Ch 8 Liabilities

Solutions – Chapter 8 Liabilities

MULTIPLE CHOICE – THEORY 1. D 6. C

2. D 7. B

3. B 8. A

4. C 9. C

5. A 10. A

Problem 1 Jade Corporation A.

Transaction Entries April 1 Truck Cash Notes Payable May 1

Aug. 1 Sept. 10 Dec. 15 B.

4,000,000 1,000,000 3,000,000

Cash Discount on Notes Payable Notes Payable

800,000 120,000 920,000

Retained Earnings Dividends Payable

300,000

Dividends Payable Cash

300,000

Purchases Accounts Payable

147,000

300,000 300,000 147,000

Adjusting Entries Dec. 31

31

31

Interest Expense 270,000 Interest Payable 3,000,000 x 12% x 9/12 = 270,000 Interest Expense Discount on Notes Payable 120,000 x 8/12 Discounts Lost Accounts Payable

270,000

80,000 80,000 3,000 3,000

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Solutions – Chapter 8 Liabilities Problem 2 Sierra Corporation Current Liabilities Accounts Payable Notes Payable – trade Notes Payable – Bank 10% Mortgage Note Payable (with notes to FS) Bonds Payable Interest Payable Wages and Salaries Payable Total Current Liabilities Non-Current Liabilities Refinanced Note Payable, due in 2015 (with note to FS) 12% Mortgage Notes Payable, due in 2023 Total Current Liabilities Total Non-Current Liabilities

P

650,000 120,000 300,000 600,000 2,000,000 250,000 15,000 P3,935,000 P 500,000 1,500,000 P2,000,000 P5,935,000

Notes to FS •

The 10% Mortgage Note Payable was issued October 1, 2009, with a term of 10years. Terms of the note give the holder the right to demand immediate payment if the company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31, 2012, the entity is already three months behind in paying its required interest payment. Hence, the note is reclassified as a current liability.

•

P500,000 Note Payable, was originally due on January 2, 2011. On December 30, 2012, The entity negotiated a written agreement with the First Bank to replace this note with a 2-year P500,000 note, which was issued on January 2, 2013. Problem 3 (Charity, Inc.)

Premium Expense (2,000,000 x 30%)/10 x P5 =

P300,000

Inventory of Premiums ( 36,000 – 28,000) x P5 =

P 40,000

Estimated Premium Claims Outstanding Expected distribution (2,000,0000 x 30%)/10 Actual distribution Still to be distributed Cost of each premium Premium Claims Outstanding

60,000 (28,000) 32,000 x P5 P160,000

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Solutions – Chapter 8 Liabilities Audit Adjustment: Inventory of Premiums Premium Expense ( 300,000 – 180,000) Estimated Premium Claims Outstanding

40,000 120,000 160,000

Problem 4 (Evergreen) Audit Adjustments: Loss on Damages Provision for Construction Damages

1,200,000 1,200,000

Loss on Pending Lawsuit 1,800,000 Provision for Damonage on Pending Lawsuit Loss on Product Defects Provision for Cost of Product Withdrawal (1,800,000 + 1,200,000) / 2 Warranty Expense Provision for Warranties P1,000,000 x 30% = P300,000 5,000,000 x 10% = 500,000 0 x 60% 0 Total P800,000

1,800,000

1,500,000 1,500,000

800,000 800,000

Problem 5 SM Department Store Correct balance of Unearned Revenue for Gift Certificates Outstanding P300,000 – P15,000 – P200,000 = P85,000 Adjusting entry Unearned Revenue for Gift Certificates Outstanding Sales Miscellaneous Income – Expired Gift Certificates

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215,000 200,000 15,000

Solutions – Chapter 8 Liabilities Problem 6 National Finance Company Date Jan. 2, 2009 July 1, 2009 Jan. 1, 2010 July 1, 2010 Jan. 1, 2011 July 1, 2011 Jan. 1, 2012 July 1, 2012 Jan. 1, 2013

1.

Effective Interest (7%)

Nominal Interest (6%)

Discount Amortization

P 312,921 313,826 314,794 315,829 316,937 318,123 319,391 320,749

300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000

12,921 13,826 14,794 15,829 16,937 18,123 19,391 20,749

Bonds Payable per client Bonds Payable redeemed Bonds Payable, per audit

P5,000,000 1,000,000* P4,000,000

*Cash payments = Redemption price + Accrued interest 1,110,000 = 1.08Face + ( Face x 12% x 3/12) 1,110,000 = 1.08Face + (.03Face) Face = 1,110,000/1.10 Face of bonds redeemed = P1,000,000 2.

Carrying value of P4M bonds on December 31, 2012 P4,602,873 x 4M/5M = P3,682,298 Face value of bonds still outstanding 4,000,000 Bond Discount, per audit P 317,702

3.

