FINACC3: SOLUTION MANUAL CHAPTER 1 AND 2!!

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.FINANCIAL ACCOUNTING
Volume Two
Valix and Peralta
2008 Edition
SOLUTION MANUAL
1
CHAPTER 1
Problem 1-1

Problem 1-2

Problem 1-3

Problem 1-4

1.
2.
3.
4.
5.

1.
2.
3.
4.
5.

1.
2.
3.
4.
5.

1.
2.
3.
4.
5.

A
D
A
C
A

A
C
B
A
A

6.
7.
8.
9.
10.

A
A
D
C
C

C
B
D
A
D

Problem 1-6

B
B
C
A
A

Problem 1-5
1.
2.
3.
4.
5.

A
D
A
D
B

6. A
7. A
8. C
9. B
10. B

Problem 1-7

Accounts payable
1,000,000
Note payable trade
3,000,000
Deposits and advances
Note payable bank
2,000,000
from customers
250,000
Note payable officers
500,000
Notes payable
1,000,000
Accounts payable trade
4,000,000
Credit balances in
Bank overdraft
300,000
customers accounts
200,000
Dividends payable
1,000,000
Serial bonds payable 1,000,000
Withholding tax payable
100,000
Accrued interest on
Income tax payable
800,000
bonds payable
150,000
Estimated warranty liability
600,000
Provision for tax
Estimated damages payable 700,000
assessment
300,000
Accrued liabilities
900,000
Unearned rent income
100,000
Estimated premium liability
200,000
Total current liabilities 4,000,000
Total current liabilities
14,100,000
Problem 1-8
Accounts payable
(500,000 + 100,000)
Accrued liabilities
Note payable - refinanced
Note payable due May 1, 2009
Total current liabilities

600,000
50,000
1,000,000
800,000
2,450,000

Noncurrent liabilitiy:
Bonds payable, due December 31, 2010

2,000,000

2
Problem 1-9
a. Current liabilities:
Note payable bank
Note payable shareholder
Less: Discount on note payable
Accrued interest payable
Total current liabilities

700,000
2,000,000
113,000
1,887,000
189,000
2,776,000

b. Note payable bank:

January 1 April 1, 2008 (2,800,000 x 12% x 3/12)
84,000
April 1 December 31, 2008 (2,100,000 x 12% x 9/12)
189,000
Note payable shareholder:
Amortization of discount from July 1 December 31, 2008
(226,000 x 6/12)
Total interest expense

273,000
113,000
386,000

Problem 1-10
1. Current liabilities:
Accounts payable
Note payable bank
Accrued expenses
Noncurrent liabilities:
Mortgage payable
Note payable due 2010
Total liabilities

7,000,000
12,000,000
4,000,000
4,000,000
3,000,000

23,000,000

7,000,000
30,000,000

2. The note payable to bank is paid from the proceeds of the issuance of share capital of
P4,000,000 on January 31, 2009 and the availment of a financing agreement on
February 15, 2009 with a financially capable commercial bank on April 1, 2009 in the
amount of P3,000,000. Nevertheless, the note payable should continue to be classified
as current.
Problem 1-11 Answer B
Note payable, September 1, 2007
Less: Payment on September 1, 2008
Balance, September 1, 2008

1,800,000
600,000
1,200,000

3
Accrued interest payable from September 1 to December 31, 2008
(1,200,000 x 12% x 4/12)

48,000

Problem 1-12 Answer A

Note payable, October 1, 2007
Less: Payment on October 1, 2008
Balance, October 1, 2008
Interest paid from January 1 to September 30, 2008
(1,200,000 x 15% x 9/12)
Interest accrued from October 1 to December 31, 2008
(800,000 x 15% x 3/12)
Interest expense for 2008

1,200,000
400,000
800,000
135,000
30,000
165,000

Problem 1-13 Answer A

January 1 October 31, 2008 (500,000 x 12% x 10/12)
February 1 July 31, 2008 (1,500,000 x 12% x 6/12)
May 1 December 31, 2008 (800,000 x 12% x 8/12)
Total interest expense of 2008
Less: Recorded interest expense
Understatement of interest expense

50,000
90,000
64,000
204,000
150,000
54,000

Problem 1-14 Answer C

Accrued interest from March 1, 2007 to February 28, 2008
(1,000,000 x 12%)
Accrued interest from March 1 to December 31, 2008
(1,000,000 + 120,000 x 12% x 10/12)
Total accrued interest payable, December 31, 2008

120,000
112,000
232,000

If the interest is compounded annually, it means that the accrued interest for one year will
also earn interest.
Problem 1-15 Answer B
12% note payable refinanced

5,000,000

4
Problem 1-16 Answer A

Accounts payable
Note payable bank
Interest payable
Mortgage note payable
Bonds payable

