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Chapter 1
Current Liabilities

PROBLEM 1: TRUE OR FALSE

1. TRUE
2. TRUE
3. FALSE – noncurrent because there is no breach of loan
covenant and the loan is long-term.
4. FALSE – minus
5. FALSE – at amortized cost
6. TRUE
7. FALSE
8. TRUE
9. FALSE – the expected breakage amount is recognized as
revenue in proportion to the pattern of rights exercised by
customers.
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. A
2. D
3. C
4. D
5. D
6. C
7. D
8. A
9. B
10. D
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PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL

1. D
Interest payable 12,000
Utilities payable 30,000
Cash dividends payable 8,000
Obligation to deliver a fixed number of own
100,000
shares worth a variable amount of cash
Bonds payable 240,000
Premium on bonds payable 20,000
Deposit liability 10,000
Lease liability 70,000
Redeemable preference shares issued 30,000
Total financial liabilities 520,000

2. B
Trade accounts payable (700K + 20K + 2K) 722,000
Salaries payable 90,000
Accrued payables 30,000
Held for trading financial liabilities 200,000
Interest payable on 10%, 4-yr. note (600K x 10% x 4/12) 20,000
Bonds payable – current portion 500,000
Income tax payable 60,000
Cash dividends payable 40,000
Total current liabilities 1,662,000

3. D
Trade and other payables 3,000,000
Note payable (issued 3 yrs. ago, maturing on Dec. 31, 20x2) 6,000,000
Current portion of serial bonds (800K x 2) 1,600,000
Total current liabilities 10,600,000

4. C (2.4M x 80%) = 1,920,000 noncurrent; (2M – 1.92M) = 80,000

current
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5. A 4,290,000 – 800,000 + 620,000 = 4,110,000

 The bank loan is classified as noncurrent because Bit Co. has

the has the right, at the end of the reporting period, to roll
over the obligation for at least twelve months after the
reporting period under an existing loan facility (i.e., the
original loan contract provides for the option to extend the loan and,
as of Dec. 31, 20x2, Bit Co. has complied with all the conditions
relating to the extension.)
 Deposits received for future subscription of shares that are
repayable in cash at any time prior to the issuance of the
subscribed shares are classified as liability. Since the SEC’s
decision is expected to be received in 20x2, the deposit liability
is classified as current in the 20x1 financial statements. If the
SEC approves Bit Co.’s increased capitalization, the liability is
reverted back to “Subscribed Capital” (and, if appropriate,
‘Share premium’). When the shares are issued, the
“Subscribed Capital” is reclassified to “Share Capital.”

6. B
Accounts payable 750,000
Interest payable 120,000
Total current liabilities 870,000

The grace period is considered because it was received by the

balance sheet date

7. C
Unadjusted accounts payable 4,600,000
(b) Consigned goods (90,000)
(c) Freight accommodation on behalf of supplier (5,000)
(d) Goods lost in transit 64,000
(e) Unreleased checks 32,000
Adjusted accounts payable 4,601,000
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8. B
Inventory Accounts payable
Unadjusted balances 800,000 960,000
(a) FOB destination (80,000) (80,000)
(c) Purchase return (20,000)
(d) Post-dated check drawn 60,000
Adjusted accounts payable 720,000 920,000

The purchase return is adjusted only to the accounts

payable and not to the inventory because the inventory balance
was determined based on the physical count on Dec. 31, 20x1,
which necessarily already excludes the return made on Dec. 29,
20x1.

9. C (125,000 + 200,000 expiring in 20x4) + 140,000 expiring in

20x5 = 465,000

10. D
Plan Initial payment per child No. of children Total
#1 500 15 7,500
#2 200 12 2,400
#3 - 9 -
9,900
Multiply by: Unexpired portion 9/12
Unearned revenue 7,425

11. D
20x1 20x2 20x3 Total
Percentage earned 60% 40%
Percentage earned 60% 40%
First half (2M ÷ 2) 1M 600,000 400,000
Second half (2M ÷ 2) 1M 600,000 400,000
Earned portions 600,000 1,000,000 400,000 2,000,000
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12. B
Redemption 126,000
Breakage (200,000 x 10% x 126/180*) 14,000
Total revenue in 20x1 140,000

