CHAPTER 1- LIABILITIES

Problem 1-1 IAA (P.15)

On December 31, 2020, Glare company provided the following information:

Account payable 1,000,000

Deposits and advances from customers 250,000

Notes Payable 1,000,000

Credit balances in customers accounts 200,000

Serial bonds payable 1,000,000

Accrued interest on bonds payable 150,000

Unearned rent income 100,000

Total Current Liabilities 3,700,000

Problem 1-2
Easy Company provided the following information on December 31, 2020:

Notes Payable- trade 3,000,000

Notes Payable- bank 2,000,000

Notes Payable- officers 500,000

Accounts Payable- trade 4,000,000

Bank overdraf 300,000

Dividends payable 1,000,000

Witholding Tax payable 100,000

Income Tax payable 800,000

Estimated warranty Liability 600,000

Estimated damages payable 700,000

Accrued Liabilities 900,000

Estimated premium liability 200,000

Total Current Liabilities 14, 100, 000

Problem 1-3 (P.16)

Manchester company provide the following information on December 31, 2020:

Income taxes withheld from employees 900,000

Cash overdraf at Harbor Bank 1,300,000

Accounts Receivable with credit balance 750,000

Estimated warranty liability 500,000

Estimated damages payable 1,500,000

Accounts Payable 3,000,000

Accrued interest on bonds payable from October 1 to December 31, 2020 150,000

(5,000,000 x 12% x 3/12)

Total Current Liabilities 8,100,000

Problem 1-4

Accounts payable (500,000 + 100,000) 600,000

Accrued Liabilities 50,000

Note payable – refinanced 1,000,000

Note payable – due May 1, 2021 800,000

Total Current Liabilities 2,450,000

Noncurrent liability
Bonds Payable, due December 31, 2021 2,000,000

Problem 1-5 (P.17)

On December 31, 2020. Cordillera Company reported the following liabilities:

Note Payable – 9% 3,000,000

Note Payable – 8% 6,000,000

Note Payable – 10% 4,000,000

Note Payable – 11% 5,000,000

Problem 1-6 (P.18)

Interson Company is planning to refinance certain short-term obligations on a long term basis. The 2020
financial statements are issued on March 15, 2021.

Accounts Payable 6,500,000

Note payable- bank 3,000,000

Interest payable 150,000

Mortgage note payable 2,000,000

Bonds payable 4,000,000

Total current liabilities 15, 650,000

Problem 1-7 (P. 19)

Cavalier Company provided the following information on December 31, 2020.

Accounts Payable 6,500,000

Note payable- bank 3,000,000

Interest Payable 150,000

Mortgage note payable 2,000,000

Bonds payable 4,000,000

Total Current liabilities 15,650,000

Problem 1-8 (P. 20)

Burma Company disclosed the following information about liabilities at year-end:

What total amount should be presented as current liabilities at year-end?

Solution.

Problem 1-9

Gar company disclosed the following liability account balances on December 31, 2020:

Accounts Payable 1,900,000

Dividends Payable 500,000

Income tax Payable 900,000
Note Payable 600,000

Total Current Liabilities 3,900,000

Problem 1-10 (P. 21)

Able company had the following amounts of long-term debt outstanding on December 31, 2020:

14% note payable due 2021 30,000

8% note payable maturing December 31, 2021 100,000

Total Current maturities 130,000

Problem 1-11
Achilles Company reported the following liability balances on December 31, 2020

12% note payable – redefined on January 31, 2021 5,000,000

Problem 1-12 (P. 22)

Eliot Company reported the following liabilities on December 31, 2020:

Accounts payable and accrued interest 1,000,000

Debentures payable – current portion 500,000

Total current liabilities 1,500,000

Problem 1-13
On December 31, 2020, Largo Company had a P750,000 note payable outstanding due July 31, 2021.
The entity planned to refinance the note by issuing long-term bonds.
What amount of the note payable should be included in current liabilities on December 31, 2020?

- The entire amount of P750,000 is shown as current liability because the note payable is due to
be settled within one year regardless of the issuance of bonds payable.

PROBLEM 1-14 (P. 23)

Dean Company has a P2,000,000 note payable due June 30, 2021. On December 31, 2020 the entity
signed an agreement to borrow up to P2,000,000 to refinance the note payable on a long-term basis.