6,500,000
3,000,000
150,000
2,000,000
4,000,000
15,650,000

Problem 1-17 Answer A

6% Note payable
8% Note payable
Total current liabilities

500,000
800,000
1,300,000

PAS 1, paragraph 63, provides that an entity shall classify its financial liabilities as current
when they are due to be settled within twelve months after balance sheet date even if an
agreement to refinance or reschedule payment on a long-term basis is completed after
balance sheet date and before the financial statements are authorized for issue.
Problem 1-18
2008
1. Cash
Sales

3,600,000
3,600,000

2. Premiums
Cash

390,000

3. Cash (5,000 x 10)

Premium expense (5,000 x 40)
Premiums (5,000 x 50)

50,000
200,000

4. Premium expense (5,000 x 20)

Cash

100,000

5. Premium expense (2,000 x 60)

Estimated premiums payable

120,000
120,000

390,000

250,000
100,000

5
2009
1. Estimated premiums payable
Premium expense
Reversing entry.
Cash

120,000
120,000
4,200,000

Sales

4,200,000

2. Premiums
Cash

580,000

3. Cash (9,000 x 10)

Premium expense (9,000 x 40)
Premiums (9,000 x 50)

90,000
360,000

4. Premium expense (9,000 x 20)

Cash

180,000

5. Premium expense (3,000 x 60)

Estimated premiums payable

180,000
180,000

580,000

450,000
180,000

Problem 1-19
1. Cash (400,000 x 9)
Sales
2. Premiums
Cash
3. Premium expense
Cash

3,600,000
3,600,000
900,000
900,000
30,000
30,000

4. Cash (8,000 x 5)
Premium expense (8,000 x 85)
Premiums (8,000 x 90)

40,000
680,000

5. Premium expense (2,000 x 85)

Estimated premiums payable

170,000
170,000

720,000

Bottle caps to be redeemed (25% x 400,000)

Less: Bottle caps redeemed (8,000 pens x 10)
Bottle caps outstanding

100,000
80,000
20,000

6
Premiums to be distributed on the balance of bottle caps (20,000 /10)
6. Premium expense
Cash (30 x 5,000)
Problem 1-20
2008

2,000

150,000
150,000

1. Cash
Sales
2. Premiums - towels
Cash

2,500,000
2,500,000
175,000
175,000

3. Cash (1,000 x 20)

Premiums expense
Premiums towels (1,000 x 100)

20,000
80,000
100,000

4. Premium expense (1,000 X 5)

Cash
5. Premium expense
Estimated premiums payable (600 X 85)

5,000
5,000
51,000
51,000

2009
1. Estimated premiums payable
Premium expense
Cash
Sales
2. Premiums - towels
Cash
3. Cash (1,800 x 20)
Premiums expense
Premiums towels (1,800 x 100)

51,000
51,000
3,125,000
3,125,000
200,000
200,000
36,000
144,000
180,000

4. Premium expense (1,800 X 5)

Cash

9,000
9,000

7
5. Premium expense
Estimated premiums payable (800 X 85)

68,000
68,000

Statement classification
Current asset:
Premiums towels
Current liability:
Estimated premiums payable
Selling expense:
Premium expense

136,000

2008

2009

75,000

95,000

51,000

68,000

170,000

Problem 1-21 Answer B

Coupons to be redeemed
(160,000 x 60%)
Less: Coupons redeemed
Balance

Problem 1-22 Answer D

96,000
40,000
56,000

Number of premiums (56,000 / 5) 11,200

Premiums to be distributed
(250,000 x 80% / 10)
Premiums distributed
Balance

20,000
15,000
5,000

Premium liability (5,000 x 100)

500,000

Amount of liability (11,200 x 20) 224,000

Problem 1-23 Answer B

Problem 1-24 Answer B

Premiums distributed in 2009 5,500

Estimated premiums in 2009
500

Coupons to be redeemed
80% x 500,000)
6,000
Less: Coupons redeemed
Less: Estimated premiums in 2008
200
Coupons outstanding
Premiums applicable to 2009
5,800
Liability for unredeemed
Premium expense (5,800 x 60) 348,000
coupons (100,000 x 15)

400,000 Total
300,000
100,000
1,500,000

Problem 1-25 Answer C

Total coupons issued and to be redeemed (600,000 x 70% x 110%)
Less: Total payments to retailer
Liability for underdeemed coupons 12/31/2008

462,000
220,000
242,000

8
Problem 1-26
Accrual approach
2008
1. Cash (300 x 15,000)
Sales
2. Warranty expense
Estimated warranty liability (60% x 300 = 180 x 800)
3. Estimated warranty liability
Cash

