Intermediate Accounting 2 Millan Answers PDF

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EXERCISES – Current Liabilities Problem 1: True or False A liability can result from past, present or future events. (F) A liability can exist even if the party to whom the obligation is owed is not specifically identified. (T) A long-term debt that is maturing within 12 months from the end of the r...

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EXERCISES – Current Liabilities Problem 1: True or False 1. A liability can result from past, present or future events. (F) 2. A liability can exist even if the party to whom the obligation is owed is not specifically identified. (T) 3. A long-term debt that is maturing within 12 months from the end of the reporting period is a current liability. (T) 4. A currently maturing debt that the entity’s management intends to refinance is presented as noncurrent. (F) - If refinancing is completed on or before the entity’s reporting period, it is presented as noncurrent - discretion - grace period 5. Trade payables are normally presented as current liabilities. (T) 6. Amortized cost liabilities are subsequently measured at the present value of the cash outflows from the instrument. (T) - you are computing the present value as of the given period 7. Entity A’s long-term loan can be accelerated by the creditor if Entity A fails to maintain a current a current ratio of at least 2:1. At the reporting date, Entity A’s current ratio is 3:1. The loan should be classified as a current liability. (F) - current asset : current liability or vice versa - accelerated (payable on demand) - no violation, favorable yung 3:1 8. A deferred tax liability that is expected to reverse within 12 months after the reporting period is presented as a current liability. (F) - deferred tax liability is ALWAYS presented as noncurrent liability regardless of reversal 9. Liabilities for cash dividends are normally presented as current liabilities unless the dividends are clearly due beyond twelve months after the reporting period. (T) 10. Financial liabilities, except those that are classified as FVPL, are initially measured at fair value plus transaction costs. (F)

Problem 2 – Financial Liabilities Entity A’s liabilities as of December 31, 2020 include the following: Accounts payable 15,000 Preference shares issued with mandatory 100,000 redemption Unearned income 7,000 Utilities payable 16,000 Warranty obligation 7,000 Deferred tax liability 2,000 Philhealth contribution payable 5,000 Obligation to deliver a fixed number of own 12,000 shares worth a fixed amount of cash Share dividends payable 3,000 Rent payable 9,000 Required: Compute for the total financial liabilities to be disclosed in Entity A’s 2020 notes to the financial statements.

Accounts payable Redeemable preference shares Utilities payable Rent payable

15,000 100,000 16,000 9,000 140,000

Problem 3 – Current Liabilities Venerable Respected Co. has the following liabilities as of December 31, 2020. a. Trade accounts payable, net of debit balance in supplier’s account of P10,000, net of unreleased checks of P8,000, and net of postdated checks of 4,000. b. Credit balance in customers’ accounts c. Financial liability designated at FVPL d. Bonds payable maturing in 10 equal annual installments of P200,000 e. 12%, 5-year note payable issued in Oct. 1, 2020 f. Deferred tax liability g. Unearned rent h. Contingent liability i. Reserve for contingencies

P 600,000 4,000 100,000 2,000,000 200,000 10,000 8,000 20,000 50,000

Required: How much is the total current liabilities? Trade accounts payable Credit balance Financial liability designated at FVPL Current portion of B/P Current portion of N/P Unearned rent

622,000 (600k+10k+8k+4k) 4,000 100,000 200,000 6,000 8,000 940,000

Problem 4 – Trade Payable Kew Co.’s account payable balance at December 31, 2020 was P2,200,000 before considering the following data: •

•

Goods shipped to Kew FOB shipping point on December 22, 2020 were lost in transit. The invoice cost of P40,000 was not recorded by Kew. On January 7, 2021, Kew filed a P40,000 claim against the common carrier. Purchases 40k Accounts payable 40k On December 27, 2020, a vendor authorized Kew to return, for full credit, goods shipped and billed at P70,000 on December 3, 2020. The returned goods were shipped by Kew on December 28, 2020. A P70,000 credit memo was received and recorded by Kew on January 5, 2021.

Accounts payable Purchase returns

•

Goods shipped to Kew FOB destination on December 20, 2020 were received and recorded on January 6, 2021. The invoice cost was P50,000.

Required: What amount should Kew report as accounts payable in its December 31, 2020 statement of financial position? Unadjusted accounts payable Goods shipped FOB shipping point Returned goods Adjusted accounts payable

2,200,000 40,000 (70,000) 2,170,000

Problem 5 – Refinancing Agreement Entity C’s liabilities as of December 31, 2020 (current year-end) include the following: •

• •

P10,000,000, 8-year loan maturing on December 31, 2021. Entity C intends to refinance this liability on a long-term basis on February 2, 2021. Entity C’s financial statements were authorized for issue on March 31, 2021. P6,000,000 loan that is payable on demand. There is no indication as of December 31, 2020 that the creditor will demand repayment within the next 12 months. P14,000,000 loan due on December 31, 2028. Entity C breached a loan provision accelerating the repayment of this loan within the next 12 months. However, on January 12, 2021, the creditor granted Entity C a 12-month grace period to rectify the breach, within which the creditor will not demand immediate repayment.

