Financial Accounting Volume Two Valix an PDF

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FINANCIAL ACCOUNTING Volume Two Valix and Peralta 2008 Edition SOLUTION MANUAL 1 CHAPTER 1 Problem Problem Problem Problem Problem 1. 2. 3. 4. 5. 1. 2. 3. 4. 5. 1. 2. 3. 4. 5. 1. 2. 3. 4. 5. 1. 2. 3. 4. 5. A D A C A A C B A A 6. 7. 8. 9. 10. A A D C C C B D A D Problem Accounts payable Deposits and ...

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FINANCIAL ACCOUNTING Volume Two Valix and Peralta 2008 Edition SOLUTION MANUAL 1 CHAPTER 1 Problem 1-1

Problem 1-2

Problem 1-3

Problem 1-4

Problem 1-5

1. 2. 3. 4. 5.

1. 2. 3. 4. 5.

1. 2. 3. 4. 5.

1. 2. 3. 4. 5.

1. 2. 3. 4. 5.

A D A C A

A C B A A

6. 7. 8. 9. 10.

A A D C C

C B D A D

Problem 1-6 Accounts payable Deposits and advances from customers Notes payable Credit balances in customers’ accounts Serial bonds payable Accrued interest on bonds payable Provision for tax assessment Unearned rent income Total current liabilities

B B C A A

A D A D B

6. 7. 8. 9. 10.

A A C B B

Problem 1-7 1,000,000 250,000 1,000,000 200,000 1,000,000 150,000 300,000 100,000 4,000,000

Note payable – trade Note payable – bank Note payable – officers Accounts payable – trade Bank overdraft Dividends payable Withholding tax payable Income tax payable Estimated warranty liability Estimated damages payable Accrued liabilities Estimated premium liability Total current liabilities

3,000,000 2,000,000 500,000 4,000,000 300,000 1,000,000 100,000 800,000 600,000 700,000 900,000 200,000 14,100,000

Problem 1-8 Accounts payable (500,000 + 100,000) Accrued liabilities Note payable - refinanced Note payable – due May 1, 2009 Total current liabilities

600,000 50,000 1,000,000 800,000 2,450,000

Noncurrent liabilitiy: Bonds payable, due December 31, 2010

2,000,000

2 Problem 1-9 a. Current liabilities: Note payable – bank Note payable – shareholder Less: Discount on note payable Accrued interest payable Total current liabilities

700,000 2,000,000 113,000

b. Note payable – bank: January 1 – April 1, 2008 (2,800,000 x 12% x 3/12) 84,000 April 1 – December 31, 2008 (2,100,000 x 12% x 9/12) 189,000 Note payable – shareholder: Amortization of discount from July 1 – December 31, 2008 (226,000 x 6/12) Total interest expense

1,887,000 189,000 2,776,000

273,000

113,000 386,000

Problem 1-10 1. Current liabilities: Accounts payable Note payable – bank Accrued expenses Noncurrent liabilities: Mortgage payable Note payable due 2010 Total liabilities

7,000,000 12,000,000 4,000,000

4,000,000 3,000,000

23,000,000

7,000,000 30,000,000

2. The note payable to bank is paid from the proceeds of the issuance of share capital of P4,000,000 on January 31, 2009 and the availment of a financing agreement on February 15, 2009 with a financially capable commercial bank on April 1, 2009 in the amount of P3,000,000. Nevertheless, the note payable should continue to be classified as current. Problem 1-11 Answer B Note payable, September 1, 2007 Less: Payment on September 1, 2008 Balance, September 1, 2008

1,800,000 600,000 1,200,000

3 Accrued interest payable from September 1 to December 31, 2008 (1,200,000 x 12% x 4/12)

48,000

Problem 1-12 Answer A Note payable, October 1, 2007 Less: Payment on October 1, 2008 Balance, October 1, 2008 Interest paid from January 1 to September 30, 2008 (1,200,000 x 15% x 9/12) Interest accrued from October 1 to December 31, 2008 (800,000 x 15% x 3/12) Interest expense for 2008

1,200,000 400,000 800,000

135,000 30,000 165,000

Problem 1-13 Answer A January 1 – October 31, 2008 (500,000 x 12% x 10/12) February 1 – July 31, 2008 (1,500,000 x 12% x 6/12) May 1 – December 31, 2008 (800,000 x 12% x 8/12) Total interest expense of 2008 Less: Recorded interest expense Understatement of interest expense

50,000 90,000 64,000 204,000 150,000 54,000

Problem 1-14 Answer C Accrued interest from March 1, 2007 to February 28, 2008 (1,000,000 x 12%) Accrued interest from March 1 to December 31, 2008 (1,000,000 + 120,000 x 12% x 10/12) Total accrued interest payable, December 31, 2008

