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CEBU CPAR
PRCTICAL ACCOUNTING 1
CURRENT LIABILITIES
PROF. U.C. VALLADOLID
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. To increase sales, Alfie Company inaugurated a promotional campaign on

June 30, 2007. Alfie placed a coupon redeemable for a premium in each
package of cereal sold at P200. Each premium costs P100. A premium is
offered to customers who send in 5 coupons and a remittance of P30. The
distribution cost per premium is P20. Alfie estimated that only 60% of the
coupons issued will be redeemed. For the six months ended December 31,
2007, the following is available:
Packages of cereal sold 100,000
Premiums purchased 10,000
Coupons redeemed 40,000
What is the estimated liability for coupons on December 31, 2007?

a. 1,080,000 c. 1,000,000
b. 720,000 d. 360,000
2. Kit Company includes one coupon in each box of laundry soap it sells. A
towel is offered as a premium to customers who send in 10 coupons and a
remittance of P5. Data for the premium offer are:
2006 2007
Boxes of soap sold 1,000,000 1,500,000
Number of towels purchased at P50 per towel 40,000 65,000
Number of towels distributed as premium 35,000 58,000
Number of towels to be distributed as premium next period 3,000 5,000
In its 2007 income statement. Kit Company should report premium
expense at

a. 3,000,000 c. 2,700,000
b. 2,610,000 d. 2,835,000
3. During 2006, Levi Company introduced a new product carrying a two-year
warranty against defects. The estimated warranty costs related to peso sales
are 5% within 12 months following sale and 10% in the second 12 months
following sale. Sales and actual warranty expenditures for the years ended
December 31, 2006 and 2007 are as follows:
Sales____ Actual expenditures
2006 20,000,000 1,500,000
2007 25,000,000 3,000,000
At December 31, 2007, Levi would report estimated warranty liability of

a. 1,500,000 c. 2,250,000
b. 750,000 d. 0
4. Lea Company sells gift certificates redeemable only when merchandise is
purchased. The certificates have an expiration date two years after issuance
date. Upon redemption or expiration, Lea recognizes the unearned revenue
as realized. Data for 2007 are as follows:
Unearned revenue, 1/1/2007 1,000,000
Gift certificates sold 5,000,000
Gift certificates redeemed 4,000,000
Expired gift certificates 500,000
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Cost of goods sold 60%

At December 31, 2007, Lea report unearned revenue of

a. 1,500,000 c. 1,000,000
b. 500,000 d. 0
5. On September 1, 2006, Teng Company issued a note payable to National
Bank in the amount of P10,000,000, bearing interest at 15%, and payable in five
equal annual principal payments of P2,000,000. On this date, the bank’s prime
rate was 12%. The first payment for interest and principal was made on
September 1, 2007. At December 31, 2007, Teng should record accrued
interest payable of

a. 1,400,000 c. 1,120,000
b. 400,000 d. 320,000
6. On November 5, 2007, a Chet Company truck was in an accident with an
auto driven by Macalelon. Chet received notice on January 15, 2008, of a
lawsuit for P4,000,000 damages for personal injuries suffered by Macalelon.
Chet’s counsel believes it is probable that Macalelon will be awarded an
estimated amount in the range between P2,000,000 and P3,000,000, and no
amount is a better estimate of potential liability than any other amount. The
accounting year ends on December 31, and the 2007 financial statements were
issued on March 31, 2008. What amount of provision should Chet accrue at
December 31, 2007?

a. 4,000,000 c. 3,000,000
b. 2,000,000 d. 2,500,000
7. Tina Company sells office equipment service contracts agreeing to service
equipment for a two-year period. Cash receipts from contracts are credited to
unearned service contract revenue and service contract costs are charged to
service contract expense as incurred. Revenue from service contracts is
recognized as earned over lives of the contracts. Information for the year 2007
is as follows:
Unearned service contract revenue – 1/1/2007 3,000,000
Cash receipts from service contracts sold 5,000,000
Service contract revenue recognized 4,500,000
Service contract expense 2,500,000
What amount should Tina report as unearned service contract revenue at
December 31, 2007?

