Solutions Chapter 8 Liabilities

MULTIPLE CHOICE THEORY

1. D 2. D 3. B 4. C 5. A
6. C 7. B 8. A 9. C 10. A

Problem 1
Jade Corporation

A. Transaction Entries
April 1 Truck 4,000,000
Cash 1,000,000
Notes Payable 3,000,000

May 1 Cash 800,000

Discount on Notes Payable 120,000
Notes Payable 920,000

Aug. 1 Retained Earnings 300,000

Dividends Payable 300,000

Sept. 10 Dividends Payable 300,000

Cash 300,000

Dec. 15 Purchases 147,000

Accounts Payable 147,000

B. Adjusting Entries

Dec. 31 Interest Expense 270,000

Interest Payable 270,000
3,000,000 x 12% x 9/12 = 270,000

31 Interest Expense 80,000

Discount on Notes Payable 80,000
120,000 x 8/12

31 Discounts Lost 3,000

Accounts Payable 3,000

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Solutions Chapter 8 Liabilities

Problem 2
Sierra Corporation

Current Liabilities
Accounts Payable P 650,000
Notes Payable trade 120,000
Notes Payable Bank 300,000
10% Mortgage Note Payable (with notes to FS) 600,000
Bonds Payable 2,000,000
Interest Payable 250,000
Wages and Salaries Payable 15,000
Total Current Liabilities P3,935,000
Non-Current Liabilities
Refinanced Note Payable, due in 2015 (with note to FS) P 500,000
12% Mortgage Notes Payable, due in 2023 1,500,000
Total Current Liabilities P2,000,000
Total Non-Current Liabilities 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 60,000
Actual distribution (28,000)
Still to be distributed 32,000
Cost of each premium x P5
Premium Claims Outstanding P160,000

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Audit Adjustment:

Inventory of Premiums 40,000

Premium Expense ( 300,000 180,000) 120,000
Estimated Premium Claims Outstanding 160,000

Problem 4
(Evergreen)

Audit Adjustments:
Loss on Damages 1,200,000
Provision for Construction Damages 1,200,000

Loss on Pending Lawsuit 1,800,000

Provision for Damonage on Pending Lawsuit 1,800,000

Loss on Product Defects 1,500,000

Provision for Cost of Product Withdrawal 1,500,000
(1,800,000 + 1,200,000) / 2

Warranty Expense 800,000

Provision for Warranties 800,000
P1,000,000 x 30% = P300,000
5,000,000 x 10% = 500,000
0 x 60% 0
Total P800,000

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 215,000

Sales 200,000
Miscellaneous Income Expired Gift Certificates 15,000

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Problem 6
National Finance Company

Date Effective Interest Nominal Interest Discount Amortized cost,

(7%) (6%) Amortization end
Jan. 2, 2009 P4,470,303
July 1, 2009 P 312,921 300,000 12,921 4,483,224
Jan. 1, 2010 313,826 300,000 13,826 4,497,050
July 1, 2010 314,794 300,000 14,794 4,511,844
Jan. 1, 2011 315,829 300,000 15,829 4,527,673
July 1, 2011 316,937 300,000 16,937 4,544,610
Jan. 1, 2012 318,123 300,000 18,123 4,562,733
July 1, 2012 319,391 300,000 19,391 4,582,124
Jan. 1, 2013 320,749 300,000 20,749 4,602,873

1. Bonds Payable per client P5,000,000

Bonds Payable redeemed 1,000,000*
Bonds Payable, per audit 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 P319,391

July 1 to October 1 P 320,749 x 3/6 160,375
October 1 to December 31
P320,749 x 4M/5M x 3/6 128,300
Interest Expense for 2012 P608,066

4. Carrying value of P1M bonds on July 1, 2012

P4,582,124 x 1M/5M P 916,425
Discount amortized, July 1 to October 1
P20,749 x 1M/5M x 3/6 2,075
Carrying value of bonds redeemed P918,500
Retirement price P1,000,000 x 108% 1,080,000
Loss on bond retirement P161,500

5. Balance of Interest Payable on December 31, 2012

P4,000,000 x 12% x 6/12 P240,000

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Solutions Chapter 8 Liabilities

Audit Adjusting Entry

Bonds Payable 1,000,000

Interest Expense 8,065
Loss on Bond Redemption 161,500
Retained Earnings 392,430
Bonds Payable Redeemed 1,110,000
Bond Discount 211,995
Interest Payable 240,000

Charge to Retained Earnings

Interest Paid before 2012 P1,500,000
Correct interest expense in periods prior to 2010 1,892,430
Effect of prior period errors P 392,430

Problem 7
(Lucky Corporation)

Correct Cost of Land

Down payment P2,000,000
PV of 4 future payments = P2,633,875 x 3.037351 8,000,000
Cost of land P10,000,000

Correct Interest Expense for 2012 P8,000,000 x 12% x 6/12 P 480,000

Audit Adjusting entries

Land 8,000,000
Discount on Notes Payable 2,535,500
Notes Payable (2,633,875 x 4) 10,535,500

Interest Expense 480,000

Discount on Notes Payable 480,000

Accrued Liabilities Land Purchase 1,316,937.50

Land 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 1,960,119

Finance Lease Liability 1,960,119

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Finance Lease Liability 290,000

Taxes and Insurance Expense (20,000 x 9/12) 15,000
Prepaid Taxes and Insurance 5,000
Prepaid Rent 310,000

Depreciation Expense Leased Equipment 147,009

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

Interest Expense (1,960,119 290,000) x 10% x 9/12 125,259

Interest Payable 125,259

Problem 9
Timex Company

(a) 1. Interest payable = P5,000,000 x 8% x 6/12 P 200,000

2. Income Tax Expense:

Current P6,000,000 x 30% P1,800,000
Deferred:
Increase in deferred tax liability
P1,500,000 x 30% 450,000
Total income tax expense P2,250,000