Bond Interest Expense for the year 2012 January 1 to June 30 July 1 to October 1 P 320,749 x 3/6 October 1 to December 31 P320,749 x 4M/5M x 3/6 Interest Expense for 2012

4.

5.

Carrying value of P1M bonds on July 1, 2012 P4,582,124 x 1M/5M Discount amortized, July 1 to October 1 P20,749 x 1M/5M x 3/6 Carrying value of bonds redeemed Retirement price P1,000,000 x 108% Loss on bond retirement

P319,391 160,375 128,300 P608,066 P 916,425 2,075 P918,500 1,080,000 P161,500

Balance of Interest Payable on December 31, 2012 P4,000,000 x 12% x 6/12 P240,000

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Amortized cost, end P4,470,303 4,483,224 4,497,050 4,511,844 4,527,673 4,544,610 4,562,733 4,582,124 4,602,873

Solutions – Chapter 8 Liabilities

Audit Adjusting Entry Bonds Payable Interest Expense Loss on Bond Redemption Retained Earnings Bonds Payable Redeemed Bond Discount Interest Payable

1,000,000 8,065 161,500 392,430 1,110,000 211,995 240,000

Charge to Retained Earnings Interest Paid before 2012 Correct interest expense in periods prior to 2010 Effect of prior period errors

P1,500,000 1,892,430 P 392,430

Problem 7 (Lucky Corporation) Correct Cost of Land Down payment PV of 4 future payments = P2,633,875 x 3.037351 Cost of land

P2,000,000 8,000,000 P10,000,000

Correct Interest Expense for 2012 P8,000,000 x 12% x 6/12

P 480,000

Audit Adjusting entries Land Discount on Notes Payable Notes Payable (2,633,875 x 4)

8,000,000 2,535,500 10,535,500

Interest Expense Discount on Notes Payable

480,000 480,000

Accrued Liabilities – Land Purchase Land

1,316,937.50 1,316,937.50

Problem 8 (Burnham Smelting Company) Capitalized cost of the leased asset 290,000 x 6.75903

P1,960,119

Audit Adjustments Leased Equipment Finance Lease Liability

1,960,119 1,960,119

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Solutions – Chapter 8 Liabilities

Finance Lease Liability Taxes and Insurance Expense (20,000 x 9/12) Prepaid Taxes and Insurance Prepaid Rent

290,000 15,000 5,000 310,000

Depreciation Expense – Leased Equipment Accumulated Depreciation – Leased Equipment 1,960,119/10 x 9/12 = 147,009

147,009

Interest Expense (1,960,119 – 290,000) x 10% x 9/12 Interest Payable

125,259

147,009

125,259

Problem 9 Timex Company (a)

1.

Interest payable = P5,000,000 x 8% x 6/12

2.

Income Tax Expense: Current P6,000,000 x 30% Deferred: Increase in deferred tax liability P1,500,000 x 30% Total income tax expense

3. (b)

(c)

Deferred Tax Liability = P4,500,000 x 30%

P1,800,000 450,000 P2,250,000 P1,350,000

Current Liabilities: Accounts Payable Dividends Payable Current Portion of Finance Lease Liability Interest Payable on Bonds Income Tax Payable 6,000,000 x 30% Total Current Liabilities

P 350,000 500,000 620,920 200,000 1,800,000 P3,470,920

Non-current Liabilities: Non-current Portion of Finance Lease Liability Bonds Payable, net of discount of P348,002 Deferred Tax Liability Total Non-current Liabilities

P3,169,880 4,651,998 1,350,000 P9,171,878

MULTIPLE CHOICE 1. 2. 3. 4. 5. 6.

P 200,000

D D A C A D

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Solutions – Chapter 8 Liabilities 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

B D C B B C C B B D D B B B

1. D

550,000 + 4,700,000 + 5,000,000 + 4,000,000 = 14,250,000 Total issue price Issue price attributable to the debt P5,000,000 x 0.6209 = P3,104,500 400,000 x 3.7908= 1,516,320 Issue price attributable to the conversion privilege

2. D

P5,500,000 4,620,820 P 879,180

Issue price attributable to the debt Date

Jan. 2, 2010 Dec. 31, 2010 Dec. 31, 2011 Dec. 31, 2012

P4,620,820

Effective Interest (10%)

Nominal Interest (8%)

