CURRENT LIABILITIES
I. Theories
1. Which of the following is true about accounts payable?
I. Accounts payable should not be reported at their present value.
II. When accounts payable are recorded at the net amount, a Purchase Discounts
account will be used.
III. When accounts payable are recorded at the gross amount, a Purchase
Discounts Lost account will be used.
A. I
B. II
C. III
D. Both II and III are true.
2. Which of the following is not true about the discount on short-term notes payable?
A. The Discount on Notes Payable account has a debit balance.
B. The Discount on Notes Payable account should be reported as an asset on the
balance sheet.
C. When there is a discount on a note payable, the effective interest rate is higher
than the stated discount rate.
D. All of these are true.
3. Which of the following statements is false?
A. A company may exclude a short-term obligation from current liabilities if the firm
intends to refinance the obligation on a long-term basis and demonstrates an
ability to complete the refinancing.
B. Cash dividends should be recorded as a liability when they are declared by the
board of directors.
C. Under the cash basis method, warranty costs are charged to expense as they are
paid.
D. Taxes withheld from employees' payroll checks should never be recorded as a
liability since the employer will eventually remit the amounts withheld to the
appropriate taxing authority.
4. Identify if the statements are true or false:
I. A zero-interest-bearing note payable that is issued at a discount will not result
in any interest expense being recognized.
II. Dividends in arrears on cumulative preferred stock should be recorded as a
current liability.
A. Both statements are true.
B. Statement I is true while statement II is false.
C. Both statements are false.
D. Statement I is false while statement II is true.
5. SM Entertainment becomes aware of a lawsuit after the date of the financial
statements, but before they are issued. A loss and related liability should be reported
in the financial statements if the amount can be reasonably estimated, an
unfavorable outcome is highly probable, and
E. the SM Entertainment admits guilt.
F. the court will decide the case within one year.
G. the damages appear to be material.
H. the cause for action occurred during the accounting period covered by the financial
statements.
Theories: Answer Key
1.
2.
3.
4.
5.
A.
B.
D.
C.
D.
II. Problems
1. The books of DKS Corp. includes the following liability account balances at December 31, 2019:
12% note payable issued September 1, 2018, maturing August 31, 2019
Php
500,000
14% note payable issued April 1, 2012, payable in six equal annual installments
of Php 150,000 beginning April 1, 2019
Php
900,000
DKS Corp.'s December 31, 2018 financial statements were issued on March 31, 2019. On January 20, 2019, the
entire Php 900,000 balance of the 14% note was refinanced by issuance of a long-term obligation payable in a
lump sum. In addition, on February 15, 2019, DKS Corp. consummated a noncancelable agreement with the
lender to refinance the 12%, Php 500,000 note on a long-term basis, on readily determinable terms that have
not yet been implemented. On the December 31, 2019 balance sheet, the amount of the notes payable that
Vernon should classify as short-term obligations is
A. Php 0
B. Php 112,500
C. Php 150,000
D. Php 612,500
2. HooChoo & Meokmool Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons,
customers receive a dog toy that the company purchases for Php 50 each. The company’s experience
indicates that 60% of the coupons will be redeemed. During 2006, 100,000 bags of dog food were sold,
12,000 toys were purchased, and 40,000 coupons were redeemed. During 2007, 120,000 bags of dog food
were sold, 16,000 toys were purchased, and 60,000 coupons were redeemed. What amounts should be
recorded as (1) premium expense for 2020, and (2) estimated premium liability on December 31, 2020?
A. (1) Php 750,000, (2) 250,000
B. (1) Php 750,000, (2) 400,000
C. (1) Php 900,000, (2) 400,000
D. (1) Php 900,000, (2) 750,000
3. At the financial statement date of December 31, 2019, the outstanding liabilities of Lee Yeol Corporation
included the following:
Cash dividends on common stock, payable on January 12, 2020.
Php
60,000
Note payable to Allied Bank, due January 20, 2020
Php
470,000
Serial bonds, of which Php 250,000 mature during 2020.
Php
1,000,000
Note payable to Philippine National Bank, due June, 2020
Php
300,000
The following transactions occurred early in 2020:
January 12: The cash dividends on common stock were paid.
