Notes for this semester: Accountancy PDF

Preview

Summary

PROBLEMS ON LIABILITIESProblem 1 These were noted in the following accounts of Faithful Inc. for the year ended December 31, 2019. Accounts Balance Notes Accounts Payable, trade P 170,000 The amount is net of P 30,000 accounts with debit balance Notes Payable, trade 70,000 The notes are all with 5 m...

Description

PROBLEMS ON LIABILITIES Problem 1 These were noted in the following accounts of Faithful Inc. for the year ended December 31, 2019. Accounts Balance Notes Accounts Payable, trade P 170,000 The amount is net of P 30,000 accounts with debit balance Notes Payable, trade 70,000 The notes are all with 5 months term, bearing interest at 15%, P 50,000 of the notes is dated September 1, while the rest are dated November 3 Advances from Customers 100,000 The goods pertaining to these advances will be delivered in 2020 Container Deposit 50,000 This is an amount received from customers for returnable containers Notes Payable - BPI 200,000 This is a five year note and are being paid off at the rate of P 4,000 per month inclusive of interest Dividend in arrears on 20,000 The company is yet to declare dividends since its last declaration and Cumulative Preferred stock distribution in 2020. Share Dividend Payable on 37,200 Ordinary Shares Liabilities under guarantee 45,000 This pertains to Faithful guarantees its employee’s bank loan. As per past agreement experience, employees unlikely default on their loan payments Convertible Bonds 1,000,000 P 1,000 bond is convertible to 10 ordinary shares. Amount due on December 31, 2022 Notes Payable - Officers 40,000 This is due in six months Salaries and Wages Payroll for the period December 16, 2019 to January 15, 2020 amounted to P 68,000 Notes Receivable 30,000 This note has been discounted in the bank on a without recourse basis, where the company received P 24,000 Output VAT 246,000 Input VAT on purchases and other operating expenses amounted to P 164,000 Accounts Receivable 215,000 The account is net of P 12,300 customer credit balances Cash in Bank 115,000 The company’s bank balances include BPI – P 125,000; PNB – P 55,000 and in BDO an overdraft with the balance Common Stock Warrants 250,000 Outstanding Common Stock Option 150,000 Outstanding Estimated Warranty Cost for 46,000 This pertains to warranty costs on goods sold in 2018 and 2019 goods sold Installment Notes Payable 75,000 This is for the equipment purchases, only one-third is due in 2020 Provision for Losses A manufacturing equipment exploded during the year injuring an employee where he filed claims on November 3. There has been no resolution for the case as of the balance sheet date but the company lawyer believed that it is probable that the company is liable between P 25,000 and P 75,000. Deferred Tax Liability 150,000 This refers to the cumulative temporary difference on taxable and financial income which will reverse evenly over the next year. 1. How much is the total current liabilities? a. P 767,300 b. P 814,300 c. P 817,300 2. How much is the total non-current liabilities? a. P 1,285,000 b. P 1,360,000 3. How much is the total liabilities? a. P 2,177,300 b. P 2,127,300

d. P 892,300 c. P 1,429,000

d. P 1,760,000

c. P 2,246,300

d. P 2,252,300

ANSWER IN PROBLEM 1 Accounts Accounts Payable, trade Notes Payable, trade Interest on Notes above Advances from Customers Container Deposit Notes Payable - BPI Dividend in arrears on Cumulative Preferred stock Share Dividend Payable on Ordinary Shares Liabilities under guarantee agreement

Balance P 170,000 70,000

Current 200,000 70,000 2500 500 100,000 50,000 40,000

170,000 + 30,000 50,000 x. 15.x 4/12 20,000 x .15 x 2/12

100,000 50,000 200,000 20,000 37,200 45,000

Long Term

160,000

(dividends are only accrued when declared) (Part of Shareholders’ Equity) This is a contingent liability, where we accrue only when there are defaults. We are only secondarily liable

