CHAPTER 1 LIABILITIES TECHNICAL KNOWLEDGE To understand the concept of liabilities. To describe the nature and type of current and noncurrent liabilities. To know the measurement of current and noncurrent liabilities. To explain the issue of long-term debt falling due within one year, To explain the issue of breach of covenants attached to a long-term debt, To descr; ‘| : ; emplong formulas in computing bonus to officers andLIABILITIES The Revised Concep provides the followi k for Financial Reporting tual Framewor! Mu y abilities: ng definition of li ligations of an entity to transfer an jabilities are present ob! Liabili o sult of past events. economic resource as a Te the essential characteristics of an accounting ‘Accordingly, liability are: The entity has a present obligation. ation is a duty or responsibility that actical ability to avoid. able must be identified but it is not necessary yee to whom the obligation is owed be % An obligi an entity has no prt ‘The entity li that the pa; identified. b. The obligation is to transfer an economic resource. This is the very heart of the definition of an accounting liability. The economic resource is the asset that represents a right with a potential to produce economic benefits. Specifically, the obligation must be to pay cash, transfer noncash asset or provide service at some future time. c. The liability arises from a past event. This means that the liability i i it i pie mee: y is not recognized until it is Present obligation An eseential characteristi iability i hds a presen? obligation of a liability is that the entity The present obligati constructive eee may be a legal obligation or @ Obligations m: nis ‘ay be legall of bi gally enforceable nding contract or statutory requirements aaa This is norm: ally th ri for goods and semviieg ot mple, with accounts payable Constructive obi . - of normal by, obligations also give rise to liabilities by reas? good business mei Practice, custom and a desire to maintain lath : ations or act in an equitable manner.fer of a0 economic resource [e) ans! i ‘ 7 ent of money, without transfer of noncash asset, without Pa mane? of sertice, there is no accounting liability. without P' A crystal Tiability 38 ; a case, there 18 liability exists. the definitive concept of an accounting zation of they declares cash dividend. when an @ ‘h an obligation to pay cash, hence, In suc aooounting when an entity declares share dividend, there is no But ving lability. accounting «the obligation is to issue the entity's own shares. of the entity’s own shares 1s not a transfer of The issuance Sead ata because the share capital is an equity item. noncash asset Thus, share dividend payable is classified as part of equity rather than an accounting liability. Past event — Another essential characteristic of a liability is that the liability must arise from a past transaction or event. ‘The past event that leads to a legal or constructive obligation is known as the obligating event. tee lgating event creates a present obligation because chligation a Do, realistic alternative but to settle the n created by the event. For exa payable Be the acquisition of goods gives rise to accounts dbligating event is the acquisition of goods. The rece; the loan, The obligati ating ‘ Smequence ef er the cash received from the bank 9° * ipt ofa bank loan results in an obligation to repay aExamples of liabilities The more common types of liabilities include the following: to suppliers for the purchase of goods a. Accounts payable b. Amounts withheld from employees for taxes and for contributions to the Social Security System r salaries, interest, rent, taxes, product e. Accruals fo rofit sharing bonus warranties and P) Cash dividends declared but not paid Deposits and advances from customers Debt obligations for borrowed funds — notes, mortgages and bonds payable g. Income tax payable h. Unearned revenue Measurement of current liabilities Conceptually, all liabilities are initially measured at present value and subsequently measured at amortized cost. However, in practice,current liabilities or short-term obligations are not discounted anymore but measured, recorded and reported at their face amount. The reason is that the discount or the difference between the face amount and the present value is usually not material and therefore ignored. Measurement of noncurrent liabilities Noncurrent liabiliti 4 ilities, for example, bonds payable and 0 : Zi layla H Dreacng ety Searing note payable, are initially measured at alue and subsequently measured at amortized cost. and subseeerm note payable is interest-bearing, it is initially In this uently measured at face amount. the not th . t Note payanieee® amount is equal to the present value of e "a, chapter tized Tin, "elation {qimeasurement” is taken up in @ later on. a Maen LnCurrent liabilities cragraph 69, provides that an entity shall classify PAS 2 Re current when! expects to se = The Sone ovale b. The entity holds the liability primarily for the purpose of "trading. ‘The liability is due to be settled within twelve months after the reporting period. ttle the liability within the entity's a. The entity does not have an unconditional right to defer ” settlement of the liability for at least twelve months after the reporting period. Trade payables and accruals for employee and other operating “costs are part of the working capital used-in the entity's normal operating cycle. Such operating items are classified as current liabilities even if settled more than twelve months after the reporting period. When the entity's normal operating cycle is not clearly identifiable, its duration is assumed to be twelve months. Other current liabilities are not settled as part of the normal operating cycle but are due for settlement within twelve months after the reporting period or held primarily for the purpose of trading. aad of Such current liabilities are