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Chapter 1
Current Liabilities

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. FALSE – also contracts and other operation of law
3. TRUE
4. FALSE – minus transaction costs
5. TRUE
6. FALSE
7. TRUE
8. FALSE
9. TRUE
10. FALSE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. C
3. A
4. B
5. D
6. A
7. D
8. A
9. B
10. C
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PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL

1. A
Notes payable 14,000
Interest payable 12,000
Rent payable 30,000
Cash dividends payable 8,000
Lease liability 70,000
Bonds payable 240,000
Premium on bonds payable 20,000
Security deposit 4,000
Redeemable preference shares issued 28,000
426,00
Total financial liabilities 0

2. D
Trade accounts payable (600K + 10K + 8K) 618,000
Interest payable on 10%, 4-year note (240K x 10% x 5/12) 10,000
Current portion of bonds payable 400,000
Held for trading financial liabilities 100,000
Income tax payable 100,000
Accrued expenses 10,000
1,238,00
Total current liabilities 0

3. C
2,000,00
Trade and other payables 0
6,000,00
Note payable (issued 3 yrs. ago, maturing on Dec. 31, 20x2) 0
Current portion of serial bonds 800,000
8,800,00
Total current liabilities
0

4. B (1.2M x 80%) = 960,000 noncurrent; (1M – 960K) = 40,000 current

5. B 3,120,000 + 480,000 – 600,000 = 3,000,000

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F Deposits received for future subscription of shares that are

repayable in cash at any time prior to the issuance of the
subscribed shares are classified as liability. Since the SEC’s
decision is expected to be received in 20x2, the deposit liability
is classified as current in the 20x1 financial statements. If the
SEC approves Poof Co.’s increased capitalization, the liability
is reverted back to “Subscribed Capital” (and, if appropriate,
‘Share premium’). When the shares are issued, the
“Subscribed Capital” is reclassified to “Share Capital.”
F The bank loan is classified as noncurrent because Poof Co. has
the has the right, at the end of the reporting period, to roll
over the obligation for at least twelve months after the
reporting period under an existing loan facility (i.e., the
original loan contract provides for the option to extend the loan and,
as of Dec. 31, 20x2, Poof Co. has complied with all the conditions
relating to the extension.)

6. A
Accounts payable 750,000
Interest payable 120,000
4,000,00
Long-term bank loan (maturing April 1, 20x9)
0
Total current liabilities 4,870,000

The grace period is disregarded because it was received after Dec.

31, 20x1.

7. B
Unadjusted accounts payable 2,300,000
(a) Goods in transit purchased FOB destination (23,000)
(b) Unreleased checks 32,000
(c) Freight accommodation on behalf of supplier (5,000)
(d) Consigned goods (90,000)
Adjusted accounts payable 2,214,000

8. C
Inventor Accounts payable
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y
Unadjusted balances 800,000 960,000
(c) Purchase return (20,000)
(d) Post-dated check drawn 60,000
Adjusted accounts payable 800,000 1,000,000

The purchase return is adjusted only to the accounts

payable, and not to the inventory, because the inventory balance
was determined based on the physical count on Dec. 31, 20x1,
which necessarily already excludes the return which was made on
Dec. 29, 20x1.

9. A
Subscriptions expirations:
 20x3 (250K + 400K) 650,000
 20x4 280,000
Unearned subscription revenue - 12/31/2003 930,000

10. C
Initial payment per No. of
Plan child children Total
#1 500 15 7,500
#2 200 12 2,400
#3 - 9 -
9,900
Multiply by: Unexpired portion 8/12
Unearned revenue 6,600

11. C
      20x1 20x2 20x3 Total
Percentage earned     40% 60%    
Percentage earned   40% 60%
First half (2M ÷ 2) 1M 400,000 600,000
Second half (2M ÷
2) 1M 400,000 600,000
Earned portions     400,000 1,000,000 600,000 2,000,000
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12. D
Redemption 108,000
Breakage (200,000 x 10% x 60%*) 12,000
Total revenue in 20x1 120,000

