FINANCIAL ACCOUNTING Volume Two Valix and Peralta 2008 Edition SOLUTION MANUAL CHAPTER Problem 1-1 Problem 1-2 Problem 1-5 A A D A A C C B A 10 B Problem 1-3 Problem 1-4 A A C B A C A B B D B D D C A A C A A D A 10 C D A B Problem 1-6 Accounts payable 3,000,000 Deposits and advances 2,000,000 from customers 500,000 Notes payable 4,000,000 Credit balances in 300,000 customers’ accounts 1,000,000 Serial bonds payable 100,000 Accrued interest on 800,000 bonds payable 600,000 Provision for tax 700,000 Problem 1-7 1,000,000 Note payable – trade Note payable – bank 250,000 1,000,000 Note payable – officers Accounts payable – trade Bank overdraft 200,000 1,000,000 Dividends payable Withholding tax payable Income tax payable 150,000 Estimated warranty liability Estimated damages payable assessment 900,000 Unearned rent income 200,000 Total current liabilities 14,100,000 300,000 Accrued liabilities 100,000 Estimated premium liability 4,000,000 Total current liabilities Problem 1-8 Accounts payable (500,000 + 100,000) 600,000 Accrued liabilities 50,000 Note payable - refinanced 1,000,000 Note payable – due May 1, 2009 800,000 Total current liabilities 2,450,000 Noncurrent liabilitiy: Bonds payable, due December 31, 2010 2,000,000 Problem 1-9 a Current liabilities: Note payable – bank 700,000 Note payable – shareholder Less: Discount on note payable 1,887,000 Accrued interest payable 189,000 Total current liabilities 2,776,000 2,000,000 113,000 b Note payable – bank: January – April 1, 2008 (2,800,000 x 12% x 3/12) 84,000 April – December 31, 2008 (2,100,000 x 12% x 9/12) 189,000 273,000 Note payable – shareholder: Amortization of discount from July – December 31, 2008 (226,000 x 6/12) 113,000 Total interest expense 386,000 Problem 1-10 Current liabilities: Accounts payable Note payable – bank Accrued expenses 23,000,000 Noncurrent liabilities: Mortgage payable Note payable due 2010 7,000,000 Total liabilities 30,000,000 7,000,000 12,000,000 4,000,000 4,000,000 3,000,000 The note payable to bank is paid from the proceeds of the issuance of share capital of P4,000,000 on January 31, 2009 and the availment of a financing agreement on February 15, 2009 with a financially capable commercial bank on April 1, 2009 in the amount of P3,000,000 Nevertheless, the note payable should continue to be classified as current Problem 1-11 Answer B Note payable, September 1, 2007 1,800,000 Less: Payment on September 1, 2008 600,000 Balance, September 1, 2008 1,200,000 Accrued interest payable from September to December 31, 2008 (1,200,000 x 12% x 4/12) 48,000 Problem 1-12 Answer A Note payable, October 1, 2007 1,200,000 Less: Payment on October 1, 2008 400,000 Balance, October 1, 2008 800,000 Interest paid from January to September 30, 2008 (1,200,000 x 15% x 9/12) 135,000 Interest accrued from October to December 31, 2008 (800,000 x 15% x 3/12) 30,000 Interest expense for 2008 165,000 Problem 1-13 Answer A January – October 31, 2008 (500,000 x 12% x 10/12) 50,000 February – July 31, 2008 (1,500,000 x 12% x 6/12) 90,000 May – December 31, 2008 (800,000 x 12% x 8/12) 64,000 Total interest expense of 2008 Less: Recorded interest expense Understatement of interest expense 204,000 150,000 54,000 Problem 1-14 Answer C Accrued interest from March 1, 2007 to February 28, 2008 (1,000,000 x 12%) 120,000 Accrued interest from March to December 31, 2008 (1,000,000 + 120,000 x 12% x 10/12) 112,000 Total accrued interest payable, December 31, 2008 232,000 If the interest is compounded annually, it means that the accrued interest for one year will also earn interest Problem 1-15 Answer B 12% note payable – refinanced 5,000,000 Problem 1-16 Answer A 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 15,650,000 Problem 1-17 Answer A 6% Note payable 500,000 8% Note payable 800,000 Total current liabilities 1,300,000 PAS 1, paragraph 63, provides that an entity shall classify its financial liabilities as current when they are due to be settled within twelve months after balance sheet date even if an agreement to refinance or reschedule payment on a longterm basis