financial liabilities {eid fr trading, bank overdraft, dividends payable, income Toner! nontrade payables and current portion of ‘urent financial liabilities. Financial that are the near liabilities held for trading are financial liabilities ore with an intention to repurchase them in mm. An example ; buy back at a quoted debt instrument that the issuer may fhe near term depending on changes in fair value.Noncurrent liabilities ‘The term noncurrent liabilities is a residual definition. All liabilities not cl noncurrent liabilities. N a. Noncurrent portion of long-term debt b. Finance lease liability c. Deferred tax liability . d. Long-term obligation to officers e. Long-term deferred revenue assified as current are classified as foncurrent liabilities include: Long-term debt falling due within one year ‘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. b. An agreement to refinance or to reschedule payment on a long-term basis is completed after the reporting period and before the financial statements are authorized for issue. a. However, if the refinancing on a long-term basis is completed on or before the end of the reporting period, the refinancing is an adjusting event and therefore the obligation is classified as noncurrent. Moreover, if the entity has the discretion to refinance or roll over an obligation for at least twelve months after the Teporting period under an existing loan facility, the obligation is classified as noncurrent even if it would otherwise be due within a shorter period, ae has an unconditional right under the existing treloe aaa a defer settlement of the liability for at least considered 1 8 after the reporting period, the obligation is Part of the entity's long-term refinancing. Note that tha discretion of acing or rolling over must be at the he entity,Covenants ttached to borrowing agree 1s are often a ments whi ore undertakings by the borrower ich rep! hese covenants are actually restrictions on the borrower as undertaking further borrowings, paying dividends we intaining specified level of working capital and so forth, Breach of covenants Under these covenants, if certain conditions relating to the borrower's financial situation are breached, the liability becomes payable on demand. PAS 1, paragraph 74, provides that such a liability is classified as current even if the lender has agreed, after the reporting period and before the statements are authorized for issue, not to demand payment as aconsequence of the breach. This liability is classified as current because at the end of the reporting period, the entity does not have an unconditional right to defer settlement for at least twelve months after that date. However, the liability is classified as noncurrent if the lender has agreed on or before the end of the reporting period to provide a grace period ending at least twelve months after that date. eel context, a grace period is a period within which the enuty can rectify the breach and during which the lender demand immediate repayment.Presentation of current liabilities inimum, the face of the 54 of PAS 1, as a minimum, eof t eae pen position shall include the following ling items for currént liabilities: Trade and other payables . Current provisions Short-term borrowing . Current portion of long-term debt Current tax liability Pao ep The term trade and other payables is a line item for accounts payable, notes payable, accrued interest on note Payable, dividends payable and accrued expenses. No objection can be raised if the trade accounts and notes payable are separately presented, Estimated liabilities Estimated liabilities are obligations which exist at the end of reporting period although their amount is not definite. In many cases, the date when the obligation is due is not also definite and in Some instances, the exact Payee cannot be identified or determined. But inspite of these circumstances, the existence of the estimated liabilities ig valid and unquestioned, Examples include estimated liability for premium, award Points, Warranties, sift certificates and bonus.a red revenue pefer 4g voventve of unearned ee eee ae rev Defermy put not Yet earnel oe venue may Pe realizable within one year or in poferred Tore year after the 7a the reporting period. more thal lizable within one year, it is aq revenue is Teal ea if the deferr' yrrent mples of current deferred revenue are unearned unearned rental income and unearned ved revenue is realizable in more than one year, defer If the detrd as noncurrent liability. it is classifies ‘Typical examples of noncurrent deferred revenue are iBarned revenue from long-term service contracts and long-term leasehold advances. Mustration An entity sells equipment service contracts agreeing to service equipment for a 2-year period. Cash receipts from contracts are credited to unearned service revenue and service contr. act costs i contract expense. 7 Revenue froy ,, thenavieg m service contracts is recognized as earned over Period of the contracts. The folk ow i ‘ing treasactions occur in the first year: Cash rece} sean t*e*ipt from servi VS Centon eo 1,000,000 Service contrac, sts paid, Foveniis WSOEEIDEA 500,000 800,Journal entries for first year 1. To record the cash receipts from service contracts sold: Cash 1,000,000 Unearned service revenue 1,000,000 2. To record the service contract costs paid: Service contract expense 500,000 Cash 500,000 3. To record the service contract revenue recognized: Unearned service revenue 800,000 Service contract revenue 800,000 Gift certificates payable Many megamalls, department stores and supermarkets sell gift certificates which are redeemable in merchandise. The accounting procedures are: 1. When the gift certificates are sold: Cash xx Gift certificates payable 2x The latter account is a current liability. 