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Chapter 1
Current Liabilities
PROBLEM 1: TRUE OR FALSE
1. FALSE
2. FALSE – also contracts and other operation of law
3. TRUE
4. FALSE – minus transaction costs
5. TRUE
6. FALSE
7. TRUE
8. FALSE
9. TRUE
10. FALSE
PROBLEM 2: MULTIPLE CHOICE – THEORY
1. D
2. C
3. A
4. B
5. D
6. A
7. D
8. A
9. B
10. C
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PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL
1. A
Notes payable
Interest payable
Rent payable
Cash dividends payable
Lease liability
Bonds payable
Premium on bonds payable
Security deposit
Redeemable preference shares issued
Total financial liabilities
14,000
12,000
30,000
8,000
70,000
240,000
20,000
4,000
28,000
426,000
2. D
Trade accounts payable (600K + 10K + 8K)
Interest payable on 10%, 4-year note (240K x 10% x 5/12)
Current portion of bonds payable
Held for trading financial liabilities
Income tax payable
Accrued expenses
Total current liabilities
618,000
10,000
400,000
100,000
100,000
10,000
1,238,000
3. C
Trade and other payables
Note payable (issued 3 yrs. ago, maturing on Dec. 31, 20x2)
Current portion of serial bonds
Total current liabilities
2,000,000
6,000,000
800,000
8,800,000
4. B (1.2M x 80%) = 960,000 noncurrent; (1M – 960K) = 40,000 current
5. B 3,120,000 + 480,000 – 600,000 = 3,000,000
 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 Poof Co.’s increased capitalization, the liability
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is reverted back to “Subscribed Capital” (and, if appropriate,
‘Share premium’). When the shares are issued, the
“Subscribed Capital” is reclassified to “Share Capital.”
 The bank loan is classified as noncurrent because Poof 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, Poof Co. has complied with all the conditions
relating to the extension.)
6. A
Accounts payable
Interest payable
Long-term bank loan (maturing April 1, 20x9)
Total current liabilities
750,000
120,000
4,000,000
4,870,000
The grace period is disregarded because it was received after Dec.
31, 20x1.
7. B
Unadjusted accounts payable
(a) Goods in transit purchased FOB destination
(b) Unreleased checks
(c) Freight accommodation on behalf of supplier
(d) Consigned goods
Adjusted accounts payable
2,300,000
(23,000)
32,000
(5,000)
(90,000)
2,214,000
8. C
Unadjusted balances
(c) Purchase return
(d) Post-dated check drawn
Adjusted accounts payable
Inventory
800,000
800,000
Accounts payable
960,000
(20,000)
60,000
1,000,000
The purchase return is adjusted only to the accounts
payable, and not to the inventory, because the inventory balance
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was determined based on the physical count on Dec. 31, 20x1,
which necessarily already excludes the return which was made on
Dec. 29, 20x1.
9. A
Subscriptions expirations:
 20x3 (250K + 400K)
 20x4
650,000
280,000
930,000
Unearned subscription revenue - 12/31/2003
10. C
Plan
#1
#2
#3
Initial payment per child
500
200
-
No. of children
15
12
9
Multiply by: Unexpired portion
Unearned revenue
Total
7,500
2,400
9,900
8/12
6,600
11. C
Percentage earned
20x1
40%
Percentage earned
First half (2M ÷ 2)
1M
Second half (2M ÷ 2) 1M
400,000
Earned portions
400,000
20x2
60%
40%
600,000
400,000
1,000,000
20x3
Total
60%
600,000
600,000
2,000,000
12. D
Redemption
Breakage (200,000 x 10% x 60%*)
Total revenue in 20x1
108,000
12,000
120,000
* 108,000 ÷ (200,000 x 90%) = 60%
Gift cards sold
Redemption
Breakage
Gift card liability - 12/31/x1
200,000
(108,000)
(12,000)
80,000
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13. C
Redemption & expiration(a) of prior yr. GCs
Redemption of current yr. GCs
Breakage (1M x 5% x 80% (b))
Total revenue in 20x1
Red’n. & exp’n.(a) - prior yr.
Red’n. - current yr.
Breakage
end.
Gift card liability
120,000
120,000 1,000,000
760,000
40,000
200,000
120,000
760,000
40,000
920,000
beg.
Current yr. sales
The unredeemed portion of ₱8,000 (120K – 112K) from prior year
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.
(a)
(b)
760,000 ÷ (1M x 95%) = 80%
14. D
15. B
Total tax for the year (72,000 x 2)
Divide by: No. of months in a year
Monthly tax
144,000
12
12,000
April 1, 20x1
Land
xxx
Cash
Real property tax payable (12K x 3 mos.)
xxx
36,000
April 30, 20x1
Real property tax expense
Real property tax payable
12,000
12,000
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May 1, 20x1
Real property tax payable
Prepaid real property tax
Cash
48,000
24,000
72,000
PROBLEM 4: FOR CLASSROOM DISCUSSION
1. Solution:
Accounts payable
Preference shares issued with mandatory redemption
Utilities payable
Rent payable
Total financial liabilities
15,000
100,000
16,000
9,000
140,000
2. Solution:
Accounts payable
Held for trading financial liabilities
Current portion of Note payable
Unearned revenue
Dividends payable
Current liabilities
3. Solution:
Currently maturing long-term debt (a)
5-year loan payable on demand (b)
Loan with breach of provision (b)
Total current liabilities
500,000
1,000,000
1,000,000
300,000
800,000
3,600,000
10,000,000
6,000,000
14,000,000
30,000,000
“An entity classifies its financial liabilities as current when they are
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 longterm basis is completed after the reporting period and before the
(a)
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financial statements are authorised for issue.” (PAS 1.72)
“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)
(b)
4. Solution:
Unadjusted accounts payable
Goods in transit shipped FOB shipping point
Goods in transit shipped FOB destination
Adjusted accounts payable
1,200,000
70,000
(80,000)
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
6. Solution:
Date
Cash
Gift card liability
400,000
400,000
to record the sale of gift certificates
Date
Gift card liability
Revenue
216,000
216,000
to record the redemption of gift certificates
Date
Gift card liability
Revenue (400,000 x 10% x 60%*)
24,000
24,000
to record the revenue from expected breakage
* 216,000 ÷ (400,000 x 90%) = 60%
7. Solution:
Unadjusted balance
Unpaid utilities
Understatement in withholding taxes
5,480,000
50,000
20,000
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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.