TECHNICAL KNOWLEDGE To understand the concept of liabilities. To define current and noncurrent liabilities. ‘To know the measurement of current and noncurrent liabilities. 7 ee To explain the treatment of long-term debt falling due within one year. To explain the treatment of breach of covenants attached to a long-term debt. : To describe formulas in computing bonus to officers and employees. Scanned with |CamScanner™| J LIABILITIES = i The Revised Conceptual Framework for Financial Reporting Provides the following definition of lial F 4 ‘Liabilities are present obligations of an entity to transfer an. “economic resource as a result of past events. af ‘Accordingly, the essential characteristics of an accounting . ,,, diability are: ; 5 gion bint a. The entity has a present obligation. <8 sk * An obligation is a duty or renponetbuty that an entity, has no practical ability to avoid. . FE ‘The entity liable must be identified but it is not necessary _ that the payee to whom the obligation is owed he sities _ identified. b. The obligation is to transfer an economic resource. This is the very heart of the definition of an accounting ice is the ‘asset that represents a right produce, economic benefit. “ ¥ ligation must be to pay cash, transfer rovide service at some future time. tial characteristic of a liability i i ocscnt oblivation c of a liability is that, the entity ation. An obligation may b : andi y be legally enforceabl binding contract or statutory eaforcenble ba Soonseave This is normally the cas e, for example, wi unt rr is and services received. ple, with accounts payabl legal obligation or of normal business practice, good business relations or a Scanned with @ camscanner-Transfer of an economic resource Without payment of money, without transfer of noncash asset, without performance of service, there is no accounting liability. A crystallization of the definitive concept of an accounting liability is when an entity declares cash dividend. In ‘such a case, there is an obligation to pay cash, hence,’ accounting liability exists. ° But when an entity declares share dividend, there is no abcounting liability. The obligation isto inoue the entity's own shares, The issuance of the entity’s own shares is not a transfer of noncash asset because the share capital is an equity item. Thus, share dividend payable is ¢lassified as part of equity rather fan an accounting liability. ; Past event ‘Another essential characteristic of a liability is ‘that the Hability, must arise from a past transaction or event. 4 The past évent that leads to a legal or constructive obligation the obligating event. g event creates a present obligation because has no realistic alternative but to settle the eated by the event. the acquisition of goods gives rise to accounts obligating event is the acquisition of goods. bank loan results in an obligation to repay ‘Scanned with © camscannerps ae wy . Examples of liabilities Cig (deen, a. Accounts payable to suppliers for the purchase of ‘good, ‘ .. b, Amounts withheld from emplo; \ x Ne. Accruale for salaries interest, rent Se warranties and profit sharing bonus” & d.. Dividends payable in cash or noncash asset : e. Deposits and advances from customers . f. Debt obligations for borrowed funds — oe bonds payable } Notes, mortgages and x e g. Income tax payable 2 i e < h> Deferred or unearned revenue. -). - taxes, product Wwe 7" ¥ Measurement of: current liabilities Conceptually, all liabilities'aze initially value and subsequently measured at ‘amortized cost, ‘The more common types of liabilities include the following: ; ‘é yees for t: i contributions to the Social Security System or°® 204 for, y Measured at ‘present ” However, .in Practice, current ‘liabilities or short-term 5 obligations are not discounted anymore but measured, recorded and reported at face amount. ‘ The reason is that the discount or the difference between the © face amount and the present value is usually not material and therefore ignored. oi ATE Ora \ /Measurement of noncurrent liabilities ,, Noncurrent liabilities, for example, bonds payable and noninterest-bearing note payable, are: initially measured at present value and subsequently measured at amortized cost. If the long-term note payable is interest-bearing, it is initially . and subsequently measured at face amount. In this case, the-face amount is equal to the present value of the note payable. ‘The.omortized cost measurement is taken up in a later chapter in relation to bonds payable. - % 4, Scanned wth G camscannerCurrent liabilities PAS 1, paragraph 69, as amended provides that an entity shall classify a liability as current when: : _a. The entity expects to settle the:liability within the entity's operating cycle. - —». The entity holds the liability primarily for the purpose of trading. : ~c. The liability is due to be settled within twelve months after the reporting period. ‘ Al. The entity does not have the right at the end of the reporting Period to defer settlement of the liability for at least twelve months after the reporting period. Trade payables and accruals for employee and other operating costs are part of the working capital used in the entity's normal. operating cycle. Such operating items are classified as current liabilities even if settled more than twelve months after the reporting period. When the entity's normal operating cycle is not clearly identifiable, its.duration is assumed to be twelve months. Other current liabilities are not settled as part of the normal operating cycle but are due for settlement within twelve months after the reporting period or held primarily for the purpose of trading. _Examples of such current liabilities are financial liabilities held for trading, bank overdraft, dividends payable, income tax payable, other nontrade payables due within one year and current portion of noncurrent financial liabilities. Financial liabilities held for trading are financial liabilities that, are incurred with an intention to repurchase them in the near term. An example is a quoted debt instrument that the issuer may buy back in the near term depending on changes in fair vahie. 