2. When the gift certificates are redeemed: Gift certificates payable XX Sales xx 3. When the gift certificates expire or when gift certificates are not redeemed: Gift certificates payable xXx Forfeited gift certificates xXx The Philippine Department of Trade and Industry ruled that Sift certificates no longer have an expiration period.fficers and empl bs compensate key off id employees by Large entiti oe perior income realized during the year. i of this scheme is to motivate officers and sme main purpose Tolating their well-being to the success pensation plan results in liability that must be d and reported in the financial statements. The bonus has four variations: This 007 measured computation usually 1, Bonus is expressed as & certain percent of income before bonus and before tax. 2. Bonusis expressed as a certain percent of income after bonus but before tax. 3, Bonusis expressed as a certain percent of income after bonus and after tax. 4, Bonus is expressed as a certain percent of income after tax but before bonus. Ilustration Ine bofie bonus and before tax noe Income tax rate : 30% Case 1-Before bonus and before tax wae bonus and before tax esc.) Bonus ea 440,000Case 2 After bonus but before tax B = .10 (4,400,000 — B) B = 440,000~,10B B+ .10B = 440,000 1,10B = 440,000 B 40,000/1.10 B = 400,000 Proof Income before bonus and before tax 4,400,000 Less: Bonus __ 400,000 Income after bonus but before tax 4,000,000 Multiply by 10% Bonus Case 3 - After bonus and after tax B 10 (4,400,000 —- B — T) T = .30 (4,400,000 — B) B 10 [4,400,000 - B - .30 (4,400,000 - B)} B 10 (4,400,000 — B - 1,320,000 + .30B) B 40,000 - .10B — 132,000 + .03B B+ .10B - .03B 40,000 - 132,000 1.07B = 308,000 B = 308,000/ 1.07 B = 287,850 T = .30 (4,400,000 - 287,850) T = 1,283,645 Proof Income before bonus and before tax Bonus Tax ’ 05 Income after bonus and after tax 8788 Multiply by 1 287,850 Bonus SS 190After tax put before bonus 4- a 10 (4,400,000 - T) 30 (4,400,000 — B) 10 [4,400,000 - -30 (4,400,000 - B)} 10 (4,400,000 — 1,320,000 + .30B) 40,000 — 132,000 + .03B 40,000 — 132,000 08,000 B = 308,000 /.97 B = 317,526 Proof g and before tax 4,400,000 Ipeomeneegg 317. 626% 30%) 1,224,742 Income after tax but before bonus 3,175,258 Maltiply by __ 10% nee 317,526 Refundable deposits Refundable deposits consist of cash or property received from customers but which are refundable after compliance with certain conditions. ‘The best example of a refundable deposit is the customer deposit wuired for returnable containers like bottles, drums, tanks and barrels. Mlustration A deposit of P10,000 is required fr : 10, quired from the customer tor returnable containers. The containers cost P8,000. Cash : 10,000 Containers’ deposit 10,000 The containers’ liability, deposit account is usually classified as current If th . rele istomer returns the containers, the deposit is simply Howes deposit ig ifthe customer fails to return the containers, the nsidered the sale price of the containers. excog : = Considered ay fe deposit over the cost of the containers #8PROBLEMS Problem 1-1 (IAA) On December 31, 2020, Glare Com information: Accounts payable, including deposits and advances from customer of P250,000 Notes payable, including note payable to bank due on December 31, 2022 of P500,000 Share dividend payable Credit balances in customers’ accounts Serial bonds payable in semiannual installment of P500,000 Accrued interest on bonds payable Contested BIR tax assessment — possible obligation ‘Unearned rent income Required: pany provided the following 1,250,000 - 1,500,000 14 ox 400,000 200,000 - 5,000,000 jap ye 150,000 ~ 300,000 100,000 - B20 ew Compute the total current liabilities on December 31, 2020. Problem 1-2 (IAA) Easy Company provided the following information on December 31, 2020: Notes payable: ‘Trade Bank loans Advances from officers Accounts payable —trade Bonk overdraft ividends payable Withholding tax payable lortgage payable income tax payable Feumated warranty liability Fe ‘timated damages payable by reason of breach of contra‘ Accrued liabilities Chemmated premium liability F ae !nerease in wages by employees covered i @ ing lawsuit ure Contract entered into for the construction of building ‘Required: 3,000,000 * 2,000,000" 20. Compute the total current liabilities on December 31, 20Problem 1-3 (IAA) Manchester Company provided the following information on December 31, 2020: Income taxes withheld from employees r oy” Cash balance at First State Bank "300 000- Cash overdraft at Harbor Bank 1950000 Accounts receivable with credit balance Y Estimated expenses of meeting warranties on. 000 merchandise previously sold 500, Estimated damages as a result of unsatisfactory ee performance ona contract 1,500,000 Accounts payable 3,000,000 , Deferred serial bonds, issued at par and bearing interest at 12%, payable in semiannual installment of P500,000 due April 1 and October 1 of each year, the last bond to be paid on October 1, 2026. Interest is also paid semiannually. Stock dividend payable 2,000, Required: Compute the total current liabilities on December 31, 2020. Problem 1-4 (AICPA Adapted) Multiple Company provided the following information on December 31, 2020: Accounts payable after deducting debit balances in suppliers’ accounts of P100,000 500,000 6" Accrued liabilities 50,000" Note payable ~ due March 31, 2021 1,000,000 Note payable - due May 1, 2021 800,000. Bonds payable — due December 31, 2022 2,000,000 x On March 1, 2021 before the 2020 financial statements were issued, the note payable of P1,000,000 was replaced by an 18-month note for the same amount. Adigtnen pan EF ‘The entity is considering similar action on the P800,000 note due on May 1, 2021. The financial statements were issued on March 31, 2021. Required: . 4, Compute total current liabilities. 