CURRENT LIABILITIES

Mark Anecito R. Perlas

TRUE OR FALSE
1. Without payment of money, without transfer of noncash asset, without performance of service, there is no accounting
liability.
2. The forfeited gift certificates account is classified as other operating income.
3. Accrual approach in accounting for warranty cost is not acceptable for income tax purposes.
4. Provision shall be recognized for future operating losses.
5. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the
reimbursement shall be recognized when it is probable that reimbursement will be received if the entity settles the
obligation.

MULTIPLE CHOICES THEORY

1. To be recognized in the balance sheet, a contingent asset must be
a. Remote
b. Probable
c. Virtually certain
d. Reasonably possible
2. At the date of purchase of a service which is not immediately used up, the cost of such unused service is a(n)
a. Revenue
b. Liability
c. Asset
d. Expense
3. The following are examples of current liabilities, except
a. Income tax payable
b. Deposits from customers
c. Bank overdraft
d. None of the above
4. If the estimated warranty cost is less than the actual cost, the difference is credited to
a. Miscellaneous income
b. Warranty expense
c. Estimated warranty liability
d. Cash

5. Which of the following statements relating to provisions, contingent liabilities and contingent assets is true?
a. A subsequent event or event after the balance sheet date is an event that creates a legal or constructive obligation
that results in an enterprise having no realistic alternative to settling the obligation.
b. A legal obligation is an obligation that is derived from an enterprises actions, where by an established pattern of
past practice, published policies or a sufficiently specific current statement, the enterprise has indicated it will
accept certain responsibilities.
c. A constructive obligation is an obligation that is derived from an enterprises actions and as a result, the enterprise
has created a valid expectation on the part of those other parties that it will discharge those responsibilities.

d. A constructive obligation is likewise an obligation that is derived from a contract (through explicit or implicit
terms), legislation or other operation of law.
6. A department store received cash and issued gift certificates that are redeemable in merchandise. The gift certificates
lapse one year after they are issued. How would the appropriate revenue accounts be affected by the redemption and
lapse of the gift certificates?
a. Increase ; Increase
b. Increase ; No effect
c. No effect ; Increase
d. No effect ; No effect
7. An accrued expense can be best described as an amount
a. Paid and currently matched with earnings
b. Paid and not currently matched with earnings
c. Not paid and not currently matched with earnings
d. Not paid and currently matched with earnings
8. For a liability to exist,
a. There must be an obligation to pay cash in the future.
b. The identity of the party to whom the liability is owed must be known.
c. There must be a past transaction or event.
d. The exact amount must be known.
9. How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be
reported in the sellers financial statements before the performance?
a. Revenue for the entire proceeds
b. Revenue to the extent of related costs expended
c. Unearned revenue to the extent of related costs expended
d. Unearned revenue for the entire proceeds
10. On October 31 of the current year, an entity received an advance payment of 60% of the sales price for special order
goods to be manufactured and delivered within five months. At the same time, the entity subcontracted for production
of the special order goods at a price equal to 40% of the main contract price. What liabilities should be reported in the
entitys October 31 balance sheet?
a. None
b. Deferred revenue equal to 60% of the main contract price and payable to subcontractor equal to 40% of the main
contract price
c. Deferred revenue equal to 60% of the main contract price and no payable to subcontractor
d. No deferred revenue but payable to subcontractor is reported at 40% of the main contract price

1. An entity received notification of legal action against the entity. The attorneys determine that it is probable
the entity will lose the suit and the loss can be estimated reliably. How should the estimated loss be reported?
a. As a loss recorded in other comprehensive income.
b. As a contingent liability reported in the statement of financial position and a loss in the income statement
c. As a provision for loss reported in the statement of financial position and a loss in the income statement
d. In the notes to financial statements as a contingency
2. If a long-term debt becomes callable due to the violation of a loan covenant
a. The debt may continue to be classified as long term if the entity believes the covenant can be renegotiated.
b. The debt must be reclassified as current.
c. Cash must be reserved to pay the debt.
d. Retained earnings must be restricted in the amount of the debt.
3. Which of the following would not be considered a provision?
a. Warranty liability
b. Bad debt

c. Tax payable
d. Note payable
4. A contingency is described as
a. An estimated liability
b. An event which is not recognized because it is not probable that an outflow will be required or the amount
cannot be reasonably estimated.
c. A potentially small liability
d. A potentially large liability
5. Which of the following is reported as interest expense?
a. Pension cost interest
b. Postretirement health-care benefits interest
c. Imputed interest on noninterest-bearing note
d. Interest incurred to finance construction of machinery for own use.
6. The discount resulting from the determination of present value of a note payable should be reported
a. Addition to the face amount of the note.
b. Deferred charge separate from the note.
c. Deferred credit separate from the note.
d. Direct deduction from the face amount of the note.