120,000 112,000 232,000

If the interest is compounded annually, it means that the accrued interest for one year will also earn interest. Problem 1-15 Answer B 12% note payable – refinanced

5,000,000

4 Problem 1-16 Answer A Accounts payable Note payable – bank Interest payable Mortgage note payable Bonds payable

6,500,000 3,000,000 150,000 2,000,000 4,000,000 15,650,000

Problem 1-17 Answer A 6% Note payable 8% Note payable Total current liabilities

500,000 800,000 1,300,000

PAS 1, paragraph 63, provides that an entity shall classify its financial liabilities as current when they are due to be settled within twelve months after balance sheet date even if an agreement to refinance or reschedule payment on a long-term basis is completed after balance sheet date and before the financial statements are authorized for issue. Problem 1-18 2008 1. Cash Sales

3,600,000 3,600,000

2. Premiums Cash

390,000

3. Cash (5,000 x 10) Premium expense (5,000 x 40) Premiums (5,000 x 50)

50,000 200,000

4. Premium expense (5,000 x 20) Cash

100,000

5. Premium expense (2,000 x 60) Estimated premiums payable

120,000

390,000

250,000

100,000

120,000

5 2009 1. Estimated premiums payable Premium expense Reversing entry.

120,000 120,000

Cash Sales

4,200,000

2. Premiums Cash

580,000

3. Cash (9,000 x 10) Premium expense (9,000 x 40) Premiums (9,000 x 50)

90,000 360,000

4. Premium expense (9,000 x 20) Cash

180,000

5. Premium expense (3,000 x 60) Estimated premiums payable

180,000

4,200,000

580,000

450,000

180,000

180,000

Problem 1-19 1. Cash (400,000 x 9) Sales 2. Premiums Cash 3. Premium expense Cash

3,600,000 3,600,000 900,000 900,000 30,000 30,000

4. Cash (8,000 x 5) Premium expense (8,000 x 85) Premiums (8,000 x 90)

40,000 680,000

5. Premium expense (2,000 x 85) Estimated premiums payable

170,000

Bottle caps to be redeemed (25% x 400,000) Less: Bottle caps redeemed (8,000 pens x 10) Bottle caps outstanding

720,000

170,000 100,000 80,000 20,000

6 Premiums to be distributed on the balance of bottle caps (20,000 /10) 6. Premium expense Cash (30 x 5,000)

2,000

150,000 150,000

Problem 1-20 2008 1. Cash Sales 2. Premiums - towels Cash 3. Cash (1,000 x 20) Premiums expense Premiums – towels (1,000 x 100) 4. Premium expense (1,000 X 5) Cash 5. Premium expense Estimated premiums payable (600 X 85) 2009 1. Estimated premiums payable Premium expense Cash Sales

2,500,000 2,500,000 175,000 175,000 20,000 80,000 100,000 5,000 5,000 51,000 51,000

51,000 51,000 3,125,000 3,125,000

2. Premiums - towels Cash

200,000

3. Cash (1,800 x 20) Premiums expense Premiums – towels (1,800 x 100)

36,000 144,000

4. Premium expense (1,800 X 5) Cash

200,000

180,000 9,000 9,000

7 5. Premium expense Estimated premiums payable (800 X 85)

68,000 68,000

Statement classification Current asset: Premiums – towels Current liability: Estimated premiums payable Selling expense: Premium expense

2008

2009

75,000

95,000

51,000

68,000

136,000

170,000

Problem 1-21 Answer B

Problem 1-22 Answer D

Coupons to be redeemed (160,000 x 60%) Less: Coupons redeemed Balance

Premiums to be distributed (250,000 x 80% / 10) Premiums distributed Balance

96,000 40,000 56,000

Number of premiums (56,000 / 5) 11,200

Premium liability (5,000 x 100)

20,000 15,000 5,000 500,000

Amount of liability (11,200 x 20) 224,000 Problem 1-23 Answer B

Problem 1-24 Answer B

Premiums distributed in 2009 5,500 Estimated premiums in 2009 500 Total 6,000 Less: Estimated premiums in 2008 200 Premiums applicable to 2009 5,800

Coupons to be redeemed 80% x 500,000) Less: Coupons redeemed Coupons outstanding

Premium expense (5,800 x 60)

348,000

Liability for unredeemed coupons (100,000 x 15)

400,000 300,000 100,000

1,500,000

Problem 1-25 Answer C Total coupons issued and to be redeemed (600,000 x 70% x 110%) Less: Total payments to retailer Liability for underdeemed coupons – 12/31/2008

462,000 220,000 242,000

8 Problem 1-26 Accrual approach 2008 1. Cash (300 x 15,000) Sales

4,500,000 4,500,000

2. Warranty expense Estimated warranty liability (60% x 300 = 180 x 800) 3. Estimated warranty liability Cash 2009 1. Cash (500 x 15,000) Sales