Discount Amortization

P462,082 468,290 475,119

P400,000 400,000 400,000

P 62,082 68,290 75,119

Amortized cost, end P4,620,820 4,682,902 4,751,192 4,826,311

3. A

Carrying value of the bonds on December 31, 2010

P4,682,902

4. C

Interest expense for 2011 =

P 468,290

5. A

Conversion of P2,000,000 on January 1, 2010 Bonds Payable Paid in Capital from Bond Conversion Privilege (879,180 x 2/5) Discount on Bonds Payable (248,808 x 2/5) Ordinary Share Capital (P2,000,000/P1,000 x 8 x 100) Share Premium

6. D

7 B

Retirement price P2,000,000 x 105% Carrying value of P2,000,000 bonds 4,751,192 x 2/5 Loss in profit or loss Interest expense for 2012 if P2,000,000 bonds were retired P475,119 x 3/5 =

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2,000,000 351,672 99,523 1,600,000 652,149 P2,100,000 1,900,477 P 199,523 P 285,072

Solutions – Chapter 8 Liabilities

Items 8 through 11 8. D

Annual rate = 70,000/500,000 = 14%

9. C

Carrying value on January 1, 2012 = 555,738 + 1,562 = 557,300 Effective interest, January 1 to June 30 = 35,000 – 1,562 = 33,438 Effective semiannual rate = 33,438 / 557,300 = 6% Effective annual rate = 6% x 2 = 12%

10. B

Premium amortization – July 1 to Dec. 31, 2012 Nominal Effective = 6% x 555,738 Amortization Premium amortization – January 1 to Dec. 31 Total amortization for 2012

P35,000 33,344 P 1,656 1,562 P 3,218

Interest expense for 2012 = 33,438 + 33,344 =

P66,782

11. B

12. C 1,500,000 x 12% 2,500,000 x 12% x 6/12 Total Interest Expense recorded 13. C

= =

P180,000 150,000 P330,000

1,500,000 x 12% x 10/12 = 2,500,000 x 12% x 6/12 = 1,000,000 x 12% x 8/12 = Total

P150,000 150,000 80,000 P380,000

14. B Face Interest payable 1,000,000 x 12% x 8/12 = Total

P1,000,000 80,000 P1,080,000

Items 15 through 20 15. B Accounts payable, per client Debit balance in suppliers’ account Shipments from cruise Goods held on consignment Accounts payable, per audit

P5,000,000 200,000 300,000 ( 90,000) P5,410,000

16. D 70,642 x 1/2 =

P

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35,321

Solutions – Chapter 8 Liabilities 17. D Total proceeds Accrued interest 1,000,000 x 11% x 6/12 Retirement price Carrying value As of 12/31/092,101,506 x ½ Amortization 30,864 x 1M/2M x 6/12 Loss 18. B

P4,000,000 x .75131 = Date 9/30/10 9/30/11 9/30/12 9/30/13

P1,100,000 ( 55,000) P1,045,000 P1,050,753 (

7,716)

1,043,037 P 1,963

P3,005,240

Interest Expense

Carrying Value P 3,005,240 3,305,764 3,636,340 4,000,000

300,524 330,576 363,660

Carrying value as of 9/30/12 Amortization 363,660 x 3/12 Carrying value 12/31/2012

P3,636,340 90,915 P3,727,255

19. B P240,000 20. B 5,000,000 (10%) + 2,000,000 (25%) =

P1,000,000

21 – 25 Interest Date March 31, 2010 Sept. 30, 2010 March 31, 2011 Sept. 30, 2011 March 31, 2012 Sept. 30, 2012 March 31, 2013

Interest Paid

Effective Interest

Premium Amortization

600,000 600,000 600,000 600,000 600,000 600,000

538,607 535,538 532,314 528,930 525,377 521,646

61,393 64,462 67,686 71,070 74,623 78,354

21. D

P10,000,000 – P3,000,000 = P7,000,000

22. D

Carrying value of remaining bonds, 9/30/2012 P10,432,910 x 7/10 Amortization of premium 9/30 to 12/31/2012 P78,354 x 7M/10M x 3/6 Carrying value of remaining bonds 12/31/2012 Face value or remaining bonds Premium on bonds payable, 12/31/12

23. C

P7,000,000 x 12% x 3/12

Amortized Cost, End P10,772,144 10,710,751 10,646,289 10,578,603 10,507,533 10,432,910 10,354,556

P7,303,037 ( 27,424) P7,275,613 7,000,000 P 275,613 P 210,000

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Solutions – Chapter 8 Liabilities 24. B

January 1 to March 31 P528,930 x 3/6 April 1 to September 30 October 1 to Dec. 31 521,646 x 7/10 x 3/6 Total interest expense for 2012

P264,465 525,377 182,576 P972,418

25. A

Carrying value of bonds retired: As of Sept. 30, 2012 P10,432,910 x 3/10 Retirement price P3,000,000 x 102% Gain on retirement of bonds

P3,129,873 3,060,000 P 69,873

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