3. Deferred Tax Liability = P4,500,000 x 30% P1,350,000

(b) Current Liabilities:

Accounts Payable P 350,000
Dividends Payable 500,000
Current Portion of Finance Lease Liability 620,920
Interest Payable on Bonds 200,000
Income Tax Payable 6,000,000 x 30% 1,800,000
Total Current Liabilities P3,470,920

(c) Non-current Liabilities:

Non-current Portion of Finance Lease Liability P3,169,880
Bonds Payable, net of discount of P348,002 4,651,998
Deferred Tax Liability 1,350,000
Total Non-current Liabilities P9,171,878

MULTIPLE CHOICE

1. D
2. D
3. A
4. C
5. A
6. D

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Solutions Chapter 8 Liabilities

7. B
8. D
9. C
10. B
11. B
12. C
13. C
14. B
15. B
16. D
17. D
18. B
19. B
20. B

1. D 550,000 + 4,700,000 + 5,000,000 + 4,000,000 = 14,250,000

Total issue price P5,500,000

Issue price attributable to the debt
P5,000,000 x 0.6209 = P3,104,500
400,000 x 3.7908= 1,516,320 4,620,820
Issue price attributable to the conversion privilege P 879,180

2. D Issue price attributable to the debt P4,620,820

Date Effective Interest Nominal Interest Discount Amortized cost,

(10%) (8%) Amortization end
Jan. 2, 2010 P4,620,820
Dec. 31, 2010 P462,082 P400,000 P 62,082 4,682,902
Dec. 31, 2011 468,290 400,000 68,290 4,751,192
Dec. 31, 2012 475,119 400,000 75,119 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 2,000,000

Paid in Capital from Bond Conversion Privilege (879,180 x 2/5) 351,672
Discount on Bonds Payable (248,808 x 2/5) 99,523
Ordinary Share Capital (P2,000,000/P1,000 x 8 x 100) 1,600,000
Share Premium 652,149

6. D Retirement price P2,000,000 x 105% P2,100,000

Carrying value of P2,000,000 bonds 4,751,192 x 2/5 1,900,477
Loss in profit or loss P 199,523

7 B Interest expense for 2012 if P2,000,000 bonds were retired

P475,119 x 3/5 = P 285,072

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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 P35,000
Effective = 6% x 555,738 33,344
Amortization P 1,656
Premium amortization January 1 to Dec. 31 1,562
Total amortization for 2012 P 3,218

11. B Interest expense for 2012 = 33,438 + 33,344 = P66,782

12. C 1,500,000 x 12% = P180,000

2,500,000 x 12% x 6/12 = 150,000
Total Interest Expense recorded P330,000

13. C 1,500,000 x 12% x 10/12 = P150,000

2,500,000 x 12% x 6/12 = 150,000
1,000,000 x 12% x 8/12 = 80,000
Total P380,000

14. B Face P1,000,000

Interest payable 1,000,000 x 12% x 8/12 = 80,000
Total P1,080,000

Items 15 through 20

15. B Accounts payable, per client P5,000,000

Debit balance in suppliers account 200,000
Shipments from cruise 300,000
Goods held on consignment ( 90,000)
Accounts payable, per audit P5,410,000

16. D 70,642 x 1/2 = P 35,321

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Solutions Chapter 8 Liabilities

17. D Total proceeds P1,100,000

Accrued interest 1,000,000 x 11% x 6/12 ( 55,000)
Retirement price P1,045,000
Carrying value
As of 12/31/092,101,506 x P1,050,753
Amortization
30,864 x 1M/2M x 6/12 ( 7,716) 1,043,037
Loss P 1,963

18. B P4,000,000 x .75131 = P3,005,240

Date Interest Expense Carrying Value

9/30/10 P 3,005,240
9/30/11 300,524 3,305,764
9/30/12 330,576 3,636,340
9/30/13 363,660 4,000,000

Carrying value as of 9/30/12 P3,636,340

Amortization 363,660 x 3/12 90,915
Carrying value 12/31/2012 P3,727,255

19. B P240,000

20. B 5,000,000 (10%) + 2,000,000 (25%) = P1,000,000

21 25

Premium Amortized Cost, End

Interest Date Interest Paid Effective Interest Amortization
March 31, 2010 P10,772,144
Sept. 30, 2010 600,000 538,607 61,393 10,710,751
March 31, 2011 600,000 535,538 64,462 10,646,289
Sept. 30, 2011 600,000 532,314 67,686 10,578,603
March 31, 2012 600,000 528,930 71,070 10,507,533
Sept. 30, 2012 600,000 525,377 74,623 10,432,910
March 31, 2013 600,000 521,646 78,354 10,354,556

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 P7,303,037
Amortization of premium 9/30 to 12/31/2012
P78,354 x 7M/10M x 3/6 ( 27,424)
Carrying value of remaining bonds 12/31/2012 P7,275,613
Face value or remaining bonds 7,000,000
Premium on bonds payable, 12/31/12 P 275,613

23. C P7,000,000 x 12% x 3/12 P 210,000

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Solutions Chapter 8 Liabilities

24. B January 1 to March 31 P528,930 x 3/6 P264,465

April 1 to September 30 525,377
October 1 to Dec. 31 521,646 x 7/10 x 3/6 182,576
Total interest expense for 2012 P972,418

25. A Carrying value of bonds retired:

As of Sept. 30, 2012 P10,432,910 x 3/10 P3,129,873
Retirement price P3,000,000 x 102% 3,060,000
Gain on retirement of bonds P 69,873

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