RESA Quizzer 3 1 PDF

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THE REVIEW SCHOOL OF ACCOUNTANCY (RESA)QUIZZER 3 – LIABILITIESPROBLEM 1 : In the course of your audit of Probe Inc. for the year ended December 31, 2014, you took note of the following information:ITEM AUDIT NOTES a. Accounts payable – trade, ₱170,This amount is net of 30,000 accounts with ₱ debit b...

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THE REVIEW SCHOOL OF ACCOUNTANCY (RESA) QUIZZER 3 – LIABILITIES PROBLEM 1: In the course of your audit of Probe Inc. for the year ended December 31, 2014, you took note of the following information: ITEM a. Accounts payable – trade, ₱170,000 b. Notes payable – trade, ₱70,000

c. Advance receipts from customers ₱100,000 d. Containers Deposit, ₱50,000 e. Notes Payable – BPI, ₱200,000

f. Dividends in arrears on cumulative preferred stock, ₱20,000 g. Stock dividends payable on common stocks, ₱37,200 h. Liabilities under guarantee agreement, ₱45,000

i. Convertible bonds, ₱1,000,000 j. Notes Payable – Officers, ₱40,000 k. Salaries and Wages l. Notes Receivables, ₱30,000

m. Output VAT, ₱246,000 n. Accounts Receivable, ₱215,000 o. Cash in banks, ₱115,000

AUDIT NOTES This amount is net of ₱30,000 accounts with debit balances The notes are all with five-month term bearing interest at 15%. ₱ 50,000 from the notes is dated September 1, while the rest are dated November 3. The goods pertaining to these advances will be delivered in 2015. This is an amount received from customers for returnable containers. This is a long-term note for five years and are being paid off at the rate of ₱4,000 per month (monthly payment include interest). The company is yet to declare dividends since its last declared and distributed dividends in 2015.

This pertains to Probe’s guarantee of its employees’ bank loans. As per past experience, employees unlikely default on their loan payments. 1,000 bonds is convertible to 10 ordinary shares. Amount due on December 31, 2017. This is due in six months. Payroll for the period December 16, 2014 to January 15, 2015 amounted to ₱68,000. This note has been discounted in a bank on a without-recourse basis, where the company received cash of ₱24,000. Input VAT on purchases and other operating expenses amounted to ₱164,000. The accounts receivable is net of ₱12,300 customer credit balances. The company’s cash in banks include a cash balance with BPI amounting to ₱125,000; with PNB amounting to ₱55,000, and; an overdraft

balance with BDO. Amount to date, ₱250,000

p. Common stock warrants outstanding q. Common stock-options outstanding r. Estimated warranty costs on goods sold, ₱46,000 s. Instalment notes payable, ₱75,000 t. Provision for losses

Amount to date, ₱150,000

u. Deferred tax liability, ₱150,000

This pertains to warranty costs on goods sold in 2013 and 2014. This is for the equipment purchases, only onethird is due in 2015. During the year, one of the manufacturing equipment of the company exploded injuring an employee. The employee filed claims for damages on November 3.there has still been no resolution yet on the case as of the balance sheet date. The company lawyers however believe that it is probable that the company will be liable between ₱25,000 and ₱75,000. This refers to deferred tax liabilities on cumulative temporary difference on taxable income and financial income which will reverse evenly over the next year.

Requirements: 1. a. 2. a. 3. a.

