FINANCIAL ACCOUNTING

Volume Two
Valix and Peralta
2008 Edition
SOLUTION MANUAL
1
CHAPTER 1

Problem 1-1 Problem 1-2 Problem 1-3 Problem 1-4 Problem 1-5

1. A 1. A 6. A 1. C 1. B 1. A 6. A
2. D 2. C 7. A 2. B 2. B 2. D 7. A
3. A 3. B 8. D 3. D 3. C 3. A 8. C
4. C 4. A 9. C 4. A 4. A 4. D 9. B
5. A 5. A 10. C 5. D 5. A 5. B 10. B

Problem 1-6 Problem 1-7

Accounts payable 1,000,000 Note payable – trade 3,000,000

Deposits and advances Note payable – bank 2,000,000
from customers 250,000 Note payable – officers 500,000
Notes payable 1,000,000 Accounts payable – trade 4,000,000
Credit balances in Bank overdraft 300,000
customers’ accounts 200,000 Dividends payable 1,000,000
Serial bonds payable 1,000,000 Withholding tax payable 100,000
Accrued interest on Income tax payable 800,000
bonds payable 150,000 Estimated warranty liability 600,000
Provision for tax Estimated damages payable 700,000
assessment 300,000 Accrued liabilities 900,000
Unearned rent income 100,000 Estimated premium liability 200,000
Total current liabilities 4,000,000 Total current liabilities 14,100,000

Problem 1-8

Accounts payable (500,000 + 100,000) 600,000

Accrued liabilities 50,000
Note payable - refinanced 1,000,000
Note payable – due May 1, 2009 800,000
Total current liabilities 2,450,000

Noncurrent liabilitiy:
Bonds payable, due December 31, 2010 2,000,000

2
Problem 1-9
a. Current liabilities:
Note payable – bank 700,000
Note payable – shareholder 2,000,000
Less: Discount on note payable 113,000 1,887,000
Accrued interest payable 189,000
Total current liabilities 2,776,000

b. Note payable – bank:

January 1 – April 1, 2008 (2,800,000 x 12% x 3/12) 84,000
April 1 – December 31, 2008 (2,100,000 x 12% x 9/12) 189,000 273,000
Note payable – shareholder:
Amortization of discount from July 1 – December 31, 2008
(226,000 x 6/12) 113,000
Total interest expense 386,000

Problem 1-10

1. Current liabilities:
Accounts payable 7,000,000
Note payable – bank 12,000,000
Accrued expenses 4,000,000 23,000,000

Noncurrent liabilities:
Mortgage payable 4,000,000
Note payable due 2010 3,000,000 7,000,000
Total liabilities 30,000,000

2. The note payable to bank is paid from the proceeds of the issuance of share capital of P4,000,000
on January 31, 2009 and the availment of a financing agreement on February 15, 2009 with a
financially capable commercial bank on April 1, 2009 in the amount of P3,000,000. Nevertheless,
the note payable should continue to be classified as current.

Problem 1-11 Answer B

Note payable, September 1, 2007 1,800,000

Less: Payment on September 1, 2008 600,000
Balance, September 1, 2008 1,200,000

3
Accrued interest payable from September 1 to December 31, 2008
(1,200,000 x 12% x 4/12) 48,000

Problem 1-12 Answer A

Note payable, October 1, 2007 1,200,000
Less: Payment on October 1, 2008 400,000
Balance, October 1, 2008 800,000

Interest paid from January 1 to September 30, 2008

(1,200,000 x 15% x 9/12) 135,000
Interest accrued from October 1 to December 31, 2008
(800,000 x 15% x 3/12) 30,000
Interest expense for 2008 165,000

Problem 1-13 Answer A

January 1 – October 31, 2008 (500,000 x 12% x 10/12) 50,000

February 1 – July 31, 2008 (1,500,000 x 12% x 6/12) 90,000
May 1 – December 31, 2008 (800,000 x 12% x 8/12) 64,000
Total interest expense of 2008 204,000
Less: Recorded interest expense 150,000
Understatement of interest expense 54,000

Problem 1-14 Answer C

Accrued interest from March 1, 2007 to February 28, 2008

(1,000,000 x 12%) 120,000
Accrued interest from March 1 to December 31, 2008
(1,000,000 + 120,000 x 12% x 10/12) 112,000
Total accrued interest payable, December 31, 2008 232,000

If the interest is compounded annually, it means that the accrued interest for one year will also earn
interest.