7. How should an entity calculate the net proceeds to be received from the bond issuance?
a. Discount the bonds at the stated rate of interest.
b. Discount the bonds at the market rate of interest.
c. Discount the bonds at the stated rate of interest and deduct bond issuance cost.
d. Discount the bonds at the market rate of interest and deduct bond issuance cost.
8. Which is a true statement for electing the fair value option for valuing bonds payable?
a. The effective interest method of amortization must be used to calculate interest expense.
b. Discount or premium is disclosed in the notes to the financial statements.
c. The fair value of the bond and the principal obligation value must be disclosed.
d. If the fair value option is elected, it must be applied to all bonds.
9. What method may be used to report the bonds payable at year-end?
a. Amortized cost
b. Fair value through other comprehensive income
c. Amortized cost and fair value through other comprehensive income
d. Amortized cost and fair value through profit or loss
10. Issued convertible bonds are
a. Separated into debt and equity components with the liability component recorded at fair value and the
residual assigned to the equity component
b. Always recorded using the fair value option
c. Recorded at face value for the liability along with the associated premium or discount
d. Recorded at face value without consideration of a premium or discount.

PROBLEMS
1. AMARGO, Inc. provides an incentive compensation plan under which its president receives a bonus equal to 10% of
the corporations income in excess of P 1,500,000 after deduction of income tax and bonus.
If income before income tax and bonus is P 4,800,000 and the tax rate is 32%, the amount of the bonus would be
2. APALIS Company, a division of Philippine Realty Corporation maintains escrow accounts and pays real estate taxes
for Philippines mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service
fee, is credited to the mortgagees account and used to reduce future escrow payments. Additional information follows:
Escrow accounts liability, January 1, 2009
Escrow payments received during 2009
Real estate taxes paid during 2009
Interest on escrow funds during 2009

P 900,000
1,500,000
1,900,000
90,000

What amount should APALIS Company report as escrow accounts liability in its December 31, 2009 balance sheet?
3. Beginning January 1, 2009, BULAN Corp. offered a 3-year warranty from date of sale on any of its products sold after
January 1, 2009. The warranty offer was part of a program to increase sales. Meeting the terms of warranty was expected
to cost BULAN 4% of sales. Sales made under warranty in 2009 totaled P 9,000,000, and one-fifth of the units sold
were returned. These units were repaired or replaced at a cost of P 65,000.
How much is the warranty expense to be reported in BULAN Corp.s income statement for 2009?
4. CABRERA Corp. is in the process of completing its financial statements for the fiscal year ending June 30, 2009. On
July 5, 2009, a fire at a production facility of CABRERA resulted in a number of adjacent buildings owned by the other
businesses being burned. CABRERAs insurance policy does not cover damage to the property of others. Insurance
companies for those other businesses have filed suit claiming for damages totaling P10M. CABRERAs legal counsels
believe it is probable that the company will have to pay for an estimated amount in the range of P5M to P7M, with all
amounts in the range considered equally likely. CABRERAs financial statements for the fiscal year ending June 30,
2009 were issued on August 15, 2009.
In its June 30, 2009 balance sheet, what amount should CABRERA report as provision for damage claims?
5. CONDALOR Corp. constructs machinery according to customers specifications. With each order received,
CONDALOR required a nonrefundable deposit of 10% of the contract price from customers. This deposit is credited to
Customer advances account which had a balance of P 622,500 on December 31, 2008. During 2009, CONDALOR
received and accepted orders from various customers with a total contract price of P 9,285,000. As of December 31,
2009, CONDALOR had already made shipments to customers of P 7,950,000. Orders for P 1,800,000 were canceled in
2009.
What is the balance of the Customer advances account at December 31, 2009?
6. DELA CRUZ Department Store sells gift certificate redeemable only when merchandise is purchased. These gift
certificates have an expiration of two years after issuance date. Upon redemption or expiration, DELA CRUZ will
recognize the unearned revenue as realized. Information for 2009 is as follows:
Unearned revenue, January 1
Gift certificates sold
Gift certificates redeemed
Expired gift certificates
Cost of goods sold

