Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

LIABILITIES
Accounting 122
TRUE OR FALSE. Determine whether the following statements are correct or not. Write A if the statement is
correct and write B if not. Final answers should be written on the answer sheet provided with this questionnaire.
Erasures are strictly not allowed.
1. Trade payables and accruals for employee and other operating costs are classified as current liabilities even
if they are to be settled more than twelve months after the reporting period.A
2. Liabilities can arise from future transactions or events as in the case of liabilities on purchase
commitments.B
3. For a liability to exist, the entity liable must be identified.A
4. An entity shall measure initially a financial liability designated at fair value through profit or loss at fair
value plus transaction costs.B
5. An obligation to distribute an entity’s assets as a result of a dividend declared near the end of the current
year is classified as part of equity rather than an accounting liability.B
6. Conceptually, all liabilities are measured at present value or discounted amount and subsequently measured
at amortized cost.A
7. For a liability to exist, an obligation to pay cash in the future must exist.B
8. The obligation to pay interest on a five-year note payable that was issued the last day of the current year is
an example of a liability.B
9. Non-current liabilities are measured at their present value.B
10. For a liability to exist, it is not necessary that the payee to whom the obligation is owed be identified.A
11. A liability which is due to be settled within twelve months after the reporting period is classified as current
even if the original term was for a period longer than twelve months and an agreement to refinance or to
reschedule payment on a long-term basis is completed before the reporting period.B
12. For a liability to exist, the exact amount of the obligation need not be known.A
13. Non-current liabilities include deferred tax and income tax liabilities. B
14. An example of a liability is the obligation to pay for goods that an entity expects to order from suppliers next
year.B
15. Current liabilities shall not be offset against assets that are to be applied to their liquidation.A
16. An entity shall measure initially a financial liability designated at fair value through profit or loss at fair
value plus transaction costs.B
17. Short-term obligations are measured, recorded and reported at face amount.A
18. For a liability to be classified as non-current, the entity liable must not have an unconditional right to defer
settlement of the liability for at least twelve months after the reporting period.B
19. If certain conditions relating to covenants are breached, the liability shall be classified as current unless the
lender has agreed after the reporting period and before the statements are authorized for issue, not to demand
payment as a consequence of the breach.B
20. Unasserted claims are never accrued because to do so would require an entity to implicitly admit liability.B
21. A 90-day note, renewable for another 90-day period should be classified in the statement of financial
position of an entity as a non-current liability because of note’s renewal option.B
22. Estimated liabilities are either current or non-current in nature.A
23. The signing of a three-year employment contract at a fixed annual salary does not meet the definition of a
liability.A
24. Mandatorily redeemable preference shares issued qualify for classification as a liability.A
25. Unearned interest income related to non-interest bearing, long-term note receivable falls under current
liabilities.B
26. After initial recognition, an entity shall measure a financial liability either at amortized cost using the
effective interest method or at fair value through profit or loss.A
27. When the fair value option of measuring a financial liability is elected, the interest expense on the financial
liability is recognized using the nominal interest rate.A
28. Employment taxes that are due to be settled in fifteen month’s time are to be presented under current
liabilities.A
29. When the entity’s normal operating cycle is not clearly identifiable, its duration is assumed to be twelve
months.A
30. A note payable with no specified maturity date does not qualify for recognition as a liability.B

SHORT PROBLEMS.Compute for the amount/s asked by each problem. Final answers should be written on the
answer sheet provided with this questionnaire. Solutions are to be written in a separate sheet of paper to be
submitted along with the answer sheet. Erasures are strictly not allowed.
PROBLEM 1:On December 31, 2011, the bookkeeper of Glare Company provided the following information:
Accounts payable, including deposits and advances from customer
of P250,000 P 1,250,000
Notes payable, including note payable to bank on December 31, 1,500,000

