CHAPTER 1 LIABILITIES TECHNICAL KNOWLEDGE To understand the concept of liabilities. To define current and noncurrent liabilities. To know the measurement of current and noncurrent liabilities. 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.LIABILITIES The Revised Conceptual Framewor provides the following definitio! Liabilities are present obligations Apres to transfer ap economic resource as a result of past eve al characteristics of an accounting rk for Financial Reporting f liabilities: Accordingly, the essenti liability are: a. The entity has a present obligation. An obligation is a duty or responsibility that an entity has no practical ability to avoid. The entity liable must be identified but it is not necessary that the payee to whom the obligation is owed be identified. b. The obligation is to transfer an economic resource. This is the very heart of the definition of an accounting liability. The economic resource is the asset that represents a right with a potential to produce economic benefit. Specifically, the obligation must be to pay cash, transfer noncash asset or provide service at some future time. ce. The liability arises from a past event. This means that the liability is not recognized until it is incurred. Present obligation An essential characteristic of a liability is that the entity has a present obligation. The present obligation may be a legal obligation or a constructive obligation. An obligation may be legally enforceable as a consequence of binding contract or statutory requirement. This is normally the case, for example, with accounts payable for goods and services received. ia A constructive obligation also gives rise to liability by reason of normal business practice, custom and a desire to maintain good business relations or act in an equitable manner. 2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 accounting liability. The obligation is to issue 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 classified as part of equity rather than an accounting liability. Past event Another essential characteristic of a liability is that the liability must arise from a past transaction or event. The past event that leads to a legal or constructive obligation is known as the obligating event. The obligating event creates a present obligation because the entity has no realistic alternative but to settle the obligation created by the event. For example, the acquisition of goods gives rise to accounts payable. The obligating event is the acquisition of goods. The receipt of a bank loan results in an obligation to repay the loan. The obligating event is the cash received from the bank as a consequence of the bank loan. 3Examples of liabilities of liabilities pliers for the purchase of goods The more common types include the following: a. Accounts payable to sup! b. Amounts withheld from employees for taxes and for amOthutions to the Social Security System interest, rent, taxes, product bonus ash asset c. Accruals for salaries, in warranties and profit sharing d. Dividends payable in cash or none: e. Deposits and advances from customers Debt obligations for borrowed funds — notes, mortgages and bonds payable g. Income tax payable h. Deferred or unearned revenue Measurement of current liabilities Conceptually, all liabilities are initially measured at present value and subsequently measured at amortized cost. However, in practice, current liabilities or short-term 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. 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 amortized cost measurement is taken up in a later chaptet in relation to bonds payable. aCurrent liabilities PAS 1, paragraph : classify'a liability sgl mend provides that an entity shall a. The entity expec operating cycle, ts to settle the liability within the entity's b. The ecu a pales holds the liability primarily for the purpose of c. The liability eae ie oe due to be settled within twelve months orting period. d. a entity does not have the right at the end of the reporting pel to defer settlement of the lability 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 value.Noncurrent liabilities es is a residual definition, The term noncurrent liabiliti ifi nt are classifieg iabiliti classified as current are fied ag All liabilities ities Noncurrent liabilities include: t a. Noncurrent portion of long-term deb b. Finance lease ed c. Deferred tax liability d. Long-term obligation to officers e. Long-term deferred revenue Long-term debt falling due within one year iabili ich i ithin twelve month; A liability which is due to be settled wit i after the reporting period is classified as current, even if. a. The original term was for a period longer than twelve months. nce or to reschedule payment on leted after the reporting period uthorized for b. An agreement to refina a long-term basis is comp and before the financial statements are a issue. 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. 