is completed after balance sheet date and before the financial statements are authorized for issue Problem 1-18 2008 Cash Sales 3,600,000 3,600,000 Premiums Cash 390,000 390,000 Cash (5,000 x 10) Premium expense (5,000 x 40) Premiums (5,000 x 50) 250,000 Premium expense (5,000 x 20) Cash 100,000 50,000 200,000 100,000 Premium expense (2,000 x 60) Estimated premiums payable 120,000 120,000 2009 Estimated premiums payable Premium expense 120,000 Reversing entry Cash Sales 4,200,000 120,000 4,200,000 Premiums Cash 580,000 580,000 Cash (9,000 x 10) Premium expense (9,000 x 40) Premiums (9,000 x 50) 450,000 90,000 360,000 Premium expense (9,000 x 20) Cash 180,000 180,000 Premium expense (3,000 x 60) Estimated premiums payable 180,000 180,000 Problem 1-19 Cash (400,000 x 9) Sales 3,600,000 Premiums Cash 900,000 3,600,000 900,000 Premium expense Cash 30,000 30,000 Cash (8,000 x 5) Premium expense (8,000 x 85) Premiums (8,000 x 90) 720,000 40,000 680,000 Premium expense (2,000 x 85) Estimated premiums payable 170,000 170,000 Bottle caps to be redeemed (25% x 400,000) 100,000 Less: Bottle caps redeemed (8,000 pens x 10) 80,000 Bottle caps outstanding 20,000 Premiums to be distributed on the balance of bottle caps (20,000 /10) 2,000 Premium expense Cash (30 x 5,000) 150,000 150,000 Problem 1-20 2008 Cash Sales 2,500,000 Premiums - towels Cash 175,000 Cash (1,000 x 20) Premiums expense Premiums – towels (1,000 x 100) 100,000 Premium expense (1,000 X 5) 2,500,000 175,000 20,000 80,000 5,000 Cash 5,000 Premium expense Estimated premiums payable (600 X 85) 51,000 2009 Estimated premiums payable Premium expense 51,000 Cash Sales 3,125,000 Premiums - towels Cash 200,000 Cash (1,800 x 20) Premiums expense Premiums – towels (1,800 x 100) 180,000 51,000 51,000 3,125,000 200,000 36,000 144,000 Premium expense (1,800 X 5) Cash 9,000 9,000 Premium expense Estimated premiums payable (800 X 85) 68,000 68,000 Statement classification Current asset: Premiums – towels Current liability: Estimated premiums payable Selling expense: Premium expense Problem 1-21 Answer B 2008 2009 75,000 95,000 51,000 68,000 136,000 170,000 Problem 1-22 Answer D Coupons to be redeemed (160,000 x 60%) 20,000 Less: Coupons redeemed 15,000 Balance 5,000 96,000 Premiums to be distributed (250,000 x 80% / 10) 40,000 Premiums distributed 56,000 Balance Number of premiums (56,000 / 5) 11,200 Premium liability (5,000 x 100) 500,000 Amount of liability (11,200 x 20) 224,000 Problem 1-23 Answer B Problem 1-24 Answer B Premiums distributed in 2009 5,500 Coupons to be redeemed Estimated premiums in 2009 500 80% x 500,000) 400,000 Total 6,000 Less: Coupons redeemed 300,000 Less: Estimated premiums in 2008 200 Coupons outstanding 100,000 Premiums applicable to 2009 5,800 Liability for unredeemed Premium expense (5,800 x 60) 348,000 coupons (100,000 x 15) 1,500,000 Problem 1-25 Answer C Total coupons issued and to be redeemed (600,000 x 70% x 110%) 462,000 Less: Total payments to retailer Liability for underdeemed coupons – 12/31/2008 220,000 242,000 Problem 1-26 Accrual approach 2008 Cash (300 x 15,000) Sales 4,500,000 Warranty expense 4,500,000 144,000 Estimated warranty liability (60% x 300 = 180 x 800) 144,000 Estimated warranty liability Cash 40,000 40,000 2009 Cash (500 x 15,000) 7,500,000 Sales 7,500,000 Warranty expense 240,000 Estimated warranty liability (60% x 500 = 300 x 800) 240,000 Estimated warranty liability Cash 150,000 150,000 Expense as incurred approach 2008 Cash Sales 4,500,000 4,500,000 Warranty expense Cash 40,000 40,000 2009 Cash Sales 7,500,000 7,500,000 Warranty expense Cash 150,000 150,000 Problem 1-27 Accrual approach 2008 Cash Sales 5,000,000 Warranty expense Estimated warranty liability (14% x 5,000,000) 700,000 5,000,000 Estimated warranty liability Cash 390,000 2009 Cash Sales 9,000,000 Warranty expense Estimated warranty liability (14% x 9,000,000) 1,260,000 390,000 Estimated warranty liability Cash 900,000 700,000 9,000,000 1,260,000 900,000 “Expense” approach 2008 Cash Sales 5,000,000 Warranty expense Cash 390,000 2009 Cash Sales 9,000,000 Warranty