Accounting for Liabilities PDF

Preview

Summary

PROBLEM NO. 1 – Current and noncurrent liabilitiesYou were able to obtain the following from the accountant for Agdangan Corp. related to the company’s liabilities as of December 31, 2022.Accounts payable P 650, Notes payable – trade 190, Notes payable – bank 800, Wages and salaries payable 15, Inte...

Description

ACCOUNTING FOR LIABILITIES

PROBLEM NO. 1 – Current and noncurrent liabilities You were able to obtain the following from the accountant for Agdangan Corp. related to the company’s liabilities as of December 31, 2022. Accounts payable Notes payable – trade Notes payable – bank Wages and salaries payable Interest payable Mortgage notes payable – 10% Mortgage notes payable – 12% Bonds payable

P 650,000 190,000 800,000 15,000 ? 600,000 1,500,000 2,000,000

The following additional information pertains to these liabilities. a. All trade notes payable are due within six months from the end of the reporting period. b. Bank notes-payable include two separate notes payable to Allied Bank. (1) A P300,000, 8% note issued March 1, 2020 , payable on demand. Interest is payable every six months. (2) A 1-year, P500,000, 11 ½% note issued January 2, 2022. On December 30, 2022, Agdangan negotiated a written agreement with Allied Bank to replace the note with a 2-year, P500,000, 10% note to be issued January 2, 2023. The interest was paid on December 31, 2022. c. 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 company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31, 2022, Agdangan is three months behind in paying its required interest payment. d. The 12% mortgage note was issued May 1, 2016, with a term of 20 years. The current principal amount due is P1,500,000. Principal and interest payable annually on April 30. A payment of P220,000 is due April 30, 2023. The payment includes interest of P180,000. 1

Accounting for Liabilities

e. The bonds payable is 10-year, 8% bonds, issued June 30, 2001. Interest is payable semi-annually every June 30 and December 31. QUESTIONS: Based on the above and the result of your audit, answer the following: 1. Interest payable as of December 31, 2022 is a. P155,000 c. P143,000 b. P203,000 d. P215,000 2. The portion of the Note Payable-bank to be reported under current liabilities as of December 31, 2022 is a. P300,000 c. P500,000 b. P800,000 d. P 0 3. Total current liabilities as of December 31, 2022 is a. P3,950,000 c. P4,138,000 b. P3,938,000 d. P3,998,000 4. Total noncurrent liabilities as of December 31, 2022 is a. P1,760,000 c. P2,560,000 d. P1,960,000 b. P3,960,000

Answers: 1) C; 2) A; 3) B; 4) D Suggested Solution: Question No. 1 P300,000 note payable to bank (P300,000 x 8% x 4/12) Mortgage note payable – 10% (P600,000 x 10% x 3/12) Mortgage note payable – 12% (P1,500,000 x 12% x 8/12) Total interest payable, 12/31/10

P

8,000 15,000 120,000 P143,000

Question No. 2 Note payable to bank - payable on demand

P300,000

The P500,000 note payable to bank will be classified as noncurrent because it was refinanced on a long term basis as of December 31, 2022. 2

Accounting for Liabilities

Question No. 3 Accounts payable Notes payable – trade Notes payable – bank (see no. 2) Wages and salaries payable Interest payable (see no. 1) Mortgage note payable – 10% (with breach of loan covenant) Mortgage note payable – 12% (P220,000 - P180,000) Bonds payable, due 7/1/11 Total current liabilities, 12/31/10

P 650,000 190,000 300,000 15,000 143,000 600,000 40,000 2,000,000 P3,938,000

In accordance with the revised PAS 1 par. 69, an entity shall classify a liability as current when: (a) it expects to settle the liability in its normal operating cycle; (b) it holds the liability primarily for the purpose of trading; (c) the liability is due to be settled within twelve months after the reporting period; or (d) the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. An entity shall classify all other liabilities as non-current. When an entity breaches an undertaking under a long-term loan agreement on or before the end of the reporting period with the effect that the liability becomes payable on demand, the liability is classified as current, even if the lender has agreed, after the reporting period and before the authorization of the financial statements for issue, not to demand payment as a consequence of the breach. The liability is current, because at the end of the reporting period, the entity does not have an unconditional right to defer its settlement for at least twelve months after that date. (PAS 1 par. 74) However, the liability is classified as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least 12 months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment. [PAS 1 par. 75]

3

Accounting for Liabilities

Question No. 4 Notes payable – bank (see no. 2) Mortgage note payable – 12% (P1,500,000 - P40,000) Total noncurrent liabilities, 12/31/10

