LIABILITIES – PRACTICE SETS 1

PROBLEM 1

Easy Company provided the following information on December 31 2021:

Note payable:
Trade 3,000,000
Bank loans 2,000,000
Advances from officers 500,000
Accounts payable 4,000,000
Bank overdraft 300,000
Dividends payable 1,000,000
Withholding tax payable 100,000
Mortgage payable 3,800,000
Income tax payable 800,000
Estimated warranty liability 600,000
Estimated damages payable by reason of breach of contract 700,000
Accrued liabilities 900,000
Estimated premium liability 200,000
Claim for increase in wages by employees covered in a pending 3,500,000
lawsuit
Contract entered into for the construction of building 5,000,000

Required:
Compute the total current liabilities on December 31, 2021.

PROBLEM 2
Manchester Company provided the following information on December 31, 2021:
Income taxes withheld from employes 900,000
Cash balance at First State Bank 2,500,000
Cash overdraft at Harbor Bank 1,300,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties on merchandise previously sold 500,000
Estimated damages as a result of unsatisfactory performance on a contract 1,500,000
Accounts payable 3,000,000
Deferred serial bonds, issued at par and bearing interest at 12%, payable in semiannual 5,000,000
installment of P500,000 due April 1 and October 1 of each year, the last bond to be paid
on October 1, 2027. Interest is also paid semi annually
Share dividend payable 2,000,000

Required:
Compute the total current liabilities on December 31, 2021.
PROBLEM 3
Multiple Company provided the following information on December 31, 2021:

Accounts payable after deducting debit balances in supplier’s 500,000

accounts of P100,000
Accrued liabilities 50,000
Note payable – due March 31, 2022 1,000,000
Note payable – due May 1, 2022 800,000
Bonds payable – due December 31, 2023 2,000,000

On March 1, 2022 before the 2021 financial statements were issued, the note payable of 1,000,000 was
replaced by an 18-month note for the same amount.
The entity is considering similar action on the P800,000 note due on May 1, 2022. The financial statements
were issued on March 31, 2022.

Required:
1. Compute total current liabilities.
2. Compute total noncurrent liabilities.

PROBLEM 4
Cascade Company manufactures a special laundry soap.

A towel is offered as a premium to customers who send in two proof-of-purchase seals from the soap boxes
and a remittance of P20. Distribution cost is P5.00 per towel.

Data for the premium offer are:

2021 2022
Soap sales 2,500,000 3,125,000
Towel purchases, P100 per towel 175,000 200,000
Number of towels distributed as premium 1,000 1,800
Number of towels expected to be distributed in subsequent period 600 800

Required:
1. Prepare journal entries for 2021 and 2022.
2. Statement classification of the account balances pertaining to the premium plan.
ANSWERS:
Easy Company
Note payable:
Trade 3,000,000
Bank loans 2,000,000
Advances from officers 500,000
Accounts payable 4,000,000
Bank overdraft 300,000
Dividends payable 1,000,000
Withholding tax payable 100,000
Income tax payable 800,000
Estimated warranty liability 600,000
Estimated damages payable by reason of breach of contract 700,000
Accrued liabilities 900,000
Estimated premium liability 200,000
TOTAL CURRENT LIABILITIES Php 14,100,000.00

Manchester Company
Income taxes withheld from employes 900,000
Cash overdraft at Harbor Bank 1,300,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties on merchandise previously sold 500,000
Estimated damages as a result of unsatisfactory performance on a contract 1,500,000
Accounts payable 3,000,000
Accrued interest on bonds payable from October 1 to December 31, 2021 150,000
(5,000,000 x 12% x 3/12)
TOTAL CURRENT LIABILITIES Php 8,100,000.00

The bonds will be paid over 5 years because the semiannual payment is Php 500,000. Since the last bond will
be paid on October 1, 2027, the first bond will be paid on April 1, 2023 which is more than 12 months from
December 31, 2021.

The share dividend payable is not an accounting liability but presented as part of shareholder’s equity as an
addition to share capital.

Multiple Company
Current Liabilities
Accounts payable (500,000 + 100,000) 600,000
Accrued liabilities 50,000
Note payable – refinanced 1,000,000
Note payable – due May 1, 2022 800,000
Total Current Liabilities 2,450,000
Non-Current Liabilities
Bonds payable – due December 31, 2023 2,000,000
Cascade Company
2021
Cash 2,500,000.00
Sales 2,500,000.00
To record soap sales

Premiums – towels 175,000.00

Cash 175,000.00
To record purchase of towels to be given as premiums

Cash (20 x 1,000) 20,000.00

Premiums expense 80,000.00
Premiums – towels 100,0000.00
To record distribution of 1,000 towels as premiums

Premiums expense (5 x 1,000) 5,000.00

Cash 5,000.00
To record distribution cost of 1,000 towels

Premiums expense (600 x 85) 51,000.00

Estimated premium liability 51,000.00
To record estimated cost of premiums to be distributed in the subsequent period

2022
Estimated premium liability 51,000.00
Premiums expense (600 x 85) 51,000.00
Reversing entry

Cash 3,125,000.00
Sales 3,125,000.00
To record soap sales

Premiums – towels 200,000.00

Cash 200,000.00
To record purchase of towels to be given as premiums

Cash (20 x 1,800) 36,000.00

Premiums expense 144,000.00
Premiums – towels 180,0000.00
To record distribution of 1,800 towels as premiums

Premiums expense (5 x 1,800) 9,000.00

Cash 9,000.00
To record distribution cost of 1,000 towels

Premiums expense (800 x 85) 68,000.00

Estimated premium liability 68,000.00
Statement Classification
2021 2022
Current Asset
Premiums – towels 75,000.00 95,000.00
Current Liability
Estimated premium liability 51,000.00 68,000.00
Selling Expense
Premiums expense 136,000.00 170,000.00