2450 ev 9 Compute total noncurrent liabilities. os...Problem 1-5 (IAA) On December 31, 2020, Cordillera Com following liabilities PAany reported the Note payable- 9% - Note payable- 8% eee Note payable ~ 10% 4,000,000 Note payable— 11% 5,000,000 The 9% note payable is noncancelable and matures on Tt 2021, Sufficient cash is expected to be available terete i is the note at maturity. etire The 8% note payable matures on May 31, 2026 but the creditor has the option of calling the note or demanding payment on June 30, 2021. However, the call option is not expected to be exercised given the prevailing market condition. The 10% note payable is due on March 31, 2022. A debt covenant requires Cordillera Company to maintain current assets at least equal to 150% of current liabilities. On December 31, 2020, Cordillera Company is in violation of this covenant. However, Cordillera Company obtained a waiver from the creditor until June 2021 having convinced the creditor that Cordillera's normal 2 to 1 ratio of current assets to current abilities will be reestablished during the first half of 2021. ‘The 11% note payable matures on June 30, 2021. On January ie 2021 before the issuance of the 2020 financial statements, note payabe was refinanced on a long-term basis. Required: Explaj ya the appropriate classification of the uotes payable osition or noncurrent in the statement of financial © On December 31, 2020.Problem 1-6 (IAA) z p tain short-term Intercon Company is planning to refinance certa ana obligations on a long term basis. The 2020 financial sta ni are issued on March 15, 2021. On December 31, 2020, before reclassification ofshort-term debt, the liabilities are: c Accounts payable ee Note payable - bank O00 GOOF Accrued expenses 4,000,000 « d ‘i 4,000,000 Vc 3,000,000 1c Mortgage payable Note payable — due in 2022 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, 2021, the bank has informally agreed to extend the maturity date for 6,000,000 to June 30, 2022, if necessary. On January 31, 2021, the entity issued share capital for 4,000,000, net of issue costs and underwriting fees of P500,000. On February 15, 2021, 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, 2021 will mature five years after the loan date. The entity used the entire proceeds of the issue of share capital to retire part of the current note payable and now intended to draw down the entire available commitment of the five-year debt on April 1, 2021. Required: 1. Present the liabilities on December 31, 2020. 2. Describe any financial statement disclosures,plem 1-7 (IAA) Pro! Cavalier Company provided the following information on December 31, 2020: Accounts: payable dino) Notes payable bank 600,000 Interest payable Eo O00 Mortgage note payable — 10% pen Bonds payable eee * Bank notes payable include two separate notes payable ~~ First Bank: ye A P3000,000, 10% note issued March 1, 2019, payable on demand. Interest is payable every six months. ‘A one-year, P5,000,000, 11% note issued January 2, 2020 On December 31, 2020, the entity negotiated a written agreement with First Bank to replace the note with a 2-year, P5,000,000, 10% note to be issued January 2, 2021. s ue The 10% mortgage note was issued October 1, 2019 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 eae payment within 10 days of the date the payment 1s Lue, On December 31, 2020, the entity is three months behind in Paying the required interest payment. euros payable are Jo-dear, 8% bonds, issued June 30, 11. Interest is payable semiannually on June 30 and eeember 31, Required: Com, . ute the total current liabilities on December 31, 2020.Problem 1-8 (IAA) «information about in Burma Company disclosed the follow! liabilities at year-en ‘Accounts payable, after deducting debit bal, 000 4,000,000 in suppliers’ accounts amounting t P0°°" 1,500,000 Accrued expenses . 500; Credit balances of customers’ accounts 1,000,000 Share dividend payable . “9 Claims for increase in wages and allowance yg laweuit 400,000 employees of the entity, covere’ Estimated expenses in redeeming prize coupons presented by customers 600,000 What total amount should be presented as current liabilities at year-end? a. 6,700,000 b. 6,600,000 ce. 7,100,000 d. 7,700,000 Problem 1-9 (AICPA Adapted) Gar Company disclosed the following liability account balances on December 31, 2020: Accounts payable 1,900,000 Bonds payable alesse 8. 3,400,000 Premium on bonds payable ~°! 200,000 Deferred tax liability 400,000 - Dividends payable 500,000 - - Income tax payable ) sh pdya’ «900,000 . - Note payable, due January 31, 2021 600,000 On December 31, 2020, what total amount should be reported as current liabilities? 7,100,000 4,300,000 3,900,000 4,100,000 poopProblem 1-1y ysvs oo ouapeay Company had the following amounts of Able nding on December 31, 2020; F long-term debt © 14% term note, due 2021 ¢ i term:note, due 2023 1 giksooo 4% note, due in 11 equal annual principal payments, 070,000 plus interest beginning December 31, 2021 7 1,100,004 20 000 wc 7% guaranteed debentures, due 2022 1.000.000 Tol jee) yet exshe 3,200,000 ‘he annual sinking fund requirement on the Hae ries is P40,000 per year. © guaranteed What total amount should be reported: as current li; on December 31, 2020? nt liabilities a. 40,000 b. 70,000 e. 100,000 (4) 130,000 Problem 1-11 (AICPA Adapted) , Achilles Company reported the following liability balances on «December 31, 2020: “— ¢ 12% note payable issued on March 1, 2019, maturing on March 1, 2021 5,000,000 \, (. 