21. – 23.

In the audit of the Heats Corporation’s financial statements at

December 31, 2021, the chief accountant of the said corporation provided the
following information:
Notes payable:
Arising from purchase of goods 304,000 cl
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, 2022; P100,000 due on Dec. 31, 2022 500,000
Arising from advances by officers, due June 30, 2022 50,000
Reserve for general contingencies 400,000 c
Employees’ income tax withheld 20,000c
Advances received from customers on purchase orders 64,000c
Containers’ deposit 50,000c
Accounts payable arising from purchase of goods,
net of debit balances of P30,000 170,000c
Accounts receivable, net of credit balances P40,000c 360,000
Cash dividends payable 80,000c
Stock dividends payable 100,000
Dividends in arrears on preferred stock, not yet declared 200,000
Convertible bonds, due January 31, 2023 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 90,000c
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

On March 1, 2022, the P400,000 note payable was replaced by an 18-month note for
the same amount. Heats is considering similar action on the P100,000 note payable
due on December 31, 2022. The 2021 financial statements were issued on March 31,
2022.
On December 1, 2022, a former employee filed a lawsuit seeking P200,000 for unlawful
dismissal. Heats’ attorneys believe that the suit is without merit. No court date has
been set.

On January 15, 2021, the BIR assessed Heats an additional income tax of P300,000 for
the 2020 tax year. Heats’ 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, 2021:
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

1. Midler Company has guaranteed a loan of P300,000 granted to Miller Company. After
the balance sheet date of Midler Company but before the directors approved the financial
statements, Midler Company receives notice that Miller Company is in liquidation and
the creditor of Miller will invoke the guarantee.

What proper accounting should Midler Company account for the guarantee?
a. The amount of the guarantee is not accounted for in Midler’s books.
b. The amount of P300,000 should be recognized as a provision.
c. The P300,000 be recognized as a liability with necessary disclosure in the notes to
financial statements
d. The contingent liability should be disclosed by way of note to the financial
statements

2. On July 1, 2021, Clapper Corporation issued a five-year note payable with a face value
of P250,000 and a 10% interest rate. The terms of the note require clapper to make
five annual payments of P50,000 plus accrued interest, with the first payment due on
June 30, 2022.

With respect to the note, how much would be included in the current liabilities
section of Clapper’s December 31, 2022 balance sheet?
a. 12,500
b. 50,000
 c. 62,500
d. 75,000

Current portion of the note 50,000

Interest payable (250k*10%*6/12) 12,500
Total current liabilities 62,500

3. On July 1, 2022, Clear Company obtained a P3,000,000, 180-day bank loan at annual
rate of 12%. The loan agreement requires Clear to maintain a P600,000 compensating
balance in its checking account at the lending bank. Clear would otherwise maintain a
balance of only P300,000 in this account. The checking account earns interest at an
annual rate of 6%.
Based on a 360-day year, the effective interest rate on the borrowing is
a. 12.00%
b. 12.67%
c. 13.33%
d. 13.50%

4. On April 1, 2021, Catherine Company borrowed P5,000,000 and signed a 2-year note
bearing interest at 12% per annum compounded annually. Interest is payable in full at
maturity on March 31, 2023. What amount should Catherine report as a liability for
accrued interest at December 31, 2022?
a. 1,104,000
b. 1,050,000
c. 1,200,000
d. 1,100,000

2021 5,000,000 * 12%*9/12 = 450,000

2022 5,000,000 *12%*3/12 = 150,000
2022 5,600,000 *12%*9/12= 504,000
TOTAL AI 1,104,000

5. On the first day of each month; Ninibeth Mortgage Company received from a
customer an escrow deposit of P500,000 for real state tax. Ninibeth records the
P500,000 in an escrow account. The customer’s real state tax is P5,600,000, payable
in equal installments on the first day of each calendar quarter. On January 1, 2022, the
balance of the escrow amount was P600,000. On September 30, 2022, what amount
should Ninibeth show as escrow liability in behalf of this customer?
a. 2,300,000
b. 1,700,000
c. 900,000
d. 300,000
BEG BALANCE 600,000
Monthly Deposits (500,000 *9) 4,500,000
Total liab 5,100,000
Actual payable (RET)(5,600,000*9/12) 4,200,000
 900,000

6. Beginning 2008, African Daisy Company began marketing a new beer called
“Serbesa”. To help promote the product, the management is offering a special Serbesa
beer mug to each customer for every 20 specially marked bottle caps of Serbesa.
African Daisy estimates that out of the 300,000 bottles of Serbesa sold during 2008,
only 50% of the marked bottle caps will be redeemed. For the year 2008, 8,000 beer
mugs were ordered by the Company at a total cost of P36,000. A total of 4,500 mugs
were already distributed to customers.

