CHAPTER 1

CURRENT LIABILITIES, PROVISIONS AND

CONTINGENCIES
PROBLE
MS
1-1. (Washington
Company)
Accounts Payable,
12/31/12, before
adjustments
Unrecorded checks
in payment to
creditors
Unrecorded
purchases (150,000
x 98%) Accounts
Payable, 12/31/12,
as adjusted
1-2.

(Adams Company)

16

1,000,000

(350,000)

147,000
797,000

Accounts Payable, 12/31/12, before adjustments

Goods purchased FOB shipping point, lost in
transit
Returned to supplier
Accounts Payable, 12/31/10, as adjusted
1-3.

P1,500,000
240,000
(80,000)
P1,660,000

(Jefferson Corporation)
(a) (1) Gross Method
Dec. 16 Purchases
Freight in
Accounts Payable Intel Company
Cash
19
26

31

26
31

66,000
1,400

Purchases
Accounts Payable Celeron Corporation

72,000

Accounts Payable- Intel Company

Purchase Discount (2% x 66,000)
Cash

66,000

Accounts Payable Celeron Corporation

Purchase Discount (2% x 72,000)
Cash

72,000

(a) (2) Net Method

Dec. 16 Purchases
Freight in
Accounts Payable Intel Company
Cash
19

66,000
1,400

72,000
1,320
64,680
1,440
70,560
64,680
1,400
64,680
1,400

Purchases
Accounts Payable Celeron Corporation

69,840

Accounts Payable Intel Company

Cash

64,680

Accounts Payable Celeron Corporation

Purchase Discounts Lost
Cash

69,840
720

69,840
64,680

70,560

Chapter 1 Current Liabilities, Provisions and Contingencies

(b)
Dec. 31

1-4.

Purchase Discounts Lost

Accounts Payable Celeron
Corporation

(Madison Company)
(a)
10/01/12 Automobiles (1,747,200 112%)
Discount on Notes Payable
Notes Payable
12/31/12

10/01/13

140,400

46,800

140,400
1,747,200
1,747,200

P1,606,800

1,080,000
120,000
1,200,000

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
(b) At December 31, 2013:
Current Liabilities:
Notes Payable, net of P50,000 Discount
1-6.

1,747,200

Interest Expense
Discount on Notes Payable
187,200 46,800

(Monroe Corporation)
(a)
06/01/12 Cash
Discount on Notes Payable
Notes Payable

05/31/13

1,560,000
187,200
46,800

(b) At December 31, 2012:

Current Liabilities:
Notes Payable, net of P140,400 Discount

12/31/12

720

Interest Expense
Discount on Notes Payable
1,560,000 x 12% x 3/12

Notes Payable
Cash

1-5.

720

70,000

50,000
1,200,000
1,200,000

P 1,150,000

(Unison Company)
(a) Market interest rate is 5%
Principal
Stated interest (8,000,000 x 9%)
Maturity value
PV factor at 5% for 1 period
Present value at May 1, 2012
Face value of the note
Premium on Notes Payable

P8,000,00
0
720,000
P8,720,00
0
0.9524
P8,304,92
8
8,000,000
P 304,928

Chapter 1 Current Liabilities, Provisions and Contingencies

05/01/12

Equipment
Notes Payable
Premium on Notes Payable

12/31/12

Interest Expense
Premium on Notes Payable (304,928 x 8/12)
Interest Payable(8,000,000 x 9% x
8/12)

8,304,928
8,000,000
304,928
276,715
203,285
480,000

4/30/13

Interest Expense
138,537*
Premium on Notes Payable (304,928
203,285)
101,643
Interest Payable
480,000
Notes Payable
8,000,000
Cash
8,720,000
*balancing figure (difference is due to rounding off of present value factor)
Carrying value as of December 31, 2012
Notes Payable
Premium on Notes Payable
Interest Payable
Total

(or 8,304,928 + 276,715)

P8,000,00
0
101,643
480,000
P8,581,64
3

b. market rate of interest is 12%.