10% note payable issued on October 1, 2019, maturing October 1, 2021 3,000,000 The 2020 financial statements were issued on March 31, 2021. On January 31, 2021, 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 a, le, the entity fi greement for the 10% note payable, the has the discretion to refinance the obligation for at least twelve onths after December 31, 2020. What amount ified as of the notes payable should be classifie current on December 31, 20207 cf 8,000,0% b) 5,000,000 a Fo00,000Problem 1-12 (AICPA Adapted) es on December Fliot Company reported the following liabliti 31, 2020: 1,000,000 Accounts payable and accrued. interest, 12% note payable issued November 1, 2019 2,000,000 maturing July 1, 2021 . annual principal 10% debentures payable, next E ‘installment of P500,000 due February 1, 2021 On December 31, 2020, the entity noneancelable agreement with the lender to re 12% note payable on a long-term basis. ~ nt should be reported 7,000,000 consummated a finance the On December 31, 2020, what total amow as current liabilities? reph a. 3,500,000 rpchey wre b. 3,000,000 e c. 1,500,000 d. 2,500,000 Problem 1-13 (AICPA Adapted) On December 31, 2020, Largo Company had a P750,000 note payable outstanding due July 31, 2021. The entity planned to refinance the note by issuing long-term bonds. Because the entity temporarily had excess cash, it prepaid 250,000 of the note on January 15, 2021. In February 2021, the entity completed a P1,500,000 bond offering. The entity will use the bond offering proceeds to repay the note payable at maturity. On March 31, 2021, the 2020 financial statements were authorized for issue. the note payable should be included in December 31, 2020? What amount of current liabilities on a. 750,000 b. 500,000 c. 250,000 d. 0 29Problem 4-14 (AICPA Adapted) Company has P2,000,000 note payable 2031. On Docember 31, 2020, the entity signed aor orrow up to P2,000,000 to refinance the n a long-term basis. due June 30, ots agreement te payable on fnancing agreement called for borrowing not to exces The OPahe value of the collateral the entity was provi On December 31, 2020, the value of the collateral way P1,500,000. On December 31, 2020, what amount of the note Payable should be reported as current liability? a. 2,000,000 b, 1,500,000 c, 800,000 “a. 500,000 Problem 1-15 (AICPA Adapted) Willem Company reported the following liabilities on December 31, 2020: Accounts payable 750,000 Short-term borrowings 400,000 Mortgage payable, current portion P100,000 8,500,000 Bank loan payable, due June 30, 2021 1,000,000 The P1,000,000 bank loan was refinanced with a 5-year loan on January 15, 2021, with the first principal payment due January 15, 2022. The financial statements were issued Februsry 28, 2021 What total amount should be reported as current liabilities on December 31, 2020? A, 1,150,000 (b) 2,250,000 © 1,250,000 850,000Problem 1-16 (AICPA Adapted) able only when ficates redeen ‘Cobb Company Cobb Company sells gift certi ption, m1 merchandise is purchased. Upon rede! vealized. recognizes the unearned revenue 4° Information for the current year: 650,000 Unearned revenue, January 1 2,250,000 Gift certificates sold 1,950,000 Gift certificates redeemed 100,000 Gift certificates unredeemed for a long time oo Cost of goods sold What amount should be reported as unearned revenue at year-end? nase ns =: ae a. 510,000 b. 570,000 c. 850,000 d. 950,000 Problem 1-17 (AICPA Adapted) Regal Company sells gift certificates, redeemable for store merchandise. The gift certificates have no expiration date. The entity has the following information pertaining to the gift certificate sales and redemptions: Unearned revenue on January 3, 2020 750,000 2020sales 2,500,000 2020 redemptions of prior year sales 250,000 2020 redemptions of current year sales 1,750,000 What amount should be reported as unearned revenue on December 31, 2020? a. 1,250,000 b. 1,125,000 c. 1,000,000 a. 500,000Problem 4-18 (AICPA Adapted) Dunne Compan a two-year per y sells equipment service contrac ts t] ox ‘ad. The sale price of each contrac, tt cover ‘act is PEDO, ast experience 18 that, of the total pesos Spent vate on service contracts, 40% is ineurred evenly dee the first contract year and 60% evenly during the Second contract year. The entity sold 1,000 contracts evenly throughout 2020 1, What is the contract revenue for 2020? (a) 120,000 ree “p. 240,000 ae 42 Ip c. 300,000 d. 150,000 2, What amount should be reported as deferered service revenue on December 31, 2020? a, 540,000 bam ite > 4x0 b.) 480,000 ‘e, 360,000 d. 300,000 s . What is the contract revenue for 2021? a. 180,000 360,000 (c) 300,000 d. 120,000 le $1 4 What is the contract revenue for 2022? a. 240,00 ° br 360099 ews) #8 {c.) 180, ar OR-19 (AICPA Adapted) ce service cont Problem 1. te ageeint bo ells applian' or eantianeea for two-year pence: ae is that, of the total asa He Rue repairs on service contracts, 40% is incu Nenly during the first contract year and 60% 18 ineurr the second contract year. ‘The past experience 0 for 2020 Receipts from serviee contract sales are 500,001 and P600,000 for 2021 Receipts from contracts are credited to pare service revenve, All sales are made evenly during the year 1. What is the contract revenue for 2020? 100,000 200,000 250,000 500,000 pe ts 2. What is the unearned revenue on December 31, 2020? a. 300,000 b. 400,000 ¢. 200,000 d. 150,000 3. What is the contract revenue for 2021? bor a, 240,000 s@¥-65 1s b. 360,000 by v4" se cc) 370,000 d. 250,000 ae 41m 7h 4. What is unearned revenue on December 31, 2021? a. 360,000 Nev b. 470,000 - 5¢ c. 480,000 d. 630,000 oeproblem 1-20 (AI apted) any sells subscriptions to a specialized g; Hart covublished semiannually and shipped tg 4 gen eapril 15 and October 15. ry iptions received after the March 31 and g, 0 bert dates are held for the next publication.” '°™er Cash from subscribers is received evenly durin ig the Cash seredited to deferred revenue from subseriptinn ‘iptions. 1,500,000 7,200,000 What amount should be reported as deferred revenue from subscription on December 31? ‘a.) 1,800,000 Tan OE “p. 3,300,000 c. 3,600,000 d. 5,400,000 Probleth 1-21 (AICPA Adapted) Deferred revenue from subscriptions — January 1 Cash receipts from subscribers during the current year Weaver Uompany sells magazine subscriptions for a 1-year, 2-year or 3-year period. Cash receipts from subscribers are credited to magazine subscriptions collected in advance and this account had a balance of P1,700,000 on January 1, 2020. The entity provided the following information for the year ended December 31, 2020: Cash receipts from subscribers 2,100,000 Magazine subscriptions revenue credited on December 31, 2020 1,500,000 the peeember 31, 2020, what amount should be reported as sence for magazine subscriptions collected in advance? 