Accrued Liabilities
Problem 3-1(AICPA Adapted)
Kemp Company must determine the December 31, 2015 accruals for advertising and rent
expense.
A P50,000 advertising bill was received January 7, 2016, comprising costs of P35,000 for
advertisement in December 2015 issues, and P15,000 for advertisements in January 2016 issues
of the newspaper.
A store lease, effective December 16, 2015, calls for fixed rent of P120,000 per month, payable
one month from the effective date and monthly thereafter.
In addition, rent equal to 5% of net sales over P6,000,000 per calendar year is payable on
January 31 of the following year. Net sales for 2015 totalled P9, 000, 000.
On December 31, 2015, what amount should be reported as accrued liabilities?
A. 260,000
B. 185,000
C. 210,000
D. 245,000
Solution 3-1 Answer D
Advertisement for December 2015
Accrued rent from December 16 to December 31, 2015
(120,000 x 6/12)
Accrued additional rent (3,000,000 x 5%)
60,000
150,000
Total accrued liabilities
245,000
35,000
Problem 3-2
Bronson Company operates a retail store and must determine the proper. December 31, 2015
year-end accrual for the following expenses.
The store lease calls for fixed rent of P10, 000 per month payable at the beginning of the month.
Additional rent equals to 6% of net sales over P2,000,000 per year payable on January 31 of the
following year. Net sales for 2015 amounted to P8,000,000.
The entity has real property subject to real property tax. The city’s fiscal year runs July 1 to June
30 and the tax assessed at 3% of real property on hand is payable on June 30, 2016.
The entity estimated that the real property tax will amount to P60,000 for the city’s fiscal year
ending June 30, 2016.
On December 31, 2015, what amount should be reported as accrual expenses?
A. 516,000
B. 390,000
C. 510,000
D. 396,000
Solution 3-2 Answer B
Accrued additional rent (6% x 6,000,000)
Accrued real property tax (60,000 x 6/12)
Accrued expenses – December 31, 2015
360,000
30,000
390,000
Problem 3-3
Sonia Company reported gross payroll of P600, 000 for the month of January. The entity paid
the payroll net of the following deductions:
Income tax
SSS
Philhealth
Pagibig
70,000
10,000
5,000
7,000
In addition, the entity recognized its additional contributions for the following in relation to
January payroll:
SSS
Philhealth
Pag-ibig
What is the total payroll tax liability?
A. 121,000
B. 70,000
C. 92,000
D. 29,000
Solution 3-3 Answer A
Salaries and wages
Withholding tax payable
SSS payable- employee
Philhealth payable- employee
Pagibig payable- employee
Cash
15,000
6,000
8,000
600,000
70,000
10,000
5,000
7,000
508,000
Payroll tax expense
SSS payable- employer
Philhealth payable- employer
Pagibig payable- employer
29,000
15,000
6,000
8,000
Problem 3-4
Chester Company reported payroll for the month of January 2015 as follows:
Total wages
Income tax withheld
500,000
60,000
All wages paid were subject to SSS the SSS tax rates were 7% each for employee and employer.
Chester remits payroll taxes on the 15th of the following month.
In the financial statement for the month ended January 31, 2015, what amount should be
reported respectively as total payroll tax liability and payroll tax expense?
A. 60,000 and 70,000
B. 95,000 and 70,000
C. 95,000 and 35,000
D. 130,000 and 35,000
Solution 3-4 Answer D
Income tax withheld
60,000
SSS- employee (7% x 500,000)
35,000
SSS- employer (7% x 500,000)
35,000
Total payroll tax liability
130,000
Problem 3-5
Miyuki Company operates a retail store. All items sold subject to a 12% value added tax, which
the entity collects and records as sales revenue. The entity files quarterly sales tax returns when
due by the twentieth day following the end of the sales quarter.
However, in accordance with state requirements, the entity remits value added tax collected by
the twentieth day of the month following any month such collections exceed P50, 000. The
entity takes these payments as credits on the quarterly sales tax return. The value added taxes
paid by the entity are charged against sales revenue.