144,000 144,000 40,000 40,000

7,500,000 7,500,000

2. Warranty expense Estimated warranty liability (60% x 500 = 300 x 800)

240,000

3. Estimated warranty liability Cash

150,000

240,000

150,000

Expense as incurred approach 2008 1. Cash Sales 2. Warranty expense Cash 2009 1. Cash Sales 2. Warranty expense Cash

4,500,000 4,500,000 40,000 40,000

7,500,000 7,500,000 150,000 150,000

9 Problem 1-27 Accrual approach 2008 1. Cash Sales

5,000,000 5,000,000

2. Warranty expense Estimated warranty liability (14% x 5,000,000)

700,000

3. Estimated warranty liability Cash

390,000

700,000

390,000

2009 1. Cash Sales

9,000,000 9,000,000

2. Warranty expense Estimated warranty liability (14% x 9,000,000) 3. Estimated warranty liability Cash

1,260,000 1,260,000 900,000 900,000

“Expense” approach 2008 1. Cash Sales 2. Warranty expense Cash 2009 1. Cash Sales 2. Warranty expense Cash

5,000,000 5,000,000 390,000 390,000

9,000,000 9,000,000 900,000 900,000

10 Problem 1-28 Units sold: October November December Total Multiply by Total failures expected Less: Failures already recorded: October sales November sales December sales Expected future failures Multiply by Estimated cost

32,000 28,000 40,000 100,000 2% 2,000 640 360 180

Warranty expense Estimated warranty liability

1,180 820 150 123,000

123,000 123,000

Problem 1-29 Answer D Warranty expense (2,400 x 300)

720,000

Problem 1-30 Answer C Warranty expense (3,000 x 80) Less: Actual warranty cost Warranty liability–June 30, 2008

Problem 1-31 Answer A 240,000 70,000 170,000

Warranty expense (5% x 5,000,000)

250,000

Problem 1-32 Answer B Warranty expense: 2008 (5,000,000 x 7%) 2009 (7,000,000 x 7%) Warranty costs: 2008 2009 Warranty liability – December 31, 2009

350,000 490,000 840,000 100,000 300,000

400,000 440,000

11 Problem 1-33 Answer A Net sales (640,000 / 8%)

8,000,000

Problem 1-34 Answer A Normal defect (500 x P10,000 x 25%) Significant defect (500 x P30,000 x 15%)

1,250,000 2,250,000 3,500,000

Problem 1-35 1. Cash Gift certificates payable

500,000

2. Gift certificates payable Sales

400,000

3. Gift certificates payable Forfeited gift certificates (8% x 500,000)

500,000

400,000 40,000 40,000

Problem 1-36 1. Cash Gift certificates payable

900,000

2. Gift certificates payable Sales

780,000

3. Gift certificates payable Forfeited gift certificates

40,000

Unearned revenue – January 1 Add: Gift certificates sold Total Less: Gift certificates redeemed Expired gift certificates Unearned revenue – December 31

900,000

780,000

40,000 260,000 900,000 1,160,000 780,000 40,000

820,000 340,000

12 Problem 1-37 Answer C Unearned revenue – January 1 Add: Gift certificates sold Total Less: Gift certificates redeemed Expired gift certificates Unearned revenue – December 31

650,000 2,250,000 2,900,000 1,950,000 100,000

2,050,000 850,000

Problem 1-38 Answer D 2008 Sales of gift certificates (2,500,000 x 90%) Less: 2007 Redemption of current year sales Unearned revenue – December 31, 2008

2,250,000 1,750,000 500,000

Unredeemed – January 1, 2008 Less: 2008 Redemption of prior year sales Expired gift certificates

750,000 250,000 500,000

Problem 1-39 Answer D 1. Cash Unearned service contract revenue

980,000 980,000

Service contract expense Cash

520,000

Unearned service contract revenue Service contract revenue

860,000

2. Unearned revenue – January 1 Cash receipts from contracts sold Total Less: Service revenue recognized Unearned revenue – December 31

520,000

860,000 600,000 980,000 1,580,000 860,000 720,000

13 Problem 1-40 Answer B Outstanding contracts on December 31, 2008 that will expire during 2009 2010 2011 Unearned service contract revenue

150,000 225,000 100,000 475,000

Problem 1-41 Answer A The entire amount of P720,000 will be considered deferred revenue on December 31, 2008 because the subscriptions start with the January 2009 issue. Problem 1-42 Answer A Monthly subscriptions (7,200,000 / 12) The subscriptions after the September 30 cut-off are: October November December Total unearned subscription revenue – December 31, 2008

600,000

600,000 600,000 600,000 1,800,000

The above subscriptions will be served in the next publication in 2009. Problem 1-43 Answer C Subscriptions received in 2008 that will expire in 2010 Subscriptions received in 2009 that will expire in 2010 Subscriptions received in 2009 that will expire in 2011 Unearned subscription revenue – December 31, 2009

125,000 200,000 140,000 465,000

Problem 1-44 Answer B Liability for refundable deposit – January 1 Deposits made in 2008 (100,000 x 5) Total Less: Deposits refunded in 2008 (110,000 x 5) Balance – December 31(current liability) The lease deposit is a noncurrent liability.

