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FINANCIAL ACCOUNTING & REPORTING 2PX – SET G SOLUTION Diamondback Company provided the following information on December 31, 2017: Income taxes withheld from employees 900, Cash balance at First State Bank 2,500, Cash overdraft at Harbor Bank 1,300, Accounts receivable with credit balance 75...

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FINANCIAL ACCOUNTING & REPORTING 2 PX – SET G SOLUTION ! 1) Diamondback Company provided the following information on December 31, 2017: Income taxes withheld from employees Cash balance at First State Bank Cash overdraft at Harbor Bank Accounts receivable with credit balance Estimated expenses of meeting warranties on merchandise previously sold Estimated damages as a result of unsatisfactory performance on a contract Accounts payable Deferred serial bonds, issued at par and bearing interest at 12%, payable in semiannual installments of P500,000 due April 1 and October 1 of each year, the last bond to be paid on October 1, 2023. Interest is also paid semiannually. Stock dividend payable What is the total current liabilities on December 31, 2017? A. 8,100,000 B. 8,950,000

C.

8,150,000

D.

SOLUTIONS: A Income taxes withheld from employees Cash balance at First State Bank – Cash, Current asset Cash overdraft at Harbor Bank Accounts receivable with credit balance Estimated expenses of meeting warranties on merchandise previously sold Estimated damages as a result of unsatisfactory performance on a contract Accounts payable Deferred serial bonds, issued at par and bearing interest at 12%, payable in semiannual installments of P500,000 due April 1 and October 1 of each year, the last bond to be paid on October 1, 2023. Interest is also paid semiannually. – if the last payment will be on October 1, 2023, then if you count it carefully the first payment will be on April 1, 2019, which is beyond 12 months from the date asked (12/31/17) Interest on the bonds (5,000,000 x 12% x 3/12) Stock dividend payable – Equity Total current liabilities ! 2) Rockies Company provided the following information on December 31, 2017: Accounts payable after deducting debit balance in suppliers’ account of P100,000 Accrued liabilities Note payable – due March 31, 2018 Note payable – due May 1, 2018 Bonds payable – due December 31, 2019

900,000 2,500,000 1,300,000 750,000 500,000 1,500,000 3,000,000

5,000,000 2,000,000

9,000,000

900,000 --1,300,000 750,000 500,000 1,500,000 3,000,000

--150,000 --8,100,000

500,000 50,000 1,000,000 800,000 2,000,000

On March 1, 2018 before the 2017 financial statements were issued, the note payable of P1,000,000 was replaced by an 18-month note for the same amount. The entity is considering similar action on the P800,000 note due on May 1, 2018. The financial statements were issued on March 31, 2018. What total amount should be presented as current and non current liabilities at year-end 2017? A. B. C. D. Current Liabilities 2,250,000 2,250,000 1,650,000 2,450,000 Noncurrent Liabilities 2,000,000 2,800,000 2,800,000 2,000,000 SOLUTION: D Accounts payable – adjusted Accrued liabilities Note payable – due March 31, 2018 Note payable – due May 1, 2018 Bonds payable – due December 31, 2019 Total !

!

!

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

Noncurrent ------2,000,000 2,000,000

! •FAR eastern university•

•FINANCIAL ACCOUNTING 2•

•SET – G•

•J S CAYETANO™•

! 3) The trial balance of Beatriz Company reflected the following liability account balances on December 31, 2018: Accounts payable 3,800,000 Accrued expense 400,000 Unearned interest income 100,000 Bonds payable 6,800,000 Premium on bonds payable 400,000 Deferred tax liability 800,000 Dividends payable 1,000,000 Income tax payable 1,800,000 Note payable, due January 31, 2019 1,200,000 Note payable, due March 15, 2020 2,000,000 Mortgage payable 1,500,000 Total amount of current liabilities in the statement of financial position as at December 31, 2018 is: A. 14,700,000 B. 9,100,000 C. 8,700,000 D. 8,300,000 SOLUTIONS: D Accounts payable Accrued expense Unearned interest income Dividends payable Income tax payable Note payable, due January 31, 2019 Total current liabilities ! 4) Marron Company has the following liabilities as of December 31, 2011. Trade accounts payable net of debit balance in supplier’s account of P20,000, net of unreleased checks of P16,000 Credit balance in customers’ accounts Financial liability designated at FVPL Bonds payable maturing in 10 equal annual installments of P400,000 12%, 5-year note payable issued on October 1, 2011 Deferred tax liability Unearned rent Contingent liability Reserve for contingencies How much is the total current liabilities? A. 1,880,000 B. 1,872,000

C.