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 1
 2013 of P500,000
Stock dividend payable 400,000
Credit balances in customer’s accounts 200,000
Serial bonds payable in quarterly installments of P500,000 5,000,000
Accrued interest on bonds payable 150,000
Contested BIR tax assessment – possible obligation 300,000
Unearned rent income 100,000
1. Compute the total current liabilities on December 31, 2011.4,700,000
PROBLEM 2: Below are independent cases of note payable transactions of three companies. Answer the questions
following each case.
2. On October 1, 2010, Pine Company issued a note payable to National Bank in the amount of P1,800,000
bearing interest at 12% and payable in three equal annual principal payments of P600,000. On this date, the
bank’s prime rate was 11%. The first interest and principal payment was made on October 1, 2011. On
December 31, 2011, what amount should be reported as accrued interest payable?36,000
3. Mann Company’s liability account balances on June 30, 2010 included a 10% note payable in the amount of
P3,600,000. The note is dated October 1, 2009 and payable in three equal annual payments of P1,200,000
plus interest. The first interest and principal payment was made on October 1, 2010. In the June 30, 2012
statement of financial position, what amount relating to this note would be presented under current
liabilities?1,290,000
4. Included in Easy Corporation’s liability account balances on December 31, 2010 was a note payable in the
amount of P1,200,000. The note is dated October 1, 2010, bears interest at 15% and is payable in three equal
annual payments of P400,000. The first interest and principal payment was made on October 1, 2011. In its
2011 income statement, what amount should Easy Company report as interest expense for this note?165,000
5. On March 1, 2010, Fine Company borrowed P1,000,000 and signed a two-year note bearing interest at 12%
per annum compounded annually. Interest is payable in full at maturity on February 28, 2012. What amount
should Fine Company report as a liability for accrued interest on December 31, 2011? 232,000
PROBLEM 3:Easy Company provided the following information on December 31, 2011.
Accounts payable – trade P 4,000,000
Notes payable:
Trade 3,000,000
Bank loans 2,000,000
Advances from officers 500,000
Bank overdraft 300,000
Contract entered into for the construction of building 5,000,000
Dividends payable 1,000,000
Withholding tax payable 100,000
Mortgage payable 3,800,000
Estimated damages payable by reason of breach of contract 700,000
Income tax payable 800,000
Estimated warranty liability 600,000
Accrued liabilities 900,000
Estimated premium payable 200,000
Claim for increase in wages by employees covered in a pending
lawsuit 3,500,000
6. Compute the total current liabilities on December 31, 2011.14,100,000
PROBLEM 4: The following information about Manchester Company is available on December 31, 2011.
Income taxes withheld from employees P 900,000
Cash balance at First State Bank – Account 101 2,500,000
Accounts receivable with credit balance 750,000
Cash overdraft at Second State Bank 1,310,000
Estimated expenses of meeting warranties on merchandise
previously sold 500,000
Estimated damages as a result of unsatisfactory performance on a
contract 1,500,000
Cash overdraft at First State Bank – Account 102 10,000
Accounts payable 3,000,000
Deferred serial bonds, issued at par and bearing interest at 12%,
payable in semi-annual installment of P500,000 due April 1and
October 1 of each year , the last bond to be paid October 1,
2017. Interest is also paid semi-annually 5,000,000
Property dividends payable 2,000,000
7. Compute the total current liabilities on December 31, 2011.10,110,000
PROBLEM 5:Multiple Company had the following liabilities on December 31, 2011:

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 2
 Accounts payable after deducting debit balances in supplier’s
accounts of P100,000 P 500,000
Accrued liabilities 50,000
Note payable – due March 31, 2012 1,000,000
Note payable – due May 1, 2012 800,000
Bonds payable – due December 31, 2013 2,000,000
On March 1, 2012 before the 2011 financial statements were issued, the note payable of P1,000,000 was replaced by
an 18-month note for the same amount. The entity is considering similar action on the P800,000 note due on May 1,
2012. The financial statements were issued on March 31, 2012.
8. Compute the total current liabilities as of December 31, 2011.2,450,00
PROBLEM 6:Intercon Company is planning to refinance certain short-term obligations on a long-term basis. The
entity has a December 31 year-end and the 2011 financial statements will be published on March 15, 2012. On
December 31, 2011, before reclassification of short-term debt, the liabilities are:
Current liabilities:
Accounts payable P 7,000,000
Note payable – bank 12,000,000
Accrued expenses 4,000,000
Non-current liabilities:
Mortgage payable 4,000,000
Note payable – due in 2013 3,000,000
The entity intends to refinance P9,000,000 of the P12,000,000 bank note payable on a long-term basis. Although the
entire P12,000,000 is due on June 30, 2012, the bank has informally agreed to extend the maturity date for
P6,000,000 to June 30, 2013, if necessary. On January 31, 2012, the entity issued share capital for P4,000,000, net
of issue costs and underwriting fees of P500,000.
On February 15, 2012, the entity entered into a financing agreement with a financially capable commercial bank,
permitting the entity to borrow up to P3,000,000. Borrowings available at the entity’s option on April 1, 2012 will
mature five years after the loan date. The entity uses the entire proceeds of the issue of share capital to retire part of
the current note payable and now intends to draw down the entire available commitment of the five-year debt on
April 1, 2012.
9. Compute the total current liabilities on December 31, 2011.23,000,000
PROBLEM 7: Canton Cave Company provided the following schedule of liabilities on December 31, 2011:
Accounts payable P 6,500,000
Notes payable – bank 8,000,000
Interest payable 150,000
Mortgage note payable – 10% 2,000,000
Bonds payable 4,000,000
An examination of the accounts revealed the following:
A. Bank notes payable include two separate notes payable to First Bank:
 A P3,000,000, 10% note issued March 1, 2010, payable on demand. Interest is payable every six
months.
 A one-year, P5,000,000 , 11% note issued January 2, 2011. On December 31, 2011, Canton Cave
negotiated a written agreement with First Bank to replace the note with a two-year, P5,000,000,
10% note to be issued January 2, 2012.
B. The 10% mortgage note was issued October 1, 2008, with a term of 10 years. Terms of the note give the
holder the right to demand immediate payment if the entity fails to make a monthly interest payment within
10 days of the date of payment is due. On December 31, 2011, Canton Cave is three months behind in
paying its required interest payment.
C. The bonds payable are 10-year, 8% bonds, issued June 30, 2002. Interest is payable semi-annually on June
30 and December 31.
10. Compute the total current liabilities on December 31, 2011.15,650,000
PROBLEM 8:Loeb Corporation frequently borrows from the bank in orderto maintain sufficient operating cash.
The following loanswere at a 12% interest rate, with interest payable at maturity.
Loeb repaid each loan on its scheduled maturity date.
Date of Loan Amount Maturity Date Term of Loan
11/1/2010 P 500,000 10/31/2011 1 year
2/1/2011 1,500,000 7/31/2011 6 months
5/1/2011 800,000 1/31/2012 9 months
Loeb records interest expense when the loans are repaid. As a result, interest expense of P150,000 was recorded in
2011.
11. Ifno correction is made, by what amount would 2011 interest expense be overstated (understated)?54,000
understated
PROBLEM 9:Jason Company offered a contest in which the winner would receive P2,000,000 payable over twenty
years. On December 31, 2011, Jason Company announced the winner of the contest and signed a note payable to the
winner for P2,000,000 payable in P100,000 installments every January 2. Also, on December 31, 2011, Jason