5 ‘Scanned with‘ Noncurrent liabilities. i The term noncurrent liabilities is a residual definition, liabilities not classified as, current are classified ag ppoutrent liabilities. Noncurrent liabilities include: Y a. Noncurrent portion of long-term debt x b. Finance lease liability c. Deferred tax liability d.: Long-term obligation to officers e. Long-term deferred revenue a - Long-term debt falling due within one year A liability which is due to be settled within twelve months '. after the reporting period is classified as current, even if: -a. The original term was for a period longer than twelve ~ months. : oe Seed _b. An agreement to refinance’or to reschedule payment on a long-term basis is completed after the reporting period and. before the financial statements are authorized for . issue. alia : 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, Roa aaw ts ee As amended, if the entity\has the right at the end of the reporting period to roll over an obligation for at least twelve months after the reporting period under an existing loan facility, the obligation is classified ‘as noncurrent even if it would otherwise be due within’a shorter period. The right to defer settlement for at least twelve months after the reporting Period must exist at the end of the reporting period. oa ‘ : : If the right does not exist at the end of the reporting period, ~ there is no potential to refinance and therefore the liability. is classified as current, i Scanned wth G camscannerCovenants /Covenants are often attached to borrowing agreements which represent undertakings by the borrower. These covenants are actually restrictions on.the borrower as to undertaking further borrowings, paying dividends, maintaining specified level of working capital and so forth. Breach of covenants Under these covenants, if certain conditions relating to the borrower's financial situation are_breached, the liability becomes payable on demand. PAS 1, paragraph 74, provides that such a liability, is classified as current even if the lender has agreed, after the reporting period and before the statements are’ authorized for issue, not to demarid payment as a consequence of the breach. ¢ This liability is classified as current because at the end of the reporting period, the entity does not have the right to defer settlement for at least twelve months after the end of reporting period. " However, the liability is classified as noncurrent if the lender has agreed on or before the end of the reporting period to provide a grace period ending at least twelve’months after the end of reporting period. A‘grace period is a period within which the entity can rectify the breach and during which the lender cannot demand immediate repayment. Scanned with @ camscanner_Presentation of current liabilities * h 54 of PAS 1, as. a minimum, the face of the Under eae nancial position shall include the following line items for current liabilities: a. Trade and other payables b. Current: provisions c. Short-term borrowing 4 Current portion of long-term debt e. Current tax liability The term trade and other payables is a line item for accounts _ payable, notes payable, accrued interest on note payable, _ dividends payable and accrued expenses. ie | No objection can be raised if the trade accounts and nota payable are separately presented. A Estimated liabilities Estimated liabilities are obligations which exist at the end reporting period although their amount is not definite. EB In many cases, the date when the obligation is due is not slog | definite and in some instances, the: exact payee cannot be identified or determined. But inspite of these circumstances, the ‘existence of ‘the estimated liabilities is valid and unquestioned. | i / Deferred revenue Deferred revenue or unearned revenue is income already received but not yet earned. Deferred revenue may be realizable within one year or in more than one year after the end of the reporting period. If the deferred revenue is realizable within one year, it i 52 current liability. ‘Typical_examples of current deferred revenue are unearned interest income, unearned rental income and unearne subscription revenue. If the deferred revenue is realizable in more than one year it is classified as noncurrent liability. Typical examples of noncurrent deferred’ revenue art unearned revenue from long-term service contracts an long-term leasehold advances. 8 Scanned wth G camscannernus computation e entities often compensate key officers and employees by of bonus for superior income realized during the year. e main purpose of this scheme is to motivate officers and iployees by directly relating their well-being to the success. the entity. v is compensation plan results in liability that must be measured and reported in the financial statements. Four variations of bonus computation aN 5 1. Bonus is expressed as a certain percent of income before bonus and before tax. Bonus is expressed as a certain percent of income after bonus but before tax. 5 : Moi. 3. Bonusis expressed as a certain percent of income after bonus and after tax. fa} id wp oe 4, Bonus is expressed as a certain percent of income after tax but before bonus. Illustration Income before bonus and before tax 4,400,000 Bonus . 