Convertible Bonds

1,000,000 1,000,000

Notes Payable - Officers

40,000 40,000

Salaries and Wages Notes Receivable 30,000 Output VAT 246,000 Accounts Receivable 215,000 Cash in Bank 115,000 Common Stock Warrants Outstanding

68,000 x 15/30 (This has to be closed upon discounting)- Not a liability nor an asset anymore. The liability is the net of output and input ( 246,000 – 164,000) Credit Balance is reported as liability, A/R is reported as P 227,300 (215,000 + 12,300) The balance of BDO is P 65,000, and there is no other acct. on BDO, reported as liability (This is an Equity Account)

34,000

82,000

12,300

65,000

250,000 Common Stock Option Outstanding

(This is an Equity Account) 150,000

Estimated Warranty Cost for goods sold

46,000 46,000

Installment Notes Payable

Current – 75,000 x 1/3

25,000

This is a provision, since it is probable and can be estimated. (25,000 + 75,000) / 2 . We will use mid-range. Deferred is always long term.

50,000

50,000

75,000 Provision for Losses

Deferred Tax Liability

150,000

150,000 TOTAL Problem 2

2,177,300

817,300

1,360,000

The following information in 2019 were available with regards to the currently maturing obligations of Batangas Inc. who follows the calendar year financial statements reporting in. a. Short term Notes Payable of P 1 Million due February 7, 2020 – On January 15, 2020, the company issued bonds with a face value of P 900,000 at 96; brokerage and other cost of issuance were P 3,450. On January 22, 2020, the proceeds from the bond issuance plus additional cash held by the company were used to liquidate the P 1 Million of short-term notes. b. Notes Payable of P 500,000 due June 1, 2020 – On February 2,2020, Batangas entered an agreement with National Life Insurance Co. where by National will lend Batangas P 400,000 payable in 5 years at 14% the proceeds of which is intended to be used to partly refinance the said notes. The money will be available to the company on May 20, 2020. c. Notes Payable of P 500,000 due June 15, 2020 – At December 31, 2019 Batangas signed an agreement to borrow up to P 500,000 to refinance the note on a long-term basis. The financing agreement called for borrowings not to exceed 80% of the value of the collateral. At the date of issue of the December 31, 2019 financial statements, the value of the collateral was P 600,000 and was not expected to fall below this amount during 2020. Assuming that the financial statements of Batangas were authorized to issue on March 31, 2020. 4. How much liabilities above are short term as of the balance sheet date? a. P 1,500,000 b. P 1,520,000 c. P 1,980,000 d. P 2,000,000 5. How much liabilities above are long term as of the balance sheet date? a. P 2,000,000 b. P 1,500,000 c. P 980,000 d. P 480,000 ANSWER IN PROBLEM 2 Current Long Term PARTICULARS a. 1,000,000 Not Refinance on a long term basis as of BS date – Current b. 500,000 Not Refinance on a long term basis as of BS date - Current c. 20,000 480,000 Refinance on a long term basis as of BS date ( 600,000 x .80)=480,000 total 1,520,000 480,000 ( 480,000 will be long term and the balance of P 20,000 will be current) Problem 3 Raid Inc., a manufacturer of heavy machinery, grants a 2-year warranty on its products. The Estimated Liability for Product Warranty account shows the following entries for the year: Beginning balance P 225,000 Provision during the year (quarterly accrual) 200,000 Total 425,000 A review of the company’s policy of accounting for warranties revealed that based on the company’s past experience, warranty claims average 5% on net sales. Moreover, the company provides for a quarterly accrual of the estimated warranties expenditure based on rough estimates. The following additional information is available from the company’s records: Gross Sales P 7,250,000 Sales Return and Allowances 150,000 Cost of Sales 3,678,000 The cost of Sales included P 415,500 cost of servicing the warranty claims for the year. 6. What is the correct balance of the estimated liability for product warranty at the end of the year? a. P 164,500 b. P 264,500 c. P 355,000 d. P 364,500 Beginning Balance 225,000 + Warranty Expense (7,250,000 – 150,000) x 5% 355,000 Less: Actual Warranty (415,500) Warranty Liability Balance 164,500

