Answers - V2Chapter 1 2012

CHAPTER 1
CURRENT LIABILITIES, PROVISIONS AND CONTINGENCIES

PROBLEMS
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.
P 1,000,000
(350,000)
147,000
P 797,000
(Adams Company)
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)
Dec. 16
19
26
31
(a) (2)
Dec. 16
19
26
31
Gross Method
Purchases
Freight in
Accounts Payable Intel Company
Cash
66,000
1,400
66,000
1,400
Purchases
Accounts Payable Celeron Corporation
72,000
Accounts Payable- Intel Company

Purchase Discount (2% x 66,000)
Cash
66,000

Purchase Discount (2% x 72,000)
Cash
72,000
Net Method
Purchases
Freight in
Cash
72,000
1,320
64,680
1,440
70,560
64,680
1,400
64,680
1,400
Purchases
69,840

Cash
64,680

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

(Madison Company)
(a)
10/01/12 Automobiles (1,747,200 112%)
Discount on Notes Payable
Notes Payable
12/31/12
10/01/13
720
720
1,560,000
187,200
1,747,200
Interest Expense
1,560,000 x 12% x 3/12
46,800
Interest Expense
187,200 46,800
140,400
Notes Payable
Cash
46,800
140,400
1,747,200
1,747,200
(b) At December 31, 2012:

Current Liabilities:
Notes Payable, net of P140,400 Discount
1-5.
(Monroe Corporation)
(a)
06/01/12 Cash
Notes Payable
12/31/12
05/31/13
1,080,000
120,000
1,200,000
Interest Expense
120,000 x 7/12
70,000
Interest Expense
120,000 70,000
50,000
Notes Payable
Cash
70,000
50,000
1,200,000
1,200,000
(b) At December 31, 2013:

Notes Payable, net of P50,000 Discount
1-6.
P1,606,800
(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
P 1,150,000
P8,000,000
720,000
P8,720,000
0.9524
P8,304,928
8,000,000
P 304,928
05/01/12
12/31/12
Equipment
Notes Payable
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
Interest Payable
Total (or 8,304,928 + 276,715)
P8,000,000
101,643
480,000
P8,581,643
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
P8,000,000
720,000
P8,720,000
0.8929
P7,786,088
8,000,000
P 213,912
05/01/12
12/31/12
Equipment
Notes Payable
Interest Expense
Discount on Notes Payable (213,912 x
8/12)
Interest Payable(8,000,000 x 9% x 8/12)
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
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
Interest Payable
Total (or 7,786,088 + 622,608)
P8,000,000
(71,304)
480,000
P8,408,696
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
225,000
150,000
Premium Expense
300,000
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
(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
(b)
Provision for premium claims outstanding

12/31/10 (30,000/5) x P70
12/31/11 (80,000/5) x P70
2011
P40,000
30,000
P70,000
5
P14,000
x P70
P980,000
2012
P(30,000)
90,000
80,000
P140,000
5
P28,000
x P70
P1,960,000
P 420,000
P1,120,000
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
Total accumulated revenue from redemption as of
12/31/12 (100,000 x 60/95)
Less revenue earned in 2011
P4,900,000
P 100,000
P
27,778
63,158
27,778
35,380
(b)
Liability as of 12/31/11 (100,000 27,778)
Liability as of 12/31/12 (100,000 63,158)
P 72,222
P 36,842
1-12. (Jackson Company)

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.
2010
2011
2012
1,000,000
1,000,000
2,500,000
2,500,000
3,500,000
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)
2011
Warranty Liability, January 1
Warranty expense (8% x 4,200,000)/(8% x 6,960,000)
Actual repair costs incurred
Warranty liability, December 31
0
336,000
(148,800)
P187,200
(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
Sales
2012
P187,200
556,800
(180,000)
P564,000
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.
1-15. (Buchanan Company)

Cash
3,000,000
3,000,000

Sales
2,750,000

Revenue from Forfeited Gift Certificates
150,000
2,750,000
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)
P250,000
200,000
(267,000)
(18,000)
P165,000
2011
Cash
Unearned Service Contract Revenue
Cost of Service Contract
Cash, Accounts Payable, etc.
2012
720,000
864,000
720,000
25,000
864,000
100,000
25,000
Unearned Service Contract Revenue

72,000
Service Contract Revenue
2011: 720,000 x 20% x =72,000
2012: 720,000 x 20% x =72,000
720,000 x 30% x =108,000
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
100,000
266,400
72,000
266,400
2011
2012
----P720,000
(72,000)
P648,000
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
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)
P9,500,000
P1,000,000
4,000,000
2011
Cash
Unearned Subscription Revenue
5,500,000
5,000,000

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
1-19. (Hayes Co.)
Property Taxes Payable
Property tax expense July 1 to Dec. 31
(72,000 x 6/12)
Payment in 2012 (Nov. payment = 72,000/3)
Income Tax Payable
Pretax income before accrued property taxes
Less accrued property tax
Income subject to tax
Income tax rate
Income tax expense
2012 payments for 2012 income tax(480,000
190,000)
VAT Payable
Output VAT (12% x 9,000,000)
2012 payments of VAT
Total current liabilities for taxes
1-20. (Garfield Company)
a.
B = 8,000,000 x 8% = 640,000
b.
5,500,000

