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Chapter 1
Current Liabilities
:
1. A debtor firm’s 12/31/05 balance sheet is to be published 3/1/06. An obligation with a due date of
3/4/11 is also due on demand by the creditor. At 12/31/05, there is no indication that the creditor
intends to call in the debt. The obligation is a current liability.

2. Deposits taken from customers by public utilities should always be reported as current liabilities
by the utility.

3. Since a dividend is generally paid within a month or so, it usually is classified as current.

4. All liabilities must be due within 12 months of the current balance sheet to be classified as
current liabilities.

5. A current liability may be classified as a long-term liability if the entity has the intention to
refinance it after the balance sheet date.

6. Trade notes payable are normally presented as current liabilities.

7. Unearned revenue is considered a financial liability.

8. Financial liabilities are initially measured at fair value plus direct costs, except for financial
liabilities that are classified as financial liabilities measured at fair value through profit or loss,
whose transaction costs are expensed immediately.

9. Non-financial liabilities are initially measured at the best estimate of the amounts needed to
settle those obligations or the measurement basis required by other applicable standard.

10. The fact that a liability is used to fund trading activities does not in itself make that liability one
that is held for trading.

“If you want to earn more, learn more” – Anonymous

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ANSWERS
1. TRUE 6. TRUE
2. FALSE 7. FALSE
3. TRUE 8. FALSE
4. FALSE 9. TRUE
5. FALSE 10. TRUE
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Use the following information for the next two questions:

Eliot Corporation’s liabilities at December 31, 2008 were as follows:

Accounts payable and accrued interest P 2,000,000

5-year 10% Notes payable – due December 31, 2011 5,000,000

Part of the loan agreement is for Elliot to appropriate a fixed amount out of its accumulated profits
and losses annually until the amount of appropriation has equaled the face of the obligation. Failure
to comply with the loan agreement will make the loan payable on demand. As of December 31, 2008,
Elliot Corporation has yet to comply with the loan agreement.

1. In its December 31, 2008 balance sheet, Elliot should report current liabilities at

a. 2,000,000
b. 2,500,000
c. 5,000,000
d. 7,000,000

2. Assuming the lender agreed on December 31, 2008 to provide a grace period of 12 months for
the entity to rectify the breach and assured Elliot Corporation that no demand of payment is to
be made within the grace period, what amount of current liabilities should Elliot Corporation
report in its December 31, 2008 balance sheet?

a. 2,000,000
b. 2,500,000
c. 5,000,000
d. 7,000,000

3. Hudson Hotel collects 15% in city sales taxes on room rentals, in addition to a ₱2 per room, per
night, occupancy tax. Sales taxes for each month are due at the end of the following month, and
occupancy taxes are due 15 days after the e+nd of each calendar quarter. On January 3, 20x1,
Hudson paid its November 20x0 sales taxes and its fourth quarter 20x0 occupancy taxes.
Additional information pertaining to Hudson's operations is:

20x0 Room rentals Room nights

October 100,000 1,100
November 110,000 1,200
December 150,000 1,800

What amounts should Hudson report as sales taxes payable and occupancy taxes payable in its
December 31, 20x0, balance sheet?
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Sales taxes Occupancy taxes Sales taxes Occupancy taxes

a. ₱39,000 ₱6,000 c. ₱54,000 ₱6,000
b. ₱39,000 ₱8,200 d. ₱54,000 ₱8,200

Use the following information for the next two questions:

BUGS Appliance Company’s accountant has been reviewing the firm’s past television sales. For the
past years, BUGS has been offering a special service warranty on all televisions sold. With the
purchase of a television, the customer has the right to purchase a 3-year service contract for an extra
P600.

Information concerning past television and warranty contract sales is given below:

2007 2006
Television sales in units 550 460
Sales price per unit P5,000 P4,000
Number of service contracts sold 350 300
Expenses relating to television warranties 38,520 13,400

BUGS’ accountant has estimated from past records that the pattern of repairs has been 40% in the
year of sale, 36% first year after sale and 24% on 2nd year of sale. Sales of the contracts are made
evenly during the year.

4. What is the adjusted balance of the unearned service contract as of December 31, 2007?

a. 111,600
b. 168,600
c. 211,200
d. 243,600

5. How much profit on service contract would be recognized in year 2007?

a. 42,000
b. 68,400
c. 71,880
d. 110,400

“Pride goes before destruction, a haughty spirit before a fall.” (Proverbs 16:18)
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SOLUTIONS

1. D 2M + 5M = 7M

2. A 2M

3. B
Solution:
20x0 Room rentals Room nights
October - 1,100
November 110,000 1,200
December 150,000 1,800
Total 260,000 4,100
Multiply by: Tax 15% 2
Total 20x0 unpaid taxes 39,000 8,200

4. D
  2007 2006
Number of service contracts
sold 350 300
Price per contract 600 600
Total 210,000 180,000
Divide by: (*sold 'evenly') 2 2
Totals 105,000 90,000

From 2007:   2007 2008 2009 2010

Percentages earned in each period   40% 36% 24%
First 105,000 assumed to have been sold at the beg. of
the pd.: (105K x 40%; x 36%; x 24%)   42,000 37,800 25,200

Percentages earned in each period 0% 40% 36% 24%

Remaining 105,000 assumed to have been sold at the
end of the pd.: (105K x 0%; 40%; x 36%; x 24%)   - 42,000 37,800 25,200

From 2006: 2006 2007 2008 2009 2010

Percentages earned in each period 40% 36% 24%
First 90,000 assumed to have been sold at the beg. of
the pd.: (105K x 40%; x 36%; x 24%) 36,000 32,400 21,600

Percentages earned in each period 0% 40% 36% 24%

Remaining 90,000 assumed to have been sold at the 36,000 32,400 21,600
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of the pd.: (105K x 0%; 40%; x 36%; x 24%)

133,80
Total earned portions (2006 & 2007 contracts) 36,000 110,400 0 84,600 25,200

Earned portion in:

2008 133,800
2009 84,600
2010 25,200
Total unearned portion as of Dec. 31,
2007 243,600

5. C
Earned portion in 2007 110,400
Expenses relating to television
warranties (38,520)
Profit 71,880