4,500,000
4,500,000
144,000
144,000
40,000
40,000

2009
1. Cash (500 x 15,000)
Sales

7,500,000
7,500,000

2. Warranty expense
Estimated warranty liability (60% x 500 = 300 x 800)
3. Estimated warranty liability
Cash

240,000
240,000
150,000
150,000

Expense as incurred approach

2008
1. Cash
Sales

4,500,000
4,500,000

2. Warranty expense
Cash

40,000
40,000

2009
1. Cash
Sales

7,500,000
7,500,000

2. Warranty expense
Cash

150,000
150,000

9
Problem 1-27
Accrual approach
2008
1. Cash
Sales
2. Warranty expense
Estimated warranty liability (14% x 5,000,000)
3. Estimated warranty liability
Cash

5,000,000
5,000,000
700,000
700,000
390,000
390,000

2009
1. Cash
Sales

9,000,000

2. Warranty expense

1,260,000

9,000,000

Estimated warranty liability (14% x 9,000,000)

3. Estimated warranty liability
Cash

1,260,000
900,000
900,000

Expense approach
2008
1. Cash
Sales
2. Warranty expense
Cash
2009
1. Cash
Sales
2. Warranty expense
Cash

5,000,000
5,000,000
390,000
390,000
9,000,000
9,000,000
900,000
900,000

10
Problem 1-28
Units sold:
October
November
December
Total
Multiply by
Total failures expected
Less: Failures already recorded:
October sales
November sales
December sales
Expected future failures
Multiply by
Estimated cost
Warranty expense
Estimated warranty liability

32,000
28,000
40,000
100,000
2%
2,000
640
360
180

1,180
820
150
123,000

123,000
123,000

Problem 1-29 Answer D

Warranty expense (2,400 x 300)

720,000

Problem 1-30 Answer C

Warranty expense (3,000 x 80)
Less: Actual warranty cost
Warranty liabilityJune 30, 2008

Problem 1-31 Answer A

240,000
70,000
170,000

Warranty expense
(5% x 5,000,000)

250,000

Problem 1-32 Answer B

Warranty expense:
2008 (5,000,000 x 7%)
2009 (7,000,000 x 7%)
Warranty costs:
2008
2009
Warranty liability December 31, 2009

350,000
490,000
840,000
100,000
300,000

400,000
440,000

11
Problem 1-33 Answer A
Net sales (640,000 / 8%)
Problem 1-34 Answer A

8,000,000

Normal defect (500 x P10,000 x 25%)

Significant defect (500 x P30,000 x 15%)

1,250,000
2,250,000
3,500,000

Problem 1-35
1. Cash
Gift certificates payable

500,000

2. Gift certificates payable

Sales

400,000

3. Gift certificates payable

Forfeited gift certificates (8% x 500,000)

500,000
400,000
40,000
40,000

Problem 1-36
1. Cash

900,000

Gift certificates payable

900,000

2. Gift certificates payable

Sales

780,000

3. Gift certificates payable

Forfeited gift certificates

40,000

Unearned revenue January 1

Add: Gift certificates sold
Total
Less: Gift certificates redeemed
Expired gift certificates
Unearned revenue December 31

780,000
40,000
260,000
900,000
1,160,000
780,000
40,000
820,000
340,000

12
Problem 1-37 Answer C
Unearned revenue January 1
Add: Gift certificates sold
Total
Less: Gift certificates redeemed
Expired gift certificates
Unearned revenue December 31

650,000
2,250,000
2,900,000
1,950,000
100,000
2,050,000
850,000

Problem 1-38 Answer D

2008 Sales of gift certificates (2,500,000 x 90%)
Less: 2007 Redemption of current year sales
Unearned revenue December 31, 2008

2,250,000
1,750,000
500,000

Unredeemed January 1, 2008

Less: 2008 Redemption of prior year sales
Expired gift certificates

750,000
250,000
500,000

Problem 1-39 Answer D

1. Cash
Unearned service contract revenue
Service contract expense

980,000
980,000
520,000

Cash
Unearned service contract revenue
Service contract revenue

520,000
860,000

2. Unearned revenue January 1

Cash receipts from contracts sold
Total
Less: Service revenue recognized
Unearned revenue December 31

860,000
600,000
980,000
1,580,000
860,000
720,000

13
Problem 1-40 Answer B
Outstanding contracts on December 31, 2008 that will expire during
2009
2010
2011
Unearned service contract revenue

150,000
225,000
100,000
475,000

Problem 1-41 Answer A

The entire amount of P720,000 will be considered deferred revenue on December 31, 2008
because the subscriptions start with the January 2009 issue.
Problem 1-42 Answer A
Monthly subscriptions (7,200,000 / 12)
The subscriptions after the September 30 cut-off are:
October
November
December
Total unearned subscription revenue December 31, 2008
The above subscriptions will be served in the next publication in 2009.
Problem 1-43 Answer C

600,000
600,000
600,000
600,000
1,800,000

Subscriptions received in 2008 that will expire in 2010

Subscriptions received in 2009 that will expire in 2010
Subscriptions received in 2009 that will expire in 2011
Unearned subscription revenue December 31, 2009

125,000
200,000
140,000
465,000

Problem 1-44 Answer B

Liability for refundable deposit January 1
Deposits made in 2008 (100,000 x 5)
Total
Less: Deposits refunded in 2008 (110,000 x 5)
Balance December 31(current liability)

150,000
500,000
650,000
550,000
100,000

The lease deposit is a noncurrent liability.