a. 3,500,000 c. 2,000,000
b. 1,000,000 d. 500,000
8. Mill Company sells washing machines that carry a three year warranty against manufacturer’s defects.
Based on company experience, warranty costs are estimated at P300 per machine. During 2006 Mill
sold 2,400 washing machines and paid warranty costs of P170,000. In its income statement for the year
ended December 31, 2006, Mill should report warranty expense of

a. 170,000 c. 240,000
b. 550,000 d. 720,000
9. Fell Company operates a retail grocery store that is required by law to collect refundable deposits of P5
on soda cans. Information for 2006 follows:
Liability for refundable deposit – January 1 150,000
Cans of soda sold 100,000
Soda cans returned 110,000
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On February 1, 2006, Fell subleased space and received a P25,000 deposit to be applied against rent at
the expiration of the lease in 2010. In Fell’s December 31, 2006 balance sheet, the current liability for
deposit amounts to

a. 125,000 c. 140,000
b. 100,000 d. 25,000
10. Marr Company sells its product in reusable containers. The customer is charged a deposit for each
container delivered and receives a refund for each container returned within two years after delivery.
Marr accounts for the containers not returned within the time limit as being retired by sale at the deposit
amount. Information for 2006 is as follows:
Container deposits at December 31, 2005 from deliveries in:
2004 150,000
2005 430,000 580,000
Deposits for containers delivered in 2006 780,000
Deposits for containers returned in 2006 from deliveries in:
2004 90,000
2005 250,000
2006 286,000 626,000
In Marr’s December 31, 2006 balance sheet, the liability for deposits on returnable containers should
be

a. 494,000 c. 584,000
b. 674,000 d. 734,000
11. Anette Video Company sells 1-and 2-year subscriptions for its video-of-the-month business.
Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity
revealed the following:
2005 2006
Sales 420,000 500,000
Less cancellations 20,000 30,000
Net sales 400,000 470,000

Subscription expirations:
2005 120,000
2006 155,000 130,000
2007 125,000 200,000
2008 140,000
400,000 470,000
In Anette’s December 31, 2006 balance sheet, the balance for unearned subscription revenue
should be

a. 495,000 c. 470,000
b. 465,000 d. 340,000
12. Able Company provides an incentive compensation plan under which its president received a bonus
equal to 10% of the corporation’s income before income tax but after deduction of the bonus.
If the tax rate is 35% and net income after bonus and income tax was
P2,600,000, what was the amount of the bonus?

a. 260,000 c. 400,000
b. 440,000 d. 200,000
13. On December31, 2007, the bookkeeper of Jovy Company provided the following infromation:

Accounts payable, including deposits and advances

from ustomers of P500,000 P 2,500,000
Note payable, including note payable to bankdue on
December 31, 2009 for P1,000,000 3,000,000
Stock dividends payable 800,000
Credit balance in customers' accounts 400,000
Serial bonds, payable in semiannual installements
of P1,000,000 10,000,000
Accrued interest on bonds payable 300,000
Contested BIR tax assessment 600,000
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Unearned rent income 100,000

In the December 31, 2007 balance sheet, how much current liabilities should be reported?
a. 6,800,000 c. 7,900,000
b. 7,300,000 d. 8,700,000
14. An analysis of Cooper Company's liabilities disclosed the following:

Accounts payable, after deducting debit balances in

suppliers' accounts amounting to P22,500
(accounts payable included nontrade liabilities
of P32,500 P105,000
Accrued expenses 15,000
Credit balances of customers' accounts 13,500
Stock dividends payable 70,000
Claims for increase in wages and allowances by
employees of the company, covered in a pending lawsuit 125,000
Estimated liabilties for premiums 60,000

How much should be presented as total current liabilities in the balance sheet?
a. 6,000 c. 183,500
b. 168,500 d. 216,000
15. The balance in Emer Company's accounts payable account at December 31, 2007 was P1,170,000
before any year-end adjustments relating to the following:

Goods were in transit from a vendor to Emer on December 31, 2007. The invoice cost
was P65,000 and the goods were shipped FOB shipping point on December 29, 2007. The
goods were received on January 4, 2008.
Goods shipped FOB shipping point on December 20, 2007 from a vendor to Emer, were
lost in transit. The invoice cost was P32,500. On January 5, 2008, Emer filled a
P25,000 claim against the common carrier.
Goods shipped FOB destination on December 21, 2007, from a vendor to Emer, were
received on January 6, 2008. The invoice cost was P19,500.