Principal
Stated interest (8,000,000 x 9%)
Maturity value
PV factor at 12% for 1 period
Present value at May 1, 2012
Face value of the note
Discount on Notes Payable
05/01/12

Equipment
Discount on Notes Payable
Notes Payable

12/31/12

Interest Expense
Discount on Notes Payable (213,912 x
8/12)
Interest Payable(8,000,000 x 9% x
8/12)

P8,000,00
0
720,000
P8,720,00
0
0.8929
P7,786,08
8
8,000,000
P 213,912
7,786,088
213,912
8,000,000
622,608
142,608
480,000

4/30/13

Interest Expense
311,304*
Interest Payable
480,000
Notes Payable
8,000,000
Discount on Notes Payable
71,304
Cash
8,720,000
*balancing figure (difference is due to rounding off of present value factor)
Carrying value as of December 31, 2012
Notes Payable

P8,000,00
0

Discount on Notes Payable

Interest Payable
Total

(or 7,786,088 + 622,608)

(71,304)
480,000
P8,408,69
6

Chapter 1 Current Liabilities, Provisions and Contingencies

1-7.

(Harrison Company)
Amount to be accrued on 12/31/10 (the best estimate of the obligation)
P800,000
No obligation is recognized for the suit filed in September 2012 nor for the
suit filed in October. However, disclosure is necessary in the notes to the
financial statements for the suit filed in October 2012 by Pasig City
government since it is reasonably possible the Pasig City government will
be successful.

1-8.

( Tyler Corporation)
a.
b.

c.

1-9.

Premium Inventory
Cash / Accounts Payable

225,000

Premium Expense
Cash (1,000 x 50)
Premium Inventory (1,000 x 150)

100,000
50,000

Premium Expense
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

300,000

225,000

150,000

(Polk Company)
(a) Premium Expense (300,000 x 30%)/20 x 28
Cost of mugs already distributed (4,000 x
28)
Estimated liability for premium claims
outstanding
(b)

300,000

P126,000
112,000
P 14,000

Premium Expense for 2012 (see a)

P126,000

1-10. Taylor Company

(a)
Expected future redemption, beg
Redeemed during the year
Expected future redemption, end
Total
Net cost of premium (120 50)
Premium expense

(2)

2011
P40,000
30,000
P70,000
5
P14,000
x P70
P980,00
0

2012
P(30,000)
90,000
80,000
P140,000
5
P28,000
x P70
P1,960,000

Provision for premium claims outstanding

12/31/10 (30,000/5) x
P70
12/31/11 (80,000/5) x
P70

P 420,00
P1,120,00

Chapter 1 Current Liabilities, Provisions and Contingencies

1-11. (Van Department Store)

(a)
Allocation of original consideration
received:
Sales revenue (98% x P5,000,000)
Liability for Customer Loyalty Awards (2% x
P5,000,000)
Revenue in 2011 as a result of redemption
100,000 x 25/90
Revenue in 2012 as a result of redemption
Total accumulated revenue from redemption as of
12/31/12 (100,000 x 60/95)
Less revenue earned in
2011
Revenue in 2012 as a result of redemption

P4,900,000
P 100,000
P

(b)
Liability as of 12/31/11 (100,000 27,778)
Liability as of 12/31/12 (100,000 63,158)

27,778

63,158

27,778
35,380

P 72,222
P 36,842

1-12. (Jackson Company)

2010
Sale of product
Accts. Receivable/Cash
Sales
Accrual of repairs
Warranty Expense
Warranty Liability
6% x 1M
6% x 2.5M
6% x 3.5M
Actual repairs
Warranty Liability
Cash/ AP, etc.

2011

2012

1,000,000
2,500,000
3,500,000
1,000,000
2,500,000
3,500,000
60,000

150,000
60,000

8,000

150,000

210,000
210,000

38,000

112,500
112,500

38,000
8,000

1-13. (Filmore Company)

(a)
Warranty Liability, January 1
Warranty expense (8% x 4,200,000)/(8% x 6,960,000)
Actual repair costs
incurred
Warranty liability, December 31

2011
P
0
336,000

2012
P187,200
556,800

(148,800)
P187,200

(180,000)
P564,000

(b)
On 2011 sales (4,200,000) x 5% x
On 2012 sales [(1/2 of 3%) + 5%] x
6,960,000
Warranty Liability, December 31, 2012, as analyzed
1-14. (Pierce Corporation)
Cash
Unearned Revenue from Gift Certificates
Outstanding
Unearned Revenue from Gift Certificates Outstanding
Sales

P105,000
452,400
P557,400
2,000,000
2,000,000
1,280,000
1,280,000

Note: The gift certificates estimated to expire will be recognized as

revenues at the date of actual expiration.