1,868,000

D.

3,800,000 400,000 100,000 1,000,000 1,800,000 1,200,000 8,300,000

1,200,000 8,000 200,000 4,000,0000 400,000 20,000 16,000 40,000 100,000

1,860,000

SOLUTIONS: B Adjusted accounts payable (1,200,000 + 20,000 + 16,000) 1,236,000 Credit balance in customer’s account (advances from customer) 8,000 Financial liability measured at FVPL 200,000 Current portion of long term debt (400,000 / 10) 40,000 Interest payable on notes (400,000 x 12% x 3/12) 12,000 Unearned rent 16,000 Total current liability 1,872,000 ! 5) Denver Corporation’s accounts payable at December 31, 2019, totaled P1,600,000 before any necessary year-end adjustments relating to the following transactions: • On December 27, 2019, Denver wrote and recorded checks to creditors totaling P700,000 causing an overdraft of P200,000 in Denver’s bank account at December 31, 2019. The checks were mailed out on January 10, 2020. • On December 28, 2019, Denver purchased and received goods for P300,000, term 2/10, n/30. Denver records purchases and accounts payable at net amount. The invoice was recorded and paid January 2, 2020. • Goods shipped FOB destination on December 20, 2019 from a vendor was received January 2, 2020. The invoice price was P130,000. At December 31, 2019, what amount should Cowboy report as total accounts payable? A. 1,900,000 B. 2,100,000 C. 2,594,000

D.

2,724,000

•FAR eastern university•

•FINANCIAL ACCOUNTING 2•

•SET G•

J S CAYETANO™

SOLUTIONS: C Unadjusted Accounts payable 1. Reversal of unreleased check 2. Unrecorded purchases as of 12/31/19 (300,000 x 98%) 3. No adjustments Adjusted Accounts payable

1,600,000 700,000 294,000 -2,594,000

6) Saints Company’s accounts payable at December 31, 2016 totaled P1,000,000 before any necessary year-end adjustments relating to the following transactions and information: • On December 27, 2016, Saints wrote and issued checks to creditors totaling P350,000. The issuance of the checks was recorded on January 3, 2017. • On December 28, 2016, Saints purchased and received goods for P150,000, terms 2/10, n/30. Saints records purchases and accounts payable at net amounts. The invoice was recorded and paid January 3, 2017. • Goods shipped FOB destination on December 20, 2016 from a vendor to Saints were received January 2, 2017. The invoice cost was P65,000. The purchase was recorded on January 2, 2017. • Goods costing P120,000 were purchased from Vikings Trading. The goods were shipped by Vikings on December 28, 2016, FOB shipping point. The goods, together with the invoice, were received by Saints on January 4, 2017. • The accounts payable general ledger balance of P1,000,000 is net of P80,000 debit balance in one supplier’s account representing deposit on goods to be delivered in February 2017. What amount should Saints Company report as total accounts payable at December 31, 2016? A. 1,697,000 C. 1,062,000 B. 997,000 D. 1,857,000 SOLUTIONS: B Unadjusted Accounts payable 1. Unrecorded payment 2. Unrecorded purchases as of 12/31/16 3. No adjustment 4. Unrecorded purchases as of 12/31/16 5. Supplier’s debit balance

