Chapter 1

Current Liabilities

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. TRUE
3. TRUE
4. FALSE
5. TRUE
6. TRUE
7. FALSE
8. FALSE
9. TRUE
10. FALSE - minus

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. A
2. C

3. Solution:
Accounts payable 15,000
Preference shares issued with mandatory redemption 100,000
Utilities payable 16,000
Rent payable 9,000
Total financial liabilities 140,000

4. Solution:
Accounts payable 500,000
Held for trading financial liabilities 1,000,000
Current portion of Note payable 1,000,000
Unearned revenue 300,000
Dividends payable 800,000
Current liabilities 3,600,000

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5. Solution:
Unadjusted accounts payable 2,200,000
Shipment lost - FOB S.P. 40,000
Purchase returns (70,000)
Adjusted accounts payable 2,170,000

6. Solution:
Currently maturing long-term debt (a) 10,000,000
5-year loan that is payable on demand (b) 6,000,000
Loan with breach of provision (b) 14,000,000
Current liabilities 30,000,000

(a)
“An entity classifies its financial liabilities as current when they
are due to be settled within twelve months after the reporting
period, even if:
a) the original term was for a period longer than twelve months,
and
b) an agreement to refinance, or to reschedule payments, on a
long-term basis is completed after the reporting period and
before the financial statements are authorised for issue.”
(PAS 1.72)

(b)“When an entity breaches a provision of a long-term loan

arrangement on or before the end of the reporting period with the
effect that the liability becomes payable on demand, it classifies
the liability as current, even if the lender agreed, after the
reporting period and before the authorisation of the financial
statements for issue, not to demand payment as a consequence of
the breach. An entity classifies the liability as current because, at
the end of the reporting period, it does not have an unconditional
right to defer its settlement for at least twelve months after that
date.”
(PAS 1.74)

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7. Solution:

Unearned revenue
ignored beg.
Redemptions - prior yr. ignored 2,000,000 2006 sales
Redemptions - current yr. 1,400,000
Estimate - not redeemed 200,000
end 400,000

8. Solution:
Total tax for the year (72,000 x 2) 144,000
Divide by: No. of months in a year 12
Monthly tax 12,000

April 1, 20x1
Land xxx
Cash xxx
Real property tax payable (12K x 3 mos.) 36,000

April 30, 20x1

Real property tax expense 12,000
Real property tax payable 12,000

May 1, 20x1
Real property tax payable 48,000
Prepaid real property tax 24,000
Cash 72,000

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PROBLEM 3: EXERCISES
1. Solution:
a. Trade accounts payable gross of debit balance,
unreleased check, and postdated check
(600,000 + 10,000 + 8,000 + 4,000). P622,000
b. Advances from customers (Credit balance in 4,000
customers’ accounts)
c. Financial liability designated at FVPL 100,000
d. Current portion of bonds payable 200,000
e. Interest payable on note payable 6,000
(P200,000 x 12% x 3/12)
g. Unearned rent 8,000
Total current liabilities P940,000

2. Solution:
Unadjusted balance 1,300,000
(a) -
(b) (40,000)
(c) 60,000
Adjusted accounts payable 1,320,000

3. Solution:
Accounts payable and accrued interest 1,000,000
12% note payable issued Nov. 1, 2004 maturing July 1,
2006 2,000,000
10% debentures payable (current portion) 500,000
Total current liabilities 3,500,000

4. Solution: (2M + 5M) = 7,000,000

5. Solution: 2,000,000

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6. Solution:
Plan Initial payment per child No. of children Total
#1 500 15 7,500
#2 200 12 2,400
#3 - 9 -
9,900
Multiply by: Unexpired portion 8/12
Unearned revenue 6,600

7. Solutions:
20x1 20x2 20x3 Total
Percentage earned
- 1st yr. 40% 60%
Percentage earned
- 2nd yr. 40% 60%
First half (2M ÷ 2) 1M 400,000 600,000
Second half (2M÷2) 1M 400,000 600,000
Earned portions 400,000 1,000,000 600,000 2,000,000

Requirement (a): Current and noncurrent portions – December 31,

20x1

Current portion of deferred revenue

(earned portion in 20x2) P1,000,000
Noncurrent portion of deferred revenue
(earned portion in 20x3) 600,000
Total deferred revenue
(P1M less earned portion in 20x1 of P200,000) P1,600,000

Requirement (b): Service revenue – 20x2

Service revenue in 20x2 (600,000 + 400,000) P1,000,000

8. Solution:
Advertising expense - December 35,000
Rent expense (120,000 x 1/2) 60,000
Contingent rent [(9M - 6M) x 5%] 150,000
Accrued liabilities 245,000

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PROBLEM 4: MULTIPLE CHOICE – THEORY
1. D
2. A
3. D
4. B
5. A
6. D
7. C
8. A
9. A
10. B

PROBLEM 5: MULTIPLE CHOICE – COMPUTATIONAL

1. A – The currently maturing notes are classified as current
liabilities.

2. B (1M x 80%) = 800,000 noncurrent; (1M – 800K) = 200,000

current

3. D
Solution:
Accounts payable-trade 750,000
Short-term borrowings 400,000
Bank loan (breach of loan covenant) 3,500,000
Other bank loan, matures June 30, 20x2 1,000,000
Total current liabilities 5,650,000

4. D
Solution:
Unearned revenue
ignored beg.
Redemptions - prior yr. ignored 250,000 Sales - 20x3
Redemptions - 20x3 175,000
Estimate of sales not to be
redeemed 25,000

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end. 50,000

The gift certificates sold in 20x2 and their related redemptions are
ignored because they have expired during the current year.
Hence, they do not affect the year-end liability.

5. C (125,000 + 200,000 expiring in 20x4) + 140,000 expiring in

20x5 = 465,000 balance of unearned subscription revenue on
Dec. 31, 20x3

6. B
Solution:
Two equal installments of real estate tax 12,000
Multiply by: No. of installments in a year 2
Annual real estate tax 24,000
Divide by: 12
Real estate tax expense per month 2,000

Accrued tax on warehouse - July and Aug. (2,000 x 2) 4,000

Accrued tax - Sept. and Oct. (2,000 x 2) 4,000
Real estate tax payable 8,000

7. B
Solution:
Advances from
customers
118,000 1/1/x0
Advances -
Advances applied 164,000 184,000 20x0
Advances
cancelled 50,000
12/31/x0 88,000

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8. C
Solution:
Liability for escrow account
700,000 1/1/x9
Taxes paid 1,720,000 1,580,000 Escrow received
45,000 Interest, net (50K x 90%)
12/31/x0 605,000

9. A
Solution:
Accounts payable, unadjusted 360,000
Add back: Debit balance 50,000
Add back: Undelivered check 100,000
Accounts payable, adjusted 510,000

10. C
Solution:

Liability for deposits

ignored 2004 deposits
2004 returns ignored 430,000 2005 deposits
2005 returns 250,000 780,000 2006 deposits
2006 returns 286,000
end 674,000