What amount should Emer report as account payable on its December 31, 2007 balance sheet?

a. 1,202,500 c. 1,235,000
b. 1,222,000 d. 1,267,500
16. XYZ Company pays all employees on a biweekly basis. Overtime pay, however, is paid in the next
biweekly period. XYZ accues salaries expenses only at its December 31 year end. Data relating to
salaries earned in December 31, 2007 are as follows:

Last payroll was paid on December 26, 2007 for the 2-week period ended December
26, 2007.
Overtime pay earned in the 2-week period ended December 26,2007 was P10,500.
Remaining workdays in 2007 were December 29, 30 and 31,on which days there was
no overtime.
The recurring biweekly salaries total P187,500.

Assuming a five-day work week, what amount should XYZ record as accrued salaries at December 31,
2007?
a. 56,250 c. 112,500
b. 66,750 d. 123,000
17. Yo Corporation pays its outside salespersons fixed monthly salaries and commissions on net sales.
Sales commissions are computed and paid on a monthly basis (in the month following the month of
sale), and fixed salaries are treated as advances against commissions. However, if the fixed salaries for
salespersons exceed their sales commissions earned for a month, such excess is not charged back to
them. Pertinent data for the month of April 2007 for the three salespersons in sales region 3 are as
follows:

Salesperson Fixed salary Net sales Commission rate

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A P10,000 P 200,000 4%
B 14,000 400,000 6%
C 18,000 600,000 6%
Totals P42,000 P1,200,000

For sales region 3, what total amount should Yo accrue for sales commissions payable at April 30,
2007?
a. 26,000 c. 68,000
b. 28,000 d. 70,000
18. At December 31, 2007, Pido Company had a note payable of P2,500,000, due on April 15, 2006. Pido
expects to retire this debt with proceeds from the sale of 100,000 shares of its common stock. The
stock was sold for P15 per share on March 4, 2006 prior to the issuance of year-end financial
statements.

In Pido's December 31, 2007 balance sheet, what amount of the notes payable should be excluded from
current liabilities?
a. 0 c. 1,500,000
b. 1,000,000 d. 2,500,000
19. Eliot corporation'sliabilities at December 31, 2008 were as follows:

Accounts payable and accrued interest P2,000,000

12% Note Payable issued November 1, 2006,
maturing on July 1, 2008 600,000
10% Debentures payble (next annual principal
installment of P1,000,000 due on February 1,2008) 7,000,000

On March 1,2008, Eliot consummated a noncancelable agreement with the lender to refinance the 12%
note payable basis, on readily determinable terms that has not yet been implemented. Both parties are
financially capable of honoring the agreement and there have been no violations in any of the
agreement's provisions. Eliot's December 31, 2007 financial statements were issued on March 31,
2008.

In its December 31, 2007 balance sheet, Eliot should report current liabilities at
a. P2,000,000 c. P3,000,000
b. P2,600,000 d. P3,600,000
20. In May 2007, Virginia Company filed suit against Brown, Inc. seeking P850,000 damages for patent
infringement. A court verdict in November 2007 awarded Virginia P600,000 in damages, but Brown's
appeal is not expected to be decided before 2007. Virginia's counsel believes it is probable but not
virtually certain that Virginia will be successful against Brown for an estimated amount in the range
between P300,000 and P450,000, with P400,000 considered the most likely amount.

What amount should Virginia record as a contingent asset from lawsuit in the year ended December 31,
2007?
a. P 0 c. P400,000
b. P300,000 d. P600,000
21. On January 3, 2007, Rose Corporation owned a machine that had cost P500,000 on which the
accumulated depreciation was P400,000 and which had a fair market value of P80,000. On January 4,
2007, this machine was irreparably damaged by Tree's Corporation and became worthless. In October
2007, acourt awarded damages of P800,000 against Tree's in favor of Rose. At December 31, 2007 the
final outcome of this case was awaiting appeal, and was, therefore, uncertain. However, in the opinion
of Rose's attorney, Tree's appeal will be denied.