1,000,000 (350,000) 147,000 --120,000 80,000 997,000

! 7) On December 31, 2019, Goten Company has accounts payable of P1,000,000 before possible adjustment for the following: • Checks drawn but not yet released to payees amounted to P12,000 while checks drawn and released to payees but were postdated amounted to P5,000. • On December 28, 2019, a vendor authorized Goten to return for full credit goods shipped and billed at P25,000 on December 14, 2019. Goten shipped the returned goods on December 31, 2019 but the credit memo was received and recorded on January 3, 2020. • Goods shipped FOB shipping point, freight prepaid from a vendor on December 28, 2019 was recorded at invoice cost at shipment date. The invoice cost is P14,000 while the freight cost is P3,000. • Goods shipped FOB destination, freight collect were received on December 29, 2019. The invoice cost of P40,000 was credited to accounts payable on date of receipt and the related freight of P5,000 was debited to an expense account. What is the adjusted accounts payable on December 31, 2019? A. 1,020,000 C. 990,000 B. 995,000 D. 984,000 SOLUTION: C Unadjusted accounts payable 12/31/19 1,000,000 1. Reversal of unreleased and postdated checks (12,000 + 5,000) 17,000 2. Unrecorded purchase return as of 12/31/19 25,000 3. Unrecorded accounts payable for freight* 3,000 4. Overstatement of accounts payable ** (5,000) Adjusted accounts payable 12/31/19 990,000 *Goten should shoulder the freight (since it was shipping point) but it was paid by the vendor (since it was freight prepaid) thus, this will increase the liability of Goten. ! !

•FAR eastern university•

•FINANCIAL ACCOUNTING 2•

•SET G•

J S CAYETANO™

8) Krillin, Inc. is preparing its financial statements for the year ended December 31, 2019. Accounts payable amounted to P200,000 before any necessary year-end adjustment related to the following: • At December 31, 2019, Krillin has a P50,000 debit balance in its accounts payable to Vegito, a supplier, resulting from a P50,000 advance payment for goods to be manufactured to Krillin specifications. •

On December 27, 2019, Krillin wrote and recorded checks to creditors totaling P30,000 that were mailed on January 10, 2020.

•

Checks in the amount of P25,000 were written to vendors and recorded on December 29, 2019. The checks were dated January 5, 2020.

What amount should Krillin report as accounts payable in its December 31, 2019 statement of financial position? A. 305,000 B. 280,000 C. 275,000 D. 205,000 SOLUTIONS: A Recorded Accounts Payable – 12/31/19 200,000 a. Add back of suppliers debit balance 50,000 b. Reversal of unreleased checks 30,000 c. Reversal of postdated checks 25,000 Adjusted Accounts Payable – 12/31/19 305,000 ! Use the following information for the next two (2) questions: Twins, Inc. distributes annual bonuses to its sales managers and two sales agents. The company reported P2,000,000 profit for 2019 before bonuses and income taxes. Income taxes of Twins, Inc. average 30%. QUESTIONS: 9) How much is the total amount of bonus if bonus of each is computed at 15% of profit after taxes and bonuses? A. 190,045 B. 200,957 C. 479,087 D. 570,135 10) How much should the sales manager and each sales agent receive, respectively, if the sales manager gets 15% and each sales agent gets 10% of profit after bonuses but before income taxes? A B C D Manager 857,143 518,519 222,222 222,222 Each sales agent 571,428 518,519 148,148 296,296 SOLUTION: C, C T = 0.30 (2,000,000 – B) B = 0.45 (2,000,000 – B – T) B = 0.45 [2,000,000 – B – (0.30 (2,000,000 – B)] B = 0.45 [2,000,000 – B – 600,000 + 0.30B] B = 900,000 – 0.45B – 270,000 + 0.135B B = 630,000 – 0.315B 1.315B = 630,000 B = 479,087 B = 0.35 (2,000,000 – B) B = 700,000 - 0.35 1.35B = 700,000 B = 518,518 Manager, 518,518 x 15/35 = 222,222 Each sales agent, 518,518 x 10/35 = 148,148 ! ! !

!

!

