Q1- CURRENT LIABILITIES

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. On December 30, 20x1, SUPPLICATE TO BEG Co. had cash of P200,000, a current ratio of 1.5:1 and a quick
ratio of .5:1. On December 31, 20x1, all cash was used to reduce accounts payable. How did these cash
payments affect the ratios?
Current ratio Quick ratio
a. Decreased No effect
b. Increased No effect
c. Increased Decreased
d. Decreased Increased
____ 2. GLOWER TO FROWN Company had a P4,000,000 note payable due on March 15, 20x6. On January 28, 20x6
before the issuance of its 20x5 financial statements, GLOWER issued long-term bonds in the amounts of
P4,500,000. Proceeds from the bonds were used to repay the note when it became due. How should GLOWER
classify the note in its December 31, 20x5 financial statements?
a. As a current liability, with separate disclosure of the note refinancing.
b. As a noncurrent liability, with separate disclosure of the note refinancing.
c. As a current liability, with no separate disclosure required.
d. As a noncurrent liability, with no separate disclosure required.
____ 3. A conversion of a company’s short-term note payable into a long-term note payable would
a. Increase only the working capital.
b. Decrease both the working capital and the current ratio.
c. Increase both the working capital and the current ratio.
d. Decrease only the working capital.
____ 4. On December 31, 20x2, EQUIVOCAL UNCERTAIN UNDECIDED Co. had a note payable due on August 1,
20x3. On January 20, 20x3, EQUIVOCAL signed a financing agreement to borrow the balance of the note
payable from a lending institution to refinance the note. The agreement does not expire within one year, and no
violation of any provision in the financing agreement exists. On February 1, 20x3, EQUIVOCAL was informed
by its financial advisor that the lender is not expected to be financially capable of honoring the agreement.
EQUIVOCAL's financial statements were issued on March 31, 20x3. How should EQUIVOCAL classify the
note on its balance sheet at December 31, 20x2?
a. As a current liability because the lender is not expected to be financially capable of honoring
the agreement and the refinancing is not at the discretion of borrower.
b. As a long-term liability because no violation of any provision in the financing agreement
exists.
c. As a current liability because the financing agreement was signed after the balance sheet
date.
d. As a long-term liability because the agreement does not expire within one year.
____ 5. OBFUSCATE DARKEN Co. has the following liabilities as of December 31, 20x1.
a. Trade accounts payable, including cost of goods received on consignment of P40,000
1,200,000
b. Held for trading financial liabilities 200,000
c. Deferred revenue 80,000
d. Bank overdraft 40,000
e. Income tax payable 200,000
f. Accrued expenses 20,000
g. Share dividend payable 48,000
h. Advances from affiliates payable in 15 months after 92,000
year-end
i. Loan of CONFUSE, Inc. guaranteed by OBFUSCATE – it is possible that
OBFUSCATE will be held liable for the guarantee 180,000

How much is the total current liabilities?

a. 1,800,000 c. 1,740,000
b. 1,660,000 d. 1,620,000
____ 6. NESCIENCE IGNORANCE Co. has the following liabilities as of December 31, 20x1.
Trade accounts payable net of debit balance in supplier’s account of P20,000, net of
unreleased checks of P16,000, and net of postdated checks of P8,000. 1,200,000
Credit balance in customers’ accounts 8,000
 Financial liability designated at FVPL 200,000
Bonds payable maturing in 10 equal annual installments of P400,000 4,000,000
12%, 5-year note payable issued on October 1, 20x1 400,000
Deferred tax liability 20,000
Unearned rent 16,000
Contingent liability 40,000
Reserve for contingencies 100,000
How much is the total current liabilities?
a. 1,872,000 c. 1,868,000
b. 1,860,000 d. 1,880,000
____ 7. ILLICIT UNLAWFUL Co. requires deposits from customers for the containers of goods sold. The customers
are refunded for the deposits received when the containers are returned within two years from date of sale of
the related goods. Deposits for containers not returned within the time limit are regarded as proceeds from
retirement of the containers. Information for 20x3 is as follows:

Container deposits at December 31, 20x2, from deliveries in:

20x1 P 80,000
20x2 180,000 P260,000
Deposits for containers delivered in 20x3 360,000
Deposits for containers returned in 20x3 from deliveries in:
20x1 P 36,000
20x2 100,000
20x3 184,000 320,000