1,900,009 ~, =m * 2,300,000 421 1,400,000 oh * 2,100,000 “he pe Sp 27Problem 1-22 ( Anette Vi the video-of-the-montl Subscriptions are ‘An analysis of t following: Sales Less cancelations Net sales Subscription expirations: 2020 2021 2022 2023 (AICPA Adapted) ideo Company sells 1- h business. collected in adv: 1d ; ihe recorded sales activity revea and 2-year subscriptions for edited to sales, d er’ Laglen led the 130,000 200,000 140,000 470,000 1, On December 31, 2021, what amount should be reported as unearned subscription revenue? ao rp 495,000 470,000 465,000 340,000 2. What amount should be reported as sub: ve unseen scription revenue Bore 175,000 305,000 285,000 250,000 oRproblem 1-23 (AICPA Adapted) ducts with reusabl Company sells pro le and 7 Far Ceara, The customer is charged a depoa enste container delivered and receives a refund for each cohitaing containt qvithin two years after the year of delive ter Containers held by customers on January 1, 2020 from deliveries in: 2018 * 75,000 2019 215,000 290,000 Containers delivered in 2020 a Containers returned in 2020 from deliveries in: * 18 45,000 219 {0% one 148,000 313,000 What is the liability for deposits on December 31, 2020? a. 247,000 = tryin , b. 292,000 ‘ (ci 337,000 d, 367,000 , Problem 1-24 (AICPA Adapted) pe = Black Company required nonrefundable advance payments with special orders for machinery constructed to customer specifications. The entity provided the following information for the current year: Customer advances — beginning of year 1,180,000 Adveteereeived with orders. to applied to orders shipped 640, ‘vances applicable to orders canceled 500,000 what amount should be reported as current liability for ‘ances from customers at year-end? 2 1,480,000 ue 1,380,009 vee § 880,000 ee d * = fe tre 29PA Adapted) aintains escrow accounts mortgage customers. nts. Interest, gee's account Problem 1-25 (AIC Kent Company, 4 realty entity, and pays real estate taxes for # rest-bearing act to the mortgat cou) funds are kept in inte) 28 credited Escrow ee Jess a 10% service fee, 18 A and used to reduce future ‘escrow payments ' i i tion for ‘The entity provided the following additional informa the current year: so0.000 Reerow accounts liability, January 1 Nera Eecrow payments received Jca0.m0 Real estate taxes paid , e008 Interest on escrow funds , What amount should be reported as escrow accounts liability on December 31? 70 a. 510,000 ee b, 515,000 : ae . .) 605,000 73 yo -@r. d. 610,000 Problem 1-26 (AICPA Adapted) a the first day of each month, Bell Company received from Reed escrow deposit of P250,000 for real estate e t i taxon entity recorded the P250,000 in an escrow Kaye's 2020 real estate tax is P: I 2, 800,000, installments on the first day of each epee equal On January 1, 2020, th i 300,000. , the balance in the escrow account was On September 30, 2020 as onl esetow Wability? , what amount should be reported a, 1,150,000 ago Sg = Aw 3 = b. 450,000 a. 850,000 d. 150,000problem 1-27 (ACP) Company has an agreement to pay the sales Nature Cerro of the entity’s earnings. "The income for the year nu sre benus and tax is 5,250,000. The income tax rate js 30% of income after bonus. ASS Required: Determine the bonus under each of the following jndependent assumptions: 1, Bonus is a certain percent of the income before bonus and before tax. 2, Bonus is @ certain percent of income after bonus but before tax. 3, Bonus is a certain percent of income after bonus and after tax. 4, Bonusis certain percent of income after tax but before bonus. * paid of rus alee ad Problem 1-28 (AICPA Adapted) Ronald Company has an incentive compensation plan under which a branch manager received 10% of the branch income after deduction of the bonus but before deduction of income tax. Branch income for the current year before the bonus and income tax was P1,650,000. The tax rate was 30%. What is the bonus for the current year? 126,000 % ea (igvoon -?! (b! 150,000 9 ©. 165,000 2 gro 4 180,000 44.8. Lo wet ger 7 “a 3 De 31—=n rropiein 1-29 (ALCPA Adapted) i ent which OVide, ristian Company has a bonus agreem 5 iat he gee ee eee eee annul bonus of 10% of the net income after bonus and tax. The income tax rate is 30%, The general manager received P280,000 for the current yeay as bonus. What is the income before bonus and tax? 1 @& 4,280,000 Se ee b. 4,000,000 Tie gi ee) (<0 0 ° rae iGo 108 noe panama = TE _ Problem 1-30 (AICPA Adapted) « After three profitable offer a bonus to the b P1,000,000 earned by years, Gretchen Company decided to ranch manager of 25% of income over the branch during the current year. The income for the branch was P1,600,000 before tax and before bonus for the current year, The bonus is computed on income in excess of P1,000,000 after deducting the bonus but before deducting tax. What is the bonus for the current year? a 120,000 Bs 1 (ven —5 150,000 ae ren ©. 250,000 a ae \s0 we (B+ | d. 320,000 as ra Je teen Problem 1-31 (AICPA Adapted) Jackson Company has an incentive compensation plan under Which the president is to receive a bonus equal to 10% of income in excess of P1,000,000 before deducting income tax but after deducting the bonus. The income before income tax and the bonus is P3,200,000, What is the amount of the bonus? a. 220,000 'b.) 200,000 c. 320,000 d. 440,000 32problem 1-32 Multiple choice UAAy 1. The most one that ontingency- ; 6 estimated. p, One that must be es co, One that comes into existence due to a gain contingency, | : a. One to be paid in cash and for which the amount and (Otiming are known. common type of liability is omes into existence a . due to a loss his not a characteristic of @ liability? 