FINANCIAL ACCOUNTING Volume Two Valix and Peralta 2008 Edition SOLUTION MANUAL 1 CHAPTER 1

Problem 1-1 Problem 1-2 Problem 1-5 1. A 6. A 2. D 7. A 3. A 8. C 4. C 9. B 5. A 10. B Problem 1-6 Accounts payable 3,000,000 Deposits and advances 2,000,000 from customers 500,000 Notes payable 4,000,000 Credit balances in 300,000 customers’ accounts 1,000,000 Serial bonds payable 100,000 Accrued interest on 800,000 bonds payable 600,000 1,000,000 1. A 2. C 3. B 4. A 5. A 6. A 7. A 8. D 9. C 10. C 1. C 2. B 3. D 4. A 5. D Problem 1-3 Problem 1-4 1. B 2. B 3. C 4. A 5. A Problem 1-7 Note payable – trade Note payable – bank 250,000 1,000,000 Note payable – officers Accounts payable – trade Bank overdraft 200,000 1,000,000 Dividends payable Withholding tax payable Income tax payable 150,000 Estimated warranty liability 1. A 2. D 3. A 4. D 5. B

Provision for tax 700,000 assessment 900,000 Unearned rent income 200,000 Total current liabilities 14,100,000 Problem 1-8

Estimated damages payable 300,000 100,000 4,000,000 Accrued liabilities Estimated premium liability Total current liabilities

Accounts payable (500,000 + 100,000) 600,000 Accrued liabilities 50,000 Note payable - refinanced 1,000,000 Note payable – due May 1, 2009 800,000 Total current liabilities 2,450,000 Noncurrent liabilitiy: Bonds payable, due December 31, 2010 2,000,000

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Problem 1-9 a. Current liabilities: Note payable – bank 700,000 Note payable – shareholder Less: Discount on note payable 1,887,000 Accrued interest payable 189,000 Total current liabilities 2,776,000

2,000,000 113,000

b. Note payable – bank: January 1 – April 1, 2008 (2,800,000 x 12% x 3/12) 84,000 April 1 – December 31, 2008 (2,100,000 x 12% x 9/12) 189,000 273,000 Note payable – shareholder: Amortization of discount from July 1 – December 31, 2008

000. Nevertheless.(226.000. 2008 (1.000 on January 31. September 1.000 4.000. 2008 1.000 Noncurrent liabilities: Mortgage payable Note payable due 2010 7.000 Balance.000. 2009 and the availment of a financing agreement on February 15.000 3 Accrued interest payable from September 1 to December 31.000 2.200.000 Problem 1-10 1.000.000 12. Problem 1-11 Answer B Note payable.000. 2009 with a financially capable commercial bank on April 1.000. 2007 1. 2007 1.000 .000.000 7.200.000 Total interest expense 386.000 x 6/12) 113.000.000 4. October 1.000 Less: Payment on September 1. September 1.000.000 Problem 1-12 Answer A Note payable. 2008 600. 2009 in the amount of P3.000.000 Total liabilities 30. the note payable should continue to be classified as current.800.200.000 x 12% x 4/12) 48. The note payable to bank is paid from the proceeds of the issuance of share capital of P4.000 3. Current liabilities: Accounts payable Note payable – bank Accrued expenses 23.

000 Interest accrued from October 1 to December 31. 2008 (500.000 Accrued interest from March 1 to December 31.000.500. October 1.000 x 12%) 120.000 Balance. 2008 400.000 x 15% x 9/12) 135. 2008 (1. 2008 204. it means that the accrued interest for one year will also earn interest. Problem 1-15 Answer B 12% note payable – refinanced 5.000 x 12% x 8/12) 64.000 54.000 Problem 1-13 Answer A January 1 – October 31. 2008 (800.000 May 1 – December 31.000 232.000 Total accrued interest payable. 2008 (1. 2007 to February 28. 2008 (1.000.000 If the interest is compounded annually.000 Total interest expense of 2008 Less: Recorded interest expense 150.000 x 12% x 10/12) 50. 2008 (800.000 February 1 – July 31.000 Understatement of interest expense Problem 1-14 Answer C Accrued interest from March 1.000 Interest expense for 2008 165.000 x 12% x 10/12) 112. 2008 (1. December 31.000.200.000 Interest paid from January 1 to September 30.000 x 12% x 6/12) 90.000 x 15% x 3/12) 30.000 .000 + 120.Less: Payment on October 1. 2008 800.

provides that an entity shall classify its financial liabilities as current when they are due to be settled within twelve months after balance sheet date even if an agreement to refinance or reschedule payment on a longterm basis is completed after balance sheet date and before the financial statements are authorized for issue.000 .000 Problem 1-17 Answer A 6% Note payable 500.000 15.000.000 4.650.600.000.300.000 PAS 1.000.600. Cash (5. Problem 1-18 2008 1. Premiums Cash 390.4 Problem 1-16 Answer A Accounts payable 6. Premium expense (5. paragraph 63.000 50.000 Bonds payable 4.000 100.000 Interest payable 150.000 3.000 Total current liabilities 1.000 x 20) 3.000 200.000 x 50) 250.000 2.000 x 10) Premium expense (5.000 Note payable – bank 3.000 8% Note payable 800.000 390.000 Mortgage note payable 2.000 x 40) Premiums (5.500. Cash Sales 3.