P 500,000 1,460,000 P1,960,000

PROBLEM NO. 2 – Current and noncurrent liabilities Atimonan Corporation is selling audio and video appliances. The company’s fiscal year ends on March 31. The following information relates to the obligations of the company as of March 31, 2022: Notes payable Atimonan has signed several long-term notes with financial institutions. The maturities of these notes are given below. The total unpaid interest for all of these notes amounts to P408,000 on March 31, 2022. Due date April 31, 2022 July 31, 2022 September 1, 2022 February 1, 2023 April 1, 2023 – March 31, 2024

Amount 720,000 1,080,000 540,000 540,000 3,240,000 P 6,120,000 P

Estimated warranties Atimonan has a one-year product warranty on some selected items. The estimated warranty liability on sales made during the 2020 – 2021 fiscal year and still outstanding as of March 31, 2021, amounted to P302,400. The warranty costs on sales made from April 1, 2021 to March 31, 2022, are estimated at P756,000. The actual warranty costs incurred during 2021 – 2022 fiscal year are as follows: Warranty claims honored on 2020 – 2021 sales Warranty claims honored on 2021 – 2022 sales Total

P 302,400 342,000 P 644,400

Trade payables Accounts payable for supplies, goods, and services purchases on open account amount to P672,000 as of March 31, 2022. 4

Accounting for Liabilities

Dividends On March 10, 2022 , Atimonan’s board of directors declared a cash dividend of P0.30 per ordinary share and a 10% ordinary share dividend. Both dividends were to be distributed on April 5, 2022 to shareholders on record at the close of business on March 31, 2022. As of March 31, 2022, Atimonan has 6 million, P2 par value, ordinary shares issued and outstanding. Bonds payable Atimonan issued P6,000,000, 12% bonds, on October 1, 2016 at 96. The bonds will mature on October 1, 2026. Interest is paid semiannually on October 1 and April 1. Atimonan uses the straight line method to amortize bond discount. QUESTIONS: Based on the foregoing information, determine the adjusted balances of the following as of March 31, 2022: 1. Estimated warranty payable a. P414,000 b. P756,000

c. P 302,400 d. P1,058,400

2. Unamortized bond discount a. P132,000 b. P108,000

c. P240,000 d. P120,000

3. Bond interest payable a. P360,000 b. P300,000

c. P180,000 d. P 0

4. Total current liabilities a. P7,734,000 b. P6,126,000

c. P6,534,000 d. P4,734,000

5. Total noncurrent liabilities a. P9,240,000 b. P9,132,000

c. P9,108,000 d. P9,000,000

5

Accounting for Liabilities

Answers: 1) A; 2) B; 3) A; 4) C, 5) B Suggested Solution: Question No. 1 Warranty payable, 3/31/09 Add warranty expense accrued during 2021-2022 Total Less payments during 2021-2022 Warranty payable, 3/31/10

P 302,400 756,000 1,058,400 644,400 P 414,000

Question No. 2 Bond discount, 10/1/04 (P6,000,000 x .04) Discount amortization, 10/1/04 to 3/31/10 (P240,000 x 5.5/10) Bond discount, 3/31/10

P240,000 132,000 P 108,000

Question No. 3 Bond interest payable, 10/1/09 to 3/31/10 (P6,000,000 x 12% x 6/12)

P 360,000

Question No. 4 Notes payable - current (maturing up to 3/31/11) Accrued interest payable – Notes payable Estimated warranty payable (see no. 1) Accounts payable Cash dividends payable (6 million shares x P0.30) Accrued interest payable – Bonds payable Total current liabilities

P2,880,000 408,000 414,000 672,000 1,800,000 360,000 P6,534,000

Question No. 5 Notes payable – noncurrent Bonds payable, net of discount of P108,000 Total noncurrent liabilities

6

P 3,240,000 5,892,000 P 9,132,000

Accounting for Liabilities

PROBLEM NO. 3 – Various current liabilities The following information relates to Candelaria Company’s obligations as of December 31, 2022. For each of the numbered items, determine the amount if any, that should be reported as current liability in Candelaria’s December 31, 2022 statement of financial position. 1. Accounts payable: Accounts payable per general ledger control amounted to P5,440,000, net of P240,000 debit balances in suppliers’ accounts. The unpaid voucher file included the following items that not had been recorded as of December 31, 2022: a) A Company – P224,000 merchandise shipped on December 31, 2022, FOB destination; received on January 10, 2023. b) B, Inc. – P192,000 merchandise shipped on December 26, 2022, FOB shipping point; received on January 16, 2023. c) C Super Services – P144,000 janitorial services for the threemonth period ending January 31, 2023. d) MERALCO – P67,200 electric bill covering the period December 16, 2022 to January 15, 2023. On December 28, 2022, a supplier authorized Candelaria to return goods billed at P160,000 and shipped on December 20, 2022. The goods were returned by Candelaria on December 28, 2022, but the P160,000 credit memo was not received until January 6, 2023. a. P5,923,200 b. P5,601,600

