Answers - Chapter 1 Vol 2rvsed

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

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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

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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

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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

9