200. Premium expense (2. Cash (400.000 x 50) 450. Estimated premiums payable Premium expense 120.000 5 2009 1.000 180. Premiums 3.000 5.000 .000 x 10) Premium expense (9.000 x 20) Cash 180.000 900.000 4.000 Problem 1-19 1. Premiums Cash 580.000 x 60) Estimated premiums payable 180.000 Reversing entry.000 90.000 3.000 120.000 2.000 580.000 x 60) Estimated premiums payable 120.600.000 5. Premium expense (9.000 180.000 360.200. Premium expense (3. Cash Sales 4.Cash 100.600.000 x 9) Sales 3.000 120.000 x 40) Premiums (9.000 4.000 2. Cash (9.

000 80.000 3.000 x 85) Estimated premiums payable 170.000 x 20) Premiums expense 2.000 pens x 10) 80. Premium expense Cash 30. Premium expense (2.000 .000 30.000 4.000 680. Premiums .000 6.000 175. Premium expense Cash (30 x 5.000 6 Premiums to be distributed on the balance of bottle caps (20.000 170.500. Cash Sales 2.000 x 85) Premiums (8.000 Less: Bottle caps redeemed (8.Cash 900.000 x 90) 720.000 Problem 1-20 2008 1.000 /10) 2.500.000 x 5) Premium expense (8.000 40.000 Bottle caps to be redeemed (25% x 400.000 Bottle caps outstanding 20.towels Cash 175.000) 100.000) 150.000 3. Cash (8.000 2.000 150. Cash (1.000 20.000 5.

Premium expense Estimated premiums payable (800 X 85) 68.000 51.000 Cash Sales 3.000 5.000 36.000 Statement classification 2008 Current asset: Premiums – towels Current liability: Estimated premiums payable Selling expense: 75. Premium expense Estimated premiums payable (600 X 85) 51. Premium expense (1.800 X 5) Cash 51.000 .000 2.000 68.000 3.000 3.125.000 7 5. Premium expense (1. Premiums . Estimated premiums payable Premium expense 51.000 4.000 9.000 144.000 4. Cash (1.800 x 20) Premiums expense Premiums – towels (1.125.000 x 100) 100.000 51.000 200.000 68.000 5.800 x 100) 180.000 2009 95.towels Cash 200.000 2009 1.000 X 5) Cash 5.Premiums – towels (1.000 9.

000 / 5) 11.Premium expense Problem 1-21 Answer B Coupons to be redeemed (160.000 x 80% / 10) Premiums distributed Balance Premium liability (5.000 56.000 Less: Coupons redeemed 300.000 x 15) 1.000 x 70% x 110%) 462.000 x 100) 500.000 242.000 coupons (100.000 Problem 1-22 Answer D Premiums to be distributed (250.000 8 Problem 1-26 Accrual approach 2008 .000 Less: Total payments to retailer Liability for underdeemed coupons – 12/31/2008 220.000 Balance 5.500.000 Number of premiums (56.000 Premiums applicable to 2009 5.000) 400.000 136.500 Coupons to be redeemed Estimated premiums in 2009 500 80% x 500.800 Liability for unredeemed Premium expense (5.200 Amount of liability (11.000 40.000 170.000 Problem 1-25 Answer C Total coupons issued and to be redeemed (600.000 Problem 1-23 Answer B Problem 1-24 Answer B Premiums distributed in 2009 5.000 x 60%) 20.000 96.800 x 60) 348.200 x 20) 224.000 Less: Coupons redeemed 15.000 Total 6.000 Less: Estimated premiums in 2008 200 Coupons outstanding 100.

500.000) 4. Warranty expense Cash 40.000 Sales 7.500.500.500. Estimated warranty liability Cash 40.000 150.000 Estimated warranty liability (60% x 500 = 300 x 800) 240.000 4.000 Sales 4.000 2009 1.000 40.500.000 2.500.000 2009 1.000 2.1. Cash Sales 4. Estimated warranty liability Cash 150. Cash (500 x 15. Cash Sales 7. Warranty expense 240.000 150.000 3.000 9 .000 3. Cash (300 x 15. Warranty expense Cash 150.000) 7. Warranty expense 144.000 Estimated warranty liability (60% x 300 = 180 x 800) 144.500.000 7.000 2.000 40.000 2.000 Expense as incurred approach 2008 1.500.