c. P5,712,000 d. P5,841,600

2. Payroll: Items related to Candelaria’s payroll as of December 31, 2022 are: Accrued salaries and wages Payroll deductions for: Income taxes withheld SSS contributions Philhealth contributions Advances to employees a. P776,000 b. P832,000

P776,000 56,000 64,000 16,000 80,000 c. P992,000 d. P912,000

7

Accounting for Liabilities

3. Litigation: In May, 2022, Candelaria became involved in a litigation. The suit being contested, but Candelaria’s lawyer believes there is probable that Candelaria may be held liable for damages estimated in the range between P2,000,000 and P3,000,000, and no amount is a better estimate of potential liability than any other amount. a. P 0 b. P3,000,000

c. P2,000,000 d. P2,500,000

4. Bonus obligation: Candelaria Company’s president gets an annual bonus of 10% of net income after bonus and income tax. Assume the tax rate of 30% and the correct income before bonus and tax is P9,600,000. (Ignore the effects of other given items on net income.) a. P 722,600 b. P2,240,000

c. P395,000 d. P628,000

5. Note payable: A note payable to the Bank of the Philippine Islands for P2,400,000 is outstanding on December 31, 2022. The note is dated October 1, 2021, bears interest at 18%, and is payable in three equal annual installment of P800,000. The first interest and principal payment was made on October 1, 2022. a. P800,000 b. P 72,000

c. P908,000 d. P872,000

6. Purchase commitment: During 2022, Candelaria entered in a noncancellable commitment to purchase 320,000 units of inventory at fixed price of P5 per unit, delivery to be made in 2023. On December 31, 2022, the purchase price of this inventory item had fallen to P4.40 per unit. The goods covered by the purchase contract were delivered on January 28, 2023. a. P 0 b. P1,408,000

c. P1,600,000 d. P 192,000

8

Accounting for Liabilities

7. Deferred taxes: On December 31, 2022, Candelaria’s deferred income tax account has a 2022 ending credit balance of P772,800, consisting of the following items: Caused by temporary differences in accounting For gross profit on installment sales For depreciation on property and equipment For product warranty expense a. P772,800 b. P196,800

Deferred tax P376,000 Cr 576,000 Cr 179,200 Dr P772,800 Cr

c. P952,000 d. P 0

8. Product warranty: Candelaria has a one year product warranty on selected items in its product line. The estimated warranty liability on sales made during 2021, which was outstanding as of December 31, 2021, amounted to P416,000. The warranty costs on sales made in 2022 are estimated at P1,504,000. Actual warranty costs incurred during 2022 are as follows: Warranty claims honored on 2021 sales Warranty claims honored on 2022 sales Total warranty claims honored a. P 0 b. P96,000

P 416,000 992,000 P1,408,000

c. P1,504,000 d. P 512,000

9. Premiums: To increase sales, Candelaria Company inaugurated a promotional campaign on June 30, 2022. Candelaria placed a coupon redeemable for a premium in each package of product sold. Each premium costs P100. A premium is offered to customers who send in 5 coupons and a remittance of P30. The distribution cost per premium is P20. Candelaria estimated that only 60% of the coupons issued will be redeemed. For the six months ended December 31, 2022, the following is available: Packages of product sold Premiums purchased Coupons redeemed

160,000 16,000 64,000

9

Accounting for Liabilities

a. P1,728,000 b. P1,600,000

c. P1,152,000 d. P 576,000

10. Due to Five Six Finance company: Candelaria’s accounting records show that as of December 31, 2022, P1,280,000 was due to Five Six Finance Company for advances made against P1,600,000 of trade accounts receivable assigned to the finance company with recourse. a. P 0 b. P320,000

c. P1,600,000 d. P1,280,000

Answers: 1) D; 2) D; 3) D; 4) D, 5) D; 6) D; 7) D; 8) D; 9) D; 10) D Suggested Solution: Question No. 1 Accounts payable per general ledger Debit balances in suppliers' accounts Goods in transit on 12/31/10, FOB shipping point Unrecorded purchase return Accounts payable, as adjusted Accrued janitorial expenses (P144,000 x 2/3) Accrued utilities (P67,200 x 15/30) Total

