CLASSROOM EXERCISES ON CURRENT LIABILITIES

1. At December 31, 2020, Nelson Corporation owes P1,000,000 on a note payable due February 15, 2021.

(a) If Nelson intends to refinance the obligation by issuing a long-term note on February 14 and using the proceeds to
pay off the note due February 15, how much (if any) of the P1,000,000 should be reported as a current liability
at December 31, 2020?
(b) If Nelson pays off the note on February 15, 2021, and then borrows P1,500,000 on a long-term basis on March 1,
how much (if any) of the P1,000,000 should be reported as a current liability at December 31, 2020, the end
of the fiscal year?
(c) If Nelson has the unconditional right to defer the payment to February 15, 2022, how much (if any) of the
P1,000,000 should be reported as a current liability at December 31, 2020?

2. Thomas Company has a long-term debt with a maturity date of November 2, 2022. On October 10, 2020, it breaches a
covenant related to this debt and the loan becomes due on demand. Thomas reaches an agreement with the lender on
January 5, 2021, to provide a waiver of the breach. The financial statement reporting date is December 31, 2020, and
the financial statements are authorized for issue on March 16, 2021.

(a) Explain whether the debt obligation should be classified as current or non- current.
(b) Assuming that the agreement was reached on December 28, 2020, explain whether the debt obligation should be
classified as current or non-current.

3. Topaz Company sells combustible chemicals in expensive reusable containers. Customers are charged a deposit for
each container delivered and receive a refund when the container is returned. Deposits collected on containers delivered
in 2020 amounted to P500,000. Deposits are forfeited if containers are not returned within one year. Eighty-five percent
of the containers were returned within the allotted time. Deposits charged are 150% of the actual cost of containers.
The inventory of containers remains in the company books until deposits are forfeited.

Provide all necessary journal entries.

4. Garnet Publications collects magazine subscriptions from customers at the time subscriptions are sold and credits the
Unearned Subscription Revenue account. Garnet collected P6,000,000 in subscription sales during its first year of
operations. At the end of the year, only 60% of the total subscription was earned.

Provide all necessary journal entries.

5. Sapphire Boutique sold 3,950 gift certificates to customers during 2020 for P500 each. Total amount credited to the
Sales account in 2020 amounted to P5,350,000. Of this amount, P1,680,000 represents the sales value of gift certificates
redeemed during the year while the remaining portion represents: 65% on cash basis and 35% on open account.

Provide all necessary journal entries.

6. Spice Company, a clothing store, has five employees. Each employee earns ten days sick leave. For 2019, each employee
is paid an hourly rate of P1,200 while the 2020 hourly rate increased to P1,280. As of January 1, 2020, each employee
had an average of 6 days unused sick leaves. Sick leaves are allowed to be carried over until the next year and are
consumed on a FIFO basis. Each employee used an average of 12 days sick leaves during 2020.

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 (a) Prepare the entry to record the related expense.
(b) Prepare the entry to record the use of the sick leaves.
(c) Compute the balance of the liability account as of December 31, 2020.

7. Pearl Company motivates its sales manager by giving him bonus. Determine and record the amount of bonus to the
sales manager under each of the situation below.
Income before bonus and tax P2,000,000
Income tax rate 30%

(a) How much is the bonus assuming the bonus is 10% of income before bonus and tax?
(b) How much is the bonus assuming the bonus is 10% of income after bonus but before tax?
(c) How much is the bonus assuming the bonus is 10% of income before bonus but after tax?
(d) How much is the bonus assuming the bonus is 10% of income after bonus and tax?

8. An employee filed a P2M lawsuit against Amethyst Company for damages suffered when one of Amethyst’s plants
exploded a year ago. The firm’s legal counsel expects the company will lose the lawsuit and estimates the loss to be
between P500,000 and P1,200,000.

(a) How much should be recognized as liability?

(b) Assuming that the loss is estimated to be between P500,000 and P1,200,000 and that P950,000 is considered to be
the best estimate, how much should be recognized as liability?
(c) Assuming that it was estimated that there is a 50% chance that the damages will amount to P950,000, 30% chance
that the damages will amount to P1,200,000, and 20% chance that the damages will amount to P500,000, how much
should be recognized as liability?
(d) Assuming that the legal counsel believes that there is a 40% chance that the company will lose the lawsuit and
estimates the loss to be between P500,000 and P1,200,000, how much should be recognized as liability?

9. Ruby Company, a supplier of in-home health care products, introduced a new therapeutic chair carrying a two–year
warranty against defects. Based on industry experience, warranty costs average 5% of sales during the first 12 months
following the date of sale and 7% the next 12 months. During December 2020, its first month of operations, the
company sold chairs worth P1,900,000. Ruby Company paid P100,000 for repairs during December 2020.

Provide all necessary journal entries.

10. Diamond Corporation offers P15 cash rebates on a particular model of hand-held hair dryer. To receive the rebate,
customers must mail in a rebate coupon enclosed in each package of hair dryer plus the cash register receipt. Previous
experience indicates that 45% of the coupons will be redeemed. Sale of 420,000 packages of hair dryer amounted to
P105 Million in 2020 and payments to customers totaled P1,950,000.

Provide all necessary journal entries.

11. Emerald Corporation puts one coupon in each package of candy that it sells and offers a toy in exchange for P10 and
five coupons. The firm bought 25,000 toys at P20 each in 2020. It is estimated that 60% of the coupons will be
redeemed. During the year, Emerald sold 180,000 packages of candy for P50 per package. Only 80,000 coupons were
redeemed during 2020.

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 (a) Provide all necessary journal entries.
(b) Assuming that Emerald will pay an additional P3 to distribute the toy to the customers, provide all necessary
journal entries.

12. Diamond’s Drillers erects and places into service an off-shore oil platform on January 1, 2020, at a cost of P10,000,000.
Diamond estimates it will cost P1,000,000 to dismantle and remove the platform at the end of its useful life in 10 years,
which it is legally obligated to do. (The present value at January 1, 2020, of the dismantle and removal costs is
P450,000.)

Prepare the entry to record the environmental liability.

13. Gold Company decided to cancel an existing property lease in one of its divisions, as its operations in this area were no
longer profitable. Unfortunately, Gold has a non-cancelable lease and cannot sublease the property. The present value
of future lease payments under the lease is P2,000,000. The penalty to break the lease is P1,450,000.

Prepare the entry to record the penalty to break the lease.

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