Following is a monthly summary appearing in the first quarter 2015 sales revenue account:
Debit
Credit
January
__
560,000
February
60,000
392,000
March
__
448,000
On March 31, 2015 what amount should be reported as value added tax payable?
A. 150,000
B. 168,000
C. 108,000
D. 90,000
Solution 3-5 Answer D
January
February
March
Sales including VAT
Sales excluding VAT (1,400,000/1.12)
Output VAT
Payment of VAT in February
VAT payable – March 31, 2015
560,000
392,000
448,000
1,400,000
1,250,000
150,000
( 60,000)
90,000
Problem 3-6
Marie Hotel collects 15% in city sales taxes on room rentals, in addition to a P200, 000 per
room, per night, occupancy tax. Sales tax for each month are due at the end of the following
months and occupancy taxes are due fifteen days after the end of each calendar quarter. On
January 3, 2016, the entity paid the November 2015 sales taxes and the fourth quarter 2015
occupancy taxes. Additional information for the fourth quarter of 2015 is as follow:
Room rentals
Room nights
October
1,000,000
1,100
November
1,100,000
1,200
December
1,500,000
1,800
What amount should be reported respectively as sales taxes payable and occupancy taxes
payable on December 31, 2015?
A. 390,000 and 600,000
B. 390,000 and 820,000
C. 540,000 and 600,000
D. 540,000 and 820,000
Solution 3-6 Answer B
November room rentals
1,100,000
December room rentals
1,500,000
Total
2,600,000
Sales taxes payable (15% x 2,600,000)
390,000
October
1,100
November
1,200
December
1,800
Fourth quarter room nights
4,100
Occupancy taxes payable (4,100 x 200)
820,000
Problem 3-7
Under state law, Stephen Company may pay 3% of eligible gross wages or it may reimburse the
state directly for actual unemployment claims. The entity believes that actual unemployment
claims will be 2% of eligible gross wages and has chosen to reimburse the state. Eligible gross
wages are defined as the first 100,000 of gross wages paid to each employee. The entity had
five employees, each of whom earned P200, 000 during the current year.
What amount should be reported as liability for unemployment claims?
A. 10,000
B. 15,000
C. 20,000
D. 0
Solution 3-7 Answer A
Total eligible gross wages (100,000 x 5 employees)
Liability for unemployment claims (2% x 500,000)
500,000
10,000
Problem 3-8
Audrey Company has a 12- month accounting period ending December 31. On April 1, 2015, it
introduced a new contractual bonus scheme covering the year to March 31 each year. It is
reasonably anticipated that the bonuses for the year to March 31, 2016 will amount to P900,
000.
What amount of liability for bonuses be recorded on December 31, 2015?
A. 225,000
B. 900,000
C. 675,000
D. 0
Solution 3-8 Answer C
Bonus payable from April 1 to December 31, 2015
(900,000 x 9/12)
675,000
Problem 3-9
Ronald Company has an incentive compensation plan under which a branch manager received
10% of the branch income after 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 is 30%.
What is the bonus for the current year?
A. 126,000
B. 150,000
C. 165,000
D. 180,000
Solution 3-9 Answer B
Income after before tax (1,650,000/110%)
Bonus
(10% x 1,500,000)
1,500,000
150,000
Problem 3-10
After three profitable years, Cairo Company decided to offer a bonus to the branch manager of
25% of income over P1, 000, 000 earned by the branch. 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 after deducting the bonus but before deducting tax.
What is the bonus of the branch manager for the current year?
A. 120,000
B. 150,000
C. 250,000
D. 320,000
Solution 3-10 Answer A
Income after bonus but before tax (600,000/125%)
Bonus
(25% x 480,000)
480,000
120,000
Problem 3-11
The bonus agreement of Christian Company provides that the general manager shall receive an
annual bonus 10% of the net income after bonus and tax. The income tax rate is 30%. The
general manager received P280, 000 for the current year as bonus.