On December 31, 2020 what amount of the note payable should be reported as current liability?
Note payable 2,000,000

Less: Refinanced on December 31, 2020 – noncurrent portion

(80% x 1,500,000) 1,200,000

Note payable – not refinanced, current portion 800,000

Problem 1-15

Willem company reported the following liabilities on December 31, 2020

What total amount should be reported as current liabilities on December 31, 2020?

Accounts payable 750,000

Short-term borrowings 400,000

Mortgage payable, current portion 100,000

Bank loan payable due June 30, 2021 1,000,000

Total current liabilities 2,250,000

Problem 16

Cobb company sells gif certificates redeemable only when merchandise is purchase. Upon redemption,
Cobb company recognizes the unearned revenue as realized.

Information for the current year.

What amount should be reported as unearned revenue at year-end?

Problem 1-17

Regal company sells gif certificates redeemable for store merchandise is purchase. The gif certificates
have no expiration date.

The entity has the following information pertaining to the gif certificate sales and redemptions.

What amount should be reported as unearned revenue on December 31, 2020?

Problem 1-18 (p. 25)

Greene company sells office equipment service contracts agreeing to service equipment for a two-year
period. Cash receipts from contracts are credted 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.

What is unearned service contract revenue on December 31?

Problem 1-19

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, 2020 before year-end adjustment.
What amount should be reported as unearned contract revenue on December 31, 2020?

Problem 1-20 (P.26)

Dunne Company sells equipment service contracts that cover a two-year period. The sale price of each
contract is P600.
1. What is the contract revenue for 2020?

40% x 600,000 =240,000 / ½ = 120,000

 2. What amount should be reported as deferred service revenue on December 31, 2020?

Total contracts sold 2020 600,000

Less: contract revenue in 2020 120,000

Total deferred service revenue 480,000

3. What is the contract revenue for 2021?

600,000 / ½ = 300,000

4. What is the contract revenue for 2022?

60% x 600,000 =360,000 / ½ = 180,000

Problem 1-21 (P.27)

Cobra company sells appliance service contracts ageing 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 and during the first contract year and 60% is incurred evenly during the second contract year.

Receipts from service contract sales are P500,000 for 2020 and P600,000 for 2021.

1. What is the contract revenue for 2020?

40% x 500,000 =250,000 / ½ = 100,000

2. What amount should be reported as deferred service revenue on December 31, 2020?

Total contracts sold 2020 500,000

Less: contract revenue in 2020 100,000

Total deferred service revenue 400,000

3. What is the contract revenue for 2021?

4. What is the unearned revenue on December 31, 2021?

Problem 1-22

Hart company sells subscriptions to a specialized directory that is published semiannually and shipped to
subscribers on April 15 and October 15.

Subscriptions received afer the march 31 and September 30 cut-off dates are held for the next
publication.

What amount should be reported as deferred revenue from subscription on December 31?

Problem 1-24

Anette Video Company sells 1- and 2year subscriptions for the video of the month business.
1. On December 31, 2021, what amount should be reported as unearned subscription revenue
465,000

2. What amount dholud be refoted as subscription revenue for 2021

Problem 1-25

Farr company sells products with reusable and expensive containers.

Containers returned in 2020 from deliveries in

What is the liability for deposits on December 31, 2020?

Problem 1-26 (P.30)

Black company rewuired nonrefundable advance payments with special orders for machinery
constructed to customers specifications.

What amount should be reported as current liability for advances from customers at year-end?

Problem 1-27 (P. 31)

Kent company, aa realty entity maintains escrow accounts and pays real estate taxes for the mortgage
customers.

Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is credited to the
mortgage’s account and used to reduce future escrow payments.

What amount should be reported as escrow accounts liability on December 31?

Problem 1-28
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 2020 real estate tax is P2,800,000 payable in equal instalments on the first day of each calendar
quarter.

On January 1, 2020 the balance in the escrow account was P300,000

On September 30, 2020 what amount should be reported as an escrow liability?

Problem 1-29 (P. 32)

Nature Company has an agreement to pay the sales manager a bonus of 5% of the entity’s earnings. The
income for the yeara before bonus and tax is P5,250,000. The income tax rate is 30% of income afer
bonus.