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. If the right does not exist at the end of i iod, rig i the reporting period, there is no potential to refinance iabili : A bility is classified as current. pe thexefare the Be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 demand 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.Presentation of current liabilities h 54 of PAS 1, as a minimum, the face of the Ue ent vip ncial position shall include the following line items for current liabilities: Trade and other payables Current provisions | Short-term borrowing ' Current portion of long-term debt. 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. No objection can be raised if the trade accounts and notes payable are separately presented. eaoge Estimated liabilities Estimated liabilities are obligations which exist at the end of reporting period although their amount is not definite. In many cases, the date when the obligation is due is not also 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. 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 is a current liability. Typical examples of current deferred revenue are unearned interest income, unearned rental income and unearned subscription revenue. : If the deferred revenue is realizable i If t le in more tl 8 it is classified as noncurrent liability. era Typical examples of noncurrent deferred revenue are unearned revenue from long-t i -term si long-term leasehold advances. ervige contracts. and 8Bonus computation Large entities often compensate key officers and employees by way of bonus for superior income realized during the year. The main purpose of this scheme is to motivate officers and employees by directly relating their well-being to the success of the entity. This compensation plan results in liability that must be measured and reported in the financial statements. Four variations of bonus computation 1. Bonus is expressed as a certain percent of income before bonus and before tax. 2. Bonus is expressed as a certain percent of income after bonus but before tax. 3. Bonus is expressed as acertain percent of income after bonus and after tax. 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% Income tax rate 25% Case 1 - Before bonus and before tax Income before bonus and before tax 4,400,000 Multiply by 10% Bonusponus but before tax Case 2 - After B = .10 (4,400,000 ~ B) B = 440,000 — .10B B+ .10B = 440,000 1.10B 440,000 B 440,000/1.10 B = 400,000 Proof Income before bonus and before tax Bonus Income after bonus but before tax Multiply by Bonus Case 3 - After bonus and after tax = .10 (4,400,000 - B -T) B T (4,400,000 — B) B 0 [4,400,000 - B - .25 (4,400,000 — B)] B 10 (4,400,000 — B — 1,100,000 + .25B) B = 440,000 -.10B- 110,000 + .025B B+.10B- .025B = 440,000- 110,000 1.075B = 330,000 B = 330,000/ 1.075 B = 306,977 T = .25 (4,400,000 — 306,977) T = 1,023,256 Proof Income before bonus and before tax 4,400,000 mus Tax (306,977) I ae (1,023,255 neome after bonus and after tax Multi 3,069,768 Itiply by Bonus 306,977 10 4,400,000 (400,000) 4,000,000 —10% 200.060Case 4 ~ After tax but before bonus B= 10 (4,400,000 - T 25 (4,400,000 — B) 10 [4,400,000 - -25 (4,400,000 — B 10 (4,400,000 — 1,100,000 + 28h} 40,000 — 110,000 + .025B 40,000 ~ 110,000 30,000 30,000 /.975 B = 338,462 Proof Income before bonus and before tax Tax (4,400,000 ~ 338,462 x 25%) (howe'se) Income after tax but before bonus Multiply by Shee Bonus 338,462 Refundable deposits Refundable deposits con: customers but which certain conditions. sist of cash or property received from are refundable after compliance with The best example of a refundable deposit is the customer deposit required for returnable containers like bottles, drums, tanks and barrels. Illustration A deposit of P10,000 is required from the customer for returnable containers. The containers cost P8,000. Cash 10,000 Containers’ deposit 10,000 The containers’ deposit account is usually classified as current liability, If the customer returns the containers, the deposit is simply refunded. i i itainers, the However, if the customer fails to return the cont i; deposit is considered the sale price of the containers. The excess of the deposit over the cost of the containers is considered as gain. 1QUESTIONS 1, Define liabilities. 2 What are the essential characteristics of an accounting liability? 3. Explain a present obligation. 4. Explain transfer of an economic resource to settle ay obligation. 5. Explain a past event that leads to @ present obligation, 6. Explain the measurement of current and noncurrent liabilities. 7. Define current and noncurrent liabilities. 8. Explain the refinancing of a long-term debt falling due within one year. 9. Explain covenants attached to borrowing agreements. 10.Explain the presentation of current liabilities in the statement of financial position. 11. Explain estimated liabilities. 12. Explain deferred revenue. 