•FAR eastern university•

•FINANCIAL ACCOUNTING 2•

•SET G•

J S CAYETANO™

! 11) Generous Company pays bonuses to its chief operating officer (COO) and sales manager. According to the incentive agreement, the COO gets 10% and the sales manager gets 8%. The basis for computing bonuses would be the net income after tax and bonuses. Income tax rate is 35%. The net income before tax and bonuses is P5,000,000 for the year 2019. How much is the bonus for the sales manager? A. 274,262 B. 223,724 C. 294,450 D. 232,766 SOLUTION: D T = 0.35 (5,000,000 – B) B = 0.18 (5,000,000 – B – T) B = 0.18 [5,000,000 – B – (0.35 (5,000,000 – B)] B = 0.18 [5,000,000 – B – 1,750,000 + 0.35B] B = 900,000 – 0.18B – 315,000 + 0.063B B = 585,000 – 0.117B 1.117B = 585,000 B = 523,724 523,724 x 8/18 = 232,766 ! 12) Tatay Company is preparing its December 31, 2019 financial statements. The following information was gathered: • The bill for December’s utility cost of P120,000 was received and paid on January 10, 2020. • A P80,000 advertising bill was received on January 2, 2020. Of the total billing, P60,000 pertain to advertisements in December 2019 and P20,000 pertain to advertisements in January 2020. • A lease, effective December 16, 2018, calls for a fixed rent of P400,000 per month, payable one month after the commencement of the lease and every month after thereafter. In addition, rent equal to 5% of net sales over P4,000,000 per year is payable on January 31 of the following year. • Total cash sales and collections on accounts amounted to P4,000,000 and accounts receivable has a net increase of P800,000 Commissions of 15% of sales are paid on the same day cash is received from customers. What is the accrued liabilities on December 31, 2019? A. 420,000 C. 540,000 B. 340,000 D. 620,000 SOLUTION: B Utility expense for December 2019 Advertising costs incurred in December 2019 Rent expense from December 16 to 31, 2019 (400,000 / 2) Contingent rent expense (*4,800,000 – 4,000,000) x 5% Commission expense not yet paid Total accrued liabilities

Beginning Sales Ending (increase

SQUEEZE

Accounts receivable 4,000,000 *4,800,000 800,000

120,000 60,000 200,000 40,000 **120,000 540,000

Collections

Total commission expense (4,800,000 total sales x 15%) 720,000 Commission expense paid (4,000,000 cash collections x 15%) (600,000) Commission not yet paid **120,000 ! Use the following information for the next two (2) questions: Swamp Co. sells computer to various computer rental businesses. Swamp also has been offering a special service warranty on computer units it sold. With the purchase of the computer unit, the customer has the right to purchase 3-year service contract for additional amount of P600. Data concerning sales of computer and warranty contract are as follows: 2019 2020 Computer units sold 550 460 Sales price per unit 5,000 4,000 Number of service contracts sold 350 300 Swamp Company has estimated based on the available past records that the pattern of repairs has been: 24% for the first year, 36% on the second year, and the remainder is on the third year. Sales of the contracts are made evenly during the year.

•FAR eastern university•

•FINANCIAL ACCOUNTING 2•

•SET G•

J S CAYETANO™

QUESTIONS: 13) What is the net income from service contract for the year ended December 31, 2021? A. 131,400 C. 117,000 B. 133,800 D. 148,200 14) How much is the unearned revenue form service contract to be presented in 2020 statement of financial position? A. 200,200 C. 280,200 B. 288,200 D. 226,200 SOLUTION: B, C Revenue recognized in 2021 Jan.1 to Jul. 1 from sale of 2019 (600 x 350 x 36% x 6/12) Revenue recognized in 2021 Jul. 1 to Dec. 31 from sale of 2019 (600 x 350 x 40% x 6/12) Revenue recognized in 2021 Jan.1 to Jul. 1 from sale of 2020 (600 x 300 x 24% x 6/12) Revenue recognized in 2021 Jul. 1 to Dec. 31 from sale of 2020 (600 x 300 x 36% x 6/12) Total revenue recognized in 2021