Problem 1-15 Answer B

12% note payable – refinanced 5,000,000

4
Problem 1-16 Answer A

Accounts payable 6,500,000

Note payable – bank 3,000,000
Interest payable 150,000
Mortgage note payable 2,000,000
Bonds payable 4,000,000
15,650,000
Problem 1-17 Answer A
6% Note payable 500,000
8% Note payable 800,000
Total current liabilities 1,300,000

PAS 1, paragraph 63, provides that an entity shall classify its financial liabilities as current when they
are due to be settled within twelve months after balance sheet date even if an agreement to refinance
or reschedule payment on a long-term basis is completed after balance sheet date and before the
financial statements are authorized for issue.

Problem 1-18

2008
1. Cash 3,600,000
Sales 3,600,000

2. Premiums 390,000
Cash 390,000

3. Cash (5,000 x 10) 50,000

Premium expense (5,000 x 40) 200,000
Premiums (5,000 x 50) 250,000

4. Premium expense (5,000 x 20) 100,000

Cash 100,000

5. Premium expense (2,000 x 60) 120,000

Estimated premiums payable 120,000

5
2009
1. Estimated premiums payable 120,000
Premium expense 120,000
Reversing entry.

Cash 4,200,000
Sales 4,200,000

2. Premiums 580,000
Cash 580,000

3. Cash (9,000 x 10) 90,000

Premium expense (9,000 x 40) 360,000
Premiums (9,000 x 50) 450,000
4. Premium expense (9,000 x 20) 180,000
Cash 180,000

5. Premium expense (3,000 x 60) 180,000

Estimated premiums payable 180,000

Problem 1-19

1. Cash (400,000 x 9) 3,600,000

Sales 3,600,000

2. Premiums 900,000
Cash 900,000

3. Premium expense 30,000

Cash 30,000

4. Cash (8,000 x 5) 40,000

Premium expense (8,000 x 85) 680,000
Premiums (8,000 x 90) 720,000

5. Premium expense (2,000 x 85) 170,000

Estimated premiums payable 170,000

Bottle caps to be redeemed (25% x 400,000) 100,000

Less: Bottle caps redeemed (8,000 pens x 10) 80,000
Bottle caps outstanding 20,000

6
Premiums to be distributed on the balance of bottle caps (20,000 /10) 2,000

6. Premium expense 150,000

Cash (30 x 5,000) 150,000

Problem 1-20

2008
1. Cash 2,500,000
Sales 2,500,000

2. Premiums - towels 175,000

Cash 175,000

3. Cash (1,000 x 20) 20,000

Premiums expense 80,000
 Premiums – towels (1,000 x 100) 100,000

4. Premium expense (1,000 X 5) 5,000

Cash 5,000

5. Premium expense 51,000

Estimated premiums payable (600 X 85) 51,000

2009
1. Estimated premiums payable 51,000
Premium expense 51,000

Cash 3,125,000
Sales 3,125,000

2. Premiums - towels 200,000

Cash 200,000

3. Cash (1,800 x 20) 36,000

Premiums expense 144,000
Premiums – towels (1,800 x 100) 180,000

4. Premium expense (1,800 X 5) 9,000

Cash 9,000

7
5. Premium expense 68,000
Estimated premiums payable (800 X 85) 68,000

Statement classification
2008 2009
Current asset:
Premiums – towels 75,000 95,000
Current liability:
Estimated premiums payable 51,000 68,000
Selling expense:
Premium expense 136,000 170,000

Problem 1-21 Answer B Problem 1-22 Answer D

Coupons to be redeemed Premiums to be distributed

(160,000 x 60%) 96,000 (250,000 x 80% / 10) 20,000
Less: Coupons redeemed 40,000 Premiums distributed 15,000
Balance 56,000 Balance 5,000
Number of premiums (56,000 / 5) 11,200 Premium liability (5,000 x 100) 500,000

Amount of liability (11,200 x 20) 224,000

Problem 1-23 Answer B Problem 1-24 Answer B

Premiums distributed in 2009 5,500 Coupons to be redeemed

Estimated premiums in 2009 500 80% x 500,000) 400,000 Total
6,000 Less: Coupons redeemed 300,000
Less: Estimated premiums in 2008 200 Coupons outstanding 100,000
Premiums applicable to 2009 5,800
Liability for unredeemed
Premium expense (5,800 x 60) 348,000 coupons (100,000 x 15) 1,500,000

Problem 1-25 Answer C

Total coupons issued and to be redeemed (600,000 x 70% x 110%) 462,000

Less: Total payments to retailer 220,000
Liability for underdeemed coupons – 12/31/2008 242,000

Problem 1-26
Accrual approach

2008
1. Cash (300 x 15,000) 4,500,000
Sales 4,500,000

2. Warranty expense 144,000

Estimated warranty liability (60% x 300 = 180 x 800) 144,000

3. Estimated warranty liability 40,000

Cash 40,000

2009
1. Cash (500 x 15,000) 7,500,000
Sales 7,500,000

2. Warranty expense 240,000

Estimated warranty liability (60% x 500 = 300 x 800) 240,000
3. Estimated warranty liability 150,000
Cash 150,000