How much is the total current liabilities? 767,000 b. 814,300 c. 817,300 How much is the total noncurrent liabilities? 1,285,000 b. 1,360,000 c. 1,429,000 How much is the total liabilities? 2,177,300 b. 2,127,300 c. 2,246,300

d. 892,300 d. 1,760,000 d. 2,252,300

Solution and Explanation:

ITEM

CURRENT LIABILITIES

a b

200,000* 70,000 3,000** 100,000 50,000 40,000*** -

c d e f g

NONCURRENT LIABILITIES 160,000 -

h i j 40,000 k 34,000**** l m 82,000***** n 12,300 o 65,000 p q r 46,000 s 25,000****** t 50,000 u TOTAL (1) 817,300 *170,000+30,000 **(50,000x15%x4/12)+(20,000x15%x2/12) ***(200,000/5) ****68000x15/30 *****246,000-164,000 ******75000x1/3 (3)

Current Liabilities Noncurrent Liabilities TOTAL LIABILITIES

1,000,000 50,000 150,000 (2) 1,360,000

817,300 1,360,000 2,177,300

Under IAS/PAS 1 paragraph 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) It does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period (see paragraph 73). Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification. An entity shall classify all other liabilities as non-current.

PROBLEM 2: You are auditing the 2014 liabilities of Bat Inc. which follows the calendar year financial statements reporting. The following information were available with regards to its currently maturing obligation:

a. On December 31, 2014, Bat Inc. had P1M of short-term notes payable due February 7, 2015. On January 15, 2015, the company issued bonds with a face value of P900,000 at 96; brokerage fees and other costs of issuance were P3,450. On January 22, 2015, the proceeds from the bond issue plus additional cash held by the company on December 31, 2014 were used to liquidate the P1M of short-term notes.

b. Another short-term debt in the form of notes payable totaling to P500,000 were due on June 1, 2015. On February 2, 2015, Batali entered an agreement with National Life Insurance Co. where National will lend Batali P400,000 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, 2015.

c. Another P500,000 notes payable is due on June 15, 2015. At the financial statement date December 31, 2014, Batali signed an agreement to borrow up to P500,000 to refinance the notes payable on a long-term basis. The financing agreement called for borrowings not to exceed 80 per cent of the value of the collateral Batali was providing. At the date of issue of the December 31, 2014 financial statements, the value of the collateral was P600,000 and was not expected to fall below this amount during 2015.

Assuming that the financial statements of Batali were authorized to be issued on March 31, 2015: 4. How much liabilities above are short-term as of the balance sheet date? a. 1,500,000 5.

b. 1,520,000

c. 1,980,000

d. 2,000,000

How much liabilities above are long-term as of the balance sheet date? a. 2,000,000

b. 1,500,000

c. 980,000

d. 480,000

Solution and explanation:

a P1,000,000 short-term notes payable due on February 7, 2015 b P500,000 short-term notes payable due on June 1, 2015 c P500,000 notes payable due on June 15, 2015 refinanced (600,000 x 80%)

CURRENT P1,000,000

NONCURRENT

500,000 20,000

480,000

P1,520,000 P480,000 PAS 1, paragraph 69, provides that an entity shall classify a liability as current when it is

expected to be settled in its normal operating cycle;held primarily for the purpose of trading;due to be settled within twelve months after the reporting period, even if the original term was for a period longer than twelve months, and agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the financial statements are authorized for issue; the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period However, if the refinancing on a long-term basis is completed on or before the end of the reporting period, the refinancing is an adjusting event and therefore the obligation is classified as noncurrent. An entity shall classify all other liabilities as non-current.

PROBLEM 3: Rado Inc. a manufacturer of heavy machinery, grants 2-year warranty on its products. The estimated Liability for product warranty account shows the following entries for the year: Beginning balance Provisions during the year (quarterly accrual) Total

P225,000 200,000 P425,000

A review of the company’s policy of accounting for warranties revealed that based on the company’s past experience, warrant claims averaged 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 Sales returns and Allowances Cost of sales