P 350,000
1,200,000
655,000
75,000
60%

On December 31, 2009, what amount should DELA CRUZ report as unearned revenue?
7. A review of the general ledger of FABILLAN Corp. at December 31, 2009 disclosed the following liabilities:
Accounts due to suppliers
Liability for pending lawsuit
Dividends payable
8% notes payable, due 6/30/10
Accrued expenses
Deferred tax liability
9% debenture bonds

P 360,000
900,000
230,000
1,500,000
170,000
100,000
4,500,000

The liability for pending lawsuit is an accrual of damages FABILLAN expects to pay on a P2M lawsuit filed against
FABILLAN in October 2009. The companys legal counsels believe it is reasonably possible that FABILLAN will lose
and pay damages to the plaintiff of P 900,000. The 9% debenture bonds were issued on October 1, 2007 with a total
face value of P 7,500,000 payable in five equal annual installments beginning October 1, 2008.
What amount should be included in the current liabilities section of FABILLANs December 31, 2009 balance sheet?
8. On December 31, 2009, the bookkeeper of GALANO Company provided the following information:
Accounts payable, including deposits and
advances from customers of P 500,000
Notes payable, including note payable to bank due
on December 31, 2011 for P 1,000,000
Stock dividends payable
Credit balance in customers accounts
Serial bonds, payable in ten semiannual
installments
Accrued interest on bonds payable
Contested BIR tax assessment
Unearned rent income

P 2,500,000
3,000,000
800,000
400,000
10,000,000
300,000
600,000
100,000

In the December 31, 2009 balance sheet, how much current liabilities should be reported?
9. The balance in GAUDARIO Companys accounts payable account at December 31, 2009 was P 1,170,000 before any
year-end adjustments relating to the following:

Goods were in transit from a vendor to GAUDARIO on December 31, 2009. The invoice cost was P 65,000 and
the goods were shipped FOB shipping point on December 29, 2009. The goods were received on January 2, 2010.
Goods shipped FOB shipping point on December 20, 2009 from a vendor to GAUDARIO, were lost in transit. The
invoice cost was P 32,500. On January 5, 2010, GAUDARIO filed a P 32,500 claim against the common carrier.
Goods shipped FOB destination on December 31, 2009, from a vendor to GAUDARIO, were received on January
6, 2010. The invoice cost was P 19,500.
On December 27, 2009, GAUDARIO wrote and recorded checks totaling P 60,000 which were mailed on January
10, 2010.

What amount should GAUDARIO report as accounts payable on its December 31, 2009 balance sheet?
10. JACOB guarantee a loan of P 200,000 granted to JOANN. At the time when the financial statements of JACOB are
being finished, it is clear that JOANN is in financial difficulties and it is probable that JACOB will meet the guarantee.
In the financial statements, JACOB should
a. Only disclose in the notes the amount of the guarantees
b. Recognize a provision for liability of P 200,000

c. Not recognize and need not disclose the guarantee

d. Recognize a provision for liability of P 200,000 and also disclose in the notes to financial statements
11. LAO Company has guaranteed a loan of P 300,000 granted to KARL Company. After the balance sheet date of LAO
Company but before the directors approved the financial statements, LAO Company receives notice that KARL
Company is in liquidation and the creditor of KARL will invoke the guarantee.
What proper accounting should LAO Company account for the guarantee?
a. The amount of the guarantee is not accounted for in LAOs books.
b. The amount of P 300,000 should be recognized as a provision.
c. The P 300,000 should be recognized as a liability with necessary disclosure in the notes to financial statements.
d. The contingent liability should be disclosed by way of note to the financial statements.
12. On December 31, 2009, MAGLALANG Company was a defendant in a pending lawsuit. The suit arose from the alleged
defect of a product that MAGLALANG sold in 2007. In the opinion of MAGLALANGs attorney, it is probable that
MAGLALANG will have to pay P 500,000 and it is reasonably possible that MAGLALANG will have to pay P 600,000
as a result of this lawsuit.
In its 2009 financial statements, MAGLALANG should report
a. An accrued liability of P 500,000 only
b. An accrued liability of P 500,000 and would disclose a contingent liability of an additional P 100,000
c. An accrued liability of P 600,000 only
d. No information about this lawsuit
13. MAPILI Company salaried employees are paid biweekly. Occasionally, advances made to employees are paid back by
payroll deductions. Information relating to salaries for the calendar year 2009 is as follows:

Employee advances
Accrued salaries payable
Salaries expense during the year
Salaries paid during the year (gross)

December 31, 2008

P 12,000
65,000

December 31, 2009

P 18,000
?
815,000
780,000

At December 31, 2009, what amount should MAPILI report as accrued salaries payable?
14. On July 1, 2009, MATIAS Company obtained a P 3,000,000, 180-day bank loan at an annual rate of 12%. The loan
agreement requires MATIAS to maintain a P 600,000 compensating balance in its checking account at the lending bank.
MATIAS would otherwise maintain a balance of only P 300,000 in this account. The checking account earns interest at
an annual rate of 6%.
Based on a 360-day year, the effective interest rate on the borrowing is

15. MIRASOL Apparel, Inc. operates a retail store and must determine the proper December 31, 2009 year-end accrual for
the following expenses:
The store lease calls for fixed rent of P 10,000 per month, payable at the beginning of the month, and additional rent
equal to 6% of net sales over P 2,000,000 per calendar year, payable on January 31 of the following year. Net sales for
2009 totaled P 8,000,000.
MIRASOL has property subject to a city property tax. The citys fiscal year runs from July 1 to June 30 and the tax,
assessed at 3% of property on hand at April 30, is payable on June 30. MIRASOL estimates that its property tax will
amount to P 60,000 for the fiscal year ending June 30, 2010.
In its December 31, 2010 balance sheet, how much should MIRASOL report as accrued expenses?

16. On July 1, 2009, MOSCA Corporation issued a five-year note payable with a face value of P 250,000 and a 10% interest
rate. The terms of the note require MOSCA to make five annual payments of P 50,000 plus accrued interest, with the
first payment due on June 30, 2010.
With respect to the note, how much would be included in the current liabilities section of MOSCAs December 31,
2009 balance sheet?
17. NICOLAS Appliance Companys accountant has been reviewing the firms past television sales. For the past years,
NICOLAS has been offering a special service warranty on all televisions sold. With the purchase of a television, the
customer has the right to purchase a 3-year service contract for an extra P600.
Information concerning past television and warranty contract sales is given below:

Television sales in units

Sales price per unit
Number of service contracts sold
Expenses relating to TV warranties

2009
550
P 5,000
350
P 38,520

2008
460
P 4,000
300
P 13,400

NICOLAS accountant has estimated from past records that the pattern of repairs has been 40% in the year of sale, 36%
first year after sale, and 24% on second year of sale. Sales of the contracts are made evenly during the year.
17.1 What is the adjusted balance of the unearned service contract as of December 31, 2009?
17.2 How much profit on service contract would be recognized in year 2009?
18. ORTIZ Company sells appliance service contracts, agreeing to repair appliances for a two-year period. ORTIZs past
experience is that, of the total pesos spent for repairs on service contracts, 40|% is incurred evenly during the first
contract year and 60% evenly during the second contract year. Receipts from service contract sales for the two years
ended December 31, 2009, are as follows:
2008..P 500,000

2009..P 600,000

Receipts from contracts are credited to unearned service contract revenue. Assume that all contract sales are made
evenly during the year.
What amount should ORTIZ Company report as unearned service contract revenue at December 31, 2009?
19. PALOGAN Companys employees earn two weeks of paid vacation for each year of employment. Unused vacation
time can be accumulated and carried forward to succeeding years and will be paid at the salary in effect when the
vacation is taken. As of December 31, 2009, when Eloisas salary was P 6,000 per week, she had earned 18 weeks
vacation time and has used 12 weeks of accumulated vacation time.
At December 31, 2009, how much should PALOGAN carry as a liability for Eloisas accumulated vacation time?
20. PINZA Company offers 3 payment plans on its 12 months contracts. Information on the 3 plans and the number of
children enrolled in each plan for the September 1, 2009 through August 31, 2010 contract year follows:

Plan
1
2
3

Initial Payment
Per Child
P 5,000
2,000
---

Monthly Fees
Per Child
--P300
500

Number of
Children
15
12
9

PINZA received P 99,000 of initial payments on September 1, 2009 and P 32,400 monthly fees during the period
September 1 through December 31, 2009.