How much is the liability for deposits on returnable containers on December 31, 20x3?
a. 220,000 c. 256,000
b. 176,000 d. 300,000
____ 8. Step reported the following relating on December 31, 2013:
Accounts payable for goods and services purchased on open account amounted to P600,000 and accrued
expense totaled P500,000 on December 31, 2013.
On July 1, 2013, the entity issued P5,000,000,8% bonds for P4,400,000 to yield 10%. The bonds mature on
June 30,2018 and pay interest annualy every June 30. On December 31,2013, the bonds were trading in the
open market at 86 to yield 12%. The effective interest method is used to amortize bind discount.
The pretax financial income for 2013 was P10,500,000 and the taxable income was P9,000,000. The
difference is due to P1,000,000 permanent difference and P500,000 temporary difference which is entity is
expected to reverse in 2014. The entity is subject to the income tax rate of 30% and made estimated income
tax payments during the year of P1,000,000. What amount of current liability should be reported on
December 31, 2013?
a. 2,800,000 c. 4,000,000
b. 3,000,000 d. 3,150,000
____ 9. Liane Company’s accounts payable at December 31, 2018, totaled P4,500,000 before any necessary year-end
adjustments relating to the following transactions:
* On December 21, 2018, Liane wrote and recorded checks to creditors totaling P2,000,000 causing an overdraft
of P500,000 in Liane’s bank account at December 31, 2018. The checks were mailed on January 10, 2009.
* On December 28, 2018, Liane purchased and received goods for P750,000, terms 2/10, n30. Liane records
purchases and accounts payable at net amount. The invoice was recorded and paid January 3, 2009.
* Goods shipped F.O.B. destination on December 20, 2018 from a vendor to Liane were received January 2,
2009. The invoice cost was P325,000.
At December 31, 2018, what amount should Liane report as total accounts payable?
a. 7,575,000 b. 7,250,000 c. 7,235,000 d. 7,553,000

UNKEMPT UNTIDY Co. requires advance payments for custom-built guitar effects, gadgets, and racks. The
records of UNKEMPT Co. show the following:
Unearned revenue, January 1, 20x1 P 4,000,000
Advances received during 20x1 40,000,000
Advances applied to orders shipped in 20x1 32,000,000
Advances pertaining to orders cancelled in 20x1 1,200,000

____ 10. How much is the current liability if the advance payments received are refundable?
a. 12,000,000 c. 13,200,000
b. 10,800,000 d. 0
____ 11. Hartford Industrial, Inc. is owned by five founding shareholders. On December 1, 2009, the entity declared a
property dividend for each shareholder that is payable on January 31, 2010. The carrying amount of the property
is P1,000,000 and the fair value is P1,500,000. However, the fair value is P1,800,000 on December 31, 2009
and P1,900,000 on January 31, 2010.
What is the dividend payable on December 31, 2009?
a. P7,500,000 c. P9,000,000
b. P5,000,000 d. P 0
____ 12. A $20,000, 90-day, 8% note payable was issued on November 1, 2015. Using a 360-day year, what is the
amount of accrued interest on December 31, 2015?
a. $267 c. $800
b. $200 d. $133
____ 13. Share (stock) dividends distributable (payable) is
a. presented as current liabilities if they are expected to be settled within 12 months from the
end of reporting period
b. not liabilities but rather presented as part of equity as a deduction to share capital.
c. not presented in the financial statements but disclosed only in the notes
d. not liabilities but rather presented as part of equity as an addition to share capital.
____ 14. A currently maturing obligation expected to be refinanced:
a. must always be reported as a current liability.
b. may be classified as noncurrent if refinancing arrangements are made and signed as of the
end of the reporting period.
c. may be classified as noncurrent if there is an intention to refinance.
d. may be classified as noncurrent if off-balance sheet financing is to be obtained after the end
of the reporting period but before the financial statements are authorized for issue.
____ 15. EVOKE SUMMON Co. sells one-year subscriptions for an industry publication published semiannually and
shipped to subscribers on May 1 and November 1. Subscriptions received after April 1 and October 1 cut-off
dates are held for the next publication. Receipts during 20x1 for subscriptions were made evenly. Information
on subscriptions is shown below:
Unearned revenue – January 1, 20x1 P12,000,000
Receipts from subscriptions during 20x1 96,000,000
How much is the unearned revenue balance on December 31, 20x1?
a. 60,000,000 c. 48,000,000
b. 24,000,000 d. 23,000,000
____ 16. SENECTITUDE OLD AGE Co. has a 10%, P4,000,000 loan payable as of December 31, 20x1 that is maturing
on July 1, 20x2. The loan is dated July 1, 19x1 and pays annual interest every July 1. On February 1, 20x2,
SENECTITUDE Co. entered into a refinancing agreement with a bank to refinance the loan on a long-term
basis. Both parties are financially capable of honoring the agreement's provisions. SENECTITUDE has the
discretion to refinance or roll over the loan for at least twelve months from December 31, 20x1 under an existing
loan facility. SENECTITUDE’s financial statements were authorized for issue on March 15, 20x2. How much
is presented as current liability in SENECTITUDE’s 20x1 year-end financial statements?
a. 200,000 c. 4,200,000
b. 0 d. 4,000,000
____ 17. Marcus Company has reported a total financial liability of P15,000,000 in its accounting records as of December
31, 2007 which include the following:
 A P3,000,000 face value perpetual bond that pays 5% interest each year.
 A P2,000,000 redeemable preference share that will be redeemed by Marcus at a future date
 A P1,500,000 redeemable preference share redeemable at the option of the holder
 A P75,000 written call option that allows the holder to purchase a fixed number of ordinary shares from
Marcus Company for a fixed amount.
What is the correct amount of financial liability that should be reported by Marcus Company in its
December 31, 2007 balance sheet?