Expense as incurred approach

2008
1. Cash 4,500,000
Sales 4,500,000

2. Warranty expense 40,000

Cash 40,000

2009
1. Cash 7,500,000
Sales 7,500,000

2. Warranty expense 150,000

Cash 150,000

9
Problem 1-27
Accrual approach

2008
1. Cash 5,000,000
Sales 5,000,000

2. Warranty expense 700,000

Estimated warranty liability (14% x 5,000,000) 700,000

3. Estimated warranty liability 390,000

Cash 390,000

2009
1. Cash 9,000,000
Sales 9,000,000

2. Warranty expense 1,260,000

Estimated warranty liability (14% x 9,000,000) 1,260,000

3. Estimated warranty liability 900,000

Cash 900,000

“Expense” approach
 2008
1. Cash 5,000,000
Sales 5,000,000

2. Warranty expense 390,000

Cash 390,000

2009
1. Cash 9,000,000
Sales 9,000,000

2. Warranty expense 900,000

Cash 900,000

10
Problem 1-28

Units sold:
October 32,000
November 28,000
December 40,000
Total 100,000
Multiply by 2%
Total failures expected 2,000
Less: Failures already recorded:
October sales 640
November sales 360
December sales 180 1,180
Expected future failures 820
Multiply by 150
Estimated cost 123,000

Warranty expense 123,000

Estimated warranty liability 123,000

Problem 1-29 Answer D

Warranty expense (2,400 x 300) 720,000

Problem 1-30 Answer C Problem 1-31 Answer A

Warranty expense (3,000 x 80) 240,000 Warranty expense

Less: Actual warranty cost 70,000 (5% x 5,000,000) 250,000
Warranty liability–June 30, 2008 170,000

Problem 1-32 Answer B

Warranty expense:
2008 (5,000,000 x 7%) 350,000
2009 (7,000,000 x 7%) 490,000
840,000
Warranty costs:
2008 100,000
2009 300,000400,000
Warranty liability – December 31, 2009 440,000

11

Problem 1-33 Answer A

Net sales (640,000 / 8%) 8,000,000

Problem 1-34 Answer A

Normal defect (500 x P10,000 x 25%) 1,250,000

Significant defect (500 x P30,000 x 15%) 2,250,000
3,500,000
Problem 1-35

1. Cash 500,000
Gift certificates payable 500,000

2. Gift certificates payable 400,000

Sales 400,000

3. Gift certificates payable 40,000

Forfeited gift certificates (8% x 500,000) 40,000

Problem 1-36

1. Cash 900,000
Gift certificates payable 900,000

2. Gift certificates payable 780,000

Sales 780,000

3. Gift certificates payable 40,000

Forfeited gift certificates 40,000
Unearned revenue – January 1 260,000
Add: Gift certificates sold 900,000
Total 1,160,000
Less: Gift certificates redeemed 780,000
Expired gift certificates 40,000 820,000
Unearned revenue – December 31 340,000

12

Problem 1-37 Answer C

Unearned revenue – January 1 650,000

Add: Gift certificates sold 2,250,000
Total 2,900,000
Less: Gift certificates redeemed 1,950,000
Expired gift certificates 100,000 2,050,000
Unearned revenue – December 31 850,000

Problem 1-38 Answer D

2008 Sales of gift certificates (2,500,000 x 90%) 2,250,000

Less: 2007 Redemption of current year sales 1,750,000
Unearned revenue – December 31, 2008 500,000

Unredeemed – January 1, 2008 750,000

Less: 2008 Redemption of prior year sales 250,000
Expired gift certificates 500,000

Problem 1-39 Answer D

1. Cash 980,000
Unearned service contract revenue 980,000

Service contract expense 520,000

Cash 520,000

Unearned service contract revenue 860,000

Service contract revenue 860,000

2. Unearned revenue – January 1 600,000

 Cash receipts from contracts sold 980,000
Total 1,580,000
Less: Service revenue recognized 860,000
Unearned revenue – December 31 720,000

13
Problem 1-40 Answer B

Outstanding contracts on December 31, 2008 that will expire during

2009 150,000
2010 225,000
2011 100,000
Unearned service contract revenue 475,000

Problem 1-41 Answer A

The entire amount of P720,000 will be considered deferred revenue on December 31, 2008 because
the subscriptions start with the January 2009 issue.

Problem 1-42 Answer A

Monthly subscriptions (7,200,000 / 12) 600,000

The subscriptions after the September 30 cut-off are:

October 600,000
November 600,000
December 600,000
Total unearned subscription revenue – December 31, 2008 1,800,000

The above subscriptions will be served in the next publication in 2009.