I. January 14: The note payable to Allied Bank was paid.
II. March 1: 40,000 shares of common stock were issued for Php 350,000. Php 300,000 of the
proceeds was used to liquidate the note payable to Philippine National Bank.
III. March 15: The financial statements for 2019 were issued.
IV. March 16: The corporation entered into a financing agreement with Allied Bank, enabling it to
borrow up to Php 500,000 at any time through the end of 2022. Amounts borrowed under the
agreement would bear interest at 1% above the bank's prime rate and would mature 3 years from
the date of the loan. The corporation immediately borrowed Php 400,000 to replace the cash used
in paying its January 20 note to the bank.
The liabilities portion of the company’s balance sheet for December 31, 2019 includes the following,
except?
A. Current Liability: Notes Payable – Allied Bank, Php 470,000
B. Current Liability: Dividends Payable, Php 60,000
C. Noncurrent Liability: Notes Payable to Philippine National Bank, Php 300,000
D. Noncurrent Liability: Serial Bonds, Php 750,000
4. In 2019, Do Corporation began selling a new line of products that carry a two-year warranty against
defects. Based upon past experience with other products, the estimated warranty costs related to dollar
sales are as follows:
First year of warranty
3%
Second year of warranty
6%
Sales and actual warranty expenditures for 2006 and 2007 are presented below:
2020
2019
Sales
Php
350,000 Php
625,000
Actual warranty Expenditures
10,000
35,000
What is the estimated warranty liability at the end of 2020?
A. Php 21,250
B. Php 21,500
C. Php 42,750
D. Php 64,250
5. In August, 2019 a worker was injured in the factory in an accident partially the result of his own negligence.
The worker has sued WonDeuk Co. for Php 950,000. Counsel believes that there is 40% chance that the
outcome of the suit will be unfavorable and that the settlement would cost the company from $130,000 to
$420,000. What entries are required to record the litigation?
A. No journal entry is required
B. Debit Litigation Expense and credit Litigation Liability of Php 275,000.
C. Debit Litigation Expense and credit Litigation Liability of Php 380,000.
D. Debit Litigation Expense and credit Litigation Liability of Php 950,000.
Problems: Answer Key
1. D.
Both liabilities have been refinanced before maturity and are now classified
as long-term liabilities.
2. C.
Coupons to be redeemed in 2019 (100,000 x 60%)
Coupons redeemed in 2019
Outstanding coupons, 2019
60,000
(40,000)
20,000
Coupons to be redeemed in 2020 (120,000 x 60%)
Coupons redeemed in 2020
Outstanding coupons, 2020
72,000
60,000
12,000
Premium Expense, 2019 (72,000 / 4 x Php 50)
Php
900,000
Estimated Premium Liability, 2019 (60,000 / 4 x Php 50)
Php
750,000
Outstanding coupons, 2019
Coupons to be redeemed in 2020 (120,000 x 60%)
Total coupons to be redeemed
Less: Coupons redeemed in 2020
Total outstanding coupons, 2020
20,000
72,000
92,000
60,000
32,000
Estimated premium liability, December 31, 2020 (32,000 / 4 x
Php 50)
Php
400,000
3. C.
The Notes Payable in Philippine National Bank is still classified as Current Liability
in the December 31, 2019 Balance Sheet since the refinancing happened after the
financial statement was issued.
Current Liabilities:
Dividends Payable
Php
60,000
Notes Payable – Allied Bank
470,000
Serial Bonds, current (maturing) portion
250,000
Notes Payable to Philippine National Bank,
300,000
Total Current Liabilities
Php
1,080,000
Noncurrent Liabilities:
Serial Bonds, noncurrent portion
750,00
0
Total Liabilities
Php
1,830,000
4. C.
Warranty Expense, 2019 (Php 350,000 x 9%)
Less: Warranty Expenditure, 2019
Warranty Liability, December 31, 2019
Warranty Expense, 2020 (Php 625,000 x 7%)
Warranty Liability, December 31, 2019
Total
Less: Warranty Expenditure, 2020
Warranty Liability, December 31, 2020
5. A.
Php
31,500
(10,000)
Php
21,500
Php
56,250
21,50
0
Php
77,750
(35,000)
Php
42,750
The 40% chance is only a possible loss and is only disclosed as contingent liability.
Such loss should be probable (>50%) to require a journal entry.