Problem 4 San Mateo Corporation began operation on January 2, 2019 with 250 employees. The company provides its employees 2 weeks paid sick leave and 2 weeks paid vacation leave for every operating year. Per company policy, employees are allowed to carry over accumulated leaves for the current period over the next year only. The same shall be forfeited if not availed of over the said period allowed. On December 31, 2019, records show that there are 55 employees who are yet to avail of any leaves, while there are 25 employees who have remaining 2 weeks unused vacation and sick leaves combined. Employees had an average daily wage rate of P 250 for a 5-day weekly operation in 2019. On December 31, 2020, records show that 925 days of vacation and sick leaves carried over from the last operating period were exercised and paid in 2020. In addition, there are 30 employees who have 6 weeks accumulated unused sick leaves and vacation leaves combined; 25 employees who have 3 weeks accumulated unused sick leaves and 2 weeks vacation leaves; 30 employees who have 3 weeks accumulated unused sick leaves and unused vacation leaves combined; 10 employees who have 1 week accumulated unused sick leave and 1 week vacation leaves. Employees had an average daily wage rate of P 275 for a 5-day weekly operation in 2020. 7. How much liability for compensated absences should be included as current liabilities as of December 31, 2019? a. P 570,625 b. P 453,750 c. P 412,500 d. P 337,500 8. How much liability for compensated absences should be included as current liabilities as of December 31, 2020? a. P570,625 b. P 453,750 c. P 412,500 d. P 337,500 ANSWER IN PROBLEM 4 Liability for Compensated Absences: Dec. 31, 2019 55 employees x 4 weeks x 5days 25 employees x 2 weeks x 5 days Multiplied by Payment per Day Liability, December 31, 2019

Liability for Compensated Absences: Dec. 31, 2019 30 employees x 6 weeks x 5days (use 4 weeks limit) 25 employees x 5 weeks x 5 days (use 4 weeks limit) 30 employees x 3 weeks x 5days 10 employees x 2 weeks x 5 days Multiplied by Payment per Day Liability, December 31, 2019

1,100 250

600 500 450 100

1,350 250 337,500

1,650 275 453,750

Note: Four weeks limit: 2 weeks VL and 2 weeks SL, since, only a year can be carried to the following year. Problem 5 Climbing Company manufactures and sells air conditioning units with a 12-month warranty under which defective air conditioning units will be replaced free of any charges. The company started out in 2019 expecting a 10% of the sales to be returned. However, due to the innovations and improvements made to the products during the year, the estimated percentage of returns increased to 15% on July 1. It is assumed that no units sold during a given quarter are returned in that quarter. Each unit is stamped with a date at time of sale so that the warranty may be properly administered. The following table of percentages indicates the pattern of sales return during the 12-month period of warranty, starting the quarter following the sale of conditioning units. Quarter following quarter of sale % of the total returns expected Gross Sales in 2019 First Quarter 40% P 16,200,000 Second Quarter 30% 14,850,000

Third Quarter Fourth Quarter

20% 10%

12,000,000 8,100,000

The company also pays for the freight costs of the return and the delivery of the defective units returned and the new replacement units, respectively. The freight costs were approximately 10% of the sales price of the air conditioning units returned. The manufacturing cost of the air conditioning units are roughly 80% of the sales price. The returned units can be salvaged at an estimated value of 15% of their sales price. Returned units on hand at December 31, 2019, were thus valued in the inventory at 15% of their original sales price. 9. What is the total estimated returns for the year ended, December 31, 2019? a. P 5,115,000 b. P 6,120,000 c. P 6,300,000 d. P 7,672,500 10. What is the warranty expense for the year ended, December 31, 2019? a. P 4,590,000 b. P 4,896,000 c. P 5,508,000 d. P 6,120,000 11. What is the estimated warranty payable as at December 31, 2019? a. P 2,176,875 b. P 2,205,900 c. P 2,322,000 d. P 2,612,250 ANSWER IN PROBLEM 5 First Quarter Sales Second Quarter Sales Total Multiplied by Rate of Return