What is the amount of the liability that African Daisy Company should report on its
December 31, 2008 balance sheet?
a. 13,500
b. 15,750
c. 20,250
d. 36,000

Cost per premium = 36,000/8000 = 4.5 cost per mug

Estimated premium (300,000*50%/20) = 7,500 mugs (estimated)

Actual claim (4,500) mugs
Unclaimed 3,000 mugs
Cost per mug P4.50
Estimated Premium Liability 13,500

7. Mark Company, a division of Star Company maintains escrow accounts and pays real
estate taxes for Star’s mortgage customers. Escrow funds are kept in interest bearing
accounts. Interest, less a 20% service fee, is credited to the mortgagee’s account and
used to reduce future escrow payments. The information regarding the escrow
accounts are kept by is as follows: escrow accounts liability as of January 1, 2008 was
P2,000,000, while Mark received payments from customers during 2008 amounting
to P4,200,000. Mark paid real estate taxes during 2008 in the amount of P3,500,000,
while the interest earned on the escrow funds was P500,000. What amount should
Mark report as escrow accounts liability in its December 31, 2008 balance sheet?
a. 2,700,000
b. 3,200,000
c. 3,100,000
d. 2,300,000

8. Felix Company records stamp service revenue and provides for the cost of
redemptions in the year the stamps are sold to licensees. Past experience indicates that
only 80% of the stamps sold will be redeemed. The liability for stamp redemption
was P2,200,000 at January 1, 2008. Additional information for 2008 is as follows:

Stamp service revenue from stamps sold to licenses 6,300,000

Cost of redemption (stamps sold prior to January 1, 2008 1,800,000
 If all stamps sold in 2008 were presented for redemption in 2008, the redemption cost
would be
P 5,250,000. What amount should Felix report as a liability for stamp redemption at
December 31, 2008?
a. 5,650,000
b. 4,600,000
c. 4,200,000
d. 2,400,000

9. A court case decided on December 21, 2008 awarded damages against Pylon. The
judge has announced that the amount of damages will be set at a future date, expected
to be in March 2009. Pylon has received advice from its lawyers that the amount of
the damages could be anything between P20,000 and P7,000,000. As of December
31, 2008, how much should be recognized in the balance sheet regarding this court
case?
a. 20,000
b. 7,000,000
c. 3,510,000
d. 0

10. During 2008, William Company guaranteed a supplier’s P500,000 loan from a bank.
On October 1,2008, William was notified that the supplier had defaulted on the loan
and filed bankruptcy protection. Counsel believes William will probably have to pay
between P250,000 and P450,000 under its guarantee. As a result of the supplier’s
bankruptcy. William entered into a contract in December 2008 to retool its machines
so that William could accept parts from other supplier’s. Retooling cost are estimated
to be P300,000. What amount should William report as a liability in its December
31,2008, balance sheet?
a. 250,000
b. 350,000
c. 450,000
d. 650,000

11. On December 31, 2021, the bookkeeper of Grand Company provided the following
information:

Accounts payable, including deposits and advances

from customers of P500,000 P 2,500,000
Notes payable, including note payable to bank due on
December 31, 2023 for P1,000,000 3,000,000
Stock dividends payable 800,000
Credit balance in customers’ accounts 400,000
Serial bonds, payable in semiannual installments
of P1,000,000 10,000,000
Accrued interest on bonds payable 300,000
 Contested BIR tax assessment 600,000
Unearned rent income 100,000

In the December 31, 2021 balance sheet, how much current liabilities should be
reported?
a. 6,800,000
b. 7,300,000
c. 7,900,000
d. 8,700,000

12. Lovely Corporation’s current liabilities at December 31, 2021 totaled P1,500,000
before any necessary year-end adjustment relating to the following transactions:

 On December 23, 2021, a vendor authorized Lovely to return for full credit,
merchandise shipped and billed at P45,000 on December 9, 2021. Lovely
shipped the returned items on December 29, 2021. A P45,000 credit memo was
received and recorded by Lovely on January 2,2022.
 During December 2021, Lovely received P75,000 from Pretty, a customer, as an
advance payment for a handicraft that Lovely will make to Pretty’s
specifications. From this transaction, Lovely has a P75,000 credit balance in its
accounts receivable from Ugly at December 31,2021.

What amount should Lovely report as total current liabilities in its December
31,2021 balance sheet?
a. 1,455,000
b. 1,470,000
c. 1,530,000
d. 1,575,000