13. Explain the classification of deferred revenue. 14. Explain the treatment of refundable deposits. 15. What are the four variations in the computation of bonus? 12PROBLEMS Problem 1-1 (IAA) On December 31, 2021, Glare Company provided the following information: Accounts payable, including deposits and advances from customer of P250,000 Notes payable, including note payable to bank due on December 31, 2023 of P500,000 1,500,000 1,250,000 Share dividend payable 400,000 Credit balances in customers’ accounts 200,000 Serial bonds payable in semiannual installment of P500,000 5,000,000 Accrued interest on bonds payable 150,000 Contested BIR tax assessment — possible obligation 300,000 100,000 Unearned rent income Required: Compute total current liabilities on December 31, 2021. Problem 1-2 (LAA) 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 Accounts payable 4,000,000 Bank overdraft 300,000 Dividends payable 1,000,000 Withholding tax payable 100,000 Mortgage payable 3,800,000 Income tax payable 800,000 Estimated warranty liability 600,000 Estimated damages payable by reason of breach of contract 700,000 Accrued liabilities 900,000 : 200,000 Estimated premium liability Claim for increase in wages by employees covered ina 3,500,000 pending lawsuit Contract entered into for the construction of building 5,000,000 Required: Compute total current liabilities on December 31, 2021. 13Problem 1-3 (IAA) se ane Manchester Company provided the following information on December 31, 2021: Income taxes withheld from employees S 500.000 Cash balance at First State Bank 1'300'000 Cash overdraft at Harbor Bank "750, 100 Accounts receivable with credit balance 1,000 Estimated expenses of meeting warranties on ee merchandise previously sold ,000 Estimated damages as a result of unsatisfactory ne performance on a contract 375002000 Accounts payable 000,000 Deferred serial bonds, issued at par and bearing interest at 12%, payable in semiannual installment of P500,000 due April 1 and October 1 of each year, the last bond to be paid on October 1, 2027. Interest is also paid semiannually. 5,000,000 Share dividend payable 2,000,000 Required: Compute the total current liabilities on December 31, 2021, Problem 1-4 (AICPA Adapted) Multiple Company provided the following information on December 31, 2021: Accounts payable after deducting debit balances in suppliers’ accounts of P100,000 500,000 Accrued liabilities 50,000 Note payable — due March 31, 2022 1,000,000 Note payable — due May 1, 2022 800,000 Bonds payable — due December 31, 2023 2,000,000 On March 1, 2022 before the 2021 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, 2022. The financial statements were issued on March 31, 2022. Required: 1. Compute total current liabilities. 2. Compute total noncurrent liabilities. 14Problem 1-5, (IAA) On December 31, 2021. G following lisbilien 1, Cordillera Company reported the Note payable~ 9% Note payable 8% B.o00.000 Note payable — 000. lote payable — 10% 4,000,000 Note payable ~ 11% 5,000,000 The 9% note payable is 31, 2022. Sufficient cas the note at maturity, noncancelable and matures on July h is expected to be available to retire ‘The 8% note payable matures on May 31, 2027 but the creditor has the option of calling the note or dema: di t. June 30, 2022. peat However, the call option is not expected to be exercised given the prevailing market condition. 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. 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 of financial position on December 31, 2021. 15Problem 1-6 (IAA) ing informat Cavalier Company provided the following ion on December 31, 2021: 6,500,009 Accounts payable 8.000.000 Notes payable — bank 150,000 Interest payable S000! Mortgage note payable ~ 10% ron Bonds payable , * Bank notes payable include two separate notes payable to First Bank. A P3,000,000, 10% note issued March 1, 2020, payable on demand. Interest is payable every six months. A one-year, P5,000,000, 11% note issued January 2, 2021. On December 31, 2021, the entity negotiated a written agreement with First Bank to replace the note With a 2-year, P5,000,000, 10% note to be issued January 2, 2029, * 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. On December 31, 2021, the entity is three months behind in paying the required interest payment. * The bonds payable are 10-year, 8% bonds, issued June 30, 2012. Interest is Payable semiannually on June 30 and December 31, Required: Compute total current liabilities on December 31, 2021. 16Problem 1-7 (IAA) Burma Company disclose Burma, d 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 ina 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 ce. 7,100,000 d. 7,700,000 Problem 1-8 (AICPA Adapted) Gar Company disclosed the following liability account balances on December 31, 2021: Accounts payable 1,900,000 Bonds payable 3,400,000 Premium on bonds payable 200,000 Deferred tax liability 400,000 Dividends payable 500,000 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? 