P 16,200,000 14,850,000 31,050,000 10%

Third Quarter Sales Fourth Quarter Sales Total Multiplied by Rate of Return

12,000,000 8,100,000 20,100,000 15%

Total Returns Manufacturing % of Sales Price Warranty Expense on Inventory Cost Freight on Returns (6,120,000 x .10) Less: Salvage Value of returns (6,120,000 x .15) Warranty Expense Expected Return on First QTR Sales (16.2 M x.10)

P 1,620,000 1,485,000 1,800,000 1,215,000

3,105,000

3,015,000 6,120,000 80% 4,896,000 612,000 (918,000) 4,590,000 Exp. Return 4th Quarter

10%

162,000

Expected Return on Second QTR Sales (14.85 M x.10) 3rd and 4th 10%+20% 445,500 nd Expected Return on Third QTR Sales (12 M x.15) 2 , 3rd, & 4th 10%+20%+30% 1,080,000 Expected Return on Fourth QTR Sales (8.1 M x.15) 1st to 4th 100% 1,215,000 Expected returned based on Sales as of Dec. 31 2,902,500 Estimated Cost 80% Est. Inventory Cost of Expected Returned 2,322,000 Freight (2,902,500 x 10%) 290,250 Salvage Value (2,902,500 x 15%) (435,375) Total Liability as of December 31, 2019 2,176,875 Note: Return is expected within a year, but it was expected it will start on the following quarter of sale. Sales in the first quarter is only expected on the fourth quarter as of the end of the year, which is 10% (see table) Problem 6 The Manger Home Shopping carries a wide variety of promotion techniques to attract customers.

1. Kitchen and Home Appliances are sold in a one-year warranty for replacement of parts and labor. The estimated warranty costs, based on past experience is 5% of sales. 2. The premium is offered on home furniture. Customer receive a coupon for each peso spent on home furniture. Customers may exchange 2,000 coupons and P 50 for a rice cooker which the company purchased at P 340 for each rice cooker and estimates that 60% of the coupons given to customers will be redeemed. The company’s total sales for 2019 were P 115.2M – P 86.4M from kitchen and home appliances and P 28.8M from home furniture. Replacement parts and labor for warranty work totaled P 2.624M during 2019. A total of 5,200 rice cookers used in the premium programs were purchased during the year and there were 9,600,000 coupons redeemed in 2019. The accrual method is used by the company to account for the warranty and premium costs for financial reporting purposes. The balance of the accounts related to warranties and premiums on January 1, 2019, were as shown below: Inventory of Premium Items P 340,000 Estimated liabilities for premiums 716,000 Estimated liabilities for warranties 2,176,000 Based on the information above, determine: 12. Promotional expenses related to premiums for the current year 2019? a. P 1,392,000 b. P 1,632,000 c. P 2,505,600 d. P 2,937,600 13. Estimated liabilities for premiums as of December 31, 2019? a. P 716,000 b. P 1,829,600 c. P 2,021,600 d. P 1,589,600 14. Estimated liabilities under warranties as of December 31, 2019? a. P 2,624,000 b. P 3,872,000 c. P 4,320,000 d. P 5,312,000 ANSWER IN PROBLEM 6 Sales of Home Furniture % of Redemption Coupons expected to be redeemed No. of Coupons required for a premium Number of Premium to be given away Multiply by Estimated Net Cost ( P 340 -P 50 ) Add: Premium Liability at the beg. of the year Coupon Redeemed during the year (9,600,000/2,000) x P 290 Premium Liability of the end of the year Sales on Kitchen and Home Appliance Rate of Expected Warranty on Sales Warranty Expense in 2019 Warranty liability, beginning of the year Actual Warranty worked