Problem 1-43 Answer C

Subscriptions received in 2008 that will expire in 2010 125,000

Subscriptions received in 2009 that will expire in 2010 200,000
Subscriptions received in 2009 that will expire in 2011 140,000
Unearned subscription revenue – December 31, 2009 465,000

Problem 1-44 Answer B

Liability for refundable deposit – January 1 150,000
Deposits made in 2008 (100,000 x 5) 500,000
Total 650,000
Less: Deposits refunded in 2008 (110,000 x 5) 550,000
Balance – December 31(current liability) 100,000

The lease deposit is a noncurrent liability.

14
Problem 1-45 Answer C

Advances – January 1 1,180,000

Advances received 1,840,000
Total 3,020,000
Advances applied (1,640,000)
Advances canceled ( 500,000)
Advances – December 31 880,000

Problem 1-46 Answer B

B = .10 (1,650,000 – B)
B = 165,000 - .10B
B + .10B = 165,000
1.10B = 165,000
B = 165,000 / 1.10
B = 150,000

Problem 1-47 Answer A

Income after bonus and tax (260,000 / 10%) 2,600,000

Income before tax (2,600,000 / 65%) 4,000,000
Income before bonus and tax (4,000,000 + 260,000) 4,260,000

Proof
Income before bonus and tax 4,260,000
Less: Bonus 260,000
Income before tax 4,000,000
Less: Tax (35% x 4,000,000) 1,400,000
Income after bonus and tax 2,600,000

Problem 1-48 Answer B

B = .05 (5,000,000 – B – T)
T = .35 (5,000,000 – B)
B = .05 [5,000,000 – B - .35 (5,000,000 – B)]
B = .05 (5,000,000 – B - 1,750,000 + .35B)
 B = 250,000 – .05B - 87,500 + .0175B
B + .05B - .0175B = 250,000 – 87,500
1.0325B = 162,500
B = 162,500 / 1.0325
B = 157,385
15
T = .35 (5,000,000 – 157,385)
T = 1,694,915

Proof of bonus
B = .05 (5,000,000 – 157,385 – 1,694,915)
B = 157,385

Problem 1-49

1. Cash 390,000
Containers’ deposit 390,000

Containers’ deposit 313,000

Cash 313,000

Containers’ deposit 30,000

Containers
30,000

Containers’ deposit on January 1, 2008 applicable to 2006 deliveries 75,000

Less: Containers returned in 2008 applicable to 2006 deliveries 45,000
Balance – expired and no longer refundable 30,000

2. Containers’ deposit – January 1, 2008 290,000

Add: Containers’ deposit in 2008 390,000
Total 680,000
Less: Containers returned in 2008 313,000
Containers not returned and expired 30,000 343,000
Containers’ deposit – December 31, 2008 337,000

Problem 1-50

1. Only a disclosure is necessary because it is not probable that the company will be liable, although
the amount can be measured reliably.

2. Retained earnings 200,000

Estimated liability for income tax 200,000

3. Accounts receivable – Sunset 120,000

Loss on guaranty 80,000
Note payable – bank 200,000
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Problem 1-51

1. Unearned subscription revenue 700,000

Subscription revenue (3,000,000 – 2,300,000) 700,000

2. Loss on damages 1,500,000

Estimated liability for damages 1,500,000

3. Loss on damages 1,000,000

Estimated liability for damages 1,000,000

Problem 1-52 Answer A

The probable loss is recorded but the possible loss is only disclosed.
`
Problem 1-53 Answer C

The best estimate is recorded. The accepted BIR offer is not recorded because it was made after the
statements are issued.

Problem 1-54 Answer D

The provision should be accrued because it is probable and measurable. The accrued amount is
P350,000 which is the midpoint of the range in the absence of the best estimate within the range.

Problem 1-55 Answer D

The contingent asset is disclosed only because the case is unresolved on December 31, 2008. The
issue is what amount of asset will be disclosed. Since the case is settled in March 2009 after the
issuance of the 2008 financial statements, the amount P1,500,000 should be disclosed. However, if
the case is settled before the issuance of the statements, the actual award of P1,000,000 should be
disclosed.

Problem 1-56 Answer A

Haze can report a gain of P1,500,000 in its 2008 income statement because this amount is already
settled on December 31, 2008. However, the remainder of P3,000,000 is only disclosed because the
defendant has appealed the said amount.
 17
Problem 1-57 Answer A

The loss on the first lawsuit is both probable and measurable and therefore can be accrued as a
provision.

Problem 1-58 Answer B

Environmental cost 500,000

Litigation cost 300,000
Total accrued liability 800,000

Both are accrued as provision because the loss is probable and measurable.

Problem 1-59 Answer D

Assessment on appeal (50% x 1,600,000) 800,000

Environmental cost 1,500,000
Total provision 2,300,000

The loss from the guaranty is not accrued because it is remote.