ASIA PACIFIC COLLEGE

Makati City
Practical Accounting Problems 1 Liabilities Tiu, MF May 2007

1. The unadjusted trial balance of Atlanta Company at December 31, 2006, included the following liabilities Accounts payable P 1,000,000 6% Notes payable due January 15, 2007 2,500,000 7.2% Notes payable due January 31, 2007 1,800,000 8% Notes payable due January 31, 2007 1,200,000 The following information was available at the time the 2006 financial statements were being prepared: Accounts payable included a P100,000 advance from the companys president which is due on December 31, 2008 Atlanta Company was able to reschedule the maturity date of the 6% notes to January 15, 2008 through an agreement made with Hawks Financing Company which was completed as of December 28, 2006. The original note will be canceled at maturity date to be replaced by a new note bearing a maturity date of January 15, 2008. Atlanta Company was able to move the maturity date of its 7.2% notes to January 31, 2008 after completing an agreement with Falcons Financing Company on January 4, 2007. The board of directors of Atlanta Company in its December 28, 2007 meeting decided unanimously that it will refinance its 8% notes from Braves Lending Company. The amount to be presented as current and non-current liabilities in Atlanta Companys December 31, 2006 balance sheet is: 2. The following schedule of Baltimore Companys outstanding liabilities as of December 31, 2006 is provided as follows: 6% Notes payable due February 1, 2007 P 2,500,000 8% Loan payable - due February 15, 2008 5,000,000 10% Loan payable due March 1, 2008 15,000,000 The following information was provided at the time the 2006 financial statements were being prepared: The 6% note includes a clause that allows Baltimore Company to reschedule the notes maturity date for a maximum period of 2 years from the date of maturity. Management has not yet made a clear intent as to whether it will make use of its roll-over option or not up to this date. The 8% loan includes a stipulation that Baltimore Company must maintain a current ratio of 1.5:1 at all times, otherwise the entire loan would be demandable immediately. At December 31, 2006, Baltimore Companys current assets amounted to P14,000,000 while its current liabilities totaled to P10,000,000. Management intends to seek a waiver from Ravens Finance Company with an assurance that it will bring its current ratio back to a 2:1 ratio before January 10,2007 and that it will not let it fall below that ratio again during the duration of the loan. On January 12, 2007, Ravens Finance Company cancelled its demand for payment after Baltimore Company successfully improves it current ratio to 1.5:1. The 10% loan includes a clause that Baltimore Company must maintain a shop within a 3-block radius from Orioles Rural Bank, otherwise the bank will terminate the loan and have it demandable. However, the loan agreement also provided a period of 12-months for Baltimore Company to set up a new shop from the time it closes its original one before the bank will issue a demand letter for the loan. On December 26, 2006, in accordance with the municipal order, Baltimore Company sold its shop to allow the construction of a road. At present, Baltimore Company is still scouting for a new location. The amount to be presented as current and non-current liabilities in Atlanta Companys December 31, 2006 balance sheet is:

3. The balance in Buffalo Companys accounts payable account at December 31, 2006 was P1,800,000 before any year-end adjustments relating to the following: Goods were in transit from a vendor to Buffalo Company on December 31, 2006. The invoice cost was P120,000 and the goods were shipped FOB shipping point on December 29, 2006. The goods were received on January 2, 2007. Goods shipped FOB shipping point on December 20, 2006 from a vendor to Buffalo Company, were lost in transit. The invoice cost was P80,000. On January 5, 2007, Buffalo Company filed an P80,000 claim against the common carrier. Goods shipped FOB destination on December 21, 2006, from a vendor to Buffalo Company, were received on January 6, 2007. The invoice cost was P195,000. The amount that Buffalo Company report as accounts payable on its December 31, 2006 balance sheet is

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4. The balance in California Corporations accounts payable account at December 31, 2006 was P1,350,000 before any necessary year-end adjustments relating to the following: Goods were in transit to California Company from a vendor on December 31, 2006. The invoice cost was P 75,000. The goods were shipped FOB shipping point on December 29, 2006 and were received on January 2, 2007. Goods shipped FOB destination on December 21, 2006, from a vendor to California Company, were received on January 6, 2007. The invoice cost was P37,500. On December 27, 2006, California Company wrote and recorded checks totaling P60,000 which were mailed on January 10, 2007. California Companys December 31, 2006 balance sheet should report accounts payable of 5. Chicago Company has 20 employees who work 8-hour days and are paid hourly. On January 1, 2005, the company began a program of granting its employees 10 days' paid vacation each year. Vacation days earned in 2005 may first be taken on January 1, 2006. Information relative to these employees is as follows: Year Hourly Wages Vacation Days Used per Employee 2005 P 200 0 2006 240 8 2007 290 10 Chicago Company has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned. The amount to be presented as liability for compensated absences in Chicago Companys December 31, 2005, 2006 and 2007 balance sheets