Chapter 1 Current Liabilities, Provisions and Contingencies

1-15. (Buchanan Company)

Cash
Unearned Revenue from Gift Certificates
Outstanding
Unearned Revenue from Gift Certificates
Outstanding
Sales
Unearned Revenue from Gift Certificates
Outstanding
Revenue from Forfeited Gift Certificates

3,000,000
3,000,000
2,750,000
2,750,000
150,000
150,000

1-16. (Lincoln Company)

Refundable Deposits, January 1,
2012
Deposits received during 2012
Deposits refunded during 2012
Deposits forfeited during 2010 (100,000 82,000)
Refundable Deposits, December 31,
2012
1-17. (Johnson Company)
(a)
Cash
Unearned Service Contract
Revenue

P250,000
200,000
(267,000)
(18,000)
P165,000

2011

2012

720,000

Cost of Service Contract

25,000
Cash, Accounts Payable, etc.
Unearned Service Contract
Revenue
72,000
Service Contract Revenue
2011: 720,000=72,000x20% x
2012: 720,000=72,000x20% x
=108,000720,000 x 30% x
=864,000 x 30% x
86,400
72,000+108,000+86,400=266,400

(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

864,000
720,000

864,000
100,000

25,000

100,000
266,400

72,000

266,400

2011

2012

-----

P648,000

P720,000
(72,000)
P648,000

864,000
(266,400)
P1,245,600

Unearned Service Contract Revenue at December 31, 2012 may also be

computed as:
720,000 x 65%
468,000
864,000 x 20% x
86,400
864,000 x 80%
691,200
Total
1,245,600
(c)
2011
2012
Revenue from service
contracts
P72,000
P266,400
Cost of service contracts
25,000
100,000
Profit from service
contracts
P47,000
P166,400

Chapter 1 Current Liabilities, Provisions and Contingencies

1-18. (Grant Publication)

(a)
Subscriptions sold in 2009 and 2010
(5,000,000 + 4,500,000)
Expired subscriptions in
2009
2010 (2,800,000 + 1,200,000)
Unearned subscriptions, Jan. 1, 2011
(b)

(b)

(c)

2011
Cash
Unearned Subscription Revenue

P9,500,000
P1,000,000
4,000,000

5,500,000
5,500,000

Unearned Subscription Revenue

Subscription Revenue
1,200,000 + 2,000,000 + 1,800,000
2012
Cash
Unearned Subscription Revenue

5,000,000

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

5,000,000
P4,500,000

5,000,000
7,000,000
7,000,000
5,700,000
2011

2012

P4,500,000 P5,000,000
5,500,000 7,000,000
(5,000,000) (5,700,000)
P5,000,000 P6,300,000

1-19. (Hayes Co.)

Property Taxes Payable
Property tax expense July 1 to Dec. 31
(72,000 x 6/12)
P
36,000
Payment in 2012 (Nov. payment = 72,000/3)
(24,000)
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
2012 payments for 2012 income tax(480,000
190,000)
(290,000)
VAT Payable
Output VAT (12% x 9,000,000)
P 1,080,000
2012 payments of VAT
(725,000)
Total current liabilities for taxes

P 12,000

195,100

355,000
P562,100

1-20. (Garfield Company)

1.
B = 8,000,000 x 8% = 640,000

2.

B = 8% (8000,000 B
) B = 640,000 - .08B

Chapter 1 Current Liabilities, Provisions and Contingencies

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

1-21. (Arthur Corporation)

a.
Bonus to sales manager = .08 x 3,000,000
Bonus to each sales agent = .06 x
3,000,000

2.

240,000

180,000

Total Bonus = .36 {3,000,000 B

T ) T = .30 {3,000,000 B }
{3,000,00
B = .36
0
B - .30 (3,000,000 B)}
B = .36
{3,000,000 B 900,000 + .30B}
B = 756,000 - .252B
B = 756,000/1.252
B (Each): 603,834 / 3

3.

=
=

603,834
(total)
201,278

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

1-22. (Cleveland, 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

1-23. (McKinley Company)

a.

Vacation earned by employees in 2012

P
200,000

Adjustment in rate for unused vacation pay in previous

periods
(250,000 150,000) x 10%
Vacation pay expense in 2012

2.