10% Incometaxrate ° 25% Case 1- Before bonus and before tax Income before bonus and before tax 4,400,000 Multiply by i 1086, Bonus 440,000. Scanned with |\CamScannerCase 2- After bonus but — : - -B =.10 (4,400,000 - B): ” : + Bos 440,000 - .10B ele B+ .10B =\440,000 : 1.10B = 440,000. B = 440,000/1.10 |’ “B = 400;000 Proaf. viel + ok gig tS Income before bonus ana before tax. Akane ‘ * Bonus J Wc Income after bonus but before tax Multiply by fick Bonus SES ey Case 3 - After bonus and after tax “B=! .10(4,400,000-B B+ ,10B - .025B 1.075B = 330,000 330,000/ 1.075 F 806,97' Proof Income before bonus and before tax’ Bonus et Tax ‘ | Income after bonus and after tax: Multiply by Bonus Scanned with |CamScanner™Case 4— After tax but before bonus ; B= .10 (4,400,000 : x tp = 126 (4,400,000 - B) B =.10 {4400.00 - .25 (4,400,000 — B)] B = 110 (4,400,000 — 1,100,000 + .26B) B = 440,000 — 110,000 + .025B B- .026B = 440,000 110,000 '975B = 330,000 B = 330,000/.975 u " B = 338,462 Proof ~ : Income before bonus and beforetax | 4,400,000 Tax (4,400,000— 338,462 x 25%) 3 (1,015,384) Income after tax but before boius > 3,384,616 f Multiply by i We 10% Bonus ‘ Lone 4 338,462 Refundable deposits. — T°" _Refundable deposits consist of cash or property received from 4 customers but which are refundable after compliance with 7 certain conditions. t 5 : The best example of a refundable deposit is the customer deposit for retu te required rnable. containers like bottles, drums, tanks — and barrels. é : Illustration A deposit of P10,000 is required from the customer for returnable containers. The containers cost P8,000. Cesh 10,000 Containers’ deposit ak + 10,000 The containers’ deposit account is usually classi ; Ea ally classified as current. If the customer returns the contain: it is sii ; He tae eu ers, the deposit is simply However, if the customer fails to ‘ - deposit is considered the sale_ price of the the nae ery: the The excess of the deposi y : considered ‘aa gain ! posit over the cost of the containers is il ‘Scanned with @ camScannerQUESTIONS 1, Define liabilities. ins 2. What are the essential characteristics of an accounting liability? 3, Explain a present obligation. m4 Explain Sransfor of an economic resource to settle an obligation. : 5. Explain a past event that leads to a present obligation. « 6. Explain’ the measurement of current and noncurrent liabilities. 7. Define current and noncurrent liabilities. 4 Baler), #8 Explain the refinaaéiniy ofa long-term debt falling due. within one year. © 9. Explain covenant attached to borrowing agreements. 10.Explain the presentation of current liabilities in th statement of financial position. | 11. Explain estimated liabilities. 2. Explain deferred revenue. 18. Explain the classification of deferred revenue. 14. Explain the treatment of refundable deposits, ay 15. What are the four variations in the computation of bonus? 12 Scanned with BcamscannerPROBLEMS Problem 1-1 @AA) On December 31, 2021, Glare Company provided the following information: ‘Accounts payable, including deposits and advances from customer cf P250,000 1,250,000~ Notes payable, including note payable to bank due on December 31, 2023 of P500,000 1,500,000 - 52741 Share dividend payable vqui ~ "400,000 Credit balances in customers’ Accounts 200,000 Serial bonds pay: aH nnual installment of P300,000 they 50D 7009 Ye(M,/ 5,000,000 Accrued interest on bonds payable 150,000—~ Contested BIR tax assessment — possible obligation 300,000. Unearned rent income 100,000-— Required: | P%,700:000°, Compute total current liabilities on December 31, 2021. » Problem 1-2. (IAA) Easy Company provided the following-information on December 31, 2021: Notes payable: "Trade 3,000,000 Bank loans 2,000,000 ‘Advances from officers \ 500,000 oe Dividends pay: 1,000,000 Withholding tax : 100,000 Morengepavabl tt ton) 3,800,000. + Income tax payable 800,000 Estimated warranty liabilit x 600, Estimated damages payable by reason of bteach of contract 700,000 Accrued liabilities 000 Estimated premium liability 200,000 Claim for increase in wages by employees coveredina ‘ pending laweuit 8,500,000 oe ed into for the construction of building 5,000,000 ¥. Required: s Py \00,000 Compite total current Uabilities on December 31, 2021. 18 ‘Scanned with @ camScannerProblem 1-8 (IAA) Manchester Company provided December 31, 2021: the following information on ; i t Income taxes withheld from employees 2, Hines Cash balance at First State Bank 1'300,000~ > Cash overdraft at Harbor Bank "750,000-~ Accounts receivable with credit balance Estimated expenses of meeting warranties on 6060" } merchandise previously sold ; . | ic «Estimated damages as a result of unsatisfactory performance on a contract Accounts payable ' Deferred serial bonds, issued atparand bearing | C7 \interest at 12%, payable ini semiannual installment \00ey fx. of P500,000 due April 1 and October Lofeach year, (0 (7 F\\7 the last bond to be paid on October 1, 2027. rf ni Interest is also paid semiannually. 5,000,000 A wre dividend payable 2,000,000 1,500,000~ 3,000,000“ Required: P% j100)D00 _. Compute the total current liabilities on December 31, 2021. . Problem 14 (AICPA Adapted) » Multiple Company-provided the following information on \ December 31, 2021: | piste Accounts payable after deducting debit balances in suppliers’ accounts of P100,000 “ Q ‘Accrued liabilities =) a cc Note payable ~ due March 81, 2022 4,000,000 Note payable — due May 1, 2022 800,000. Bonds payable —_due December 31, 2023 2,000,000 bon On March 1, 2022 before the 2021 financial statements were issued, the note payable of P1,000,000 laced an ‘18-month note for the same amount, wag FenIPeee BY iM v BD : i, . The entity is considering similar action on the P800,000 note a in ae ea The financial statements were issued 4 Required: 1. Compute total -current liabilities s. 9) 190,000 2. Compute total noncurrent liabilities. 