Problem 1-30
Ronald Company has an incentive compensation plan under which a branch manager received 10% of
the branch income afer 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 tax rate was
30%.
What is the bonus for the current year?
Problem 1-31 (P.33)
Christian Company has a bonus agreement which provides that the general manager shall receive an
annual bonus of 10% of the net income afer bonus and tax. The income tax rate is 30%.
The general manager received P 280,000 for the current year as bonus. What is the income before bonus
and tax?

Problem 1-32
Afer three profitable years, Gretchen Company decided to offer a bonus to the branch manager ff 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 is computed on income in excess of P1,000,000 afer deducting the bonus but before
deducting tax.

That is the bonus for the current year?

Chapter 5- bonds payable

Problem 5-9 (P.189)

Problem 5-10 (P.189)

Problem 5-11 (P.190)

Problem 5-12 (P.190)

Problem 5-13 (P.191)

Problem 5-14 (P.191)

Problem 5-15 (P.191)

Problem 5-16 (P.192)

Problem 5-17 (P.192)

Problem 5-18 (P.192)

Problem 5-19 (P.193)

Problem 5-20 (P.193)

Problem 5-21 (P.193)

Chapter 6 – Effective interest method
Problem 6-13 (P. 230)

Marsh Company The entity used the effective interest method of amortizing bond discount. Interest is
payable semiannually on January 1 and July 1.

For six months ended June 30, 2020, what amount should be reported as bond interest expense?

Problem 6-14 (P. 230)

On July 1, 2020, Tara Company issued 4,000 bonds of 8%, P1,000 face amount for P3,504,000. The bonds
were issued to yield 10%. The bonds are dated July 1, 2020 and mature on July 1, 2029. Interest payable
semiannually on January 1 and July 1.

What amount of the bond discount should be amortized for the six months ended December 31, 2020?

Problem 6-15 (P. 230)

Moon Company issued 10% bonds payable in the face amount of P4,500,000. The bonds mature on
January 1, 2030.
For the six months ended June 30, 2020, what amount should be reported as bond interest expense?

Problem 6-16 (P. 231)

Ward Company issued 9% bonds with face amount of P4,000,000 which mature on January 1, 2030. The
bonds were issued for P3,756,000 to yield 10%, resulting in bond discount of P244,000.

The entity used the interest method of amortizing bond discount. Interest is payable annually on
December 31.

1. On December 31, 2020, what iss the balance of the discount on bonds payable?
2. What is the carrying amount of bonds payable on December?

Problem 6-17 (P. 231)

Wolf Company issued 10% bonds in the face amount

Problem 6-18 (P. 232)

Problem 6-19 (P. 232)

Problem 6-20 (P. 233)

Problem 6-21 (P. 233)

Problem 6-22 (P. 234)

Problem 6-23 (P. 234)

Problem 6-24 (P. 235)

Problem 6-25 (P. 235)

Problem 6-26 (P. 236)

Problem 6-27 (P. 236)

Chapter 7 – Compound Financial Instrument

Problem 7-9 (P. 264)

At the beginning of current year, Fence Company issued 12% P5,000,000 non convertible bonds at 103
which are due in 5 years.

On the date of issuance, the market value of the share was P40 and the market value of the warrant was
P4.
1. What amount should be recognized as discount or premium on the original issuance of the
bonds>
- 342,000 discount
2. What is the equity component arising from the issuance of bonds payable?
- 492,000\
3. What amount is credited to share premium if all of the share warrants are exercised?
- 4,242,000
Problem 7-10 (P. 265)

Moses company issued P5,000,000 face amount, 5-year bonds at 109. Each P1,000 bond was issued
with 10 share warrants, each of which entitled the bondholder to purchase one share of P100 par value
at P120. Immediately afer issuance, the market value of each warrant was P5.

However, the prevailing market rate of interest for similar bonds without warrants is 12%.

1. What is the carrying amount of the bonds payable on the date of issuance?
2. What amount should be recorded initially as discount or premium on bonds payable?
3. What is the equity component arising from the issuance of bonds payable?
4. What amount is credited to share premium if all of the share warrants are exercised?