2, Whicl a. It represents @ transfer of an economic resource. (7) Ii must be payable in cash. \ jt arises from present obligation to other entity. &. It results from past transaction or event. 3, Classifying liabilities as either curren! helps creditors assess Ay Profitability b) The relative risk of an entity's liabilities \Z The degree of an entity's liabilities { ‘The amount of an entity's liabilities bligations are reported as noncurr t or noncurrent 4 Short-term ol ent if a. The entity has a long-term line of credit. b. The entity has tentative plan to issue long- __ payable. (ce) The entity has the discretion © long-term. a. ihe entity has the ability to refinance on a long-term asis. 5. ee situation would not require tha! ties be reported as current? + The long-term debt is callable by the creditor. The creditor has the right to demand payment due to d The violation. . {fp Telong-term debt matures within she upcoming Ye" (ey of these require the current classification. 33 term bonds o refinance as { noncurrent op. ich of the following rep! airy + “¢. The obligation to pay _ 2 ~ 10. a. The obligation to pay for goods that an entity expects to order from suppliers next year b. The obligation to provide goods that enstomers have ye ordered and paid for during the current a interest on a five-year note d the last day of the year payable that was issue: ne shaiee d. The obligation to distribute an entity's 0 Which does not meet the definition of a liability? The signing of a an employment contract at fixed salary ‘An obligation to provide goods or services 17 the future ‘A note payable with no specified maturity date ‘An obligation that is estimated in amount ao mp) Which of the following is a characteristic of a current liability but not a noncurrent liability? a. Unavoidable obligation. b.. Present obligation to transfer an economic resource. c. Settlement is expected within the normal operating cycle or within 12 months, whichever is longer. d. The obligating event has already occurred. Which of the following is not considered a characteristic of a liability? a. Present obligation b, Arises from past event ce. Results in a transfer of economic resource d. Liquidation is reasonably expected to require use of current assets Which of the following is not an acceptable presentation of current liabilities? a. Listing current liabilities in the order of maturi i Sa it b. Listing current liabilities according to aeacat ° c. Offsetting current liabilities against assets that are ‘i ee applied to their liquidation . Showing current liabilities i iquidati Se ‘ies in the order of liquidationproblem 1-33 Multiple choice (IAA) the short-term obligations at year-end a, aan renewable for another 90-day period ee vTasifcation of the notes payable? a, Current liabilities b. Deferred credits cc, Noncurrent liabilities d. Intermediate debt ‘At year-end, an entity has 120-day note payable outstanding. The entity has followed the policy of replacing the note rather than repaying it over the last three years ‘The entity's treasurer says that this policy is expected to continue indefinitely, and the arrangement is acceptable to the bank to which the note was issued. What is the proper classification of the note in the year-end statement of financial position? a. Dependent on the intention of management b. Dependent on the actual ability to refinance ) Current liability, unless specific refinancing criteria are met d. Noncurrent liability e Anentity had a note payable due next year. After the end of reporting period and before the issuance of the current year financial statements, the entity issued long-term bonds payable. Proceeds from the bonds were used to repay the note when due. How should the entity classify the note payable at current year-end? Current liability with separate disclosure of the note i Tefinancing @. Sunt liability with no disclosure required ~ Noncurrent liability with separate disclosure of the note tefinancing ' Noncurrent liability with no separate disclosure required 35ment in six months’ to refinance for s to refinance ¢ of financial Joan due for repay! the option _ The entity plan: the statemen' ted? 4, An entity has a time, but the entity has repayment two years later. this loan. In which section of position should this loan be presen! Current liabilities Current assets Noncurrent liabilities Noncurrent assets BP stp 6. At year-end, an entity classified a note payable as current liability. Under what condition could the entity reclassify the note payable from current to noncurrent? a. If the entity has the intent and ability to feclassify the note before the end of reporting period. b. If the entity has executed an agreement to refinance the note(before issuance of the financial statements. If the entity-has the intent and ability to reclassify the note before the issuance of the financia a statements BeedB NO eee QUES . If the entity has executed an agreement to refinan the note before the end of reporting period. “° & gn” c.problem 1-34 Multiple choice (AICPA Adapteq) ost relevant measurement of liabilit ' The Jpition should always reflect a. The expectation of the management Historical cost b. The credit standing of the entity é. The single most likely minimum possible amount ‘es at initial 2, Which statement best describes the term liability? a. An excess of equity over current assets bp, Resources to meet. financial commitinents when due c. The residual interest in the assets of the entity @ ‘A present obligation arising from past event 3, What is the relationship between present value and the concept of a liability? (g) Present value is used to measure certain liabilities. b. Present value is not used to measure liabilities. c. Present value is used to measure all liabilities. d. Present value is used to measure noncurrent liabilities only. 4, Ifa long-term debt becomes callable due to the violation ofa loan covenant , gia pirbd tHlend bene® P :) The debt may continue to be classified as noncurrent if the covenant can be renegotiated. b. The debt should be reclassified as current. c. Cash must be reserved to pay the debt. d. Retained earnings must be restricted. 