150,000 500,000 650,000 550,000 100,000

14 Problem 1-45 Answer C Advances – January 1 Advances received Total Advances applied Advances canceled Advances – December 31

1,180,000 1,840,000 3,020,000 (1,640,000) ( 500,000) 880,000

Problem 1-46 Answer B B B B + .10B 1.10B B B

= = = = = =

.10 (1,650,000 – B) 165,000 - .10B 165,000 165,000 165,000 / 1.10 150,000

Problem 1-47 Answer A Income after bonus and tax (260,000 / 10%) Income before tax (2,600,000 / 65%) Income before bonus and tax (4,000,000 + 260,000)

2,600,000 4,000,000 4,260,000

Proof Income before bonus and tax Less: Bonus Income before tax Less: Tax (35% x 4,000,000) Income after bonus and tax

4,260,000 260,000 4,000,000 1,400,000 2,600,000

Problem 1-48 Answer B B T B B B B + .05B - .0175B 1.0325B B B

= .05 (5,000,000 – B – T) = .35 (5,000,000 – B) = .05 [5,000,000 – B - .35 (5,000,000 – B)] = .05 (5,000,000 – B - 1,750,000 + .35B) = 250,000 – .05B - 87,500 + .0175B = 250,000 – 87,500 = 162,500 = 162,500 / 1.0325 = 157,385

15 T = .35 (5,000,000 – 157,385) T = 1,694,915 Proof of bonus B = .05 (5,000,000 – 157,385 – 1,694,915) B = 157,385 Problem 1-49 1. Cash Containers’ deposit

390,000 390,000

Containers’ deposit Cash

313,000

Containers’ deposit Containers

30,000

313,000

30,000 Containers’ deposit on January 1, 2008 applicable to 2006 deliveries Less: Containers returned in 2008 applicable to 2006 deliveries Balance – expired and no longer refundable 2. Containers’ deposit – January 1, 2008 Add: Containers’ deposit in 2008 Total Less: Containers returned in 2008 Containers not returned and expired Containers’ deposit – December 31, 2008

75,000 45,000 30,000 290,000 390,000 680,000

313,000 30,000

343,000 337,000

Problem 1-50 1. Only a disclosure is necessary because it is not probable that the company will be liable, although the amount can be measured reliably. 2. Retained earnings Estimated liability for income tax

200,000

3. Accounts receivable – Sunset Loss on guaranty Note payable – bank

120,000 80,000

200,000

200,000

16 Problem 1-51 1. Unearned subscription revenue Subscription revenue (3,000,000 – 2,300,000)

700,000 700,000

2. Loss on damages Estimated liability for damages

1,500,000

3. Loss on damages Estimated liability for damages

1,000,000

1,500,000

1,000,000

Problem 1-52 Answer A The probable loss is recorded but the possible loss is only disclosed. ` Problem 1-53 Answer C The best estimate is recorded. The accepted BIR offer is not recorded because it was made after the statements are issued. Problem 1-54 Answer D The provision should be accrued because it is probable and measurable. The accrued amount is P350,000 which is the midpoint of the range in the absence of the best estimate within the range. Problem 1-55 Answer D The contingent asset is disclosed only because the case is unresolved on December 31, 2008. The issue is what amount of asset will be disclosed. Since the case is settled in March 2009 after the issuance of the 2008 financial statements, the amount P1,500,000 should be disclosed. However, if the case is settled before the issuance of the statements, the actual award of P1,000,000 should be disclosed. Problem 1-56 Answer A Haze can report a gain of P1,500,000 in its 2008 income statement because this amount is already settled on December 31, 2008. However, the remainder of P3,000,000 is only disclosed because the defendant has appealed the said amount.

17 Problem 1-57 Answer A The loss on the first lawsuit is both probable and measurable and therefore can be accrued as a provision. Problem 1-58 Answer B Environmental cost Litigation cost Total accrued liability

500,000 300,000 800,000

Both are accrued as provision because the loss is probable and measurable. Problem 1-59 Answer D Assessment on appeal (50% x 1,600,000) Environmental cost Total provision The loss from the guaranty is not accrued because it is remote.

800,000 1,500,000 2,300,000...