Problem 7-11 (P. 266)

At the beginning of current year, Case Company issued P5,000,000 of 12% nonconvertible bonds
payable at 103 which are due in five years.

In addition,
On the date of issuance, the quoted market value of each warrant was P4. The market value of the
bonds ex-warrants at the time of issuance is 95.
 1. What is the carrying amount of the bonds payable on the date of issuance?
2. What amount of the proceeds from the bond issue should be recognized as an increase in
sharehlders’ equity?
3. What amount is credited to share premium if all of the share warrants are exercised?

Problem 7-12 (P. 267)

Moriones Company issued face amount 12% 5-year convertible bonds at 110 at the beginning of current
year, paying interest semiannually on January 1 and July 1.

What is the increase in shareholders’ equity arising from the original issuance of the convertible bonds?

Problem 7-13 (P. 267)

At the beginning of current year, Susan Company issued 5,000 convertible bonds. The bonds have a
three-year term and are issued at 110 with a face amount og P1,000 per bond.

Interest is payable annually in arrears at a nominal 6% interest rate.

What is the equity component arising from the original issuance of the convertible bonds?
Problem 7-14 (P. 268)
On December 31, 2020, Cey Company had outstanding 12% P5,000,000 face amount convertible bonds
maturing on December 31, 2025.
Interest is payable on June 30 and December 31.

At

Problem 7-15 (P. 268)

Spare Company had an outstading share capital with par value of P50,000,000 and a 12% convertible
bond issue in the face amount of P10,000,000. Interest payment dates of the bond issue are June 30 and
December 31.

What amount of share premium should be recognized by reason of the conversion of bonds payable into
share capital?

Problem 7-16 (P. 269)

Clay company had P600,000 convertible 8% bonds payable outstanding on June 30. Each P1,000 bond
was convertible into 10 ordinary shares of P50 par value.

The unamortized premium on these bonds was P12,000 at the date of conversation. No equity
component was recognized when the bonds were originally issued.

What is the increase in share premium as a result of the bond conversion?

Problem 7-17 (P.269)

Problem 7-18 (P. 270)

On December 31, 2020, Tamia Company showed the followig balances:

Bonds payable – 6%

Discount on bonds payable

Share premium – conversion privilege

The interest is payable annually every December 31. The convertible bonds are not converted but fully
paid on December 31, 2020.

However, the quoted price of the bonds without the conversion privilege is 95.
Chapter 8- Note Payable

Problem 8-10 (P.293)

Joshua Company bought a new machine and agreed to pay in equal annual installment of P600,000 at
the end of each of the next five years. The preventing interest rate for this type of transaction is 12%.
1.. What amount should be reported as note payable if financial statements were prepared today?

- 2,160,000

2. What is the interest expense for the first year?

- 259,200

Problem 8-11 (P.293)

Mann Company reported a 10% note payable of P3,600,000 on June 30, 2020. The note is dated October
1, 2018 and payable in three equal annual payments of P1,200,000 plus interest.

On june 30,2020 what amount should be reported as accrued interest payable for this note?

- 180,000

Problem 8-12 (P.294)

On December 31, 2020, Bart company purchased a machine from Fell company in exchange for a
noninterest bearing note requiring eight payments of P200,000.

On December 31, 2020, what is the carrying amount of the note payable?
- 942,400
Problem 8-13 (P.294)
At the beginning of current year, Pares company borrowed P3,600,000 from a major customer
evidenced by a noninterest bearing note due in three years.
The entity agreed to supply the customer’s inventory needs for the loan period at an amount lower than
market price.

What amount of interest expense should be reported in the income statement for the current year?

Problem 8-14 (P.295)

At year-end, Roth company issued a P1,000,000 face amount note payable in exchange for services
rendered.
The note, made at usual trade terms, is due in nine months and bears interest, payable at maturity, at
the annual rate of 3%.
At what amount should the note payable be reported at year-end?

-1,000,000

Problem 8-15 (P.295)

On September 1, 2019, Pine company issued a note payable in the amount of P1,800,000, bearing
interest at 12%, and payable in three equal annual principal paymenrs if P600,00. On this date, the prime
rate was 11%.

On December 31,2020, what amount should be reported as accrued interest payable?

