PROBLEM NO.

2
The following information relates to Sonic Company’s obligations as of December 31,
2005. For each of the numbered items, determine the amount if any, that should be
reported as current liability in Sonic’s December 31, 2005 balance sheet.

1. Accounts payable:
Accounts payable per general ledger control amounted to P5,440,000, net of P240,000
debit balances in suppliers’ accounts. The unpaid voucher file included the following
items that not had been recorded as of December 31, 2005:
a) A Company – P224,000 merchandise shipped on December 31, 2005, FOB
destination; received on January 10, 2006.
b) B, Inc. – P192,000 merchandise shipped on December 26, 2005, FOB shipping
point; received on January 16, 2006.
c) C Super Services – P144,000 janitorial services for the three-month period ending
January 31, 2006.
d) MERALCO – P67,200 electric bill covering the period December 16, 2005 to
January 15, 2006.
On December 28, 2005, a supplier authorized Sonic to return goods billed at P160,000
and shipped on December 20, 2005. The goods were returned by Sonic on December
28, 2005, but the P160,000 credit memo was not received until January 6, 2006.
a. P5,923,200 b. P5,712,000 c. P5,601,600 d. P5,841,600

2. Payroll:
Items related to Sonic’s payroll as of December 31, 2005 are:
Accrued salaries and wages P776,000
Payroll deductions for:
Income taxes withheld 56,000
SSS contributions 64,000
Philhealth contributions 16,000
Advances to employees 80,000
a. P776,000 b. P992,000 c. P832,000 d. P912,000

3. Litigation:
In May, 2005, Sonic became involved in a litigation. The suit is being contested, but
Sonic’s lawyer believes it is possible that Sonic may be held liable for damages
estimated in the range between P2,000,000 and P3,000,000, and no amount is a better
estimate of potential liability than any other amount.
a. P0 b. P2,000,000 c. P3,000,000 d. P2,500,000
4. Bonus obligation:
Sonic Company’s president gets an annual bonus of 10% of net income after bonus
and income tax. Assume the tax rate of 30% and the correct income before bonus and
tax is P9,600,000. (Ignore the effects of other given items on net income.)
a. P722,600 b. P395,000 c. P2,240,000 d. P628,000

5. Note payable:
A note payable to the Bank of the Philippine Islands for P2,400,000 is outstanding on
December 31, 2005. The note is dated October 1, 2004, bears interest at 18%, and is
payable in three equal annual installment of P800,000. The first interest and principal
payment was made on October 1, 2005.
a. P800,000 b. P908,000 c. P72,000 d. P872,000

6. Purchase commitment:
During 2005, Sonic entered in a noncancellable commitment to purchase 320,000 units
of inventory at fixed price of P5 per unit, delivery to be made in 2006. On December
31, 2005, the purchase price of this inventory item had fallen to P4.40 per unit. The
goods covered by the purchase contract were delivered on January 28, 2006.
a. P0 b. P1,600,000 c. P1,408,000 d. P192,000

7. Deferred taxes:
On December 31, 2005, Sonic’s deferred income tax account has a 2005 ending credit
balance of P772,800, consisting of the following items:
Caused by temporary differences in accounting Deferred tax
For gross profit on installment sales P376,000 Cr.
For depreciation on property and equipment 576,000 Cr
For product warranty expense 179,200 Dr
P772,800 Cr.
a. P772,800 b. P952,000 c. P196,800 d. P0

8. Product warranty:
Sonic has a one year product warranty on selected items in its product line. The
estimated warranty liability on sales made during 2004, which was outstanding as of
December 31, 2004, amounted to P416,000. The warranty costs on sales made in
2005 are estimated at P1,504,000. Actual warranty costs incurred during the current
2005 fiscal year are as follows:
Warranty claims honored on 2004 sales P 416,000
Warranty claims honored on 2005 sales 992,000
Total warranty claims honored P1,408,000
a. P0 b. P1,504,000 c. P96,000 d. P512,000

9. Premiums:
To increase sales, Sonic Company inaugurated a promotional campaign on June 30,
2005. Sonic placed a coupon redeemable for a premium in each package of product
sold. Each premium costs P100. A premium is offered to customers who send in 5
coupons and a remittance of P30. The distribution cost per premium is P20. Sonic
estimated that only 60% of the coupons issued will be redeemed. For the six months
ended December 31, 2005, the following is available:
Packages of product sold 160,000
Premiums purchased 16,000
Coupons redeemed 64,000
a. P1,728,000 b. P1,152,000 c. P1,600,000 d. P576,000
10. Due to Five Six Finance company:
Sonic’s accounting records show that as of December 31, 2005, P1,280,000
was due to Five Six Finance Company for advances made against P1,600,000
of trade accounts receivable assigned to the finance company with recourse.
a. P0 b. P1,600,000 c. P320,000 d.
P1,280,000