1000; 000 14 Scanned wth G camscannerProblem 1-5 (IAA) ‘ On December 31, 2021, Cordillera Company reported: the following liabilities: Note payable— 9% 5. 3,000,000 Notepayable~ 8% 6,000,000 Note payable~ 10% 4,000,000 Note payable— 11% 8,000,000 The 9% note payable is noncancelable and matures on July 31, 2022. Sufficient cash is expected to be available to retire the note at maturity. The 8% note payable matures on May 31, 2027 but the creditor has the option of calling’ the note or demanding payment on June 30, 2022. ie i However, the call option is not expected to be exercised given the prevailing market condition. |, 3 The 10% note payable is due on March 31, 2023. A debt covenant requires Cordillera Company to maintain current assets at least equal to 150% of current liabilities. On December 31, 2021, Cordillera Company ‘is in violation of this covenant. 4 : However, Cordillera Company’ obtained a waiver from the creditor until June 2022 having convinced the creditor that Cordillera Company's normal 2 to 1 ratio of current assets to current liabilities shall be reestablished during the first half of 2022; ‘ The 11% note payable matures on June 30, 2022. On January 31, 2022 before the issuance of the 2021 financial statements, the note payabe was refinanced on a long-term basis. Required: Explain the appropriate classification of the notes payable as current or noncurrent in the statement, i i position on December 31, 2021. of inanciel 15 Scanned wth G camscannerProblem 1-6 (IAA) Cavalier Company provided the following information on December 31, 2021: 4,600,000 Accounts payable q i Notes payable — bank 8.000.000 I 2 Interest payable 000 Mortgage note payable - 10% 000,000 | ° Bonds payable A000 } * Bank notes payable include two separate notes payable to First Bank. demand. Interest is payable every six months. n December 31, 2021, the entity negotiated a written greement with First Bank to replace the note with a ” 2-year, 5,000,000, 10% note to be issued January 2, 2022. * ‘The 10% mortgage note was issued October 1, 2020 with a term of 10 years. Terms of the note give the holder the right to demand _ immediate payment if the entity fails to make a monthly interest payment within 10 days of the date-the payment is due. ogt > eaghe On December 31, 2021, the entity is three months behind in paying the zequired interest payment. : , k * The bonds payable are 10-year, -8% bonds, issued June 30, 2012. Interest is payable semiannu: on June 30 and » December 31. gat ‘ Required: Compute total current liabilities on December 81, 2021. 16 ‘A P3,000,000, 10% note issued March 1, 2020, payable on A one-year, P5,000,000, 11% note issued January 2, 2021. ~ 5 §5%,G00" ¥. Scanned wth G camscannerProblem 1-7 (IAA) “Burma Company disclosed the following information about liabilities at year-end: Accounts payable, after deducting debit balances in suppliers' accounts amounting to P100,000~ 4,000,000~ Accrued expenses 1,500,000- Credit balances of customers’ accounts 500,000~ Share dividend payable 1,000,000 Claims for increase in wages and allowance by employees of the entity, covered in a pending lawsuit 400,000 Estimated expenses in redeeming prize coupons presented by customers 600,000- What total amount should be reported.as current liabilities at year-end? A. 6,700,000 / b. 6,600,000 ov’ c. 7,100,000 a. 7,700,000 Problem 1-8 (AICPA Adapted) Gar Company didclosed the following liability account balances on December 31, 2021: —-Ascounts payable 1,900,000 Bonds payable ‘ec 3,400,000 Premium on bonds payabie ‘ON © ‘ (200,000 ) Deferred tax liability {WON 400,000 _-Dividends payable “ 800,000 ~ Income tax payable 900,000 “Note payable, due January 31, 2022 600,000 On December 31, 2021, what total amount should be reported as current liabilities? a. 7,100,000 b. 4,300,000 2 3,900,000 d. 4,100,000 17 Scanned wth G camscannerProblem 1-9 (AICPA Adapted) . Able Company had the following amounts. of long-term debt ° outstanding on December 31, 2021: 14% note payable, due 2022 : ieee 11% note payable, due ai alsin lass ,070, _8% note payable, due in 11 equal anni vayments, plus interest beginning December 31, 2022. 1, 200,600 7% guaranteed debentures, due 2023 1,000, Total - 3,200,000 The annual fuking fund requirement on the guaranteed debentures is P40,000 per year. F What total amount should be reported as current liabilities on December 31, 2021? : a. 40,000 b. 70,000 c, — 100,000 A 130,000 Problem 1-10 (AICPA Adapted) : \ Achilles Company reported the following liability balances on December 31, 2021: : _12%;iote payable issued on March 1, 2020, maturing on March 1, 2022 ‘ : 10% note payable issued on October 1, 2020, maturing October 1, 2022 ; 3,000,000 ‘The 2021 financial statements were iasued on March 31, 2022. On January 31, 2022, the entire P5,000,000 balance of the 12% note payable was refinanced: through issuance of a long-te obligation payable lump sum, me meee noe On December 31, 2021, the entity has the right lo defer settlement. of the 10% note payable f : , Hesarber 61°30 payal le for at least: twelve months after 5,000,000 What amount of the note . wi current on December 31, 20: payable should be classified ae a. 8,000,000 b.- 5,000,000 ¢. 