7,100,000 4,300,000 3,900,000 4,100,000 Bore 17Problem 1-9 (AICPA Adapted) eae Able Company had the following as of B-term dep, outstanding on December 31, 2021: 14% note payable, due 2022 1,070'009 11% note payable, due 2024 ncipal 8% note payable, due in 11 equal a er DR, 2022 1,100,009 payments, plus interest begi inning 1,000,00 7% guaranteed debentures, due 2023 4,000,000 3,200,000 Total === The annual sinking fund requirement on the guaranteeq debentures is P40,000 per year. What total amount should be reported as current liabilities on December 31, 2021? a. 40,000 cE 70,000 c. 100,000 d. 130,000 Problem 1-10 (AICPA Adapted) Achilles Company reported the following liability balances on December 31, 2021: 12% note payable issued on March 1, 2020, maturing on March 1, 2022 5,000,000 10% note payable issued on October 1, 2020, maturing October 1, 2022 3,000,000 The 2021 financial statements were issued on March 31, 2022. a January 31, 2023, the satire P5,000,000 balance of the 12% note payable was refinance: ugh issua; f : obligation payable lump sum. nee of a long-term On December 31, 2021, the entity has the Tight to defe 1% not b er settlement Desember 312021 78 fF at least twelve months after t amount of the notes ’ ; eeenet on December 31, Don) oe should be classified as a. 8,000,000 b. 5,000,000 c. 3,000,000 d. 9 18Problem 1-11 (AICPA Adapted) ae. reported the following liablities on December Accounts payable and accrued interest 1,000,000 12% note payable issued November 1, 2020 _ maturing duly 1, 2022 2,000,000 10% debentures payable, next annual principal : installment of P500,000 due February 1, 2022 7,000,000 On December 31, 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 ce. 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 July 31, 2022. The entity planned to refinance the note by issuing long-term bonds. Because the entity temporarily had excess cash, it prepaid P250,000 of the note on January 15, 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 payable should be included in current liabilities on December 31, 2021? a, 750,000 b. 500,000 c. 250,000 d. 0 19ted) Problem 1-13 (AICPA Adap a 000,000 note payable due June 9 eel ‘the entity signed an agreemen| Dean Company had a 0 to refinance the note payable on 31, 20; 2022. On December 31, to borrow up to P2,000,00 a long-term basis. ; fi ing agreement called for borrowing Sot to etree aoe of the elie of the collateral the entity ing % On December 31, 2021, the value 0! P1,500,000. On December 31, 2021, what amount, of the note payable should be reported as current liability? a. 2,000,000 b. 1,500,000 c, d f the collateral Was 800,000 500,000 Problem 1-14 (AICPA Adapted) Willem Company reported the following liabilities on December 31, 2021: Accounts payable 750,000 Short-term borrowings 400,000 Mortgage payable, current portion P100,000 3,500,000 Bank loan payable, due June 30, 2022 1,000,000 The P1,000,000 bank loan was refinanced with a 5-year loan on January 15, 2022, with the first. princi January 15, 2023. Principal payment due The financial statements were issued February 28, 2029. What total amount sh ; ae on December 31, 30217. P® "Ported as current liabilities a. 1,150,000 b. 2,250,000 ec. 1,250,000 d. 850,000 20Problem 1-15 (AICPA Adapted) reene i i Gases Company, sells office equipment service contracts ervice equipment for a two-year period. Cash receipts fro; m contract: i contract revenue. § are credited to unearned Berdices contract costs are charged to service contract Pp! nee incurred. Revenue from service contracts is recognized as earned over the term of the contracts. Unearned contract revenue at J: . january 1 600, Cash receipts from service contracts sold 980, 00 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 b. 480,000 ce. 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 31, 2021 expire during 2022 P150,000, during 2023 P225,000 and during 2024 P100,000. What amount should be reported as unearned contract revenue on December 31, 2021? 540,000 475,000 295,000 245,000 ao rp 21Problem 1-17 (AICPA Adapted) “The auipment serve contract i Pong” The past experience is Ss the to a one repairs on service oomrard 60% evenly during the secon} contract year. The entity sold 1,000 contrac! 1. What amount should be reported as contract revenue for 2021? a. 120,000 b. 240,000 c. 300,000 d. 150,000 Dunne Company s a two-year period. ts evenly throughout 2021. 2. What amount should be reported as deferred contract revenue on December 31, 2021? 