What is the income before bonus and tax?
A. 4,280,000
B. 4,000,000
C. 2,800,000
D. 3,720,000
Solution 3-11 Answer A
Income after bonus and tax (280,000/10%)
Income before tax
(2,800,000/70%)
Income before bonus and tax (4,000,000/280,000)
2,800,000
4,000,000
4,280,000
Problem 3-12
Tobruk Company has an agreement to pay its sales manager a bonus of 5% of the income after
tax. The income for the year before bonus and tax is P5, 250, 000. The income tax rate is 30% of
income after bonus.
What is the bonus for the year?
A. 262,000
B. 250,000
C. 177,536
D. 186,548
Solution 3-12 Answer C
B = .05 (5,250,000-B-T)
T = .30 (5,250,000-B)
B = .05 (5,250,000-B-.30 (5,250,000-B)
B = .05 (5,250,000-B-1,575,000+.30B)
B = 262,500-.05B-78,750+.015B
B+.05B-.015B = 262,500-78,750
1.035B = 183,750
B = 177,536
Problem 3-13
On July 1, 2015, the Quezon City government issued realty tax assessment for the fiscal year
ended June 30, 2016. On September 1, 2015, Zuma Company purchased a land in Quezon City.
The purchase price was reduced by a credit for accrued realty taxes.
The entity does not record the entity year’s real estate tax obligation but instead records tax
expenses at the end of each month by adjusting prepaid real estate taxes or real estate taxes
payable as appropriate.
On November 1, 2015, the entity paid the first of two equal instalments of P600, 000 for realty
taxes.
What amount of the payment should be recorded as a debit or real state taxes payable?
A. 200,000
B. 400,000
C. 500,000
D. 600,000
Solution 3-13 Answer B
Monthly realty taxes (600,000/6)
100,000
September 1, Land (100,000 x 2)
200,000
September 30 Taxes (for September)
100,000
October 31 Taxes (for October)
100,000
Real State taxes payable
400,000
Problem 3-14
Kent Company, a division of National Realty Corporation maintains an escrow account and pays
real estate taxes for the mortgage customer. Escrow funds are kept in interest- bearing accounts.
Interest, less 10% service fee, is credited to the mortgage’s account and used to reduce future
escrow payments.
Escrow account liability – January 1
Escrow payments received during the year
Real estate taxes paid during the year
Interest on escrow funds
What is the escrow account liability on December 31?
A. 510,000
B. 515,000
C. 605,000
D. 610,000
Solution 3-14 Answer C
Escrow account liability- January 1
Add: Escrow payment received
Interest on escrow funds
Total:
Less: Real estate taxes paid
Service fee (10% x 50,000)
Escrow accounts liability- December 31
700,000
1,580,000
1,720,000
50,000
1,580,000
50,000
1,720,000
5,000
700,000
1,630,000
2,330,000
1,725,000
605,000
Problem 3-15
On the first day of each month, Bell Company received from Kent Company an escrow deposit
of P250, 000 for real estate taxes. Bell Company recorded the P250, 000 in an escrow account.
The 2015 real estate tax is P2, 800, 000, payable in equal instalment on the first day of each
calendar quarter. On January 1, 2015, the balance in the escrow account was P300, 000.
On September 30, 2015, what amount should be reported as escrow liability?
A. 1,150,000
B. 450,000
C. 850,000
D. 150,000
Solution 3-15 Answer B
Escrow liability- January 1, 2015
300,000
Escrow deposit received from January 1 to September
30, 2015 (250, 000 x 9 months)
2,250,000
Total:
2,550,000
Less: Payment for real state tax from January 1 to
September 30, 2015 or three quarters
(2,800,000 x ¾)
2,100,000
Escrow liability – September 30, 2015
450,000
PROVISION AND CONTINGENT LIABILITY
Problem 4-1
During 2015, Odyssey Company is the defendant in a patent infringement lawsuit. The entity’s
lawyers believe there is a 30% chance that the court will dismiss the case and the entity will
incur no outflow of economic benefits.
