Problems On Liabilities

Problems on Liabilities
1. On Dec. 31, 2021, Glare Company provided the following information:

Accounts payable, including deposits and 1,250,000
advances from customer of P250,000
Notes payable, including note payable to bank due 1,500,000
on Dec. 31, 2023 of P500,000
Share dividend payable 400,000
Credit balances in customers’ accounts 200,000
Serial bonds payable in semiannual installment 5,000,000
of P500,000
Accrued interest on bonds payable 150,000
Contested BIR tax assessment – possible obligation 300,000
Unearned rent income 100,000
Required: Compute total current liabilities on Dec. 31, 2021
Solution:
Accounts payable, including deposits and 1,250,000
advances from customer of P250,000
Notes payable, including note payable to bank due 1,000,000
on Dec. 31, 2023 of P500,000
Credit balances in customers’ accounts 200,000
Serial bonds payable in semiannual installment 1,000,000
of P500,000 (500,000 x 2)
Accrued interest on bonds payable 150,000
Unearned rent income 100,000
Total current liabilities, 12/31/21 3,700,000
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2. Easy Company provided the following information:
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
Estimated premium liability 200,000
Claim for increase in wages by employees covered
in a pending lawsuit 3,500,000
Contract entered into for the construction of building 5,000,000
Required: Compute for total current liabilities on Dec. 31, 2021
Solution:
Notes payable:
Trade 3,000,000
Bank loans 2,000,000
Advances from officers 500,000
Bank overdraft 300,000
Dividends payable 1,000,000
Withholding tax payable 100,000
Income tax payable 800,000
Estimated warranty liability 600,000
Estimated damages payable by reason of breach of contract 700,000
Estimated premium liability 200,000
3. Manchester Company provided the following information on Dec. 31, 2021:
Income taxes withheld from employees 900,000
Cash balance at First State Bank 2,500,000
Cash overdraft at Harbor Bank 1,300,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties on
merchandise previously sold 500,000
Estimated damages as a result of unsatisfactory 1,500,000
performance on a contract
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, 2026. Interest is also paid semiannually. 5.000.000
Stock dividend payable 2,000,000
Required: Compute the total current liabilities on Dec. 31, 2021.
Solution:
Income taxes withheld from employees 900,000
Cash overdraft at Harbor Bank 1,300,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties on
merchandise previously sold 500,000
Estimated damages as a result of unsatisfactory 1,500,000
performance on a contract
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, 2026. Interest is also paid semiannually.
Accrued interest (5,000,000 x 12% x 3/12) 150,000
4. Multiple Company provided the following information on Dec. 31, 2021:
Accounts payable after deducting debit balances in
suppliers' accounts of P100,000 500,000
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: Compute the total current and non-current liabilities.
Solution:
Current Liabilities:
Accounts payable (500,000 + 100,000) 600,000
Note payable – refinanced 1,000,000
Note payable – due May 1, 2022 800,000
Total 2,450,000
Non-current Liabilities:
Bonds payable – due December 31, 2023 2,000,000
5. 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 assumptions:
a. Bonus is a certain percent of the income before bonus and before tax.
b. Bonus is a certain percent of the income after bonus but before tax.
c. Bonus is a certain percent of the income after bonus and after tax.
d. Bonus is a certain percent of the income after tax but before bonus.
Solution:
a. before bonus and before tax
Net Income 5,250,000
Multiply: Bonus rate 5%
Bonus 262,500
b. after bonus and before tax
B = BR (N/I – B – T)
B = 0.05 (5,250,000 – B)
B = (262,500 – 0.05B)
B + 0.05B = 262,500
1.05B = 262,500
B = 262,500/1.05
Bonus = 250,000
c. after bonus and after tax
B = BR (N/I – B – T)
T = TR (N/I – B)
B = 0.05 [5,250,000 – B – 0.30(5,250,000 – B)]
B = 0.05 (5,250,000 – B – 1,575,000 + 0.30B)
B = 262,500 – 0.05B – 78,750 + 0.015B
B + 0.05B – 0.015B = 262,500 – 78,750
1.035B = 183,750
B = 183,750/1.035
Bonus = 177,536.23
T = TR (N/I – B)
T = 0.30 (5,250,000 – 177,536.23)
Taxes = 1,521,739.10
d. after tax and before bonus
B = BR (N/I – T)
T = TR (N/I – B)
B = 0.05 [5,250,000 – 0.30(5,250,000 – B)]
B = 0.05 (5,250,000 – 1,575,000 + 0.30B)
B = 262,500 - 78,750 + 0.015B
B – 0.015B = 262,500 – 78,750
0.985B = 183,750
B = 183,750/0.985
Bonus = 186,548.22
Problems on Premium Liability
1. Cereal Company is a manufacturer and sells its product to retailers. Retailers sell the product
to its customers and for each product purchased by customers, a rebate coupon of P50 discount is
given and may be used on future purchase of the same product. Retailers are reimbursed for the
discount by the manufacturer upon redemption of the coupon.
During the current year, Cereal Company sold 40,000 products to the retailers at P187.50 each or
P7,500,000.
It is expected that 75% of the coupons will be redeemed. At year-end, Cereal Company paid the
retailers P500,000 as reimbursement.
a. What amount should be reported as stand-alone selling price of the rebate coupon?
Number of products sold 40,000
Multiply by discount per coupon 50
Total amount of discount 2,000,000
Multiply by expected redemption 75%
Stand-alone selling price of rebate coupons 1,500,000
b. What amount of the transaction price should be allocated to the rebate coupons?
Stand-alone Fraction Allocated
Products Sold 7,500,000 7,500/9,000 6,250,000
(40,000 x 187.50)
Rebate coupons 1,500,000 1,500/9,000 1,250,000
(7,500,000 x
1,500/9,000)
Total 9,000,000 7,500,000
(7,500,000 x 1,500/9,000) = 1,250,000

c. What amount should be reported as sales revenue in 2021?
Products sold (40,000 x 187.50) 7,500,000
d. What amount should be reported as rebate liability at year-end?
(7,500,000 x 1,500/9,000) = 1,250,000
1,250,000 – 500,000 = 750,000
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Problems on Liabilities

1. On Dec. 31, 2021, Glare Company provided the following information:

(7,500,000 x 1,500/9,000) = 1,250,000

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