Unused vacation pay in previous periods, adjusted to

current rate (250,000 150,000) x 110%
Vacation pay earned by employees in 2012 unused

10,000
P
210,000
P110,000
200,000

Chapter 1 Current Liabilities, Provisions and Contingencies

P310,00
0

Liability for vacation pay, 12/31/12

1-24. (Roosevelt Corporation)

The full amount of P2,000,000 is classified as current liability because on December
31, 2012 (the reporting date), the enterprise has no unconditional right to defer the
settlement of the obligation for a period of at least 12 months.

1-25.

Current
Case 1 . Taft, Inc.
3,600,000 x 80%
3,000,000 2,880,000
Case
2.
Taft, Inc.
Case
3.

Wilson Corporation
Situation A
Situation B
Situation C
Situation D

P2,880,000
P 120,000
2,000,000

Current

Non-current

6,000,000
0
6,000,000
-0-

0
6,000,000
0
6,000,000

1-26. (Harding Company)

Current Liabilities
14% Notes Payable, refinanced on March 10,
2013
Current portion of 16% notes payable
Total current liabilities
1-27. (Coolidge Company)
Current Liabilities:
Accounts Payable
Mortgage Notes Payable
Bank Notes Payable due currently
Interest Payable
Value Added Tax Payable
Income Tax Payable
Withholding Tax Payable
Total Current Liabilities

Noncurrent

P2,500,000
800,000
P3,300,00
0

P 270,000
1,300,000
100,000
7,500
288,000
315,000
120,000
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.

Chapter 1 Current Liabilities, Provisions and Contingencies

MULTIPLE CHOICE QUESTIONS

Theory
MC1
MC2
MC3
MC4
MC5
MC6
MC7
MC8
MC9
MC10

D
B
C
B
B
A
B
C
C
C

Problems
MC23
D
MC24
C
MC25
MC26
MC27
MC28

A
D
C
A

MC29
MC30
MC31
MC32
MC33
MC34

D
D
D
C
A
A

MC35
MC36

D
B

MC37

MC38
MC39
MC40

A
A
B

MC41
MC42

D
C

MC43

MC44
MC45

C
C

MC46
MC47
MC48
MC49
MC50

B
C
A
D
A

MC11
MC12
MC13
MC14
MC15
MC16
MC17
MC18
MC19
MC20
MC21
MC22

D
B
D
B
B
A
B
A
B
C
D
D

540,000 + 30,000 + 15,000 = 585,000

100,000 + (100,000 x 0.3 x 9/12) = 102,250 x .944 = 96,524
Proceeds = 100% - 10% = 90% ; Effective interest = 10%/90% =
11.11%
P500,000, which is the reasonable estimate
Given
65,000 + 815,000 780,000 = 100,000
6% ( 4,500,000-2,500,000)+=2,5012,000= +
(8,500 x
126,750
540,000 + 960,000 780,000 = 720,000
[(1/2 x 35%) + 50% x 2,100,000] + 92.5%(2,730,000) = 3,942,750
[(15% + 35%) x P2,100,000] + (1/2 x 15% x 2,730,000) = 729,750
(15% + 35%) x P2,730,000 = 682,500
(x 50% x 2,100,000) + (67.5% x 2,730,000) + (92.5% x 2,475,000) =
4,657,125
1,000 x 750 = 750,000
42,000 + (750,000 x 3/10) = 267,000
{(500,000 x 80%) 300,000} = 100,000; 100,000 x (50+5-40) =
1,500,000
{ (3,000,000 x 60%) / 10 } 42,000 =
138,000;
138,000 x P0.50 = 69,000
(400,000 x 70%) 100,000 = 180,000 ; ( 180,000 /5) x 20 = 720,000
(180,000 x 50%) 75,000 = 15,000
24,000 x 300 =
7,200,000
7,200,000 1,700,000 = 5,500,000
1,500,000 x 4% =
60,000
B = 0.45 {2,000,000 B - .30 (2,000,000
B}) ;
B = 479,087
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
B = 0.10 {2,500,000 - .30 (2,500,000 B)} = 180,412
600,000 + 900,000 + 400,000 = 1,900,000
2,400,000 1,900,000 = 500,000
3,800,000 + 2,000,000 5,000,000 = 800,000 decrease in profit
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

1
0