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Detailed Solutions To Problem 5

This document provides detailed explanations and solutions to 10 accounting problems. It addresses topics such as classifying short and long-term debt, recognizing unearned revenue, accruing real estate taxes, and calculating contract and deposit liabilities. The solutions include calculations and journal entries.

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Maria Angelica
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86 views3 pages

Detailed Solutions To Problem 5

This document provides detailed explanations and solutions to 10 accounting problems. It addresses topics such as classifying short and long-term debt, recognizing unearned revenue, accruing real estate taxes, and calculating contract and deposit liabilities. The solutions include calculations and journal entries.

Uploaded by

Maria Angelica
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Solutions to Problem 5: Detailed Explanation

1.) Choice "C" is correct. $1,500,000 should be excluded from current liabilities because
100,000 shares of common stock were sold at $15 per share.
The remaining $250,000 should be included in current liabilities because current assets
will be used to pay off the balance.
Rule: Long-term debt that matures within one year should be classified as a current
liability, unless retirement is to be accomplished with other than current assets.
Current obligations expected to be refinanced.

2.) B. P40, 000 P960, 000

Pam Inc. has successfully refinanced a short-term note on a long-term basis before the
issuance of the 20x5 financial statements.
The borrowings on a long-term basis are limited to P960, 000 (.80 × P1200, 000
collateral provided by Pam). Thus, P960, 000 of the note is reclassified as long term,
and the remaining P40, 000 of the note is classified as current.

3.) D. P5,650,000

Current liabilities are obligations of an entity that are expected to require the use of
current assets or the providing of services (or the creation of another liability that will
require the use of current assets or provision of services) during the next year or
operating cycle, whichever is longer.
For Wilk Co., accounts payable-trade, short-term borrowings, and the other bank loan,
which matures during next year, are all (conventional) current liabilities.
The bank loan for P3, 500,000 also must be classified in total as a current liability
because Wilk is in violation of the terms of the loan agreement, and the creditor has not
waived its right to demand immediate loan payment.
The sum of the four accounts is P5, 650,000

4.) D. P50 000

The solution says the answer is P50, 000. The explanation is that all of the 20x2
unearned revenue is redeemed or expired. Then you have the (P250, 000 20x3 sales)
minus (P175, 000 20x3 redemptions) minus (10% gift certificates * P250, 000) = P50,
000

5. P465, 000

an entity recognizes revenue when (or as) it satisfies a performance obligation by


transferring a promised good or service to a customer. The balance for unearned
subscription revenue (a contract liability) should reflect the advance collections for which
the performance obligation is not satisfied. Thus, the unearned subscriptions
subscription revenue as of 12/31/20x3 total P465, 000 (P125, 000 + P200, 000 + P140,
000).

6.) B.P8, 000

The total annual real estate tax is 2(P12, 000) or P24, 000. Therefore, the tax per
month is P2, 000. Day assumed the taxes, already assessed on the property, for the full
year.

The payment on November 1 covers the four months July, August, September, and
October, for a total cost of P8, 000. This portion of the P12, 000 payment is debited to
real estate taxes payable, because the full annual property tax amount is already
accrued on Ran's books from the purchase of the property. Pre-paid real estate taxes
are debited for the remaining P4, 000 of the payment.

7. ) B. P88,000

The amount of P88,000 (P118,000 beginning balance + P184,000 advances received –


P164,000 advances credited to revenue after shipment of orders – P50,000 for canceled
orders) should be reported as a contract liability. It is current because the performance
obligation will be satisfied using current assets (goods constructed to customer
specifications). The advances applicable to canceled orders are not refundable because
no performance obligation remains to be satisfied.

8.) C.P605, 000

The liability at the beginning of the year was $700,000. Escrow payments of $1,580,000
were credited and taxes paid of $1,720,000 were debited to the account during the year.
Furthermore, interest of P45, 000 [P50, 000 – (P50, 000 × 10%) service fee] was
credited. Thus, the year-end balance was P605, 000 (P700, 000 + P1, 580,000 – P1,
720,000 + P45, 000).

9. A.P510,000.

Unadjusted accounts payable at 12/31/Year 1360,000

Reverse debit balance and record as a prepaid (asset) 50,000

Reverse unmailed checks 100,000

_____________________________

Adjusted accounts payable at 12/31/Year P510,000


10. Answer is (C) 580,000 + 780,000 - 626,000 - 60,000 = 674,000.

When customers pay the deposit for a container, cash is debited and the liability is
credited. Therefore, at 12/31/2005 the liability consists of deposits for containers still
held by customers from the last two years (P580, 000). During 2006, the liability was
increased for deposits on containers delivered (P780, 000). When containers are
returned, the deposits are returned to the customers; in 2006, the liability was debited
and cash credited for P626, 000. Also, at 12/31/11, some customers still held containers
from 2004 (P150, 000 – P90, 000 = P60, 000). The two-year time limit has expired on
these, so the company is no longer obligated to return the deposit. The containers are
considered sold to the customers, so the liability account is debited and sales credited
for P60, 000. This results in a 12/31/2006 balance of P674, 000.

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