ACTIVITY CHAPTER 1

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

Accounts payable and accrued interest P2,000,000
5-year 10% Notes payable – due December 31, 2011- P5,000,000

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.

In its December 31, 2008 balance sheet, Elliot should report current liabilities at
Ans.
Solution: 2,000,000 + 5,000,000=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?
Ans. 2,000,000

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 end 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?
Ans. Sales taxes 39,000 and Occupancy taxes 8,200
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.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 2007
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.
What is the adjusted balance of the unearned service contract as of December 31, 2007?
Ans. 243,600
Solution:
2007 2006
Number of service contracts sold 350 300
Price Contract 600 600
Total 210,000 180,000
Divided by: 2 2
Total 105,000 90,000

For 2007: 2007 2008 2009 2010

Period earnings 40% 36% 24%
1st Half sale 42,000 37,800 25,200 .

For 2007: 2007 2008 2009 2010

Period earnings 40% 36% 24%
2nd Half sale 42,000 37,800 25,200

For 2007: 2006 2007 2008

Period earnings 40% 36% 24%
1st Half sale 36,000 32,400 21,600
For 2007: 2006 2007 2008 2009 2010
Period earnings 40% 36% 24%
2ND Half sale 36,000 32,400 21,600 -
Total 110,400 133,800 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. How much profit on service contract would be recognized in year 2007?

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