* 108,000 ÷ (200,000 x 90%) = 60%

Gift cards sold 200,000

Redemption (108,000)
(12,000
Breakage )
Gift card liability - 12/31/x1 80,000

13. C
Redemption & expiration(a) of prior yr. GCs 120,000
Redemption of current yr. GCs 760,000
Breakage (1M x 5% x 80% (b)) 40,000
Total revenue in 20x1 920,000

Gift card liability

120,000 beg.
Red’n. & exp’n.(a) - prior 1,000,00 Current yr.
yr. 120,000 0 sales
Red’n. - current yr. 760,000
Breakage 40,000
end. 200,000

The unredeemed portion of ₱8,000 (120K – 112K) from prior year

(a)

has expired during 20x1 because the problem states that the gift
certificates sold expire within one year. Accordingly, this amount is
recognized as breakage revenue (and as reduction in liability) in 20x1.

(b)
760,000 ÷ (1M x 95%) = 80%

14. D

15. B
Total tax for the year (72,000 x 2) 144,000
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Divide by: No. of months in a year 12

Monthly tax 12,000

April 1, 20x1
Land xxx
Cash xxx
Real property tax payable (12K x 3 mos.) 36,000

April 30, 20x1

Real property tax expense 12,000
Real property tax payable 12,000

May 1, 20x1
Real property tax payable 48,000
Prepaid real property tax 24,000
Cash 72,000

PROBLEM 4: FOR CLASSROOM DISCUSSION

1. Solution:
Accounts payable 15,000
Preference shares issued with mandatory redemption 100,000
Utilities payable 16,000
Rent payable 9,000
Total financial liabilities 140,000

2. Solution:
Accounts payable 500,000
Held for trading financial liabilities 1,000,000
Current portion of Note payable 1,000,000
Unearned revenue 300,000
Dividends payable 800,000
Current liabilities 3,600,000

3. Solution:
Currently maturing long-term debt (a) 10,000,000
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5-year loan payable on demand (b) 6,000,000

14,000,00
Loan with breach of provision (b) 0
Total current liabilities 30,000,000

(a)
“An entity classifies its financial liabilities as current when they are
due to be settled within twelve months after the reporting period,
even if:
a) the original term was for a period longer than twelve months,
and
b) an agreement to refinance, or to reschedule payments, on a long-
term basis is completed after the reporting period and before the
financial statements are authorised for issue.” (PAS 1.72)

(b)
“When an entity breaches a provision of a long-term loan
arrangement on or before the end of the reporting period with the
effect that the liability becomes payable on demand, it classifies the
liability as current, even if the lender agreed, after the reporting
period and before the authorisation of the financial statements for
issue, not to demand payment as a consequence of the breach. An
entity classifies the liability as current because, at the end of the
reporting period, it does not have a right to defer its settlement for at
least twelve months after that date.” (PAS 1.74)

4. Solution:
Unadjusted accounts payable 1,200,000
70,00
Goods in transit shipped FOB shipping point 0
(80,000
Goods in transit shipped FOB destination )
Adjusted accounts payable 1,190,000

5. Solution:
 Subscriptions revenue in 20x2: (160,000 + 2,690,000) = 2,850,000
 Unearned subscriptions as of 12/31/x2 = 110,000

6. Solution:
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Dat Cash 400,000

e
Gift card liability 400,000
to record the sale of gift certificates
Dat Gift card liability 216,000
e
Revenue 216,000
to record the redemption of gift certificates
Dat Gift card liability 24,000
e
Revenue (400,000 x 10% x 60%*) 24,000
to record the revenue from expected breakage
* 216,000 ÷ (400,000 x 90%) = 60%

7. Solution:
5,480,00
Unadjusted balance
0
50,00
Unpaid utilities
0
20,00
Understatement in withholding taxes
0
5,550,00
Adjusted total current liabilities
0

Dividend payable is recognized when the entity declares the

dividends (or when the declaration is approved by a relevant
authority, if such approval is required).
The dividends declared (in the problem) are recognized
only on Jan. 7, 20x2 (assuming it is not subject to further
approval). The dividends are only disclosed in the 20x1 financial
statements as a non-adjusting event after the reporting period.