Warranty expense Cash 390.000.260.000 390. Cash Sales 9.000) 1.000 2.000 1.000 5.000 900.000 2.000 3.000 9.000. Warranty expense Estimated warranty liability (14% x 5.Problem 1-27 Accrual approach 2008 1.000 700.000 900.000. Cash Sales 9.000.000) 700.000 5. Cash Sales 5.000 2.000 3.260.000.000.000 . Warranty expense Estimated warranty liability (14% x 9. Warranty expense Cash 900.000. Estimated warranty liability Cash 900.000.000.000 2.000. Estimated warranty liability Cash 390. Cash Sales 5.000 390.000 2009 1.000 9.000 2009 1.000 “Expense” approach 2008 1.

000 123.000) 250.000 Multiply by 2% Total failures expected 2.000 November 28. 2008 170.000 Total 100.000 Warranty liability–June 30.10 Problem 1-28 Units sold: October 32.000 .000 (5% x 5.000.400 x 300) Problem 1-30 Answer C 640 360 180 1.000 December 40.000 Warranty expense Less: Actual warranty cost 70.000 Problem 1-31 Answer A Warranty expense (3.000 x 80) 240.000 720.000 Problem 1-29 Answer D Warranty expense (2.180 820 150 123.000 Less: Failures already recorded: October sales November sales December sales Expected future failures Multiply by Estimated cost Warranty expense Estimated warranty liability 123.

000 x 25%) 1.000 400. Cash 900.000 3.000 11 Problem 1-33 Answer A Net sales (640.000 350.000.000 490.000 2.000 Problem 1-36 1.250.000 40.000 x 7%) Warranty costs: 2008 2009 Warranty liability – December 31.000) 40. Cash Gift certificates payable 500. Gift certificates payable Forfeited gift certificates (8% x 500. Gift certificates payable Sales 400.000 100.000 Problem 1-35 1.000 x 7%) 2009 (7.Problem 1-32 Answer B Warranty expense: 2008 (5.000 500.000 .000 840.000 300.000 400.000. 2009 440.000 Significant defect (500 x P30.000 3.000 Problem 1-34 Answer A Normal defect (500 x P10.000 / 8%) 8.250.500.000 x 15%) 2.000.

000 1.000 Add: Gift certificates sold 2.000 2.250. Gift certificates payable Forfeited gift certificates 40. Gift certificates payable Sales 780.000 Unearned revenue – January 1 260.000 Unearned revenue – December 31 850.000 Less: Gift certificates redeemed Expired gift certificates 820.000 Add: Gift certificates sold 900.000 780.000 40.Gift certificates payable 900.950.160.900.000 Less: Gift certificates redeemed Expired gift certificates 2.000 40.000 Unearned revenue – December 31 340.000 3.000 .000 780.000 Total 2.000 Total 1.000 12 Problem 1-37 Answer C Unearned revenue – January 1 650.000 100.050.

000 Expired gift certificates 500.000 Less: Service revenue recognized 860. Unearned revenue – January 1 600.000 Less: 2007 Redemption of current year sales 1.Problem 1-38 Answer D 2008 Sales of gift certificates (2.000 860.000 2.000 Problem 1-39 Answer D 1.000 Unearned revenue – December 31 720.000 Cash receipts from contracts sold 980.000 Unredeemed – January 1.580.000 Service contract expense Cash 520. 2008 750.000 x 90%) 2.000 520.500.000 980.000 . Cash Unearned service contract revenue 980.750.000 Unearned revenue – December 31.250.000 Unearned service contract revenue Service contract revenue 860.000 Total 1.000 Less: 2008 Redemption of prior year sales 250. 2008 500.

2008 because the subscriptions start with the January 2009 issue.000 2011 100.000 Problem 1-41 Answer A The entire amount of P720.000 / 12) 600.000 The above subscriptions will be served in the next publication in 2009.000 November 600.13 Problem 1-40 Answer B Outstanding contracts on December 31.000 Subscriptions received in 2009 that will expire in 2010 200.000 Subscriptions received in 2009 that will expire in 2011 140. Problem 1-42 Answer A Monthly subscriptions (7.000 Total unearned subscription revenue – December 31.000 . 2008 that will expire during 2009 150.000 The subscriptions after the September 30 cut-off are: October 600.000 2010 225.800. Problem 1-43 Answer C Subscriptions received in 2008 that will expire in 2010 125.000 December 600. 2008 1.200.000 Unearned service contract revenue 475.000 will be considered deferred revenue on December 31.