6. Determine the amount of liability at December 31, 2006 for each of the ff independent cases: Dallas Company requires non-refundable advance payments with special orders from customers for machinery constructed to their specification. Information for 2002 follows: Customer advances, 12/31/06 P 415,000 Advances received with orders in 2006 619,000 Advances applied to orders shipped in 2006 530,000 Advances applicable to orders cancelled in 2006 166,000

Eureka Company sells its products in expensive reusable containers. The customer is charged a deposit for each container delivered and received a refund for each container returned within two years after the year of delivery. Eureka Company accounts for the containers not returned within the time limit as being sold at the deposit amount. Information for 2006 is as follows: Containers held by customers at December 31, 2005, from deliveries in 2004 P 255,000 2005 P 672,000 Containers delivered in 2006 P 1,290,000 Containers returned in 2006 from deliveries in 2004 P 180,000 2005

P 420,000

2006

P 470,000

Franklin Company sells portable DVD players for P16,300 each and offers to each customer a 3-year service contract for an additional P675. During 2006, the company sold 300 DVD players and 250 service contracts for cash. Expenses related to the service contracts for 2006 amounted to P20,250. Past records of the company indicate that the pattern of repairs has been 40% in the year after the sale, 36% in the second year, and 24% in the third year. Sales of the contracts are made evenly during the year

Georgetown Company sells subscriptions to a monthly magazine that is delivered to customers at the end of each month, beginning with the end January. Subscriptions are P280 for one year and are received as follows for the first 3 months of 2002: January 700 subscriptions; February 720 subscriptions; and March 780 subscriptions

7. Hawaii Company offers audio discs featuring local bands for 2005 as a premium for every 5 chocolate wrappers presented by customers together with P10. The company sells the chocolate bars to distributors for P50 each. The purchase price of each audio disc to the company is P25; in addition, it costs P5 to mail each CD. The results of the premium plan for the years 2005 and 2006 are as follows: 2005 2006 Audio discs purchased 800,000 900,000 Chocolate bars sold 2,890,000 2,700,000 Wrappers redeemed 1,200,000 1,800,000

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2005 wrappers expected to be redeemed in 2006 290,000 2006 wrappers expected to be redeemed in 2007 350,000 Prepare the necessary journal entries to be recorded that should be made in 2005 and 2006

8. To stimulate the sales of its Honey Puffs breakfast cereal, Indiana Company places one (1) coupon in each box. Five coupons are redeemable for a premium consisting of a hand puppet. In 2006 the company purchases 400,000 puppets at P20 and sells 950,000 boxes of Honey Puffs at P42 a box. Based from its experience with other similar premium offers, the Indiana Company estimates that 60% of the coupons will be mailed back for redemption. In 2006, 300,000 coupons were presented for redemption of which 50,000 coupons remains under processing at December 31, 2006 Prepare the necessary journal entries to be recorded in 2006 relative to the premium plan 9. Jacksonville Company records stamp service revenue and provides for the cost of the redemption in the year stamps are sold to licensees. Jacksonville Companys past experience indicate that only 80 % of the stamps sold to licensees and will be refunded. Jacksonville Companys liability for stamp redemptions was P13,000,000 at December 31, 2006. Additional information for 2006 is as follows: Stamp service revenue from stamps sold licensees P 9,500,000 Cost of redemption (stamps sold prior to 01/01/02) 6,000,000 If all the stamps sold in 2006 were presented for redemption in 2006, the redemption cost would be P5,200,000. The amount reported as Liability for Stamp Redemptions in Jacksonville Companys December 31, 2006 balance sheet is 10. In packages of its products, Kentucky Company includes coupons that may be presented at retail stores to obtain discounts on other Kentucky Company products. Retailers are reimbursed for the face amount of the coupons redeemed plus 10% of that amount for handling costs. Kentucky Company honors requests for coupon redemption by retailers up to 3 months after the consumer expiration date. Kentucky Company estimates that 40% of all coupons issued will ultimately be unredeemed. Information relating to coupons issued by Kentucky Company during 2006 is as follows: Consumer expiration dates 12/31/06 Total face amount of coupons issued P 975,000 Total payments to retailers as of 12/31/02 330,000 The amount to be reported as Liability for Unredeemed Coupons in Kentucky Companys December 31, 2006 balance sheet is