14
Problem 1-45 Answer C
Advances January 1
Advances received
Total
Advances applied
Advances canceled
Advances December 31

1,180,000
1,840,000
3,020,000
(1,640,000)
( 500,000)
880,000

Problem 1-46 Answer B

B
B
B + .10B
1.10B
B
B

=
=
=
=
=
=

.10 (1,650,000 B)
165,000 - .10B
165,000
165,000
165,000 / 1.10
150,000

Problem 1-47 Answer A

Income after bonus and tax (260,000 / 10%)
Income before tax (2,600,000 / 65%)
Income before bonus and tax (4,000,000 + 260,000)

2,600,000
4,000,000
4,260,000

Proof
Income before bonus and tax
Less: Bonus
Income before tax
Less: Tax (35% x 4,000,000)
Income after bonus and tax

4,260,000
260,000
4,000,000
1,400,000
2,600,000

Problem 1-48 Answer B

B
T
B
B
B
B + .05B - .0175B
1.0325B
B
B

=
=
=
=
=
=
=
=
=

.05 (5,000,000 B T)
.35 (5,000,000 B)
.05 [5,000,000 B - .35 (5,000,000 B)]
.05 (5,000,000 B - 1,750,000 + .35B)
250,000 .05B - 87,500 + .0175B
250,000 87,500
162,500
162,500 / 1.0325
157,385

15
T = .35 (5,000,000 157,385)
T = 1,694,915
Proof of bonus
B = .05 (5,000,000 157,385 1,694,915)
B = 157,385
Problem 1-49
1. Cash
Containers deposit

390,000
390,000

Containers deposit
Cash

313,000

Containers deposit
Containers

30,000

313,000

30,000
Containers deposit on January 1, 2008 applicable to 2006 deliveries
Less: Containers returned in 2008 applicable to 2006 deliveries
Balance expired and no longer refundable
2. Containers deposit January 1, 2008
Add: Containers deposit in 2008
Total
Less: Containers returned in 2008
Containers not returned and expired
Containers deposit December 31, 2008

75,000
45,000
30,000
290,000
390,000
680,000

313,000
30,000

343,000
337,000

Problem 1-50
1. Only a disclosure is necessary because it is not probable that the company will
liable, although the amount can be measured reliably.

be

2. Retained earnings
Estimated liability for income tax
3. Accounts receivable Sunset
Loss on guaranty
Note payable bank

200,000
200,000
120,000
80,000
200,000

16
Problem 1-51
1. Unearned subscription revenue
Subscription revenue (3,000,000 2,300,000)
2. Loss on damages
Estimated liability for damages
3. Loss on damages
Estimated liability for damages

700,000
700,000
1,500,000
1,500,000
1,000,000
1,000,000

Problem 1-52 Answer A

The probable loss is recorded but the possible loss is only disclosed.
`
Problem 1-53 Answer C
The best estimate is recorded. The accepted BIR offer is not recorded because it was made
after the statements are issued.
Problem 1-54 Answer D
The provision should be accrued because it is probable and measurable. The accrued
amount is P350,000 which is the midpoint of the range in the absence of the best estimate
within the range.
Problem 1-55 Answer D
The contingent asset is disclosed only because the case is unresolved on December 31,
2008. The issue is what amount of asset will be disclosed. Since the case is settled in March
2009 after the issuance of the 2008 financial statements, the amount P1,500,000 should be
disclosed. However, if the case is settled before the issuance of the statements, the actual
award of P1,000,000 should be disclosed.
Problem 1-56 Answer A

Haze can report a gain of P1,500,000 in its 2008 income statement because this amount is
already settled on December 31, 2008. However, the remainder of P3,000,000 is only
disclosed because the defendant has appealed the said amount.

17
Problem 1-57 Answer A
The loss on the first lawsuit is both probable and measurable and therefore can be accrued
as a provision.
Problem 1-58 Answer B
Environmental cost
Litigation cost
Total accrued liability

500,000
300,000
800,000

Both are accrued as provision because the loss is probable and measurable.
Problem 1-59 Answer D
Assessment on appeal (50% x 1,600,000)
Environmental cost
Total provision
The loss from the guaranty is not accrued because it is remote.

800,000
1,500,000
2,300,000