However, if the court rules in favor of the claimant, the lawyers believe that there is a 20%
chance that the entity will be required to play damages of P200, 000 and an 80% chance that
the entity will be required to pay damages of P100, 000. Other outcomes are unlikely.
The court is expected to rule in late December 2016. There is no indication that the claimant will
settle out of court.
A 7% risk adjustment factor to the probability- weighted expected cash flow is considered
appropriate to reflect the uncertainties in the cash flow estimates.
An appropriate discount rate is 5% per year. The present value of 1 at 5% for one period is 0.95.
What is the measurement of the provision for lawsuit?
A. 100,000
B. 84,000
C. 89,880
D. 85,386
Solution 4-1 Answer D
Weighted probabilities:
20% x 200,000 x 70%
80% x 100,000 x 70%
Weighted cash flows
Multiply by risk adjustment factor (100% + 7%)
Adjusted cash flows
Multiply by PV of 1 at 5% for one period
Present value of cash flows
28,000
56,000
84,000
1.07
98,880
.95
85,386
Problem 4-2
During 2015, Libya Company is the defendant in a breach of patent lawsuit. The lawyers believe
there is an 80% chance that the court will not dismiss the case and the entity will incur outflow
of benefits.
If the court rules in favour of the claimant, the lawyers believe that there is a 60% chance that
the entity will be required to pay damages of P2, 000,000 and 40% chance that the entity will be
required to pay damages of P1, 000, 000. Other amount of damages are unlikely.
The court is expected to rule in late December 2016. There is no indication that the claimant will
settle out of court.
A 7% risk adjustment factor to the cash flows is considered appropriate to reflect the
uncertainties in the cash flow estimates.
An appropriate discount rate is 10% per year. The present value of 1 at 10% for one period is
0.91.
What is the measurement of the provision on December 31, 2015?
A. 1,280,000
B. 1,369,000
C. 1,500,000
D. 1,246,336
Solution 4-2 Answer D
Weighted probabilities:
60% x 2,000,000 x 80%
40% x 1,000,000 x 80%
Expected cash flows
Multiply by risk adjustment factor (100% + 7%)
Adjusted cash flows
Multiply by PV of 1 at 10% for one Period
Present value of cash flows
960,000
320,000
1,280,000
1.07
1,369,600
0.91
1,246,336
Problem 4-3
In May 2015, Cherry Company relocated an employee from the Manila head office to a branch
in Zamboanga City. At the end of the reporting period on June 30, 2015, the costs are estimated
at P350, 000 analyzed as follows:
Cost for shipping goods
Airfare
Temporary accommodation cost for May and June
Temporary accommodation cost for July and August
Reimbursement for lease break cost paid in July
(Lease was terminated in May)
Reimbursement for cost of living increases for the
Period May 1, 2015 to May 1, 2016
Total
10,000
90,000
30,000
80,000
20,000
120,000
350,000
What amount should be recognized as provision for relocation costs on June 30, 2015?
A. 250,000
B. 240,000
C. 160,000
D. 140,000
Solution 4-3 Answer C
Cost of shipping goods
Airfare
Temporary accommodation cost for May and June
Reimbursement for lease break cost
Reimbursement for cost of living increases for May and June
(120,000 x 2/12)
Total provision for relocation costs
10,000
30,000
80,000
20,000
20,000
160,000
Problem 4-4
During 2015, Manfred Company guaranteed a supplier’s P500, 000 loan from a bank. On
October 1, 2015, the entity was notified that the supplier had default on the load and filed for
bankruptcy protection. Counsel believed that the entity would probably have to pay P250, 000
under the guarantee. As a result of the supplier’s bankruptcy, the entity entered into a contract
in December 2015 to retool its machines so that the entity could accept parts from other
suppliers. Retooling costs are estimated to be P300, 000.