P7,250,000 150,000 6,378,000

The cost of sales included P415,000 cost of servicing 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. 164,500 c. 355,000 b. 264,500 d. 364,500 Solution and Explanation: According to PAS 37-Provisions, Contingent Liabilities and Contingent Assets On the valuation of contingent liabilities: “The amount recognized as a provision shall be the best estimate of the expenditure required to

settle the present obligation at the end of the reporting period. The best estimate of the expenditure required to settle the present obligation is the amount that an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time.” This means that companies must provide a provision for their contingent liabilities. The value of this provision is the best estimate of the company throughout it’s experience and practice. In this problem, the information given was company’s policy of accounting for warranties, warrant claims averaged 5% on net sales. This means that the provision is 5% of net sales. To compute for Provision on warranties: Gross Sales Less: Sales returns and Allowances Net Sales Percentage for provision Provision for the year

P7,250,000 (150,000) 7,100,000 x5% 355,000

This is recorded by debiting Warranty Expense and Crediting Estimated Warranty Liability. In order to get the accumulated balance of Estimated Warranty Liability we simply add prior period warranty liabilities Beginning Balance of warranty Liability Provision for warranty Liability Warranty Liabilities paid during the year

225,000 355,000 (415,500) Php 164,500 A.

Problem 4: SAN MIG CORP. began operation on January 2, 2014 with 250 employees. The company provides its employees 2 weeks paid sick leave and 2 weeks paid vacation leave for every operating year. The company’s police on sick leave and vacation leave allows each employee to carry over accumulated leaves current period over the next year only. The same shall be forfeited if not availed over the said period allowed. On December 31, 2014, 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 if P250 for a 5-day weakly operation in 2014. On December 31, 2015, records show that 925 days of vacation and sick leave carried over from the last operation period were exercised and paid in 2015. In addition, there are 30 employees who have 6 weeks left accumulated unused sick leaves and vacation leaves combined; 25 employees who have accumulated 3 weeks unused sick leaves and 2 weeks unused vacation leaves; 30 employees who have accumulated 3 weeks unused sick leaves and vacation leaves combined; 10 employees who have accumulated 1 week unused sick leaves and 1 week unused

vacation leaves. Employees had an average daily wage rate of P275 for a 50day weekly operation. 7. How much liability for compensated absences should be included as current liabilities as of December 31, 2014? a. 570,625

b. 453,750

c. 412,500

d. 337,500

8. How much liability for compensated absences should be included as current liabilities as of December 31, 2015? a. 570,625

b. 453,750

c. 412,500

d. 337,500

Solution and Explanation: 7. 55 employees x 20 days 25 employees x 10 days Total days of compensated absences x Daily rate Total Current Liability for Compensated Absences, 2014

1100 250 1350 P 250 P 337,500

8. 30 employees x 20 days 25 employees x 20 days 30 employees x 15 days 10 employees x 10 days Total days of compensated absences x Daily rate Total Current Liability for Compensated Absences, 2015

600 500 450 100 1350 P 275 P 453,750

Under PAS 19 Employee Benefits, compensated absences falls under the short term employee benefits. “Short-term employee benefits include items such as: (a) wages, salaries and social security contributions; (b) short-term compensated absences (such as paid annual leave and paid sick leave) where the compensation for the absences is due to be settled within 12 months after the end of the period in which the employees render the related employee service; (c) profit-sharing and bonuses payable within twelve months after the end of the period in which the employees render the related service; and (d) non-monetary benefits (such as medical care, housing, cars and free or subsidized goods or services) for current employees.”

“Liability is also recognized as to the portion not yet paid by the company, PAS 19 par. 10 makes it clear. When an employee has rendered service to an entity during an accounting period, the entity shall recognised the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service: (a) as a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, an entity shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund; and (b) as an expense, unless another Standard requires or permits the inclusion of the benefits in the cost of an asset” Par. 11 to 13 also indicates that compensated absences can be accumulating or non-accumulating and the reasons for the absences: “An entity shall recognize the expected cost of short-term employee benefits in the form of compensated absences under paragraph 10 as follows: (a) in the case of accumulating compensated absences, when the employees render service that increases their entitlement to future compensated absences; and (b) in the case of non-accumulating compensated absences, when the absences occur. An entity may compensate employees for absence for various reasons including vacation, sickness and short-term disability, maternity or paternity, jury service and military service. Entitlement to compensated absences falls into two categories: (a) accumulating; and (b) non-accumulating. Accumulating compensated absences are those that are carried forward and can be used in future periods if the current period’s entitlement is not used in full.” PROBLEM 5: CUMMINGS INC. manufactures and sells air conditioning units with a 12 months warranty under which defective air conditioning units will be replaced free of any charges. The company started out in 2014 expecting 10% of the sales to be returned. However, due to the innovations and improvements made to the products during the year, the estimated percentage if 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 with the quarter following the sale of air conditioning units. QUARTER FOLLOWING QUARTER OF SALE First Quarter