expense Cash 900,000 5,000,000 390,000 9,000,000 900,000 10 Problem 1-28 Units sold: October 32,000 November 28,000 December 40,000 Total 100,000 Multiply by 2% Total failures expected 2,000 Less: Failures already recorded: October sales November sales December sales Expected future failures Multiply by Estimated cost Warranty expense Estimated warranty liability 123,000 Problem 1-29 Answer D 640 360 180 1,180 820 150 123,000 123,000 Warranty expense (2,400 x 300) Problem 1-30 Answer C 720,000 Problem 1-31 Answer A Warranty expense (3,000 x 80) 240,000 Warranty expense Less: Actual warranty cost 70,000 (5% x 5,000,000) 250,000 Warranty liability–June 30, 2008 170,000 Problem 1-32 Answer B Warranty expense: 2008 (5,000,000 x 7%) 2009 (7,000,000 x 7%) 350,000 490,000 840,000 Warranty costs: 2008 2009 Warranty liability – December 31, 2009 100,000 300,000 400,000 440,000 11 Problem 1-33 Answer A Net sales (640,000 / 8%) 8,000,000 Problem 1-34 Answer A Normal defect (500 x P10,000 x 25%) 1,250,000 Significant defect (500 x P30,000 x 15%) 2,250,000 3,500,000 Problem 1-35 Cash Gift certificates payable 500,000 Gift certificates payable Sales 400,000 Gift certificates payable Forfeited gift certificates (8% x 500,000) 40,000 500,000 400,000 40,000 Problem 1-36 Cash Gift certificates payable 900,000 Gift certificates payable Sales 780,000 900,000 780,000 Gift certificates payable Forfeited gift certificates 40,000 Unearned revenue – January 260,000 Add: Gift certificates sold 900,000 Total 1,160,000 Less: Gift certificates redeemed Expired gift certificates 820,000 Unearned revenue – December 31 340,000 40,000 780,000 40,000 12 Problem 1-37 Answer C Unearned revenue – January 650,000 Add: Gift certificates sold 2,250,000 Total 2,900,000 Less: Gift certificates redeemed Expired gift certificates 2,050,000 Unearned revenue – December 31 850,000 Problem 1-38 Answer D 2008 Sales of gift certificates (2,500,000 x 90%) 2,250,000 Less: 2007 Redemption of current year sales 1,750,000 1,950,000 100,000 Unearned revenue – December 31, 2008 500,000 Unredeemed – January 1, 2008 750,000 Less: 2008 Redemption of prior year sales 250,000 Expired gift certificates 500,000 Problem 1-39 Answer D Cash Unearned service contract revenue 980,000 980,000 Service contract expense Cash 520,000 520,000 Unearned service contract revenue Service contract revenue 860,000 Unearned revenue – January 600,000 Cash receipts from contracts sold 980,000 Total 1,580,000 Less: Service revenue recognized 860,000 Unearned revenue – December 31 720,000 860,000 13 Problem 1-40 Answer B Outstanding contracts on December 31, 2008 that will expire during 2009 150,000 2010 225,000 2011 100,000 Unearned service contract revenue 475,000 Problem 1-41 Answer A The entire amount of P720,000 will be considered deferred revenue on December 31, 2008 because the subscriptions start with the January 2009 issue Problem 1-42 Answer A Monthly subscriptions (7,200,000 / 12) 600,000 The subscriptions after the September 30 cut-off are: October 600,000 November 600,000 December 600,000 Total unearned subscription revenue – December 31, 2008 1,800,000 The above subscriptions will be served in the next publication in 2009 Problem 1-43 Answer C Subscriptions received in 2008 that will expire in 2010 125,000 Subscriptions received in 2009 that will expire in 2010 200,000 Subscriptions received in 2009 that will expire in 2011 140,000 Unearned subscription revenue – December 31, 2009 465,000 Problem 1-44 Answer B Liability for refundable deposit – January 150,000 Deposits made in 2008 (100,000 x 5) 500,000 Total 650,000 Less: Deposits refunded in 2008 (110,000 x 5) 550,000 Balance – December 31(current liability) 100,000 The lease deposit is a noncurrent liability 14 Problem 1-45 Answer C Advances – January 1,180,000 Advances received Total 3,020,000 Advances applied (1,640,000) Advances canceled ( 500,000) Advances – December 31 Problem 1-46 Answer B B B B + 10B 1.10B B B = = = = = = 10 (1,650,000 – B) 165,000 - 10B 165,000 165,000 165,000 / 1.10 150,000 Problem 1-47 Answer A Income after bonus