What amount should be reported as liability on December 31, 2015?
A. 250,000
B. 450,000
C. 550,000
D. 750,000
Solution 4-4 Answer A
The guarantee should be accrued as a provision because the loss is probable and the amount
can be reasonably estimated.
Problem 4-5
On February 5, 2016, an employee filed a P2, 000, 000 lawsuit against Steel Company for
damages suffered when one of Steel’s plant exploded on December 29, 2015. The legal counsel
believed the entity would probably lose the lawsuit and estimated the loss to be P500, 000. The
employee offered to settle the lawsuit out of court for P900, 000 but the entity did not agree to
the settlement.
On December 31, 2015, what amount should be reported as liability from lawsuit?
A. 2,000,000
B. 1,000,000
C. 900,000
D. 500,000
Solution 4-5 Answer D
The loss is accrued as a provision because it is probable and the amount can be reasonable
estimated.
Problem 4-6
During 2015, Beal Company became involved in a tax dispute with the BIR. On December 31,
2015, the tax advisor believed that an unfavourable outcome was probable and reasonable
estimate of additional taxes was P500, 000 after the 2015 financial statements were issued, the
entity received and accepted a BIR settlement offer of P550, 000.
What amount of accrued liability should have been reported on December 31, 2015?
A. 650,000
B. 550,000
C. 500,000
D. 0
Solution 4-6 Answer C
The reasonable estimate of P500, 000 is recorded. The accepted BIR offer is not recorded
because it was made after the statement are issued. In 2016, when the BIR settlement offer of
P550, 000 is accepted, an additional liability of P50, 000 will be recognized.
Problem 4-7
Nia Company is involved in litigation regarding a faulty product sold in a prior years. The entity
has consulted with an attorney and determined that it is possible that the entity may lose the
case. The attorney estimated that there is a 40% chance of any payment would be P5, 000, 000.
What is the required journal entry as a result of this litigation?
A. Debit litigation expense P5,000,000 and credit litigation liability P5,000,000
B. No journal entry is required.
C. Debit litigation expense P2,000,000 and credit litigation liability P2,000,000
D. Debit litigation expense P3,000,000 and credit litigation liability P3,000,000
Solution 4-7 Answer B
The possible loss is only disclosed as a contingent liability since the probability of loss is 40%.
The probability of loss should be more than 50% in order to be accrued as a provision.
Problem 4-8
Concord Company sells motorcycle helmets. In 2015, the entity sold 4,000,000 helmets before
discovering a significant defect in their construction. By December 31, 2015, two lawsuits had
been filed against the entity. The first lawsuit, which the entity has little chance of winning, is
expected to be settled out of court for P1,500,000 in January 2016. The legal counsel believed
that the entity has a 50-50 chance of winning, the second lawsuit, which is for P1,000,000.
What is the accrued liability on December 31, 2015 as a result of the lawsuits?
A. 1,500,000
B. 1,000,000
C. 2,500,000
D. 0
Solution 4-8 Answer A
The loss on the first lawsuit is both probable and measurable and therefore can be accrued as a
provision.
The loss on the second lawsuit is disclosed as a contingent liability because the loss is only
possible.
Problem 4-9
Prime Company has long owned a manufacturing site that has now been discovered to be
contaminated with toxic waste. The entity has acknowledge its responsibility for the
contamination. An initial clean-up feasibility study has shown that it will cost at least P500,000
to clean up the toxic waste. During the current year, the entity has been sued for patent
infringement and lost the case. A preliminary judgement of P300,000 was issued and is under
appeal. The entity’s attorneys agree that it is probable that the entity will lose this appeal.
What amount of provision should be accrued as liability?
A. 500,000
B. 800,000
C. 300,000
D. 0
Solution 4-9 Answer B
Accrued liability (500,000+300,000)
800,000
Problem 4-10
On November 5, 2015, a Dunn Company truck was in an accident with an auto driven by Bell.
