Page | 1 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 Page | 2 PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL 1. A Notes payable 14,000 Interest payable 12,000 Rent payable 30,000 Cash dividends payable 8,000 Lease liability 70,000 Bonds payable 240,000 Premium on bonds payable 20,000 Security deposit 4,000 Redeemable preference shares issued 28,000 Total financial liabilities 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 618,000 10,000 400,000 100,000 100,000 10,000 Total current liabilities 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 4. 2,000,00 0 6,000,00 0 800,000 8,800,00 0 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 Page | 3 ☞ 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 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 8. C 2,300,000 (23,000) 32,000 (5,000) (90,000) 2,214,000 Page | 4 Unadjusted balances (c) Purchase return (d) Post-dated check drawn Adjusted accounts payable Inventor y 800,000 Accounts payable 960,000 (20,000) 60,000 1,000,000 800,000 The purchase return is adjusted only to the accounts payable, and not to the inventory, because the inventory balance 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 Unearned subscription revenue - 12/31/2003 650,000 280,000 930,000 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 20x1 40% Percentage earned 20x3 400,000 20x2 60% 40% 600,000 400,000 400,000 1,000,000 600,000 600,000 Percentage earned First half (2M ÷ 2) Second half (2M ÷ 2) Earned portions 1M 1M Total 60% 2,000,000 Page | 5 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 200,000 (108,000) Breakage Gift card liability - 12/31/x1 (12,000) 80,000 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 120,000 760,000 40,000 920,000 Red’n. & exp’n.(a) - prior yr. Red’n. - current yr. Breakage end. Gift card liability 120,000 1,000,00 120,000 0 760,000 40,000 200,000 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) 144,000 Page | 6 Divide by: No. of months in a year Monthly tax 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 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 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) 15,000 100,000 16,000 9,000 140,000 500,000 1,000,000 1,000,000 300,000 800,000 3,600,000 10,000,000 6,000,000 Page | 7 Loan with breach of provision (b) Total current liabilities 14,000,000 30,000,000 (a) “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 long-term basis is completed after the reporting period and before the financial statements are authorised for issue.” (PAS 1.72) (b) “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) 4. Solution: Unadjusted accounts payable Goods in transit shipped FOB shipping point 1,200,000 70,000 Goods in transit shipped FOB destination Adjusted accounts payable (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: Dat Cash e Gift card liability 400,000 400,000 to record the sale of gift certificates Dat e Gift card liability Revenue 216,000 216,000 Page | 8 to record the redemption of gift certificates Dat e 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 Adjusted total current liabilities 5,480,000 50,000 20,000 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.