and tax (260,000 / 10%) 2,600,000 Income before tax (2,600,000 / 65%) 4,000,000 Income before bonus and tax (4,000,000 + 260,000) 4,260,000 Proof 1,840,000 880,000 Income before bonus and tax 4,260,000 Less: Bonus 260,000 Income before tax 4,000,000 Less: Tax (35% x 4,000,000) 1,400,000 Income after bonus and tax 2,600,000 Problem 1-48 Answer B B = 05 (5,000,000 – B – T) T = 35 (5,000,000 – B) B = 05 [5,000,000 – B - 35 (5,000,000 – B)] B = 05 (5,000,000 – B - 1,750,000 + 35B) B = 250,000 – 05B - 87,500 + 0175B B + 05B - 0175B = 250,000 – 87,500 1.0325B = 162,500 B = 162,500 / 1.0325 B = 157,385 15 T = 35 (5,000,000 – 157,385) T = 1,694,915 Proof of bonus B = 05 (5,000,000 – 157,385 – 1,694,915) B = 157,385 Problem 1-49 Cash Containers’ deposit 390,000 390,000 Containers’ deposit Cash 313,000 313,000 Containers’ deposit Containers 30,000 30,000 Containers’ deposit on January 1, 2008 applicable to 2006 deliveries 75,000 Less: Containers returned in 2008 applicable to 2006 deliveries 45,000 Balance – expired and no longer refundable 30,000 Containers’ deposit – January 1, 2008 290,000 Add: Containers’ deposit in 2008 Total Less: Containers returned in 2008 Containers not returned and expired Containers’ deposit – December 31, 2008 390,000 680,000 313,000 30,000 343,000 337,000 Problem 1-50 Only a disclosure is necessary because it is not probable that the company will be liable, although the amount can be measured reliably Retained earnings Estimated liability for income tax 200,000 200,000 Accounts receivable – Sunset Loss on guaranty Note payable – bank 120,000 80,000 200,000 16 Problem 1-51 Unearned subscription revenue Subscription revenue (3,000,000 – 2,300,000) 700,000 Loss on damages Estimated liability for damages 1,500,000 Loss on damages Estimated liability for damages 1,000,000 700,000 1,500,000 1,000,000 Problem 1-52 Answer A The probable loss is recorded but the possible loss is only disclosed ` Problem 1-53 Answer C The best estimate is recorded The accepted BIR offer is not recorded because it was made after the statements are issued Problem 1-54 Answer D The provision should be accrued because it is probable and measurable The accrued amount is P350,000 which is the midpoint of the range in the absence of the best estimate within the range Problem 1-55 Answer D The contingent asset is disclosed only because the case is unresolved on December 31, 2008 The issue is what amount of asset will be disclosed Since the case is settled in March 2009 after the issuance of the 2008 financial statements, the amount P1,500,000 should be disclosed However, if the case is settled before the issuance of the statements, the actual award of P1,000,000 should be disclosed Problem 1-56 Answer A Haze can report a gain of P1,500,000 in its 2008 income statement because this amount is already settled on December 31, 2008 However, the remainder of P3,000,000 is only disclosed because the defendant has appealed the said amount Problem 1-57 Answer A The loss on the first lawsuit is both probable and measurable and therefore can be accrued as a provision Problem 1-58 Answer B Environmental cost 500,000 Litigation cost 300,000 Total accrued liability 800,000 Both are accrued as provision because the loss is probable and measurable Problem 1-59 Answer D Assessment on appeal (50% x 1,600,000) 800,000 Environmental cost 1,500,000 Total provision 2,300,000 The loss from the guaranty is not accrued because it is remote  ... 12/31/2008 220,000 242 ,000 Problem 1-26 Accrual approach 2008 Cash (300 x 15,000) Sales 4, 500,000 Warranty expense 4, 500,000 144 ,000 Estimated warranty liability (60% x 300 = 180 x 800) 144 ,000 Estimated... 350,000 49 0,000 840 ,000 Warranty costs: 2008 2009 Warranty liability – December 31, 2009 100,000 300,000 40 0,000 44 0,000 11 Problem 1-33 Answer A Net sales ( 640 ,000 / 8%) 8,000,000 Problem 1- 34 Answer... Problem 1 -47 Answer A Income after bonus and tax (260,000 / 10%) 2,600,000 Income before tax (2,600,000 / 65%) 4, 000,000 Income before bonus and tax (4, 000,000 + 260,000) 4, 260,000 Proof 1, 840 ,000