540,000 480,000 360,000 300,000 Bose 3. What amount should be reported as contract revenue for 2022? a. 180,000 b. 360,000 c. 300,000 d. 120,000 = bho Reece should be reported as contract revenue for 240,000 360,000 180,000 0 Bor Pp 22Problem 1-18 (AICPA Adapted) Cobb Company sells appli i > ‘ ppliance serv i repair appliances for two-year periods ne eee The past experience is that, of t repairs on service contracts, 40% the first contract year and 60% i: the second contract year. he total amount spent for is incurred evenly during is incurred evenly during Receipts from service contract sales are P500 000 for 2021 and P600,000 for 2022. aoe 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 2021? a. 100,000 b. 200,000 c. 250,000 d. 500,000 2. What amount should be reported as unearned contract revenue on December 31, 2021? a. 300,000 b. 400,000 ce. 200,000 d. 150,000 3. What amount should be reported as contract revenue for 2022? a. 240,000 b. 360,000 c. 370,000 d. 250,000 4. What amount should be reported as unearned contract revenue on December 31, 2022? a. 360,000 b. 470,000 c. 480,000 d. 630,000 23Probiem 1-19 (AICPA Adapted) s to a specialized directo, scription: Hart Company sells subscriptio id shipped to subscriber! that is published semiannually a! on April 15 and October 15. March 31 and Septembe, ipti received after the aor Subscriptions received next publication. 30 cut-off dates are held for the Cash from subscribers is received evenly during the yea, and is credited to deferred subscription revenue. Deferred subscription revenue - January 1 77a 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 b. 3,300,000 c. 3,600,000 d. 5,400,000 Problem 1-20 (AICPA Adapted) Weaver Company sells magazine subscriptions for a 1-year, 2-year or 3-year period. Cash receipts from subscribers are credited to deferred subscription revenue and this account had a balance of P1,700,000 on January 1, 2021. The entity provided the following information for the year ended December 31, 2021: Cash receipts from subscribers 2,100,000 Subscription revenue recognized on December 31,2021 1,500,000 On December 31, 2021, what amount should be reported as deferred subscription revenue? a. 1,900,000 b. 2,300,000 ce. 1,400,000 d. 2,100,000 24Problem 1-21 (AICPA Adapted) Anette Video Com: the video-of-the- Subscriptions are collec An analysis of the re following: Sales Less cancelations Net sales Subscription expirations: 2021 2022 2023 2024 ‘pany sells 1- and month business. 2021 420,000 20,000 400,000 120,000 155,000 125,000 400,000 2-year subscriptions for ted in advance and credited to sales. corded sales activity revealed the 130,000 200,000 140,000 470,000 1. On December 31, 2022, what amount should be reported as unearned subscription revenue? Bee 495,000 470,000 465,000 340,000 2. What amount should be reported as subscription revenue for 2022? peop 175,000 305,000 285,000 250,000 25Problem 1-22 (AICPA Adapted) ws tad Marr Company sells products with reusal me en it pee dsive containers. The customer is charge toe pate OF each container delivered and receives ae ua on deliver et2iney returned within two years after the ye elivery, Containers held by customers on January 1, 2021 from deliveries in: 150,000 2020 430,000 580,099 Containers delivered in 2021 780,000 Containers returned in 2021 from deliveries in: 90,000 2020 250,000 2021 286,000 626,000 What amount should be reported as liability for deposits on December 31, 2021? a. 494,000 b. 584,000 c. 674,000 d. 734,000 Problem 1-23 (IAA) Diversified Company sells perishable electronic products that are shipped in reusable containers, Customers pay a deposit for each container. The deposit is equal to the container cost, Customers receive a refund when the container is returned. During the current year, deposits collected on containers shipped amounted to Pi00,b00, Deposits are forfeited if containers are not returned in 18 inonthi 8. Containers held by customers at the beginning of the year During the current ear, an a d and deposits of P25,000' were forferioy | 410,000 was refunde Hibat smount should be reported as liability for refundable a. 595,000 b. 620,000 c. 645,000 d. 290,000 26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 c. 880,000 da. 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 — Monthlyfee — Number of per child per child children #1 50,000 - 15 #2 20,000 3,000 2 #3 - 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? 330,000 438,000 660,000 990,000 ae rp 27Problem 1-26 (AICPA Adapted) Kent Company, a realty entity, maintains en accounts and pays real estate taxes for the mortgage customers. n interest-bearing accounts. Interest fee is credited to the mortgagee’, escrow payments. Escrow funds are kept i income less a 10% service account and used to reduce future The entity provided the following additional information for the current year: Escrow accounts liability, January 1 ‘l ero, 00 Escrow payments received is ,000 Realestate taxes paid . Seo Interest income on escrow funds What amount should be reported as escrow accounts liability on December 31? 