CHAPTER 1

CURRENT LIABILITIES, PROVISIONS AND CONTINGENCIES

PROBLEMS

1-1. (Epson Company)

Accounts Payable, 12/31/07, before adjustments P 1,000,000

Unrecorded checks in payment to creditors (350,000)
Unrecorded purchases (150,000 x 98%) 147,000
Goods in transit purchased FOB destination but recorded (65,000)
Accounts Payable, 12/31/07, as adjusted P 732,000

1-2. (Gay Company)

Accounts Payable, 12/31/07, before adjustments P1,500,000

Goods purchased FOB shipping point, lost in transit 240,000
Returned to supplier (60,000)
Accounts Payable, 12/31/07, as adjusted P1,680,000

1-3. (Megabytes 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

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

1-4. (Blue Bird Company)

(a)
10/01/07 Automobiles (1,747,200 ÷ 112%) 1,560,000
Discount on Notes Payable 187,200
Notes Payable 1,747,200
12/31/07 Interest Expense 46,800
Discount on Notes Payable 46,800
1,560,000 x 12% x 3/12
10/01/08 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, 2007:

Current Liabilities:
Notes Payable, net of P140,400 Discount P1,606,800

1-5. (Matagumpay Corporation)

(a)
06/01/06 Cash 1,080,000
Discount on Notes Payable 120,000
Notes Payable 1,200,000

12/31/06 Interest Expense 70,000

Discount on Notes Payable 70,000
120,000 x 7/12

05/31/07 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, 2007:

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

1-6. (Goliath Company)

Amount to be accrued on 12/31/07 (the best estimate of the obligation) P800,000

No obligation is recognized for the suit filed in September 2007 nor for the suit filed
in October. However, disclosure is necessary in the notes to the financial statements
for the suit filed in October 2007 by Pasig City government since it is probable the
Pasig City government will not be successful.

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Chapter 1 – Current Liabilities, Provisions and Contingencies

1-7. (Graphics 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

1-8. (Alcatel 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 2007 (see a) P126,000

1-9. (Adventure Company)

2005 2006 2007
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

1-10. (Packard Company)

(a)
2006 2007
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 2006 sales (4,200,000 x 5% x ½) P105,000
On 2007 sales [(1/2 of 3%) + 5%] x 6,960,000 452,400
Warranty Liability, December 31, 2007, as analyzed P557,400

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Chapter 1 – Current Liabilities, Provisions and Contingencies

1-11. (Smart 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.

1-12. (Robinson)
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

1-13. (Francesca Royale)

Refundable Deposits, January 1, 2007 P250,000
Deposits received during 2007 200,000
Deposits refunded during 2007 (267,000)
Deposits forfeited during 2007 (100,000 – 82,000) (18,000)
Refundable Deposits, December 31, 2007 P165,000

1-14. (DOS Company)

(a) 2007 2008
Cash 720,000 864,00
0
Unearned Service Contract Revenue 720,00 864,00
0 0

Cost of Service Contract 25,000 100,00

0
Cash, Accounts Payable, etc. 25,000 100,00
0

Unearned Service Contract Revenue 72,000 266,40

0
Service Contract Revenue 72,000 266,40
0
2007: 720,000 x 20% x ½=72,000
2008: 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) 2007 2008

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

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Chapter 1 – Current Liabilities, Provisions and Contingencies

Unearned Service Contract Revenue at December 31, 2008 may also be computed as
follows:
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) 2007 2008
Revenue from service contracts P72,000 P266,400
Cost of service contracts 25,000 100,000
Profit from service contracts P47,000 P166,400

1-15. (Pioneer Publication)

(a)
Subscriptions sold in 2005 and 2006
(5,000,000 + 4,500,000) P9,500,000
Expired subscriptions in
2005 P1,000,000
2006 (2,800,000 + 1,200,000) 4,000,000 5,000,000
Unearned subscriptions, Jan. 1, 2007 P4,500,000

(b) 2007
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) 2008
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) 2007 2008

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

1-16. (Ace Co.)

Property Taxes Payable
Property tax expense July 1 to Dec. 31 (72,000 x 6/12) P 36,000
Payment in 2007 (Nov. payment = 72,000/3) (24,000) P 12,000
Income Tax Payable
Income tax expense (1,629,000 x 35%) P 570,150
2007 payments for 2006 income tax (480,000 – 90,000) (390,000) 180,150
VAT Payable
Output VAT (12% x 9,000,000) P 1,080,000
2007 payments of VAT (725,000) 355,000
Total current liabilities P547,150

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Chapter 1 – Current Liabilities, Provisions and Contingencies

1-17. (Extreme Company)

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

b. B = 8% (8000,000 – B )
B = 640,000 - .08B
B = 640,000/1.08 = 592,593

c. B = .08 (8,000,000 – T )
T = .35 (8,000,000 – B )
B = .08 {8,000,000 - .35 (8,000,000 – B ) }
B = .08 {8,000,000 – 2,800,000 + .35B}
B = 416,000 + .028B
B = 416,000/0.972 = 427,984

d. B = .08 {8,000,000 – B – T }
T = .35 (8,000,000 – B)
B = .08{8,000,000 – B - .35 (8,000,000 – B)}
B = .08 {8,000,000 – B – 2,800,000 + .35B}
B = 416,000 - .052B
B = 416,000/1.052 = 395,437

1-18. (San Roque 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 = .35 {3,000,000 – B }
B = .36 {3,000,000 – B - .35 (3,000,000 – B)}
B = .36 {3,000,000 – B – 1,050,000 + .35B}
B = 702,000 - .234B
B = 702,000/1.234 = 568,882 (total)
B (Each): 568,882 / 3 = 189,627
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

1-19. (Globe, Inc.)

B = .06 {9,000,000 – B – T }
T = .35 (9,000,000 – B)
B = .06 (9,000,000 – B - .35 (9,000,000 – B ) }
B = .06 { 9,000,000 – B – 3,150,000 + .35B }
B = 351,000 - .039B
B = 351,000 / 1.039 = 337,825
T = .35 (9,000,000 – 337,825)
T = 3,031,761

1-20. (Desktop Company)

a. Vacation earned by employees in 2007 P 200,000
Adjustment in rate for unused vacation pay in previous periods
(250,000 – 150,000) x 10% 10,000

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Chapter 1 – Current Liabilities, Provisions and Contingencies

Vacation pay expense in 2007 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 2007 unused 200,000
Liability for vacation pay, 12/31/07 P310,000

1-21. (Jim Corporation)

The full amount of P2,000,000 is classified as current liability because on December 31, 2007
(the balance sheet date), the enterprise has no unconditional right to defer the settlement of
the obligation for a period of at least 12 months.

1-22. Current Non-current

Case 1 . James, Inc.
3,600,000 x 80% P2,880,000
3,000,000 – 2,880,000 P 120,000

Case 2. James, Inc. 2,000,000 0

Current Non-current
Case 3. Sylvester Corporation
Situation A -0- 6,000,000
Situation B 6,000,000 0
Situation C -0- 6,000,000
Situation D -0- 6,000,000

1-23 (Trey Company)

Current Liabilities
14% Notes Payable, refinanced on March 10, 2008 P2,500,000
Current portion of 16% notes payable 800,000
Total current liabilities P3,300,000

1-24. (Internet 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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Chapter 1 – Current Liabilities, Provisions and Contingencies