a. P13,425,000 c. P14,925,000
b. P11,925,000 d. P11,500,000
____ 18. Which of the following statements is true?
a. A short-term deferred revenue should be classified as a current liability.
b. Liabilities must be due within 12 months of the current balance sheet to be classified as
current liabilities.
c. A current liability may be classified as a long-term liability if the entity has the intention to
refinance it after the balance sheet date.
 d. Deposits taken from customers by public utilities should always be reported as current
liabilities by the utility.
____ 19. A currently maturing obligation is normally presented as current. In which of the following instances may a
currently maturing obligation be presented as noncurrent?
a. refinancing is completed as of the end of reporting period,
b. grace period is received as of the end of reporting period to rectify a breach of loan
agreement ending at least 12 months after the end of reporting period.
c. refinancing after the end of reporting period but before authorization of financial statements
for issue is at the discretion of the entity
d. in any of these instances
____ 20. Which of the following items would be excluded from current liabilities?
a. A long-term liability callable or due on demand by the creditor but the creditor has given no
indication that the debt will be called.
b. Normal accounts payable which had been assigned by the creditor to a finance company.
c. A short-term debt which at the discretion of the entity can be rolled over at least twelve
months after the balance sheet date.
d. Long-term debt callable within one year or less because the debtor violated a debt provision.
____ 21. On January 1, 20x1, DOLEFUL SAD Co. took a 3-year, P4,000,000 loan from a bank. The loan agreement
requires DOLEFUL to maintain a current ratio of 2:1. If the current ratio falls below 2:1, the loan becomes
payable on demand. As of December 31, 20x1, DOLEFUL’s current ratio is 1.8:1. On December 31, 20x1, the
bank agreed not to collect the loan in 20x2 and gave DOLEFUL 12 months to rectify the breach of loan
agreement. How much is presented as current liability in relation to the loan in DOLEFUL’s 20x1 year-end
financial statements?
a. 4,200,000 c. 0
b. 200,000 d. 4,000,000
____ 22. On December 31, 20x1, INTIMIDATE FRIGHTEN Co. has accounts payable of P4,000,000 before possible
adjustment for the following:
 Goods in transit from a vendor to INTIMIDATE on December 31, 20x1 with an invoice cost of
P200,000 purchased FOB shipping point was not yet recorded.
 Goods shipped FOB shipping point from a vendor to INTIMIDATE was lost in transit. The invoice
cost of P80,000 was not yet recorded.
 Goods shipped FOB shipping point from a vendor to INTIMIDATE on December 31, 20x1 amounting
to P32,000 was recorded and included in the year-end physical count as “goods in transit.”
 Goods in transit from a vendor to INTIMIDATE on December 31, 20x1 with an invoice cost of P40,000
purchased FOB destination was not yet recorded. The goods were received in January 20x2.
 Goods with invoice cost of P60,000 was recorded and included in the year-end physical count as “goods
in transit.” It was found out that the goods were shipped from a vendor under FOB destination.
 Checks drawn but not yet released to payees amounted to P48,000 while checks drawn and released to
payees but were postdated amounted to P20,000.
 On December 28, 20x1, a vendor authorized INTIMIDATE to return for full credit goods shipped and
billed at P100,000 on December 14, 20x1. INTIMIDATE shipped the returned goods on December 31, 20x1
but the credit memo was received and recorded only on January 3, 20x2.
 Goods shipped FOB shipping point, freight prepaid from a vendor on December 28, 20x1 was recorded
at invoice cost at shipment date. The invoice cost is P56,000 while the freight cost is P12,000.
 Goods shipped FOB destination, freight collect were received on December 29, 20x1. The invoice cost
of P160,000 was credited to accounts payable on date of receipt and the related freight of P20,000 was debited
to an expense account.