Subscription Revenue
1,200,000 + 2,000,000 + 1,800,000
2012
Cash
(c)
B = 8% (8000,000 B )
B = 640,000 - .08B
5,000,000
P4,500,000
5,000,000
7,000,000
7,000,000
5,700,000
2011
P4,500,000
5,500,000
(5,000,000)
P5,000,000
36,000
(24,000)
2012
P5,000,000
7,000,000
(5,700,000)
P6,300,000
P 12,000
P1,629,000
12,000
P1,617,000
30%
P 485,100
195,100
(290,000)
P 1,080,000
(725,000)
355,000
P562,100
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
b.
c.
=
=
240,000
180,000
Total Bonus = .36 {3,000,000 B T )

T = .30 {3,000,000 B }
B = .36 {3,000,000 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
=
=
603,834 (total)
201,278
B
B
B
B
B
=
=
=
727,273 (total)
272,727
227,273
= .32 {3,000,000 B }
= 960,000 - .32B
= 960,000/1.32
(Sales Manager): 727,273 x 12/32
(Each Sales Agent): 727,273 x 10/32
1-22. (Cleveland, Inc.)

B = .06 {9,000,000 B T }
T = .30 (9,000,000 B)
B
B
B
B
=
=
=
=
.06 (9,000,000 B - .30 (9,000,000 B ) }

.06 { 9,000,000 B 2,700,000 + .30B }
378,000 - .042B
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%
10,000
Vacation pay expense in 2012
P 210,000
b.
Unused vacation pay in previous periods, adjusted to

current rate (250,000 150,000) x 110%
Vacation pay earned by employees in 2012 unused
P110,000
200,000
Liability for vacation pay, 12/31/12
P310,000
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
Non-current
Case 1 . Taft, Inc.

3,600,000 x 80%
3,000,000 2,880,000
P 120,000
Case 2. Taft, Inc.
2,000,000
Current
Non-current
6,000,000
0
6,000,000
-0-
0
6,000,000
0
6,000,000
P2,880,000
Case 3. Wilson Corporation

Situation A
Situation B
Situation C
Situation D
1-26. (Harding Company)

Current Liabilities
14% Notes Payable, refinanced on March 10, 2013
Current portion of 16% notes payable
Total current liabilities
P2,500,000
800,000
P3,300,000
1-27. (Coolidge Company)

Accounts Payable
P 270,000
Mortgage Notes Payable
1,300,000
Bank Notes Payable due currently
100,000
Interest Payable
7,500
Value Added Tax Payable
288,000
Income Tax Payable
315,000
Withholding Tax Payable
120,000
Total Current Liabilities
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.
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
A
MC26
D
MC27
C
MC28
A
MC29
D
MC30
D
MC31
D
MC32
C
MC33
A
MC34
A
MC35
MC36
MC37
MC38
MC39
MC40
MC41
MC42
MC43
MC44
MC45
D
B
B
A
A
B
D
C
D
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) = 120,000 + (8,500 x ) + 2,500 = 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
10

Answers - V2Chapter 1 2012

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CHAPTER 1

CURRENT LIABILITIES, PROVISIONS AND CONTINGENCIES

Accounts Payable- Intel Company

Accounts Payable Celeron Corporation

Accounts Payable Intel Company

Accounts Payable Celeron Corporation

Chapter 1 Current Liabilities, Provisions and Contingencies

Purchase Discounts Lost

(b) At December 31, 2012:

(b) At December 31, 2013:

Chapter 1 Current Liabilities, Provisions and Contingencies

b. market rate of interest is 12%.

Chapter 1 Current Liabilities, Provisions and Contingencies

Premium Expense for 2012 (see a)

1-10. Taylor Company

Provision for premium claims outstanding

Chapter 1 Current Liabilities, Provisions and Contingencies

1-11. (Van Department Store)

1-12. (Jackson Company)

1-13. (Filmore Company)

Chapter 1 Current Liabilities, Provisions and Contingencies

1-15. (Buchanan Company)

Unearned Revenue from Gift Certificates Outstanding

Unearned Revenue from Gift Certificates Outstanding

1-16. (Lincoln Company)

Unearned Service Contract Revenue

Chapter 1 Current Liabilities, Provisions and Contingencies

1-18. (Grant Publication)

Unearned Subscription Revenue

Unearned Subscription Revenue, January 1

Unearned Subscription Revenue

Chapter 1 Current Liabilities, Provisions and Contingencies

1-21. (Arthur Corporation)

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

1-22. (Cleveland, Inc.)

.06 (9,000,000 B - .30 (9,000,000 B ) }

T = .30 (9,000,000 362,764)

1-23. (McKinley Company)

Vacation earned by employees in 2012

Unused vacation pay in previous periods, adjusted to

Chapter 1 Current Liabilities, Provisions and Contingencies

Liability for vacation pay, 12/31/12

1-24. (Roosevelt Corporation)

Case 1 . Taft, Inc.

Case 2. Taft, Inc.

Case 3. Wilson Corporation

1-26. (Harding Company)

1-27. (Coolidge Company)

Chapter 1 Current Liabilities, Provisions and Contingencies

MULTIPLE CHOICE QUESTIONS

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

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