37,800 42,000 21,600 32,400 133,800

Unearned as of 12/31/20 from sale on 2019 (600 x 350 x 58%) 121,800 Unearned as of 12/31/20 from sale on 2020 (600 x 300 x 88%) 158,400 Total unearned as of 12/31/20 280,200 ! 15) Andrew Company sells 3-year service contracts for air-conditioning units for P1,800 each. Sales of service contract are made evenly throughout each year. The company estimated that 5% of repairs are done in the first year from the date of sale, 30% in the second year and 65% in the third year. Service contracts sold are as follows: Number of service contracts sold

2014 1,840

How much revenue from service contracts sold in 2014 realized in 2016? A. 2,235,600 B. 2,152,800 C. 1,573,200

2015 2,110

2016 2,550

D.

1,076,400

SOLUTIONS: C Contracts sold in 2014 earned in 2016, 1,840 x 1,800 x 47.5% (half of 30% + half of 65%) 1,573,200 ! 16) Wild Company has just opened a novelty store. Wild decided to sell gift certificates as part of its sales promotion. Transactions relating to the gift certificates during the year are shown below: • Sold gift certificates worth P100,000. • Gift certificates worth P80,000 were redeemed. • P10,000 gift certificates expired. • P2,000 gift certificates were estimated not to be redeemed. What is the unearned revenue from gift certificates as of December 31, 2019? A. 20,000 C. 10,000 B. 90,000 D. 8,000 SOLUTION: D Unearned Revenue from Gift Certificates Redemption 80,000 0 Beginning balance Expiration 10,000 100,000 Cash receipt from customers Amount estimated not to be redeemed 2,000 --8,000 Ending balance ! 17) Hudson Hotel collects 15% in city sales taxes on room rentals, in addition to a P2 per room, per night, occupancy tax. Sales taxes for each month are due at the end of the following month, and occupancy taxes are due 15 days after the end of each calendar quarter. On January 3, Year 2, Hudson paid its November Year 1 sales taxes and its fourth quarter Year 1 occupancy taxes. Additional information pertaining to Hudson’s operations is Year Room Rentals Room Nights October 100,000 1,100 November 110,000 1,200 December 150,000 1,800 What amount should Hudson report as sales taxes payable and occupancy taxes payable in its December 31, Year 1

statement of financial position? •FAR eastern university•

•FINANCIAL ACCOUNTING 2•

•SET G•

J S CAYETANO™

Sales taxes Occupancy taxes

A 39,000 6,000

B 39,000 8,200

C 54,000 6,000

D 54,000 8,200

SOLUTION: C Room rentals for November and December (110,000 + 150,000) Sales tax Sales taxes paid on January 2, Year 2, - therefore unpaid as of December 31, Year 1 Room nights for 3 months (fourth quarter) – 1,100 + 1,200 + 1,800 Occupancy tax Total occupancy tax unpaid ! 18) Perez Company sells products with reusable and expensive containers. container delivered and receives a refund for each container returned Containers held by customers on January 1, 2019 from deliveries in: 2017 2018 Containers delivered in 2019 Containers returned in 2019 from deliveries in: 2017 2018 2019 What is the liability for deposits on December 31, 2019? A. 494,000 B. 584,000

C.

260,000 15% 39,000 4,100 2 8,200

The customer is charged a deposit for each within two years after the year of delivery.

674,000

150,000 430,000

90,000 250,000 286,000

580,000 780,000

626,000

D.

734,000

SOLUTION: C Cash returned to customers Deposit forfeited (150,000 – 90,000)

Liability for container deposit 626,000 580,000 60,000 780,000 674,000

01/01/19 – Beginning balance Cash receipt from customers 12/31/19 – Ending balance

! 19) T’Chaka Company reported the following liabilities on December 31, 2017: Accounts payable Short-term borrowings Mortgage payable, current portion P100,000 Bank loan payable, due June 30, 2018

750,000 400,000 3,500,000 1,000,000

The P1,000,000 bank loan was refinanced with a 5-year loan on January 15, 2018, with the first principal payment due January 15, 2019. The financial statements were issued February 28, 2018. What total amount should be...