* (200,000 x 90%) = 180K

Gift cards sold 200,000

Redemption (126,000)
Breakage (14,000)
Gift card liability - 12/31/x1 60,000

13. A
Redemption & expiration(a) of prior yr. GCs 120,000
Redemption of current yr. GCs 779,000
Breakage (1M x 5% x 779/950 (b)) 41,000
Total revenue in 20x1 940,000

The unredeemed portion of ₱8,000 (120K – 112K) from prior year

(a)

has expired during 20x1 because the problem states that the gift
certificates sold expire within one year. Accordingly, this amount is
recognized as breakage revenue (and as reduction in liability) in 20x1.

(b) (1M x 95%) = 950K

Gift certificates sold during 20x1 1,000,000

Gift certificates sold and redeemed in 20x1 (779,000)
Breakage revenue (41,000)
Unearned revenue – Dec. 31 20x1 180,000

14. D
Total tax for the year (72,000 x 2) 144,000
Divide by: No. of months in a year 12
Monthly tax 12,000
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April 1, 20x1
Land xxx
Cash xxx
Real property tax payable (12K x 3 mos.) 36,000

April 30, 20x1

Real property tax expense 12,000
Real property tax payable 12,000

May 1, 20x1
Real property tax payable 48,000
Prepaid real property tax 24,000
Cash 72,000

15. C

PROBLEM 4: FOR CLASSROOM DISCUSSION

1. Solution:
Accounts payable 15,000
Preference shares issued with mandatory redemption 100,000
Utilities payable 16,000
Rent payable 9,000
Total financial liabilities 140,000

2. Solution:
Accounts payable 500,000
Held for trading financial liabilities 1,000,000
Current portion of Note payable 1,000,000
Unearned revenue 300,000
Dividends payable 800,000
Current liabilities 3,600,000
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3. Solution:
Currently maturing long-term debt (a) 10,000,000
5-year loan payable on demand (b) 6,000,000
Loan with breach of provision (b) 14,000,000
Total current liabilities 30,000,000

“An entity classifies its financial liabilities as current when they are
(a)

due to be settled within twelve months after the reporting period,

even if:
a) the original term was for a period longer than twelve months,
and
b) an agreement to refinance, or to reschedule payments, on a long-
term basis is completed after the reporting period and before the
financial statements are authorised for issue.” (PAS 1.72)

(b) “When an entity breaches a provision of a long-term loan

arrangement on or before the end of the reporting period with the
effect that the liability becomes payable on demand, it classifies the
liability as current, even if the lender agreed, after the reporting
period and before the authorisation of the financial statements for
issue, not to demand payment as a consequence of the breach. An
entity classifies the liability as current because, at the end of the
reporting period, it does not have a right to defer its settlement for at
least twelve months after that date.” (PAS 1.74)

4. Solution:
Unadjusted accounts payable 1,200,000
Goods in transit shipped FOB shipping point 70,000
Goods in transit shipped FOB destination (80,000)
Adjusted accounts payable 1,190,000

5. Solution:
 Subscriptions revenue in 20x2: (160,000 + 2,690,000) = 2,850,000
 Unearned subscriptions as of 12/31/x2 = 110,000
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6. Solution:
Date Cash 400,000
Gift card liability 400,000
to record the sale of gift certificates
Date Gift card liability 216,000
Revenue 216,000
to record the redemption of gift certificates
Date Gift card liability 24,000
Revenue (400,000 x 10% x 60%*) 24,000
to record the revenue from expected breakage
* 216,000 ÷ (400,000 x 90%) = 60%

7. Solution:
Unadjusted balance 5,480,000
Unpaid utilities 50,000
Understatement in withholding taxes 20,000
Adjusted total current liabilities 5,550,000

Dividend payable is recognized when the entity declares the

dividends (or when the declaration is approved by a relevant
authority, if such approval is required).
The dividends declared (in the problem) are recognized
only on Jan. 7, 20x2 (assuming it is not subject to further
approval). The dividends are only disclosed in the 20x1 financial
statements as a non-adjusting event after the reporting period.