650.10 (1. 14 Problem 1-45 Answer C Advances – January 1 1.840.000 Less: Deposits refunded in 2008 (110.000 / 1.10B B B = = = = = = ..000 Advances applied (1.600.000 165.000 x 5) 550.000) Advances – December 31 Problem 1-46 Answer B B B B + .000) Advances canceled ( 500.000 165.000 Deposits made in 2008 (100.000 – B) 165.000 Total 650.000 Balance – December 31(current liability) 100.000 1.020.000 .10 150.Unearned subscription revenue – December 31.000 x 5) 500.10B 1.000 The lease deposit is a noncurrent liability.180.000 .000 / 10%) 2.000 Problem 1-44 Answer B Liability for refundable deposit – January 1 150. 2009 465.10B 165.000 Advances received Total 3.000 Problem 1-47 Answer A Income after bonus and tax (260.000 880.640.

000 – .000 – 157..000 + 260.87.000.000.000 Less: Tax (35% x 4. Cash Containers’ deposit 390.915 Proof of bonus B = .000 Income after bonus and tax 2.000 / 65%) 4.385 15 T = .35 (5.500 1.000 – B) B = .000 – B)] B = .0325 B = 157.05 (5.694.000) 1.400.05 (5.05 [5.000.385 Problem 1-49 1.000 .000 – B – T) T = .000.000 Income before bonus and tax (4.600.000 – 157.260.000 Less: Bonus 260.000 390.694.260.05B .000.35 (5.000 Containers’ deposit Cash 313.000.500 B = 162.000 – B .05 (5.000) 4.0325B = 162.0175B B + .35 (5.000 313.000.Income before tax (2.915) B = 157.385 – 1.000.000 + .000 Income before tax 4.385) T = 1.500 / 1.000 – B .000.05B .0175B = 250.500 + .000 Problem 1-48 Answer B B = .600.000 – 87.000.000 Proof Income before bonus and tax 4.000.750.1.35B) B = 250..

although the amount can be measured reliably.000 337.000 3.000) 700.000 1. Accounts receivable – Sunset Loss on guaranty Note payable – bank 200.000.000 Containers’ deposit on January 1.000 1. 2008 applicable to 2006 deliveries Less: Containers returned in 2008 applicable to 2006 deliveries 45.000 120.000 2.000 Add: Containers’ deposit in 2008 Total Less: Containers returned in 2008 Containers not returned and expired Containers’ deposit – December 31.000 390.000 343.Containers’ deposit Containers 30.000 16 Problem 1-51 1.500. 2008 Problem 1-50 75.000 1.500.000 – 2. Retained earnings Estimated liability for income tax 200. Only a disclosure is necessary because it is not probable that the company will be liable. Unearned subscription revenue Subscription revenue (3.000 2.000.000 30. Containers’ deposit – January 1.000 80. 2.000 313.000 30. Loss on damages Estimated liability for damages 1.000 680.000 3. 2008 290.000 Balance – expired and no longer refundable 30.300.000 200.000 . Loss on damages 700.

The issue is what amount of asset will be disclosed. the remainder of P3. 2008. Problem 1-58 Answer B . Since the case is settled in March 2009 after the issuance of the 2008 financial statements.Estimated liability for damages 1. if the case is settled before the issuance of the statements. the amount P1. Problem 1-55 Answer D The contingent asset is disclosed only because the case is unresolved on December 31.500.000 which is the midpoint of the range in the absence of the best estimate within the range. the actual award of P1. However. 2008.000.000 Problem 1-52 Answer A The probable loss is recorded but the possible loss is only disclosed. However. Problem 1-54 Answer D The provision should be accrued because it is probable and measurable.000. Problem 1-56 Answer A Haze can report a gain of P1. The accrued amount is P350.000 is only disclosed because the defendant has appealed the said amount.000.000 in its 2008 income statement because this amount is already settled on December 31. ` Problem 1-53 Answer C The best estimate is recorded. The accepted BIR offer is not recorded because it was made after the statements are issued. 1 7 Problem 1-57 Answer A The loss on the first lawsuit is both probable and measurable and therefore can be accrued as a provision.000 should be disclosed.000 should be disclosed.500.

Problem 1-59 Answer D Assessment on appeal (50% x 1. .000 The loss from the guaranty is not accrued because it is remote.500.000 Environmental cost 1.600.300.000 Both are accrued as provision because the loss is probable and measurable.000 Total provision 2.000) 800.Environmental cost 500.000 Litigation cost 300.000 Total accrued liability 800.