answers - v2chapter 1 2012

CHAPTER 1 CURRENT LIABILITIES, PROVISIONS AND CONTINGENCIES

PROBLEMS

1-1. (Washington Company)

Accounts Payable, 12/31/12, before adjustments P 1,000,000 Unrecorded checks in payment to creditors (350,000) Unrecorded purchases (150,000 x 98%) 147,000 Accounts Payable, 12/31/12, as adjusted P 797,000

1-2. (Adams Company)

Accounts Payable, 12/31/12, before adjustments P1,500,000 Goods purchased FOB shipping point, lost in transit 240,000 Returned to supplier (80,000) Accounts Payable, 12/31/10, as adjusted P1,660,000

1-3. (Jefferson Corporation)

(a) (1) Gross Method Dec. 16 Purchases 66,000 Freight in 1,400 Accounts Payable – Intel Company 66,000 Cash 1,400 19 Purchases 72,000 Accounts Payable – Celeron Corporation 72,000 26 Accounts Payable- Intel Company 66,000 Purchase Discount (2% x 66,000) 1,320 Cash 64,680 31 Accounts Payable – Celeron Corporation 72,000 Purchase Discount (2% x 72,000) 1,440 Cash 70,560

(a) (2) Net Method Dec. 16 Purchases 64,680 Freight in 1,400 Accounts Payable – Intel Company 64,680 Cash 1,400 19 Purchases 69,840 Accounts Payable – Celeron Corporation 69,840 26 Accounts Payable – Intel Company 64,680 Cash 64,680 31 Accounts Payable – Celeron Corporation 69,840 Purchase Discounts Lost 720 Cash 70,560

Chapter 1 – Current Liabilities, Provisions and Contingencies

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(b) Dec. 31 Purchase Discounts Lost 720 Accounts Payable – Celeron Corporation 720

1-4. (Madison Company)

(a) 10/01/12 Automobiles (1,747,200 ÷ 112%) 1,560,000 Discount on Notes Payable 187,200 Notes Payable 1,747,200 12/31/12 Interest Expense 46,800 Discount on Notes Payable 46,800 1,560,000 x 12% x 3/12 10/01/13 Interest Expense 140,400 Discount on Notes Payable 140,400 187,200 – 46,800 Notes Payable 1,747,200 Cash 1,747,200

(b) At December 31, 2012: Current Liabilities: Notes Payable, net of P140,400 Discount P1,606,800

1-5. (Monroe Corporation)

(a) 06/01/12 Cash 1,080,000 Discount on Notes Payable 120,000 Notes Payable 1,200,000 12/31/12 Interest Expense 70,000 Discount on Notes Payable 70,000 120,000 x 7/12 05/31/13 Interest Expense 50,000 Discount on Notes Payable 50,000 120,000 – 70,000 Notes Payable 1,200,000 Cash 1,200,000

(b) At December 31, 2013:

Current Liabilities: Notes Payable, net of P50,000 Discount P 1,150,000

1-6. (Unison Company)

(a) Market interest rate is 5% Principal P8,000,000 Stated interest (8,000,000 x 9%) 720,000 Maturity value P8,720,000 PV factor at 5% for 1 period 0.9524 Present value at May 1, 2012 P8,304,928 Face value of the note 8,000,000 Premium on Notes Payable P 304,928


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05/01/12 Equipment 8,304,928 Notes Payable 8,000,000 Premium on Notes Payable 304,928 12/31/12 Interest Expense 276,715 Premium on Notes Payable (304,928 x 8/12) 203,285 Interest Payable(8,000,000 x 9% x 8/12) 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 P8,000,000 Premium on Notes Payable 101,643 Interest Payable 480,000 Total (or 8,304,928 + 276,715) P8,581,643

b. market rate of interest is 12%.

Principal P8,000,000 Stated interest (8,000,000 x 9%) 720,000 Maturity value P8,720,000 PV factor at 12% for 1 period 0.8929 Present value at May 1, 2012 P7,786,088 Face value of the note 8,000,000 Discount on Notes Payable P 213,912

05/01/12 Equipment 7,786,088 Discount on Notes Payable 213,912 Notes Payable 8,000,000 12/31/12 Interest Expense 622,608 Discount on Notes Payable (213,912 x

8/12)

142,608 Interest Payable(8,000,000 x 9% x 8/12) 480,000 4/30/13 Interest Expense 311,304* Interest Payable 480,000 Notes Payable 8,000,000 Discount on Notes Payable 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 P8,000,000 Discount on Notes Payable (71,304) Interest Payable 480,000 Total (or 7,786,088 + 622,608) P8,408,696


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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. Premium Inventory 225,000 Cash / Accounts Payable 225,000 b. Premium Expense 100,000 Cash (1,000 x 50) 50,000 Premium Inventory (1,000 x 150) 150,000 c. Premium Expense 300,000 Estimated Liability for Premium Claims Outstanding 300,000

(40% x 1,000,000)/ 100 = 4,000 4,000 – 1,000 = 3,000; 3,000 x (150 – 50) = 300,000 1-9. (Polk Company)