11. Louisiana Company sold 3,000,000 boxes of buco-macapuno pie mix under a new sales promotional program.
Each box contains one coupon, which submitted with P4 entitles the customer to a baking pan. Louisiana Company pays P16 per pan and P2 for handling and shipping. Louisiana Company estimates that 70% of the coupons will be redeemed, even though only 800,000 coupons had been processed during 2006. The amount to be reported by Louisiana Company as Liability for Unredeemed Coupons in its December 31, 2006 is

12. Miami Company sells computers for P20,000 each and also gives each customer a 3-year warranty that requires
the company to perform periodic services and to replace defective parts. During 2006, the company sold 500 computers. Based on experience, the company has estimated the total 3-year warranty costs as P400 for parts and P800 for labor. In 2006, Miami Company incurred actual warranty costs relative to 2006 computer sales of P5,000 for parts and P12,000 for labor. Prepare the necessary journal entries related to the warranty

13. During 2006, New Orleans Company introduced a new product carrying a two-year warranty against defects.
The estimated warranty costs related to peso sales are 3% within 12 months following sale and 5% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2006 and 2007, are as follows: Sales Actual expenditures 2006 5,000,000 100,000 2007 8,000,000 600,000 At December 31, 2007, New Orleans Company would report estimated warranty liability of

14. Oregon Company has a contract with its Chief Executive Officer to pay him a bonus during each of the years
2004, 2005, 2006 and 2007. The income tax rate is 35%. The profit before deductions for bonus and income taxes were P9,000,000 in 2004; P14,000,000 in 2005; P17,000,000 in 2006; and P25,000,000 in 2007. The presidents bonus of 10% is deductible for tax purposes in each year and is to be computed as follows: In 2004 the bonus is based on profit before deductions for bonus and income tax In 2005 the bonus is based on profit after deduction of bonus but before deduction of income tax

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In 2006 the bonus is based on profit before deduction of bonus but after deduction of income tax In 2007 the bonus is based on profit after deduction for bonus and income tax Compute the amount of the bonus for each year. 15. Oakland Corporation pays its outside salespersons fixed monthly salaries and commissions on net sales. Sales commissions are computed and paid on a monthly basis (in the month following the month of sale), and the fixed salaries are treated as advances against commissions. However, if the fixed salaries for salespersons exceed their sales commissions earned for a month, such excess is not charged back to them. Pertinent data for the month of April 2006 for the three salespersons in sales in Sector 7 are as follows: Salesperson Fixed Salary Net Sales Commission Rate A P 10,000 P 200,000 4% B 14,000 400,000 6% C 18,000 600,000 6% Totals P 42,000 P 1,200,000 The amount that Oakland Company should accrue for sales commissions at April 30, 2006 is 16. Pennsylvania Company maintains escrow accounts and pays real estate taxes for its mortgage customers. Escrow funds are kept n interest-bearing accounts. Interest less 10% service fee, is credited to the mortgagees account and used to reduce future escrow payments. Additional information follows: Escrow accounts liability, January 1, 2006 P 900,000 Escrow payments received during 2006 1,500,000 Real estate taxes paid during 2006 1,900,000 Interest on escrow funds during 2006 90,000 Pennsylvania Company should report escrow accounts payable in its December 31, 2006 balance sheet of 17. Philadelphia Company a manufacture of electronic greeting cards, has had a lawsuit filed against it by Queensland Incorporated, another manufacturer of electronic greeting cards. The suit alleges patent right infringements by Philadelphia Company and asks for compensatory damages. For the following likely situations, determine how Philadelphia Company should report the information concerning the lawsuit: a. Philadelphia Companys legal counsel estimates that the infringement case may result in a loss of P1,000,000 but considers the likelihood of losing the case as remote b. Philadelphia Companys legal counsel estimates that the infringement case may result in a loss of P1,200,000 but considers the likelihood of losing the case as reasonably possible

c. Philadelphia Companys legal counsel is convinced that the likelihood of losing the case is probable, the
potential amount of the loss, however, is currently undeterminable d. Philadelphia Companys legal counsel is convinced that the likelihood of losing the case is probable, the potential amount of the loss is estimated to be P1,150,000 e. Philadelphia Companys legal counsel is convinced that the likelihood of losing the case is probable, the potential amount of the loss, based on reliable evidences would be as follows: 20% that the liability would be P800,000; 50% that the liability would be at P1,000,000; 30% that the liability would be P1,200,000 f. Philadelphia Companys legal counsel is convinced that the likelihood of losing the case is probable, the potential amount of the loss, based on reliable evidences would be around P750,000 to P1,500,000.

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