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 3
Company purchased an annuity for P836,500 to provide the P1,900,000 prize after the first P100,000 installment
which was paid on January 2, 2012.
12. On December 31, 2011, what amount should be reported as note payable – contest winner, net of current
portion?836,500
13. In the 2011 income statement, what amount should be reported as contest prize expense?936,500
PROBLEM 10: Able Company had the following amounts of long-term debt outstanding on December 31, 2011:
14% term note, due 2012 P 30,000
11% term note, due 2014 1,070,000
8% note, due in 11 equal annual principal payments, plus interest
beginning December 31, 2012 1,100,000
7% guaranteed debentures, due 2013 1,000,000
The annual sinking fund requirement on the guaranteed debenture is P40,000 per year.
14. What amount should Able Company report as current maturities of long-term debt in its December 31,
2011 statement of financial position?130,000
PROBLEM 11: Included in Tagkayawan Company’s liability balances on December 31, 2011 were the following:
10% note payable issued on October 1, 2010, maturing October 1,
2012 P 3,000,000
12% note payable issued on March 1, 2010, maturing on March 1,
2012 5,000,000
The 2011 financial statements were issued on March 31, 2012. On January 31, 2012, the entire P5,000,000 balance
of the 12% note payable was refinanced through issuance of a long-term obligation payable lump sum. Under the
loan agreement for the 10% note payable, Tagkayawan Company has the discretion to refinance the obligation for at
least twelve months after December 31, 2011.
15. What amount of the notes payable should be classified as non-current on December 31, 2011?3,000,000
PROBLEM 12: Included in Witt Company’s liability account balances on December 31, 2011 were the following:
6% note payable issued October 1, 2010 maturing September 30,
2012 P 500,000
8% note payable issued April 1, 2010 maturing April 1, 2012 800,000
The December 31, 2011 financial statements were issued on March 31, 2012. On January 15, 2012, the entire
P800,000 balance of 8% note was refinanced by issuance of a long-term obligation payable in a lump sum. In
addition, on March 10, 2012, Witt Company consummated a non-cancelable agreement with the lender to refinance
the 6%, P500,000 note on a long-term basis, on readily determinable terms that have not yet been implemented.
Both parties are financially capable of honoring the agreement and there have been no violations of the agreement’s
provisions.
16. In the December 31, 2011, statement of financial position, what amount of the notes payable should be
classified as current?1,300,000
PROBLEM 13:On December 31, 2011, Largo Company had a P750,000 note payable outstanding due July 31,
2012. Largo Company borrowed the money to finance construction of a new plant. Largo Company planned to
refinance the note by issuing long-term bonds. Because Largo Company temporarily had excess cash, it prepaid
P250,000 of the note on January 15, 2012. In February 2012, Largo Company completed a P1,500,000 bond
offering. Largo Company will use the bond offering proceeds to repay the note payable at its maturity and to pay
construction cost during 2012. On March 31, 2012, Largo Company issued its 2011 financial statements.
17. What amount of the note payable should Largo Company include in current liabilities on December 31,
2011?750,000
PROBLEM 14: Dean Company has P2,000,000 of note payable due June 30, 2012. At the end of reporting period
on December 31, 2011, Dean Company signed an agreement to borrow up to P2,000,000 to refinance the note
payable on a long-term basis. The financing agreement called for borrowing not to exceed 80% of the value of the
collateral Dean Company was providing. On December 31, 2011, the value of the collateral was P3,000,000. Under
the existing loan facility, Dean Company has the discretion to refinance or roll over the note payable for at least
twelve months after the end of the reporting period.
18. What amount of the note payable should Largo Company include in current liabilities on December 31,
2011?0

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 4