At December 31, 2007, how much should Rose accrue for this sign contingency?
a. P 0 c. P700,000
b. P100,000 d. P800,000
22. On January 17, 2008, an explosion occurred at Jeff Company plant causing extensive property damage
to area buildings. Although noclaims had yet been asserted against Jeff Company by March 10,2008,
Jeff's managament and cousel concluded that it is reasonably possible Jeff will be reponsible for
damages, and that P2,500,000 would be reasonable estimate of its liability. Jeff's P10,000,000
comprehensive public liability policy has a P500,000 deductible clause.
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In Jeff's December 31, 2007 financial statements, which are issued on March 25, 2008, how should this
term be reported?
a. No footnote disclosure or accrual is necessary.
b. As a footnote disclosure indicating the possible loss of P500,000.
c. As an accrued liability of P500,000.
d. As a footnote disclosure indicating the possible loss of P2,500,000.
23. On December 31, 2007, Laban Company was a defendant in a pending lawsuit. The suitarose from the
alleged defect of a product that Laban sold in 2005. In the opinion of Laban's attorney, it is probable that
Laban will have to pay P500,000 and it is reasonably possible that Laban will have to pay P600,000 as a
result of this lawsuit.

In its 2007 financial statements, Laban should report

a. an accrued liability of P500,000 only.
b. an accrued liability of P500,000 and would disclose a contingent liability of an
additional P100,000.
c. an accrued liability of P600,000 only.
d. no information about this lawsuit.

Problem

24. In the audit of the Kimberly Corporation’s financial statements at December 31, 2005, the chief
accountant of the said corporation provided the following information:
Notes payable:
Arising from purchase of goods 304,000
Arising from 5 year-bank loans, on which marketable securities
valued at P600,000 have been pledged as security, P400,000 due
on June 30, 2006; P100,000 due on Dec. 31, 2006 500,000
Arising from advances by officers, due June 30, 2006 50,000
Reserve for general contingencies 400,000
Employees’ income tax withheld 20,000
Advances received from customers on purchase orders 64,000
Containers’ deposit 50,000
Accounts payable arising from purchase of goods,
net of debit balances of P30,000 170,000
Accounts receivable, net of credit balances P40,000 360,000
Cash dividends payable 80,000
Stock dividends payable 100,000
Dividends in arrears on preferred stock, not yet declared 200,000
Convertible bonds, due January 31, 2007 1,000,000
First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year 2,000,000
Overdraft with Allied Bank 90,000
Cash in bank balance with PNB 390,000
Estimated damages to be paid as a result of unsatisfactory
performance on a contract 160,000
Estimated expenses on meeting guarantee for service
requirements on merchandise sold 120,000
Estimated premiums payable 75,000
Deferred revenue 87,000
Accrued interest on bonds payable 360,000
Common stock warrants outstanding 120,000
Common stock options outstanding 210,000
Unused letters of credit 400,000
Deficiency VAT assessment being contested 500,000
Notes receivable discounted 200,000
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On March 1, 2006, the P400,000 note payable was replaced by an 18-month note for the same
amount. Kimberly is considering similar action on the P100,000 note payable due on
December 31, 2006. The 2005 financial statements were issued on March 31, 2006.

On December 1, 2005, a former employee filed a lawsuit seeking P200,000 for unlawful
dismissal. Kimberly’ attorneys believe that the suit is without merit. No court date has been
set.

On January 15, 2006, the BIR assessed Kimberly an additional income tax of P300,000 for the
2003 tax year. Kimberly’ attorneys and tax accountants have stated that it is likely that the BIR
will agree to a P200,000 settlement.

REQUIRED:
Based on the above and the result of your audit, compute for the following as of December 31,
2005:
1. Total current liabilities
a. P2,500,000 b. P2,100,000 c. P2,300,000 d. P2,400,000
2. Total noncurrent liabilities
a. P3,300,000 b. P2,900,000 c. P3,000,000 d. P3,400,000
3. Total liabilities
a. P5,200,000 b. P5,000,000 c. P5,400,000 d. P5,800,000
25. The following information relates to Raptors Company’s obligations as of December 31, 2007.
For each of the numbered items, determine the amount if any, that should be reported as
current liability in Raptors’s December 31, 2007 balance sheet.