3,000,000 d. 0 r 18 Scanned wth G camscannerProblem 1-11 (AICPA A ¢ dapted) / Eliot Company. eporiad the following liablities on December 31, 2021: Accounts payable and accrued interest 1,000,000~ 12% note payable issued November 1, 2020 maturing July. 1.2022 5 2,000,000 10% debentures payable, next annual: principal installment of P500,000 dite February 1, 2022 7,000,000 On December 81, 2021, the entity consummated a noncancelable agreement with the lender to refinance the 12% note payable on a long-term basis. : On December 31, 2021, what total amount should be reported as current liabilities? a. 3,500,000 b. 3,000,000 4. 1,500,000 d. 2,500,000 Problem 1-12 (AICPA Adapted) On December 31, 2021, Largo Company had a P750,000 note payable outstanding due duly, 81,:2022. The entity planned to refinance the note by, issuing long-term bonds. Because the entity temporarily had excess cash, it pee 250,000 of the note on January 16, 2022. In February 2022, the entity completed a P1,500, 000 bond offering. The entity: will use the bond offering proceeds to repay the note payable’ at maturity. On March 31, 2022, the 2021 financial’'statements were authorized for issue. What amount of the note vuvable should be included in current liabilities on December 31, 2021? az” 750,000 b. . 500,000 c. 250,000 da. 0 19 Scanned wth G camscannerProblem 1-13 (AICPA Adapted) Dean Company had a P2;000,000 note payable due June 30, 2022. On December 31, 2021, the entity signed an agreement to borrow up to P2,000,000 to refinance the note payable on a long-term basis. The financing agreement called for borrowing not to exceed 80% of the value of the collateral the entity was providing. On December 31, 2021, the value of the collateral was P1,500,000.X —0 2» © [2000 (Lere ). On December 31, 2021, what amount of the note payable 4 should be reported as current liability? x a. 2,000,000 b. 1,500,000 -c--~ — 800,000 d. 500,000 Problem 1-14 (AICPA Adapted) Willem Company reported the following liabilities o: December 31, 2021: current portion P100,000*~ ; due June $0, 2022 0,000 bank loan was refinanced with a 5-year loan” 15, 2022, with the first principal payment due. 5, 2023. i a What total amount should be reported as current liabilities ‘on December 31, 2021? ‘ Scanned with |\CamScannerProblem 1-15 (AICPA Adapted) Greene Company sells office equipment service contracts agreeing to service equipment for a two-year period. Cash receipts from contracts are credited to unearned contract revenue. Service contract costs are charged to service contract expense as incurred. Revenue from service contracts is recognized as earned over the term of the contracts. Unearned contract revenue at January 1 600,000 Cash receipts from service contracts sold 980,000 Service contract revenue recognized 860,000 Service contract expense 520,000 What amount should be reported as unearned contract revenue on December 31? a. 460,000 bz 480,000 ¢. 490,000 d. 720,000 Problem 1-16 (AICPA Adapted) Ryan Company sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or |three-year, period. Cash receipts from contracts are credited to unearned contract revenue. This account had a balance of P720,000 on December 31, 2021 before year-end adjustment. Service contract costs are charged as incurred to service contract expense which had a balance of P180,000. Outstanding service contracts on December 81, 2021 expire during 2022 P150,000, during 2023 P225,000 and during 2024 100,000. What amount should be reported as unearned contract - revenue on December 31, 2021? 540,000 475,000 295,000 245,000 perp 21 Scanned with @ camscannerProblem 1-17 (AICPA :Adapted) - Dunne Company sells equipment service contracts that cover 8 two-year period. The sale price of each contract is P600. ‘The past experience is that, of the total pesos spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. ‘ i The entity Bold 1,000 contracts evenly throughout 2021. 1. What amount should be reported as contract revenue fc 2021? Fe ae"t90,.000. YO‘ x 400, 0002 240 1000 tp i b. 240,000 = 120) 000. 4 c. 300,000 4 : d. 160,000 .. What amount should be reported as deferred contra: revenue on December 81, 2021? ‘ Jolal confeacte cold 202! (yoo X&00) Lets S Combacd rorenut 0227] Teal deferred semice retire [20) OG) 000. ti‘ = YOO, 00 pense amount should be reported as contract revenue foi a. 240,000 0% XUOO, COO eo, 06 mh ly b. 360,000 bo", x LOO, Coo leo, e00 Pf i ce 180,000 a. 0 22 Scanned with @ camscannerProblem 1-18 (AICPA Adapted) | Cobb: Company sells appliance service contracts ageeing to repair appliances for ' two-year period. The past experience is that, of the total amount spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% is incurred evenly during the second contract year. Receipts from service contract sales are P500,000 for 2021 and P600,000 for 2022. Receipts from contracts are credited’ to unearned contract revenue: All sales are made evenly during the year. 1. What amount should be reported as contract revenue for 20217 100,000 200,000 250,000 . 500,000 2. What amount should be. reported’ as unearned contract revenue ‘on’ December 31, 2021? 300,000 400,000 200,000. i .. 150,000 i 3. What amount should be reported as contract revenue for 2022? 240,000. 