Dunn received notice on January 15, 2016 of a lawsuit for P700,000 damages for personal
injuries suffered by Bell. The entity’s counsel believed it is probable that bell will be awarded an
estimated amount in the range between P200,000 and P450,000, and no amount is a better
estimate of potential liability than any other amount because each point in the range is as likely
as any other. The 2015 financial statements were issued on March 1, 2016.
What amount of loss should be accrued on December 31, 2015?
A. 450,000
B. 200,000
C. 325,000
D. 0
Solution 4-10 Answer C
Midpoint of the range (200,000+450,000/2)
325,000
Problem 4-11
On March 1, 2015, a suit was filed against Dean Company for patent infringement. Dean’s legal
counsel believed an unfavourable outcome is probable and estimated that Dean will have to pay
between P850,000 and P900,000 in damages. However, Dean’s legal counsel is of the opinion
that P600,000 is a better estimate than any than other amount in the range. The situation was
unchanged when the December 31, 2015 financial statements were released on February 15,
2016.
What amount should be accrued as liability on December 31, 2015 in connection with this suit?
A. 900,000
B. 600,000
C. 500,000
D. 0
Problem 4-11 Answer B
Accrued liability – best estimate
600,000
Problem 4-12
On November 1, 2015, Vienna Company was awarded a judgement of P1,500,000 in connection
with a lawsuit. The decision is being appealed by the defendant and it is expected that the
appeal process will be completed by the end of 2016. The attorney believed that it is highly
probable that an award will be upheld on appeal but that the judgement may be reduced by
40%.
What amount should be reported as a receivable on December 31, 2015?
A. 1.500,000
B. 600,000
C. 900,000
D. 0
Solution 4-12 Answer D
The contingent asset is only disclosed when probable and measurable. The asset and related
gain are recognized only when realized.
Problem 4-13
On January 1, 2015 Brenda Company owned a machine with cost of P2,000,000. The
accumulated depreciation was P1,200,000, estimated residual value was P120,000 and fair
value was P3,200,000. On January 3, 2015, this machine was irreparably damaged by Lann
Company and become worthless. In October 2015, a court awarded damages of P3,200,000
against Lann in favor of Brenda. On December 31, 2015, the final outcome of this case was
awaiting appeal and was therefore uncertain. However, in the opinion of Brenda’s attorney,
Lann’s appeal would be denied.
On December 31, 2015, what amount of gain should be accrued?
A. 320,000
B. 260,000
C. 200,000
D. 0
Problem 4-13 Answer D
The contingent asset and related contingent gain are only disclosed because the case is still
under appeal by the defendant.
Problem 4-14
In May 2015, Caso Company filed suit against Wayne Company seeking P1,900,000 damages for
patent infringement. A court verdict in November 2015 awarded Caso P1,500,000 in damages,
but Wayne’s appeal is not expected to be decided before 2016. Caso’s counsel believed it is
probable that Caso will be successful against Wayne for an estimated amount in the range
between P800,000 and P1,100,000, with P1,000,000 considered the most likely amount.
What amount should be Caso record as income from the lawsuit for the year ended December
31, 2015?
A. 1,500,000
B. 1,100,000
C. 1,000,000
D. 0
Solution 4-14 Answer D
A contingent asset and the related contingent gain are disclosed only where the inflow of
economic benefits is probable.
Problem 4-15
During January 2015, Haze Company won a litigation award for P1,500,000 which was tripled to
P4,500,000 to include punitive damages. The defendant, who is financially stable, has appealed
only the P3,000,000 punitive damages. The entity was awarded P5,000,000 in an unrelated suit
it filed, which is being appealed by the defendant. Counsel is unable to estimate the outcome of
these appeals.
In the 2015 financial statements, what amount should be reported as pretax gain?
A. 1,500,000
B. 4,500,000
C. 5,000,000
D. 9,500,000
Solution 4-15 Answer A
A gain of P1,500,000 should be reported. However, the remainder of P3,000,000 is only
disclosed because the defendant has appealed the said amount.