-48,000
Problem 8-16 (P. 295)
On March 1, 2019, Alpha company borrowed P1,000,000 and signed a 2-year note bearing interest at
12% per annum compounded annually. Interest is payable in full at maturity on February 28, 2021.

What amount should be reported as accrued interest payable on December 31, 2020?

- 232,000

Problem 8-17 (P.296)

On January 1, 2020, Solemn company sold land to Glory company. There was no established market
price for the land.

The note has no ready market. The prevailling rate of interest for a note of this type is 10%.

What is the carrying amount of the note payable on December 31, 2020?

- 1,388,560
Problem 8-18(P.296)

On January 1, 2020, Easy Company reported a note payable of P1,200,000.

The notes is dated October 1, 2019, bears interest at 15% and is payable in three equal annual payments
of P400,000.
What amount should be reported as accrued interest expense for2020?

Problem 8-19 (P. 297)

Loob company frequently borrowed rom the bank in order to maintain sufficient operating cash. The
loans were at a 12% interest rate, with interest payable at maturity.

If no correction is made, by what amount would interest expense for 2020 be understated?

Problem 8-20

Problem 8-21(P. 298)

On july 1, 2020, Justine Company borrowed P1,000,000 on a 10% five-year interest-bearing note.

The entity irrevocably elected the fair value option in measuring the note payable.
1. What is the interest expense for 2020
 - 50,000
2. What is the carrying amount of the note payable on December 31, 2020?
- 975,000
3. What amount should be reported as gain from change in fair value of the note payable for 2020?
- 25,000

Problem 8-22 (P. 299)

On January 1, 2020, Jonathan company borrowed P500,000 8% note due in four years, The present
value of the note on the date of issuance was P367,500.

The entity elected irrevocably the fair value option in measuring the note payable.
1. What is the carrying amount of the note payable on December 31, 2020?
2. What amount should be reported as interest expense for 2020?
3. What amount of gain from change in fir value of the note payable should be reported for 2020?
4. At what amount should the discount on note payable be presented on December 31, 2020?
Chapter 9 – Debt Restructure

Problem 9-13 (P.324)

Hull company is in debited to Apex company under a P5,000,000, 12%, three- year note dated December
31, 2018.

What amount of pretax gain on extinguishment should Hull company report as component of income
from continuing operations in 2020?

Problem 9-14

The following information pertains to the transfer of real estate pursuant to a debt restricting by Knob
company to Mene Company in full liquidation of Knob company’s liability to Mene Company.

What amount of pretax gain on extinguishment should Knob Company report as component of income
from continuing operations?
Problem 9-15 (P. 325)

During 2020, Mann Company experienced financial difficulties and is likely to default on a P5,000,000,
15% three-year note dated January 1, 2018 payable to summit bank.

What amount should be reported as gain from extinguishment of debt in the 2020 income statement?

Problem 9-16 (P.325)

Due to extreme financial difficulties, Armada Company had negotiated a restructing of a 10%
P5,000,000 note payable due on December 31, 2020. The unpaid interest on the note on such date was
P500,000.

The present value of 1 at 10% for three periods is 0.75 and the resent value of an ordinary annuity of 1 at
10% for three periods is 2.49

1. What is the gain on extinguishment for 2020?

- 1,703,200
 2. What is the interest expense for 2021?
- 379,680

problem 9-17 (P.326)

Due to adverse economic circumstances and poor management, Tagaytay Highlands company had
negotiated a restricting of a 9% P6,000,000 note payable to Second bank due on January 1, 2020.
There was no accrued interest on the note on January 1, 2020.

1. What is the present value of the new note payable on January 1, 2020?
- 5,494,500
2. What is the gain on modification of debt to be recognized for 2020?
- 505,500
3. What is the interest expense for 2020 as a result of the modification?
- 494,505

Problem 9-18 (P.327)

On January 1, 2020, Granada Company had an overdue 10% note payable to First Bank at P8,000,000
and accrued interest of P800,000.
As a result of a restricting agreement on January 1, 2020, First bank agreed to the following provisions:

The principal obligation is reduced to P6,000,000

1. What is the present value of the new note payable on January 1, 2020?
- 6,380,400
2. What is the gain on extinguishment of debt to be recognized for 2020?
- 2,419,600
3. What is the interest expense to be recognized for 2020?
- 638,040