360,000, 370,000 250,000 4, What amount should be reported as unearned contract revenue on December 81, 2022? - a, 360,000 b.’ 470,000 c. 480,000 d. 630,000 nese peop Boop 23 Scanned wth G camscannerProblem 1-19 (AICPA Adapted) Hart Company sells subscriptions to a specialized directory that is published semiannually and shipped to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 80 cut-off dates are held for the next publication. Cash from subscribers is received evenly during the year and is credited to deferred subscription revenue. Deferred subscription revenue — January 1 1,500,000 Cash receipts from subscribers during the current year 7,200,000 What amount should be reported as deferred subscription revenue on December 31? a. 1,800,000 3,300,000 3,600,000 5,400,000 lem 1-20 (AICPA Adapted) y Company sells magazine subscriptions for a l-year, — r 3-year period. i ipts from subscribers are credited to deferred | revenue and this account had a balance o a January 1, 2021. rovided the following information for the ye ber 31, 2021: eipts from subscribers mn December 81, 2021, what amount should be reported a leferred subscription revenue? a. 1,900,000 b, 2,300,000 c. 1,400,000 d. 2,100,000 24 Scanned with |\CamScannerProblem 1-21 (AICPA Adapted) Anette Video Company sells 1- and 2-year subscriptions for the video-of-the-month business. Subscriptions are.collected in advance and credited to sales. An analysis of the recorded sales activity tevealed the following: 2022 Sales 500,000 Less cancelations _30,000 Net sales ‘ 470,000 Subscription expirations: 2021 120,000 . 2022 155,000 130,000 2023 125,000 200,000 2024 : 140,000 400,000 470,000 1. On December 81, 2022, what amount should be reported as unearned, subscription revenue? 495,000 470,000 465,000 340,000 pore 2. What amount should be reported as subscription revenue for 2022? a. 175,000 b. 305,000 ¢.» 285,000 d, 250,000 25 Scanned with @ camscannerProblem 1-22 (AICPA Adapted) Marr Company sells products with reusable and expensive , Containers. The custome charged a deposit for each container delivered and receives a refund for each container returned within two years after the year of delivery. \ Containers held by customers on January 1, 2021 from deliveries in: 2019 150,000 2020 430,000 580,000 Containers delivered in 2021 780,000 Containers returned in 2021 from deliveries in: ; 2019 90,000 e. 250,000 2020 | 2021 . 286,000 626,00 at amount should be reported as liability for deposits on ecember 31, 2021? 494,000 a Company sells perishable electronic pein reusable containers. Customers ic rod is equal to the container cost. Customers the container is returned. 4 urrent, year fe osits collected on conte amounted to P 100. De; oats are forfeited ers are not a Eon e 18 moni tainers held by customers. at the’ be ning of the 330,000. sinning ~ During the current year, an amount of P410,000 was and dey deposits of P25, 000 were forfeited. if ‘What amount should be reported as liability for reid deposit at year-end? a. 595,000 Scanned with @ camscannerProblem 1-24 (AICPA Adapted) Black Company. required nonrefundable advance payments with special orders for machinery constructed to customer specifications. The entity provided the following information for the current year: Customer advances — beginning of year 1,180,000 Advances received with orders 1,840,000 ‘Advances applied to orders shipped 1,640,000 Advances applicable to orders canceled 500,000 What amount should be reported as current liability for advances from customers at year-end? a. 1,489,000 b. 1,380,000 a 880,000, d. 0 Problem 1-25 (AICPA Adapted) Lovie Company offered three payment plans on twelve-month contracts. The entity provided the following information on the three plans and the number of children enrolled in each plan from September 1, 2022 through August 31, 2023 contract year: Initial payment. Monthly fee. Number of per child | -perchild children # 50,000 - 15 #2 20,000 3,000 ie 32 #8 - 5,000 9 The entity received P990,000 of initial payments on September 1, 2022, and P324,000 of monthly fees during the period September 1 through December 31, 2022. On December 31, 2022, what amount should be reported as deferred revenue? a. 330,000 b. 438,000 ec. 660,000 d. 990,000 27 Scanned with @ camscannerProblem 1-26 (AICPA Adapted) Kent Company, a realty entity, maintains escrow accounts and pays real estate taxes for the mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, income less a 10% service fee is credited to the mortgagee's account and used to reduce future escrow payments. The entity provided the following additional information for the current year: Escrow accounts liability, January 1 700,000 Escrow payments received 1,580,000 Realestate taxes paid 1,720,000 Interest income on escrow funds 50,000 What amount should be reported as escrow accounts liability. on December 31? a. 510,000 . 515,000 1-27 (AICPA Adapted) day of each month, Bell Company received fron an escrow deposit of P250,000 for real estate ity recorded the P250,000 in an escrow | al estate tax is P2,800,000, payable in equal on the first day of each calendar quarter. 1, 2021, the balance in the escrow account was eptember 30, 2021, what amount should be reported an escrow liability? a. 250,000 b. 450,000 ¢. 850,000 d. 150,000 28 Scanned with |\CamScanneroblem 1-28 (ACP) lature Company had an agreement to pay the sales manager bonus of 5% of the entity's earnings. The income for the ar before bonus and tax was P5,250,000. The income tax rate is 25%. equired: termine the bonus under each of the following dependent assumptions: . Bonus is a certain percent of the income before bonus and before tax. .. Bonus is a certain percent of income after bonus but before tax. . Bonus is a certain percent of income after bonus and after - tax. . Bonus is certain percent of income after tax but before bonus. roblem 1-29 (AICPA Adapted) nald Company had an incentive compensation plan under hich a branch manager received 10% of the branch income after deduction of the bonus but before deduction of income tax. ranch income for the current year before the bonus and income tax was P1,650,000. The income tax rate was 25%. ‘hat amount should be reported as bonus for the current 29 1 Scanned with |\CamScannerProblem 1-30 (AICPA Adapted) ? Christian Company had a bonus agreement which provided ~ that the general manager shall receive an annual bonus of | 10% of the income after bonus and tax. The income tax rate, is 25%. i The general manager received P300,000 for the current year as bonus. What amount should be reported as income before bonus _ and tax? a. 4,300,000 b. 4,000,000 ¢. 