(a) Premium Expense (300,000 x 30%)/20 x 28 P126,000 Cost of mugs already distributed (4,000 x 28) 112,000 Estimated liability for premium claims outstanding P 14,000

(b) Premium Expense for 2012 (see a) P126,000

1-10. Taylor Company

(a) 2011 2012 Expected future redemption, beg - P(30,000) Redeemed during the year P40,000 90,000 Expected future redemption, end 30,000 80,000 Total P70,000 P140,000 ÷ 5 ÷ 5 P14,000 P28,000 Net cost of premium (120 – 50) x P70 x P70 Premium expense P980,000 P1,960,000

(b) Provision for premium claims outstanding 12/31/10 (30,000/5) x P70 P 420,000 12/31/11 (80,000/5) x P70 P1,120,000


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1-11. (Van Department Store) (a)

Allocation of original consideration received: Sales revenue (98% x P5,000,000)

P4,900,000

Liability for Customer Loyalty Awards (2% x P5,000,000) P 100,000 Revenue in 2011 as a result of redemption 100,000 x 25/90

P 27,778

Revenue in 2012 as a result of redemption Total accumulated revenue from redemption as of

12/31/12 (100,000 x 60/95)

P 63,158 Less revenue earned in 2011 27,778 Revenue in 2012 as a result of redemption P 35,380

(b)

Liability as of 12/31/11 (100,000 – 27,778) P 72,222 Liability as of 12/31/12 (100,000 – 63,158) P 36,842

1-12. (Jackson Company)

2010 2011 2012 Sale of product Accts. Receivable/Cash 1,000,000 2,500,000 3,500,000 Sales 1,000,000 2,500,000 3,500,000 Accrual of repairs Warranty Expense 60,000 150,000 210,000 Warranty Liability 60,000 150,000 210,000 6% x 1M 6% x 2.5M 6% x 3.5M Actual repairs Warranty Liability 8,000 38,000 112,500 Cash/ AP, etc. 8,000 38,000 112,500

1-13. (Filmore Company)

(a) 2011 2012 Warranty Liability, January 1 P 0 P187,200 Warranty expense (8% x 4,200,000)/(8% x 6,960,000) 336,000 556,800 Actual repair costs incurred (148,800) (180,000) Warranty liability, December 31 P187,200 P564,000 (b) On 2011 sales (4,200,000 x 5% x ½) P105,000 On 2012 sales [(1/2 of 3%) + 5%] x 6,960,000 452,400 Warranty Liability, December 31, 2012, as analyzed P557,400

1-14. (Pierce Corporation) Cash 2,000,000 Unearned Revenue from Gift Certificates Outstanding 2,000,000 Unearned Revenue from Gift Certificates Outstanding 1,280,000 Sales 1,280,000 Note: The gift certificates estimated to expire will be recognized as revenues at the date of actual expiration.


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1-15. (Buchanan Company)

Cash 3,000,000 Unearned Revenue from Gift Certificates Outstanding 3,000,000 Unearned Revenue from Gift Certificates Outstanding 2,750,000 Sales 2,750,000 Unearned Revenue from Gift Certificates Outstanding 150,000 Revenue from Forfeited Gift Certificates 150,000

1-16. (Lincoln Company)

Refundable Deposits, January 1, 2012 P250,000 Deposits received during 2012 200,000 Deposits refunded during 2012 (267,000) Deposits forfeited during 2010 (100,000 – 82,000) (18,000) Refundable Deposits, December 31, 2012 P165,000

1-17. (Johnson Company)

(a) 2011 2012 Cash 720,000 864,000 Unearned Service Contract Revenue 720,000 864,000 Cost of Service Contract 25,000 100,000 Cash, Accounts Payable, etc. 25,000 100,000 Unearned Service Contract Revenue 72,000 266,400 Service Contract Revenue 72,000 266,400 2011: 720,000 x 20% x ½=72,000 2012: 720,000 x 20% x ½=72,000 720,000 x 30% x ½=108,000 864,000 x 30% x ½=86,400 72,000+108,000+86,400=266,400

(b) 2011 2012 Unearned Service Contract Revenue, Jan. 1 ----- P648,000 Sale of contracts during the year P720,000 864,000 Service contracts earned during the year (72,000) (266,400) Unearned Service Contract Revenue, Dec. 31 P648,000 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 ½ 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


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1-18. (Grant Publication) (a) Subscriptions sold in 2009 and 2010 (5,000,000 + 4,500,000) P9,500,000 Expired subscriptions in 2009 P1,000,000 2010 (2,800,000 + 1,200,000) 4,000,000 5,000,000 Unearned subscriptions, Jan. 1, 2011 P4,500,000

(b) 2011 Cash 5,500,000 Unearned Subscription Revenue 5,500,000 Unearned Subscription Revenue 5,000,000 Subscription Revenue 5,000,000 1,200,000 + 2,000,000 + 1,800,000 (b) 2012 Cash 7,000,000 Unearned Subscription Revenue 7,000,000 Unearned Subscription Revenue 5,700,000 Subscription Revenue 5,700,000 1,300,000 + 2,400,000 + 2,000,000 (c) 2011 2012 Unearned Subscription Revenue, January 1 P4,500,000 P5,000,000 Subscription received during the year 5,500,000 7,000,000 Subscription revenue for the year (5,000,000) (5,700,000) Unearned Subscription Revenue, December 31 P5,000,000 P6,300,000

1-19. (Hayes Co.)

