription Revenue, January 1 Subscription received during the year Subscription revenue for the year Unearned Subscription Revenue, December 31
7,000,000
2007 P4,500,00 0 5,500,000 (5,000,00 0) P5,000,00 0
5,700,000 2008 P5,000,00 0 7,000,000 (5,700,00 0) P6,300,00 0
1-16. (Ace Co.)
Property Taxes Payable Property tax expense July 1 to Dec. 31 (72,000 x 6/12) Payment in 2007 (Nov. payment = 72,000/3) Income Tax Payable Income tax expense (1,629,000 x 35%) 2007 payments for 2006 income tax (480,000 – 90,000) VAT Payable Output VAT (12% x 9,000,000) 2007 payments of VAT Total current liabilities
6
P
P
36,000 (24,000)
P 12,000
570,150 (390,000)
180,150
P 1,080,000 (725,000)
355,000 P547,150
Chapter 1 – Current Liabilities, Provisions and Contingencies
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 = .35 (8,000,000 – B ) B = .08 {8,000,000 - .35 (8,000,000 – B ) } B = .08 {8,000,000 – 2,800,000 + .35B} B = 416,000 + .028B B = 416,000/0.972 = 427,984
d.
B = .08 {8,000,000 – B – T } T = .35 (8,000,000 – B) B = .08{8,000,000 – B - .35 (8,000,000 – B)} B = .08 {8,000,000 – B – 2,800,000 + .35B} B = 416,000 - .052B B = 416,000/1.052 = 395,437
1-18. (San Roque 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 = .35 {3,000,000 – B } B = .36 {3,000,000 – B - .35 (3,000,000 – B)} B = .36 {3,000,000 – B – 1,050,000 + .35B} B = 702,000 - .234B B = 702,000/1.234 = B (Each): 568,882 / 3 =
568,882 (total) 189,627
c.
B = .32 {3,000,000 – B } B = 960,000 - .32B B = 960,000/1.32 B (Sales Manager): 727,273 x 12/32 B (Each Sales Agent): 727,273 x 10/32
=
727,273
(total)
=
272,727 = 227,273
1-19. (Globe, Inc.)
B = .06 {9,000,000 – B – T } T = .35 (9,000,000 – B) B B B B
= = = =
.06 (9,000,000 – B - .35 (9,000,000 – B ) } .06 { 9,000,000 – B – 3,150,000 + .35B } 351,000 - .039B 351,000 / 1.039 = 337,825
T = .35 (9,000,000 – 337,825) T = 3,031,761
1-20. (Desktop Company) a.
Vacation earned by employees in 2007 P 200,000 Adjustment in rate for unused vacation pay in previous periods (250,000 – 150,000) x 10% 10,000
7
Chapter 1 – Current Liabilities, Provisions and Contingencies
Vacation pay expense in 2007 b.
P 210,000
Unused vacation pay in previous periods, adjusted to current rate (250,000 – 150,000) x 110% Vacation pay earned by employees in 2007 unused Liability for vacation pay, 12/31/07
P110,000 200,000 P310,000
1-21. (Jim Corporation)
The full amount of P2,000,000 is classified as current liability because on December 31, 2007 (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.
1-22.
1-23
Current
Non-current
Case 1 . James, Inc. 3,600,000 x 80% 3,000,000 – 2,880,000
P 120,000
Case 2.
James, Inc.
2,000,000
0
Current
Non-current
Case 3.
Sylvester Corporation Situation A Situation B Situation C Situation D
-06,000,000 -0-0-
6,000,000 0 6,000,000 6,000,000
P2,880,000
(Trey Company) Current Liabilities 14% Notes Payable, refinanced on March 10, 2008 P2,500,000 Current portion of 16% notes payable 800,000 Total current liabilities P3,300,000
1-24. (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.
8
Chapter 1 – Current Liabilities, Provisions and Contingencies
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