Required: Compute for the total current liabilities as of December 31, 2020. 10,000,000 6,000,000 14,000,000 30,000,000 Problem 6 – Liabilities payable on demand Eliot Corporation’s liabilities at December 31, 2020 were as follows: Accounts payable and accrued interest 2,000,000 5-year 10% Notes Payable – due December 31, 2023 5,000,000 Part of the loan agreement is for Elliot to appropriate a fixed amount out of its accumulated profits and losses annually until the amount of appropriation has equaled the face amount of the obligation. Non-compliance will render the note as payable on demand by the lender. As of December 31, 2020, Elliot Corporation has yet to comply with the loan agreement. Required: a. What amount of current liabilities should Elliot Corporation report in its December 31, 2020 statement of financial position? 2,000,000 5,000,000

7,000,000 b. Assume the lender agreed on December 31, 2020 to provide Elliot a grace period of 12 months to rectify the breach and within which, the lender will not demand payment. What amount of current liabilities should Elliot Corporation report in its December 31, 2020 statement of financial position? 2,000,000 Problem 7 - Unearned Income/Deferred Revenue Gallery Department Store sells gift certificates redeemable for store merchandise. The certificates expire one year after their issuance. Gallery has the following information pertaining to its gift certificates sales and redemptions: Unearned at December 31, 2019 600,000 2020 sales 2,000,000 2020 redemptions of prior-year sales 200,000 2020 redemptions of current-year sales 1,400,000 Gallery’s experience indicates that 10% of gift certificates sold will not be redeemed. Required: In its December 31, 2020 statement of financial position, what amount should Gallery report as unearned revenue? UNEARNED REVENUE 1,400,000 – redemptions of current year 2,000,000 – 2020 sales sales 200,000 – gift certificates not redeemed 400,000 Problem 8 - Liability for Deposits received Kent Co., a division of National Realty, Inc., maintains escrow accounts and pays real estate taxes for National’s mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is credited to the mortgagee’s account and used to reduce future escrow payments. Additional information follows: Escrow accounts liability, 1/1/2020 Escrow payments received during 2020 Real estate taxes paid during 2020 Interest on escrow funds during 2020

P

700,000 1,580,000 1,720,000 50,000

What amount should Kent report as escrow accounts liability in its December 31, 2020 balance sheet? Liability for escrow accounts 1,720,000 – real estate taxes payment 700,000 – beg. balance 1,580,000 – escrow payments received 45,000 – interest on escrow net of 10% 605,000

Problem 9 - Liability for Deposits received Inter Company sells its products in reusable, expensive containers. The customer charged deposit for each container delivered and receives a refund for each container returned within two years after the year of delivery. Inter accounts for the containers not returned within the limit as being retired by sale at the deposit amount. Information for 2020 is as follows: Deposits for containers at December 31, 2019 from deliveries in: 2018 2019

150,000 430,000

Deposits for containers delivered in 2020

580,000 780,000

Deposits for containers returned in 2020 from deliveries in: 2018 2019 2020

90,000 250,000 286,000

626,000

What amount should Inter Company report as a liability for deposit in returnable containers at December 31, 2020?

Liability for deposits 250,000 – containers returned 2019 430,000 – deposits 2019 286,000 – containers returned 2020 780,000 – deposits 2020 674,000 Problem 10 – Accrued Expenses Entity D acquired a piece of land on April 1, 2020. The purchase price was reduced by a credit for the real property taxes accrued during the year. Entity D records real property taxes at each month-end by adjusting the prepaid tax or tax payable account as appropriate. On May 1, 2020, Entity D paid the first of two equal installments of P72,000 for real property taxes. What is the entry to record the payment on May 1?

Problem 11 – Accrued Expenses Kemp Company must determine the December 31, 2020, year-end accruals for advertising and rent expense. A P50,000 advertising bill was received on January 7, 2021, comprising P35,000 for advertisements in December 2020 issues of a newspaper and P15,000 for advertisements in January 2021. A store lease, effective October 16, 2020, calls for a fixed rent of P120,000 per month, payable one month from the effective date and monthly thereafter. In addition, rent equal

to 5% of net sales over P6,000,000 per calendar year is payable on January 31 of the following year. Net sales for 2020 were P9,000,000. Required: How much are the accrued liabilities in the December 31, 2020 statement of financial position? Problem 12 – Accrued Expenses On July 1, 2019, Ran County issued a realty tax assessment for its fiscal year ended June 30, 2020. On September 1, 2019, Day Co. purchased a warehouse in Ran County. The purchase price was reduced by a credit for accrued realty taxes. Day did not record the entire year’s real estate obligation, but instead records tax expenses at the end of each month by adjusting prepaid real estate taxes payable, as appropriate. On November 1, 2019, Day paid the first of two equal installments of P12,000 for realty taxes. Required: What amount of this payment should Day record as a debit to real estate taxes payable?...