1. Accounts payable:
Accounts payable per general ledger control amounted to P5,440,000, net of P240,000
debit balances in suppliers’ accounts. The unpaid voucher file included the following items
that not had been recorded as of December 31, 2007:
a) A Company – P224,000 merchandise shipped on December 31, 2007, FOB
destination; received on January 10, 2008.
b) B, Inc. – P192,000 merchandise shipped on December 26, 2007, FOB shipping
point; received on January 16, 2008.
c) C Super Services – P144,000 janitorial services for the three-month period ending
January 31, 2008.
d) MERALCO – P67,200 electric bill covering the period December 16, 2007 to
January 15, 2008.
On December 28, 2007, a supplier authorized Raptors to return goods billed at P160,000
and shipped on December 20, 2007. The goods were returned by Raptors on December
28, 2007, but the P160,000 credit memo was not received until January 6, 2008.
a. P5,923,200 b. P5,712,000 c. P5,601,600 d. P5,841,600

2. Payroll:
Items related to Raptors’s payroll as of December 31, 2007 are:
Accrued salaries and wages P776,000
Payroll deductions for:
Income taxes withheld 56,000
SSS contributions 64,000
Philhealth contributions 16,000
Advances to employees 80,000
a. P776,000 b. P992,000 c. P832,000 d. P912,000
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3. Litigation:
In May, 2007, Raptors became involved in a litigation. The suit is being contested, but
Raptors’s lawyer believes it is possible that Raptors may be held liable for damages
estimated in the range between P2,000,000 and P3,000,000, and no amount is a better
estimate of potential liability than any other amount.
a. P0 b. P2,000,000 c. P3,000,000 d. P2,500,000

4. Bonus obligation:
Raptors Company’s president gets an annual bonus of 10% of net income after bonus and
income tax. Assume the tax rate of 30% and the correct income before bonus and tax is
P9,600,000. (Ignore the effects of other given items on net income.)
a. P722,600 b. P395,000 c. P2,240,000 d. P628,000

5. Note payable:
A note payable to the Bank of the Philippine Islands for P2,400,000 is outstanding on
December 31, 2007. The note is dated October 1, 2006, bears interest at 18%, and is
payable in three equal annual installment of P800,000. The first interest and principal
payment was made on October 1, 2007.
a. P800,000 b. P908,000 c. P72,000 d. P872,000

6. Purchase commitment:
During 2007, Raptors entered in a noncancellable commitment to purchase 320,000 units of
inventory at fixed price of P5 per unit, delivery to be made in 2008. On December 31, 2007,
the purchase price of this inventory item had fallen to P4.40 per unit. The goods covered by
the purchase contract were delivered on January 28, 2008.
a. P0 b. P1,600,000 c. P1,408,000 d. P192,000

7. Deferred taxes:
On December 31, 2007, Raptors’s deferred income tax account has a 2007 ending credit
balance of P772,800, consisting of the following items:
Caused by temporary differences in accounting Deferred tax
For gross profit on installment sales P376,000 Cr.
For depreciation on property and equipment 576,000 Cr
For product warranty expense 179,200 Dr
P772,800 Cr.
a. P772,800 b. P952,000 c. P196,800 d. P0

8. Product warranty:
Raptors has a one year product warranty on selected items in its product line. The
estimated warranty liability on sales made during 2006, which was outstanding as of
December 31, 2006, amounted to P416,000. The warranty costs on sales made in 2007 are
estimated at P1,504,000. Actual warranty costs incurred during the current 2007 fiscal year
are as follows:
Warranty claims honored on 2006 sales P 416,000
Warranty claims honored on 2007 sales 992,000
Total warranty claims honored P1,408,000
a. P0 b. P1,504,000 c. P96,000 d. P512,000

9. Premiums:
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To increase sales, Raptors Company inaugurated a promotional campaign on June 30,

2007. Raptors placed a coupon redeemable for a premium in each package of product
sold. Each premium costs P100. A premium is offered to customers who send in 5 coupons
and a remittance of P30. The distribution cost per premium is P20. Raptors estimated that
only 60% of the coupons issued will be redeemed. For the six months ended December 31,
2007, the following is available:
Packages of product sold 160,000
Premiums purchased 16,000
Coupons redeemed 64,000
a. P1,728,000 b. P1,152,000 c. P1,600,000 d. P576,000

10. Due to Five Six Finance company:

Raptors’s accounting records show that as of December 31, 2007, P1,280,000 was due to
Five Six Finance Company for advances made against P1,600,000 of trade accounts
receivable assigned to the finance company with recourse.
a. P0 b. P1,600,000 c. P320,000 d. P1,280,000