510,000 515,000 605,000 610,000 ao op Problem 1-27 (AICPA Adapted) On the first day of each month, Bell Company received from Kaye Company an escrow deposit of P250,000 for real estate taxes. The entity recorded the P250,000 in an escrow account. Kaye's 2021 real estate tax is P2,800,000, payable in equal installments on the first day of each calendar quarter. On January 1, 2021, the balance in the escrow account was 300,000. On September 30, 2021, what amount should be reported 28 an escrow liability? a. 250,000 b. 450,000 c. 850,000 d. 150,000 28Problem 1-28 (ACP) Nature Company had an agreement to pay the sales manager a bonus of 5% of the entity's earnings. The income for the year before bonus and tax was P5,250,000. The income tax rate is 25%. Required: Determine the bonus under each of the following independent assumptions: 1. Bonus is a certain percent of the income before bonus and before tax. 2. Bonus is a certain percent of income after bonus but before tax. 3. Bonus is a certain percent of income after bonus and after tax. 4, Bonus is certain percent of income after tax but before bonus. Problem 1-29 (AICPA Adapted) Ronald Company had an incentive compensation plan under, which a branch manager received 10% of the branch income after deduction of the bonus but before deduction of income tax. Branch income for the current year before the bonus and income tax was P1,650,000. The income tax rate was 25%. What amount should be reported as bonus for the current year? a. 126,000 b. 150,000 c. 165,000 d. 180,000 29d) Problem 1-30 (AICPA Adapted) t which prov; Christian Company had a bonus agren™. an annual Bonded that the general manager shall receiv eee hus of 10% of the income after bonus and tax. Tate is 25%. The general manager received P300,000 for the current yea, as bonus. What amount should be reported as income before bonus and tax? a. 4,300,000 b. 4,000,000 c. 3,000,000 d. 3,700,000 Problem 1-31 (AICPA Adapted) After three profitable years, Cairo Company decided to offer a bonus to the branch manager of 25% of income over P1,000,000 earned by the branch during the current year. The income for the branch was P1,600,000 before tax and before bonus for the current year. The bonus was computed on income in excess of P1,000,000 after deducting the bonus but before deducting tax. What amunt should be reported as bonus for the current year? a. 120,000 b. 150,000 c. 250,000 d. 320,000 Problem 1-32 (AICPA Adapted) Jackson Company had an incentive com} i der which the president shall receive a onus ena a Lome of income in excess of P1,000,000 before deductin, income tax but after deducting the bonus, a tax and the bonus was P3,200,000.°° income before income What amount should be reported as bonus? a. 220,000 b. 200,000 c. 320,000 d. 440,000 30Problem 1-33 Multiple choice (IAA) i. we i ia! The most common type of liability is a. One that comes into exi contingency: istence due to a loss b. One that must be estimated. One that comes into existence due to a gain contingency. d. One to be paid in cash and for which the amount and timing are known. ge . Which is not a characteristic of a liability? a. It represents a transfer of an economic resource. b. It must be payable in cash. c. It arises from present obligation to other entity. d. It results from past transaction or event. Classifying liabilities as either current or noncurrent helps creditors assess a. Profitability b. The relative risk of an entity's liabilities c. The degree of an entity's liabilities d. The amount of an entity's liabilities 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. 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. c. Which situation would require that noncurrent liabilities be reported as current? le by the creditor. -term debt is callab! a. The long-term demand payment due to b. The creditor has the right to a contractual violation. ay ; c. The long-term debt matures within the upcoming year. d. All of these require the current classification. 31oe liability? 6. Which of the following represents @ a. The obligation to pay for goods tet an entity expec, oder om sur le that customers hay b. The obligation to Boers cutrentiveae id for during t ©. See ere ealto pay iotenae ta Pos Note ‘ i st day ear ble that was issued the lai ay 0 d. The obligation to distribute an entity's own shares 7. Which does not meet the definition of a liability? igni: t fixed sala, a. The signing of a an employment contract at ry 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 noncurrent liability? 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. 9. Which of the following is not considered a characteristic of a liability? a. Present obligation b. Arises from past event c. Results in a transfer of economic resource d Liquidation is reasonably expected to require use of current assets 10. Which of the following of current liabilities? a. Listing current liabilitie. b. Testing current liabilities according to amount c. Oise pa ed ta the eities against assets that are 4 ar liquidatio; d. Showing current liabilitee sono i fee liabilities jn the order of liquidation is not an acceptable presentation s in the order of maturity 32Problem 1-34 Multiple choice (IAA) 1. 