3,000,000 d, 3,700,000 Problem 1-31 (AICPA Adapted) After three profitable years, Cairo Company decided to o a bonus to the branch manager of 25% of income over P1,000,000 earned by the branch during the current year.) e income for the branch was P1,600,000 before tax and efore bonus for the current year. e bonus was computed on income in excess of P1,000,0 00 r deducting the bonus but before deducting tax. runt should be reported as bonus for the current, jon Company had an incentive compensation plan uni ich the president shall receive a bonus equal to 1! ne in excess of P1,000,000 before deducting income it after deducting the bonus. The income before inco tax and the bonus was P3,200,000.. q What amount should be reported as bonus?: fe. 220,000 . ¢. 820,000 a. 30 Scanned with |\CamScannerroblem 1-33 Multiple choice (AA) 1. The most common type of liability is a. One that comes into existence due to a loss contingency. b. One that must be estimated. c. One that comes into existence due to a gain contingency, A. One to be paid in cash and for which the amount and timing are known. % 2, Which is not a characteristic of a liability? a. It represents a transfer of an economic resource. _». It must be payable in cash. *¢. It arises from present obligation to other entity. d. It results from past transaction or event. 3. Classifying liabilities as either current or noncurrent helps creditors: assess a. Profitability ». The relative risk of an entity's liabilities “¢. The degree of an entity's liabilities d. The amount of an entity's liabilities 4, Short-term obligations are reported as noncurrent if a. The entity has a long-term line of credit. b. ‘The entity has tentative plan to issue long-term bonds payable. : x. The entity has the right at the end of the reporting ; period to defer settlement of the liability for at least 12 months after the end of the reporting period. d. The entity has the ability to refinance on a long-term basis. 5. Which situation would require that noncurrent liabilities be reported as current? 5 a. The long-term debt is callable by the creditor. b. The creditor has the right to demand payment due to a contractual violation. - c. The long-term debt matures within the upcoming year. _/4. All of these require the current classification. 31 Scanned with |\CamScanner6, Which of the following represents a liability? | a. The obligation to pay for goods that an entity expects to order from suppliers next year _». The obligation to provide goods that customers have ordered and paid for during the current year c, The obligation to pay interest on a five-year note payable that was issued the last day of the year d. The obligation to distribute an entity's own shares 7. Which does not meet the definition of a liability? . The signing of a an employment contract at fixed salary b. An obligation to provide goods or services in the future c. A note payable with no specified maturity date d. An obligation that is estimated in-amount 8. Which of the following is a characteristic of a current liability but not a noncutrent liability? 4 a. Unavoidable obligation. b. Present obligation to transfer an economic resource. _c. Settlement is expected within the normal operating cycle or within 12 months, whichever is longer. d. The obligating event has already occurred. ilts in a transfer of economic resource dation is reasonably expected to require use of bilities? rent liabilities in the order of maturity urrent liabilities according to amount current liabilities against assets that are _ to be applied to their liquidation a d. Showing current liabilities in the order of liquidation preference 4 82 Scanned with @ camscannerroblem 1-34 Multiple choice (IAA) |. Among the short-term obligations at year-end are 90-day notes, renewable for another 90-day period. What is the classification of the notes payable? 4. Current liabilities b. Deferred credits c. Noncurrent liabilities d. Intermediate debt 2.At year-end, an entity had 120-day note payable outstanding. The entity has followed the policy of replacing the note rather than repaying it over the last three years. The entity's treasurer says that this policy is expected to continue indefinitely, and the arrangement is acceptable to the bank to which the note was issued. What is the proper classification of the note in the year-end statement of financial position? ‘ a. Dependent on the intention of management b. Dependent on the actual ability to refinance _«: Current liability, unless specific refinancing criteria are ; met d. Noncurrent liability _ 8. An entity had a note payable due next year. After the end of reporting period and before the issuance of the current year financial statements, the entity issued long-term bonds payable. Proceeds from the bonds were used to repay the note when due. How should the entity classify the note payable at current year-end? ac Current liability with separate disclosure of the note refinancing b. Current liability with no disclosure required c. Noncurrent liability with separate disclosure of the note refinancing d. Noncurrent liability with no separate disclosure required 33 Scanned with |\CamScanner4, An entity had a loan due for répayment in six months' time, but the entity had the right to defer settlement ~ for two years later. The entity planned to refinance this "loan. In which section of the statement of financial position should this loan be presented? ; A a. Current liabilities b. Current ‘assets -& Noncurrent liabilities d. Noncurrent assets liability. Under what condition could the entity reclassify _ the note payable from current to noncurrent? 