P5,440,000 240,000 192,000 (160,000) 5,712,000 96,000 33,600 P5,841,600

Question No. 2 Accrued salaries and wages Income taxes withheld SSS contributions payable Philhealth contributions Total

P776,000 56,000 64,000 16,000 P912,000

Question No. 3 Midpoint of the range [(P2,000,000 + P3,000,000)/2]

P2,500,000

PAS 37 par. 36 states that the amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Par. 39 further states that where there is a continuous range of possible outcomes, and each point 10

Accounting for Liabilities

in that range is a likely as any other, the mid-point of the range is used. Question No. 4 B = 10% (P9,600,000 - B - T) T = 30% (P9,600,000 - B) T = P2,880,000 - .3B B = 10% [P9,600,000 - B - (P2,880,000 - .3B)] B = 10% (P9,600,000 - B - P2,880,000 + .3B) B = 10% (P6,720,000 - .7B) B = P672,000 - .07B 1.07B = P672,000 B = P628,000 (rounded off) Question No. 5 Principal amount due, 10/1/11 Accrued interest payable (P1,600,000 x 18% x 3/12) Total

P800,000 72,000 P872,000

Question No. 6 Estimated liability for purchase commitment [320,000 x (P5 - P4.40)]

P192,000

If an entity has a contract that is onerous, the present obligation under the contract shall be recognized and measured as a provision. (PAS 37 par. 66) An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Question No. 7 The revised PAS 1 par. 56 states that when an entity presents current and non-current assets, and current and non-current liabilities, as separate classifications on the face of the statement of financial position, it shall not classify deferred tax assets (liabilities) as current assets (liabilities).

11

Accounting for Liabilities

Question No. 8 Warranty payable, 12/31 /09 Add warranty expense accrued during 2022 Total Less payments during 2022 Warranty payable, 12/31/10

P 416,000 1,504,000 1,920,000 1,408,000 P 512,000

Question No. 9 Estimated coupons to be redeemed (160,000 x 60%) Less coupons redeem ed Coupons outstanding Divide by exchange rate Premiums to be issued Multiply by net premium cost (P100+P20-P30) Estimated liability for coupons, 12/31/10

96,000 64,000 32,000 5 6,400 P90 P576,000

Question No. 10 This transaction involves assignment of accounts receivable, wherein the company obtained a loan using the receivables as security. Accounts receivable – assigned will be included in trade and other receivables, while the related loan will be reported under current liabilities.

PROBLEM NO. 4 – Estimated liabilities – warranty and premium Dolores’ Music Emporium carries a wide variety of music promotion techniques - warranties and premiums – to attract customers. Musical instrument and sound equipment are sold in a one-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso spent on recorded music or sheet music. Customers may exchange 200 coupons and P20 for an AM/FM radio. Dolores pays P34 for each radio and estimates that 60% of the coupons given to customers will be redeemed.

12

Accounting for Liabilities

Dolores’ total sales for 2022 were P57,600,000 – P43,200,000 from musical instrument and sound reproduction equipment and P14,400,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled P1,312,000 during 2022. A total of 52,000 AM/FM radio used in the premium program were purchased during the year and there were 9,600,000 coupons redeemed in 2022. The accrual method is used by Dolores to account for the warranty and premium costs for financial reporting purposes. The balance in the accounts related to warranties and premiums on January 1, 2022, were as shown below: Inventory of Premium AM/FM radio Estimated Premium Claims Outstanding Estimated Liability from Warranties

P 319,600 358,400 1,088,000

QUESTIONS: Based on the above and the result of your audit, determine the amounts that will be shown on the 2022 financial statements for the following: 1. Warranty expense a. P 864,000 b. P1,152,000

c. P1,312,000 d. P 640,000

2. Estimated liability from warranties a. P 864,000 b. P1,312,000

c. P1,088,000 d. P 640,000

3. Premium expense a. P 604,800 b. P1,468,800

c. P 864,000 d. P1,008,000

4. Inventory of AM/FM radio a. P375,600 b. P319,600

c. P618, 800 d. P455,600

5. Estimated liability for premiums a. P604,800 b. P291,200

c. P507,600 d. P358,400

13

Accounting for Liabilities

Answers: 1) A; 2) D; 3) A; 4) D, 5) B Suggested Solution: Question No. 1 Warranty expense (P43,200,000 x 2%)

P864,000

Question No. 2 Estimated liability from warranties, 1/1/10 Add warranty expense for 2022 Total Less actual expenditures for 2022 Estimated liability from warranties, 12/31/10

P1,088,000 864,000 1,952,000 1,312,000 P 64...