Property Taxes Payable Property tax expense July 1 to Dec. 31 (72,000 x 6/12)

P 36,000

Payment in 2012 (Nov. payment = 72,000/3) (24,000) P 12,000 Income Tax Payable Pretax income before accrued property taxes P1,629,000 Less accrued property tax 12,000 Income subject to tax P1,617,000 Income tax rate 30% Income tax expense P 485,100 2012 payments for 2012 income tax(480,000–

190,000)

(290,000) 195,100

VAT Payable Output VAT (12% x 9,000,000) P 1,080,000 2012 payments of VAT (725,000) 355,000 Total current liabilities for taxes P562,100

1-20. (Garfield Company)

a. B = 8,000,000 x 8% = 640,000

b. B = 8% (8000,000 – B ) B = 640,000 - .08B


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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 = 240,000 Bonus to each sales agent = .06 x 3,000,000 = 180,000

b. 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 = 603,834 (total) B (Each): 603,834 / 3 = 201,278

c. B = .32 {3,000,000 – B } B = 960,000 - .32B B = 960,000/1.32 = 727,273 (total) B (Sales Manager): 727,273 x 12/32 = 272,727 B (Each Sales Agent): 727,273 x 10/32 = 227,273

1-22. (Cleveland, Inc.)

B = .06 {9,000,000 – B – T } T = .30 (9,000,000 – B) B = .06 (9,000,000 – B - .30 (9,000,000 – B ) } B = .06 { 9,000,000 – B – 2,700,000 + .30B } B = 378,000 - .042B B = 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% P110,000

Vacation pay earned by employees in 2012 unused 200,000


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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% P2,880,000 3,000,000 – 2,880,000 P 120,000 Case 2. Taft, Inc. 2,000,000 0 Current Non-current Case 3. Wilson Corporation Situation A 6,000,000 0 Situation B 0 6,000,000 Situation C 6,000,000 0 Situation D -0- 6,000,000

1-26. (Harding Company)

Current Liabilities 14% Notes Payable, refinanced on March 10, 2013 P2,500,000 Current portion of 16% notes payable 800,000

Total current liabilities P3,300,000

1-27. (Coolidge Company) Current Liabilities: 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.


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MULTIPLE CHOICE QUESTIONS Theory MC1 D MC11 D MC2 B MC12 B MC3 C MC13 D MC4 B MC14 B MC5 B MC15 B MC6 A MC16 A MC7 B MC17 B MC8 C MC18 A MC9 C MC19 B MC10 C MC20 C MC21 D MC22 D Problems MC23 D 540,000 + 30,000 + 15,000 = 585,000 MC24 C 100,000 + (100,000 x 0.3 x 9/12) = 102,250 x .944 = 96,524 MC25 A Proceeds = 100% - 10% = 90% ; Effective interest = 10%/90% = 11.11% MC26 D P500,000, which is the reasonable estimate MC27 C Given MC28 A 65,000 + 815,000 – 780,000 = 100,000 MC29 D 6% ( 4,500,000-2,500,000) = 120,000 + (8,500 x ½ ) + 2,500 = 126,750 MC30 D 540,000 + 960,000 – 780,000 = 720,000 MC31 D [(1/2 x 35%) + 50% x 2,100,000] + 92.5%(2,730,000) = 3,942,750 MC32 C [½ (15% + 35%) x P2,100,000] + (1/2 x 15% x 2,730,000) = 729,750 MC33 A ½ (15% + 35%) x P2,730,000 = 682,500 MC34 A (½ x 50% x 2,100,000) + (67.5% x 2,730,000) + (92.5% x 2,475,000) =

4,657,125 MC35 D 1,000 x 750 = 750,000 MC36 B 42,000 + (750,000 x 3/10) = 267,000 MC37 B {(500,000 x 80%) – 300,000} = 100,000; 100,000 x (50+5-40) = 1,500,000 MC38 A { (3,000,000 x 60%) / 10 } – 42,000 = 138,000; 138,000 x P0.50 = 69,000 MC39 A (400,000 x 70%) – 100,000 = 180,000 ; ( 180,000 /5) x 20 = 720,000 MC40 B (180,000 x 50%) – 75,000 = 15,000 MC41 D 24,000 x 300 = 7,200,000 MC42 C 7,200,000 – 1,700,000 = 5,500,000 MC43 D 1,500,000 x 4% = 60,000 MC44 C B = 0.45 {2,000,000 – B - .30 (2,000,000 – B}) ; B = 479,087 MC45 C 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

MC46 B B = 0.10 {2,500,000 - .30 (2,500,000 – B)} = 180,412 MC47 C 600,000 + 900,000 + 400,000 = 1,900,000 MC48 A 2,400,000 – 1,900,000 = 500,000 MC49 D 3,800,000 + 2,000,000 – 5,000,000 = 800,000 decrease in profit MC50 A 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

answers - v2chapter 1 2012

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