4 a. If the entity had the intent and ability to reclass the note before the end of reporting period. ~ +H b. If the entity had executed an agreement to re! " the note before issuance of the financial statem c. If the entity had the intent and ability to recla: ‘the note before the issuance of the financial statements. t (If the entity had executed an agreement to refini the note before the end of reporting period. 5, At year-end, an entity classified a note payable as current a Sh 34 Scanned with |CamScanner™blem 1-35 Multiple choice (AICPA Adapted) The most relevant measurement of liabilities at initial cognition should always reflect a. The expectation of the management . Historical cost 4. The credit standing of the entity “ d. The single most likely minimum possible amount Which statement best describes the term liability? a. An excess of equity over current assets b. Resources'to meet financial commitments when due c. The residual interest in the assets of the entity A A present obligation arising from past event . What is the relationship between present value and the concept of.a liability? | 4. Present value is used to measure certain liabilities. _ b. Present value is not used to measure liabilities. c. Present value is used to measure all liabilities. d. Present value is used to measure noncurrent liabilities only. . If a long-term debt becomes callable due to the violation of a loan covenant } a. The debt may continue to be classified as noncurrent if the covenant can be renegotiated. _by The debt should be reclassified as current. c. Cash must be reserved to pay the debt. d. Retained earnings must be restricted. & What is the classification of debt callable by the creditor? a. Noncurrent liability ec Current liability » c. Current liability if the creditor intends to call the debt within one year d. Current liability if it is probable that the creditor will call the debt within one year 35 Scanned with |\CamScannerProblem 1-86 Multiple choice (IAA) 1. An entity received an advance payment for special order goods that are to be manufactured and delivered within six months. How should the advance payment be reported? a. Deferred credit b. Contra asset account c. Current liability d. Noncurrent liability 2. At year-end, an entity sold refundable merchandise — coupons. The entity received a certain amount for each - coupon redeemable next year for merchandise with a certain — retail price. At year-end, how should the entity report these coupon transactions? a. Unearned revenue at the merchandise's retail price b. Unearned revenue at the cash received c. Revenue at the merchandise's price d. Revenue at the cash received lvance payments from customers represent Liabilities until the product is provided. mponent of shareholders’ equity. until the product is provided. upon receipt of the advance payment. qual, a large increase in unearned revenue in ent period would be expected to produce what revenue in a future period? F \ increase because unearned revenue becomes _ revenue when earned. Large decrease because unearned revenue implies _ that less revenue has been earned which reduces: future revenue. 4 No effect because unearned revenue is a liability. Large decrease because unearned revenue indicates collection problems that will reduce net revenue in future period. 4 ae 36 Scanned with @ camscanner‘ How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the statement of financial position before the performance? a. Revenue for the entire proceeds pb. ‘Revenue to the extent of related costs expanded c. Unearned revenue to the éxtent of related costs expended : d.. Unearned revenue for the entire proceeds Magazine subscriptions collected in advance should be treated as a. Acoritra account to magazine subscriptions receivable b. Deferred revenue in the liability section c. Deferred revenue in the shareholders’ equity section d. Magazine subscription revenue in the income statement in the period collected . Under a royalty agreement with another entity, an entity shall receive royalties from the assignment of a patent for four years, The royalties received’ in advance should be reported as revenue In the period received In the period earned Evenly over the life of the royalty agreement |. At the date of the royalty agreement Bore An entity is a retailer of home appliances and offers a service ‘contract on each appliance sold. Collections received for service contracts should be recorded as an increase in Deferred revenue account Sales contracts receivable valuation account Shareholders' equity valuation account Service revenue account Roop 37 Scanned with Bcamscanner9. An entity sells appliances that include a three-year ~ warranty. Service calls under the warranty are performed by an independent mechanic under a contract with the entity. Based on experience, warranty costs are expected | to be incurred for each machine sold. When should the - entity recognize the warranty costs? Evenly over the life of the warranty When the service calls are performed When payments are made to the mechanic When the machines are sold Beop 10. At the end of the current year, an entity received advance payment of 60% of the sale price for special ord goods to be manufactured and delivered within fiv: months. At the same time, the entity subcontracted for production of the special order goods at a price equal : 40% of the main contract price. - statement of financial position? None main contract price erred revenue equal to 60% of the main contr , and no payable to subcontractor 38 Scanned with |\CamScanner