How much is the adjusted accounts payable on December 31, 20x1?

a. 4,220,000 c. 4,148,000
b. 4,168,000 d. 4,180,000
____ 23. RUSE TRICK Co. is preparing its December 31, 20x1 year-end financial statements. The following information
was gathered:
The bill for December’s utility costs of P120,000 was received and paid on January 10, 20x2.
A P80,000 advertising bill was received on January 2, 20x2. Of the total billing, P60,000 pertain to
advertisements in December 20x1 and P20,000 pertain to advertisements in January 20x2.
A lease, effective December 16, 20x0, calls for a fixed rent of P400,000 per month, payable one month after
the commencement of the lease and every month thereafter. In addition, rent equal to 5% of net sales over
P4,000,000 per year is payable on January 31 of the following year.
Total cash sales and collections on accounts amounted to P4,000,000 and accounts receivable has a net increase
of P800,000. Commissions of 15% of sales are paid on the same day cash is received from customers.
 How much is the accrued liabilities as of December 31, 20x1?
a. 620,000 c. 340,000
b. 540,000 d. 420,000
____ 24. PARADIGM EXAMPLE Co. has a 10%, P4,000,000 loan payable as of December 31, 20x1 that is maturing
on July 1, 20x2. Interest on the loan is due every July 1 and December 31. On February 1, 20x2, PARADIGM
Co. entered into a refinancing agreement with a bank to refinance the loan on a long-term basis. Both parties
are financially capable of honoring the agreement's provisions. PARADIGM’s financial statements were
authorized for issue on March 15, 20x2. How much is presented as current liability in relation to the loan in
PARADIGM’s 20x1 year-end financial statements?
a. 0 c. 4,000,000
b. 4,200,000 d. 200,000
____ 25. Of the following items, the one which should be classified as a current liability is
a. An accommodation endorsement on a demand note issued by an affiliated company.
b. Unfunded past service costs of a pension plan to the extent that benefits have not vested and
the costs have not been charged to operations.
c. A cash dividend declared before the balance sheet date when the date of record is subsequent
to the balance sheet date.
d. Dividends in arrears on cumulative preferred stock.
____ 26. Which of the following statements is true?
a. If no reasonable estimate can be made of the minimum amount expected to be available for
future refinancing, the entire outstanding short-term obligation must be disclosed as a
noncurrent obligation.
b. If ability to refinance a currently maturing obligation is present, but no arrangements are
made as of the balance sheet date, the obligation should be classified as noncurrent debt.
c. Obligations that are due on demand should be classified as a current liability even though
liquidation of the liability is not expected within the next year or operating cycle, whichever
is longer.
d. If a refinancing is soon to be accomplished by issuing ordinary shares, a currently maturing
short-term obligation should be included in shareholders’ equity on the current balance sheet
____ 27. Which of the following statements is false?
a. An entity may exclude a short-term obligation from current liabilities if refinancing is at the
discretion of the entity under an existing loan facility.
b. Under the cash basis method, warranty costs are charged to expense as they are paid.
c. Cash dividends should be recorded as a liability when they are declared by the board of
directors.
d. Income 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.
____ 28. Which of the following statements is correct?
a. A company may exclude a short-term obligation from current liabilities if it is paid off after
the balance sheet date and subsequently replaced by long-term debt before the balance sheet
is issued.
b. A company may exclude a short-term obligation from current liabilities if the firm intends
to refinance the obligation on a long-term basis.
c. A company may exclude a short-term obligation from current liabilities if the company can
demonstrate an ability to consummate a refinancing even if refinancing is not under an
existing loan facility.
d. None of these.

ENTAIL NEED Co. sells service contracts that cover a 2-year period. The sales price of each contract is P4,000.
ENTAIL sold 1,000 contracts evenly throughout 20x1. ENTAIL’s past experience shows that of the total pesos
spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly
during the second contract year.

____ 29. How much is the service revenue recognized in 20x1?

a. 2,000,000 c. 2,400,000
b. 800,000 d. 1,600,000
____ 30. Which of the following statements is correct?
a. A company may exclude a short-term obligation from current liabilities if the firm has
consummated and completed a long-term refinancing as of reporting period.
b. A company may exclude a short-term obligation from current liabilities if it is paid off after
the balance sheet date and subsequently replaced by long-term debt before the balance sheet
is issued.
c. A company may exclude a short-term obligation from current liabilities if the firm intends
to refinance the obligation on a long-term basis.
d. A company may exclude a short-term obligation from current liabilities if the firm can
demonstrate an ability to consummate a refinancing short of discretion to roll over the
liability for at least twelve months after the reporting period.