MODULE 1: CURRENT LIABILITIES

PROBLEM 1: On August 31, Grant Co. partially refunded P180,000 of its outstanding 10% note
payable made one year ago to Arma State Bank by paying P180,000 plus P18,000 interest,
having obtained the P198,000 by using P52,400 cash and signing a new one-year P160,000
note discounted at 9% by the bank.

Instructions
(1) Make the entry to record the partial refunding. Assume Grant Co. makes reversing entries
when appropriate.
(2) Prepare the adjusting entry at December 31, assuming straight-line amortization of the
discount.

PROBLEM 2: Compensated absences.

Wolff Co. began operations on January 2, 2016. It employs 15 people who work 8-hour days.
Each employee earns 10 paid vacation days annually. Vacation days may be taken after January
10 of the year following the year in which they are earned. The average hourly wage rate was
P24.00 in 2016 and P25.50 in 2017. The average vacation days used by each employee in 2017
were 9. Wolff Co. accrues the cost of compensated absences at rates of pay in effect when
earned.

Instructions
Prepare journal entries to record the transactions related to paid vacation days during 2016 and
2017.

PROBLEM 3: Contingent liabilities.

Below are three independent situations.
1. In August, 2017 a worker was injured in the factory in an accident partially the result of his
own negligence. The worker has sued Rooney Co. for P800,000. Counsel believes it is
reasonably possible that the outcome of the suit will be unfavorable and that the settlement
would cost the company from P250,000 to P500,000.
2. A suit for breach of contract seeking damages of P2,400,000 was filed by an author against
Early Co. on October 4, 2017. Early's legal counsel believes that an unfavorable outcome is
probable. A reasonable estimate of the award to the plaintiff is between P600,000 and
P1,800,000. No amount within this range is a better estimate of potential damages than any
other amount.

3. Peete is involved in a pending court case. Peete’s lawyers believe it is probable that Peete
will be awarded damages of P1,000,000.

Instructions
Discuss the proper accounting treatment, including any required disclosures, for each situation.
Give the rationale for your answers.

PROBLEM 4: Premiums.
Farley Music Shop gives its customers coupons redeemable for a poster plus a Dixie Chicks
CD. One coupon is issued for each dollar of sales. On the surrender of 100 coupons and P5.00
cash, the poster and CD are given to the customer. It is estimated that 80% of the coupons will
be presented for redemption. Sales for the first period were P700,000, and the coupons

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MODULE 1: CURRENT LIABILITIES

redeemed totaled 340,000. Sales for the second period were P840,000, and the coupons
redeemed totaled 850,000. Farley Music Shop bought 20,000 posters at P2.00/poster and
20,000 CDs at P6.00/CD.

Instructions
Prepare the following entries for the two periods, assuming all the coupons expected to be
redeemed from the first period were redeemed by the end of the second period.

PROBLEM 5: Premiums.
Barkley 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 P1.20 each. Barkley's experience
indicates that 60 percent of the coupons will be redeemed. During 2016, 100,000 bags of dog
food were sold, 12,000 toys were purchased, and 40,000 coupons were redeemed. During
2017, 120,000 bags of dog food were sold, 16,000 toys were purchased, and 60,000 coupons
were redeemed.

Instructions
Determine the premium expense to be reported in the income statement and the estimated
liability for premiums on the balance sheet for 2016 and 2017.

PROBLEM 6: Bonus calculation.

Wilson Co. has an agreement with the sales manager that she is to receive a bonus of 5% of
net income after deduction of the bonus and income taxes. Company income before deduction
of the bonus and income taxes is P200,000. Income taxes are 30% and the bonus is deductible
for taxes.

Instructions
(a) Show your calculation of the amount of the bonus to the nearest peso.
(b) Show your calculation of the amount of the taxes to the nearest peso.

2|Financial Accounting and Reporting II