5. What is the classification of debt callable by the creditor? Noncurrent liability 2 Gurtent liability - Current liability if the creditor intends to call the debt i one year ; ; i i ‘urrent liability if it is probable that the creditor wil the debt within one yearij choice Problem 1-35 Multiple us : 1, Advance payments from ¢' vovided: a. Liabilities until 4 b. A componen c. Assets until the produ d, Revenue upon re ed with gift car’ : ied. is Preyance payment. d sales should be 2, Revenue associat recognized 4 i is sold. 4, When the gift card is so! b. No later than the last day of ae ¢. When the probability of gift car as remote. 10" pen d. Under no circumstances i i ned revenue in 3. All else equal, a large increase uneari the current period would be expected to produce what effect on revenue in a future period? e unearned revenue becomes reporting period. demption 18 viewed a, Large increase becaus revenue when earned. . b. Large decrease because unearned revenue implies that less revenue has been earned which reduces future revenue. .. No effect-because unearned revenue is a liability. Large decrease because unearned revenue indicates collection problems that will reduce net revenue in future period. 4, When a product is delivered for whit , ich a customer advance has been previously recei enn ee ly received, the appropriate a. A debit to revenue and credit to liabili i 0 liabi b. A debit to revenue and credit to ae i &) a coiat to asset and credit to revenue (@) A debit to liability and credit to revenue Re 5. When cash is received fr ct ‘om customers in refundable deposit, the cash account is inemeege tio responding increase in eased wath a. Current liability b. Revenue c. Shareholders’ equity” d. Contributed capital. aRProblem 1-90 sseerr=- 7 “> ss“apted) department store received cash and iss; certificate that is redeemable in merchandise. gift certificate was issued ued a gift - When the Deferred revenue account should be decreased AA Deferred revenue account should be increased (Revenue account should be decreased S Revenue account should be increased 2. A retail store received cash and issued gift certificates A relgre redeemable in merchandise. How would the deferred revenue account be affected by the redemption and nonredemption of certificates, respectively? a. Decrease and No effect b.| Decrease and Decrease ‘e” No effect and No effect d. No effect and Decrease 3, An entity received an advance payment for special order goods that are to be manufactured and delivered within six months. How should the advance payment be reported? a. Deferred charge b. Contra asset account (@ Current liability d. Noncurrent liability 4. At year-end, an entity sold refundable merchandise coupons. The entity received a certain amount for each coupon redeemable next year for merchandise with a certain retail price, At year-end, how should the entity report these Coupon transactions? Unearned revenue at the merchandise'’s retail price 2 pusened revenue at the cash received - Xevenue at the merchandise's price venue at the cash received aasale of jved from the advance Seer, he PO or err performance be o tickets for a i before the Eine statement of financial position performance? a. Revenue for the entire proceeds ae b. Revenue to the extent of related costs ied ae c. Unearned revenue to the extent o! expended ; d. Unearned revenue for the entire proceeds 6. Magazine subscriptions collected in advance should be treated as a. A contra account to magazine subscriptions receivable (b) Deferred revenue in the liability section / ©. Deferred revenue in the shareholders’ equity section d. Magazine subscription revenue in the income statement in the period collected 7. Under a royalty agreement with another entity, an entity will receive royalties from the assignment of a patent for four years. The royalties received in advance should be reported as revenue a. In the period received (®) In the period earned & Evenly over the life of the x ‘oyalty agreement d. At the date of the royalty agreement 8. An entity is a retailer of home appliances and offer: contract on each appliance sold. Collections re: service contracts should be recorded as an incre; @ Deferred revenue account b. Sales contracts receivable valuation account, G, Shareholders’ equity valuation account d. Service revenue account 5 a service ceived for ase in a Ang.An entity sells appliances that includ arranty. Service calls under the warrant by an independent mechanic under a contract with th, entity. Based on experience, warranty costs are eatrgts to be incurred for each machine sold. When should the entity recognize these warranty costs? © 4 three-year Y are performed Evenly over the life of the warranty When the service calls are performed When payments are made to the mechanic ) When the machines are sold gaye Att, oO phe gurinly ate Ye a 10. At the end" ‘of thé current year, an entity received an advance payment of 60% of the sales price for special order goods to be manufactured and delivered within five months. At the same time, the entity subcontracted for production of the special order goods at a price equal to 40% of the main contract price. “Tine fanely Arc a t What liabilities should be reported in the year-end statement of financial position? Qe op a. None b. Deferred revenue equal to 60% of the main contract price and payable to subcontractor equal to 40% of _-> the main contract price (c. Deferred revenue equal to 60% of the main contract Price and no payable to subcontractor a. No deferred revenue but payable to subcontractor is Teported at 40% of the main contract price