28,800,000 60% 17,280,000 2,000 8,640 P 290 P 2,505,600 Premium Expense 716,000 (1,392,000) 1,829,600 Premium Liability 86,400,000 5% 4,320,000 2,176,000 (2,624,000) 3,872,000

Warranty Liability

Problem 7 Orange Appliance Center reports the following liability items in its balance sheet as of December 31, 2019: Liability for unredeemed coupons P 109,750 Unearned Service Contracts 300,000 Accrued officer bonuses The liability for unredeemed coupons is in relation to discount coupons distributed by the company to customers who may present the same within a stated expiration date to various company distributors to avail of them discount as indicated in the face of the coupons. Distributors are reimbursed for the face value of coupons redeemed, plus 10% of the coupon value for handling costs. The company honors requests for coupon reimbursements to distributors three months after the expiration date. In Orange experience, 75% of the coupons issued ultimately are redeemed by customers. The total face value of coupon issued during the year and expiring on December 31, 2019 amounted to P

250,000 while total payments to distributors as of the same date is at P 140,250. The total coupon value was set up as a liability while the total payments were charged against the liability set-up. Aside from the company’s normal selling operations, it also sells equipment service contracts agreeing to service equipment for a two-year period. Revenue from service contracts is recognized as earned over the lives of the contracts. Additional information shows that Unearned Service Contract revenue at January 1, 2019 is at P 300,000; cash Receipts from service contract sold is at P 490,000 recorded as revenue; service contract revenue actually realized is at P 430,000. The company provides a special bonus for its executive officers based on 10% of its net income before bonus but after income tax. Net income for the year before tax and before adjustments related to the previous information is at P 1,016,250. Assume income tax rate is 35%. Accrual is yet to be made on the bonuses. 15. What is the adjusted balance of the liability for unredeemed coupons? a. P 134,750 b. P 109,750 c. P 66,000 d. P 47,250 16. What is the adjusted balance of the unearned service contract? a. P 240,000 b. P 300,000 c. P 360,000 d. P 490,000 17. What is the adjusted balance of the accrued officer bonuses accounts? a. P 61,032 b. P 67,358 c. P 90,909 d. P 100,000 ANSWERS IN PROBLEM 7 Total Face Value of Coupon Issued during the year P 250,000 Add: Handling Cost 10% 25,000 Total 275,000 Percentage Expected to be redeemed 75% Required Estimated Expense 206,250 Actual Cost / Reimbursements to distributors (140,250) Estimated liability of discount coupon, end 66,000 Contract Service, Beginning Contract Sold this period Less: Service Earned Contract Service liability, end

P 300,000 490,000 (430,000) 360,000

Unadjusted Income before Tax P 1,016,250 Overstatement of liability of on unredeemed coupon (109,750-66,000) 43,750 Understatement of Unearned Service Contract (360,000 – 300,000) (60,000) Adjusted Income before tax P 1,000,000 B = .10 (NI); Tax = .35 (IBT-B) B=.10 (1,000,000 - .35 (1,000,000 – B) B=.10 (1,000,000 – 350,000+.35B) B=.10 (650,000 + .35B) B= 65,000 + .035B 1B-.035B = P 65,000 .965B = P 65,000 B = 67,358

Problem 8 You are auditing the financial statements of Puerto Rico Inc. for the year ended, December 31, 2019. The liability portion of the company’s balance sheet shows the following information: Current Liabilities Accounts Payable P 250,000 Warranty Liability 10,000

Non-Current Liability Liability Under Finance Lease 540,000 Bonds Payable 851,706 Upon further investigation on the liability accounts, you discovered the following: a. Accounts Payable You rendered purchase cut-off on the company’s purchases transactions from December 15 to January 15. The results of such cut-off are summarized below: Receiving Report No. Amount Invoice Date...