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FAR EASTERN UNIVERSITY

Institute of Accounts, Business and Finance (IABF)
Accountancy and Internal Auditing Department
Financial Accounting & Reporting, Part III
Quiz – Current Liabilities, Part I

Name: _____________________________________________Yr. and Section: __________________

Instructions: Provide the following required in the worksheet. Strictly no erasures in this test questionnaire
and in the worksheet. Show the computations in good form.

Problem 1—Accounts and Notes Payable.

Described below are certain transactions of Larson Company for 2010:
1. On May 10, the company purchased goods from Fry Company for P50,000, terms 2/10, n/30.
Purchases and accounts payable are recorded at net amounts. The invoice was paid on May 18.
2. On June 1, the company purchased equipment for P60,000 from Raney Company, paying P20,000 in
cash and giving a one-year, 9% note for the balance.
3. On September 30, the company borrowed P108,000, by signing a one-year zero-interest-bearing
P120,000 note at First State Bank.

Instructions
(a) Prepare the journal entries necessary to record the transactions above using appropriate dates.
(b) Prepare the adjusting entries necessary at December 31, 2010 in order to properly report interest
expense related to the above transactions. Assume straight-line amortization.

Problem 2—Refinancing of short-term debt

At the financial statement date of December 31, 2010, the liabilities outstanding of Packard Corporation
included the following:
1. Cash dividends on ordinary shares, P60,000, payable on January 15, 2011.
2. Note payable to Galena State Bank, P470,000, due January 20, 2011.
3. Serial bonds, P1,000,000, of which P250,000 mature during 2011.
4. Note payable to Third National Bank, P300,000, due January 27, 2011.

The following transactions occurred early in 2011:

January 15: The cash dividends on ordinary shares were paid.
January 20: The note payable to Galena State Bank was paid.
January 25: The corporation entered into a financing agreement with Galena State Bank, enabling it to
borrow up to P500,000 at any time through the end of 2013. Amounts borrowed under the
agreement would bear interest at 1% above the bank's prime rate and would mature 3
years from the date of the loan. The corporation immediately borrowed P400,000 to
replace the cash used in paying its January 20 note to the bank.
January 26: 40,000 ordinary shares were issued for P350,000. P300,000 of the proceeds was used to
liquidate the note payable to Third National Bank.
February 1: The financial statements for 2010 were issued.

Instructions
Prepare a partial statement of financial position for Packard Corporation, showing the manner in which the
above liabilities should be presented at December 31, 2010. The liabilities should be properly classified
between current and non-current, and appropriate note disclosure should be included.

Problem 3—Notes payable.

On August 31, Jenks Co. partially refinanced P180,000 of its outstanding 10% note payable made one year
ago to Arma State Bank by paying P180,000 plus P18,000 interest, having obtained the P198,000 by using
P52,400 cash and signing a new one-year P160,000 note discounted at 9% by the bank.

Instructions
(1) Make the entry to record the partial refunding. Assume Jenks Co. makes reversing entries when
appropriate.
(2) Prepare the adjusting entry at December 31, assuming straight-line amortization of the discount.