In its December 31, 2009 balance sheet, what amount should PINZA report as deferred revenue?
21. All of REOTIRAS Companys employees are entitled to two weeks of paid vacation for each full year in REOTIRASs
employ. Unused vacation time can be accumulated and carried forward to succeeding years and will be compensated at
the salary in effect when the vacation is taken. Lara started her employment with REOTIRAS on January 1, 2003. As
of December 31, 2009, when Laras salary was P 5,000 per week, Lara had used 10 weeks of her accumulated vacation
time. In December 2009, Lara notified REOTIRAS of her intention to use her accumulated vacation weeks in June
2010. REOTIRAS regularly scheduled salary adjustments in July of each year. REOTIRAS properly did not deduct
compensation for unused vacations in Laras 2009 income tax return.
How much should REOTIRAS report as a liability at December 31, 2009 for Laras accumulated vacation time?
22. The following information about SARMIENTO Company is available at December 31, 2009:
Employee income taxes withheld
Cash balance at Kirk Bank
Cash overdraft at Paul Bank
Accounts receivable with credit balance
Estimated expenses of meeting warranties on
merchandise previously sold
Estimated damages as a result of unsatisfactory
performance on a contract
Accounts payable
Deferred serial bonds, issued at par and bearing
interest at 12%, payable in semiannual
installments of P 800,000 due April 1 and
October 1 of each year, the last bond to be paid
on October 1, 2015. Interest is also paid
semiannually.
Customers deposit

800,000
3,000,000
600,000
200,000
450,000
1,000,000
750,000

8,000,000
500,000

The December 31, 2009 balance sheet should report current liabilities at
23. YSAGUN Company pays all employees on a biweekly basis. Overtime pay, however, is paid in the next biweekly
period. YSAGUN accrues salaries expenses only at its December 31 year-end. Data relating to salaries earned in
December 31, 2009 are as follows:

Last payroll was paid on December 26, 2009 for the 2-week period ended December 26, 2009.
Overtime pay earned in the 2-week period ended December 26, 2009 was P 120,000.
Remaining work days in 2009 were December 29, 30, and 31, on which days, there was no overtime.
The recurring biweekly salaries total P 800,000.

Assuming a six-day workweek, what amount should YSAGUN record as accrued salaries at December 31, 2009?
24. YUZON Company inaugurated a promotional campaign on January 2, 2009 to promote the salability of their product.
YUZON Company placed a coupon redeemable for a premium in each package of cereal sold at P200. Each premium
costs P25 and 10 coupons must be presented by a customer to receive a premium. YUZON estimated that only 70% of
the coupons issued would be redeemed. For the 6 months ended July 31, 2009, the following transactions occurred:
Packages of cereal sold
Premiums purchased
Coupons redeemed

120,000
30,000
54,000

How much should be reported as premium expense and estimated liability for coupons on the fiscal year ended July 31,
2009, respectively?

25. SABADO Company sells televisions at an average price of P 15,000 and also offers to each customer a separate 3-year
warranty contract for P 1,500 that requires the company to perform periodic services and to replace defective parts.
During 2009, the company sold 300 televisions and 270 warranty contracts for cash. It estimates the 3-year warranty
costs as P200 for parts and P400 for labor and accounts for warranties separately. Assume sales occurred on December
31, 2009, income is recognized on the warranties, and straight-line recognition of warranty revenues occurs.
What amount of current and non-current liability relative to warranty revenue would appear on the December 31, 2009
balance sheet, respectively?

But thanks be to God! He gives us the victory through our Lord Jesus Christ.
1 Corinthians 15:57
MERRY CHRISTMAS
HAPPY NEW YEAR 2017!
GOD BLESS
#PushingAndWorkingBeyondTheLimits