% OF TOTAL RETURNS EXPECTED 40%

Second Quarter Third Quarter Fourth Quarter

30% 20% 10%

Gross sales of air conditioning units in 2014 are as follows: QUARTER First Second Third Fourth

SALES IN PESO Php 16,200,000 14,850,000 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 cost 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. The returned units on hand at December 31,2014, were thus valued in the inventory at 15% of their original sales price. Requirements: 9. What is the total estimated returns for the year ended December 31, 2014? a. 5,115,000

b. 6,120,00

c. 6,300,000

d. 7,672,500

Solution: Q1 16,200,000 10% Q2 14,850,000 10% Q3 12,000,000 15% Q4 8,100,000 15% TOTAL ESTIMATED RETURNS

Php 1,620,000 1,485,000 1,800,000 1,215,000 Php 6,120,000

10. What is the warranty expense for the year ended December 31, 2014? a. 4,590,000

b. 4,896,000

c. 5,508,000

d. 6,120,000

Solution: Manufacturing cost ( 6,120,000 x 80% ) Freight cost ( 6,120,000 x 10% ) Salvage Value ( 6,120,000 x 15% )

Php 4,896,000 612,000 918,000

WARRANTY EXPENSE

Php 4,590,000

11. What is the estimated warranties payable as of December 31, 2014? a. 2,176,875

b. 2,205,900

c. 2,322,000

d. 2,612,250

Solution: Q1 Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q2 40%

Q3 30% 40%

Estimated Returns 1,620,000 1,485,000 1,800,000 1,215,000

Manufacturing cost ( 2,902,500 x 80% ) Freight cost ( 2,902,500 x 10% ) Salvage Value ( 2,902,500 x 15% ) Estimated warranties payable

Q4 20% 30% 40%

10% 30% 60% 100%

Expected % of returns 10% 30% 60% 100%

Php 162,000 445,500 1,080,000 1,215,000 Php 2,902,500 Php 2,322,000 290,250 435,300 Php 2,176,875

Explanation: Under PAS 37, paragraph 24, Where there are a number of similar obligations (eg product warranties or similar contracts) the probability that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Although the likelihood of outflow for any one item may be small, it may well be probable that some outflow of resources will be needed to settle the class of obligations as a whole. If that is the case, a provision is recognised (if the other recognition criteria are met).

PROBLEM 6: Mountain Province Home Depot carries a wide variety of promotion techniques to attract customers. Kitchen and home appliances are sold in a one-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 5% of sales. The premium offered on the home furniture. Customer receive a coupon for each peso spent on home furniture. Customers may exchange 2,000 coupons and P50 for a rice cooker which the company purchased at P340 for each rice cooker and estimates that 60% of the coupons given to the customers will be redeemed. The company’s total sales for 2014 were P115.2M – P86.4M from kitchen and home appliances and P28.7M from home furniture. Replacement parts and labor for warranty work totaled P2.624M during 2014. A total of 5,200 rice cookers used in the premium program were purchased during the year and there were 9,600,00 coupons redeemed in 2014 The accrual method is used by the company 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, 2014, were shown below: Inventory of Premium Items Estimated liabilities for premiums Estimated liabilities for warranties

P340...