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? a. 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 c. Current liability, unless specific refinancing criteria are met d. Noncurrent liability 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? ~ 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 a. 33F ayment in six mon 4. Ai tity had a loan due for rep! ths time, but the entity had the right to defer setting for two years later. The entity planned to refinance this loan. In which section of the statement of financig) 9 position should this loan be presented? Current liabilities Current assets Noncurrent liabilities Noncurrent assets Boop 5. At year-end, an entity classified a note payable as current liability. Under what condition could the entity reclassify the note payable from current to noncurrent? a. If the entity had the intent and ability to reclassify the note before the end of reporting period. b. If the entity had executed an agreement to refinance the note before issuance of the financial statements c. If the entity had the intent and ability to reclassify the note before the issuance of the financial statements. d. If the entity had executed an agreement to refinance the note before the end of reporting period. 84Problem 1-35 Multiple choice (AICPA Adapted) 1. The most relevant measurem: iabili initi: iti, ent of liabilities at recognition should always reflect initial a. The expectation of the manage he ex] ‘ment b. Historical cost x c. The credit standing of the entity d. The single most likely minimum possible amount 2. 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 d. A present obligation arising from past event id What is the relationship between present value and the concept of a liability? Present value is used to measure certain liabilities. Present value is not used to measure liabilities. Present value is used to measure all liabilities. Present value is used to measure noncurrent liabilities only. Boop » _ 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. b. 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? o Noncurrent liability a. b. Current liability / ¢. 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Problem 1-36 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? Deferred credit Contra asset account Current liability Noncurrent liability peop ad 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? Unearned revenue at the merchandise's retail price Unearned revenue at the cash received Revenue at the merchandise's price Revenue at the cash received peop 2 . Advance payments from customers represent Liabilities until the product is provided. A component of shareholders’ equity. Assets until the product is provided. . Revenue upon receipt of the advance payment. aeop = All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period? a. Large increase because unearned revenue becomes revenue when earned. b. Large decrease because unearned revenue implies that less revenue has been earned which reduces future revenue. No effect because unearned revenue is a liability. Large decrease because unearned revenue indicates collection problems that will reduce net revenue in future period. ae 365. ed 2 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 b. Revenue to the extent of related costs expanded c. Unearned revenue to the extent of related costs expended d. Unearned revenue for the entire proceeds . Magazine subscriptions collected in advance should be treated as A contra account to magazine subscriptions receivable Deferred revenue in the liability section Deferred revenue in the shareholders' equity section Magazine subscription revenue in the income statement in the period collected Beep 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 Bere Anentity 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 Boop 379. 10. ; include a three. fy liances that inc! Year A ea el under the warranty are performeg b . we endent mechanic under a contract with the Seen warranty costs are expecteq ity. Based on experience, W: alteineneed for each machine sold. When should the 9 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 peop At the end of the current year, an entity received an advance payment of 60% of the sale price for special order goods to be manufactured and delivered within five months. At the same time, the entity subcontracted for production of the special order goods at a price equal to 40% of the main contract price. What liabilities should be reported in the year-end statement of financial position? ‘a. None b. Deferred revenue equal to 60% of the main contract price and payable to subcontractor equal to 40% of the main contract price c. Deferred revenue equal to 60% of the main contract price and no payable to subcontractor d. No deferred revenue but Payable to subcontractor is reported at 40% of the main contract price 38