financial accounting baysa and lupisan 2008 volume 2 edition

FINANCIAL ACCOUNTINGVolume Two

Valix and Peralta2008 Edition

SOLUTION MANUAL1

CHAPTER 1

Problem 1-1 Problem 1-2 Problem 1-3 Problem 1-4 Problem 1-5

1. A 1. A 6. A 1. C 1. B 1. A 6. A 2. D 2. C 7. A 2. B 2. B 2. D 7. A3. A 3. B 8. D 3. D 3. C 3. A 8. C4. C 4. A 9. C 4. A 4. A 4. D 9. B5. A 5. A 10. C 5. D 5. A 5. B 10. B

Problem 1-6 Problem 1-7

Accounts payable 1,000,000 Note payable – trade3,000,000

Deposits and advances Note payable – bank2,000,000

from customers 250,000 Note payable – officers 500,000Notes payable 1,000,000 Accounts payable – trade

4,000,000Credit balances in Bank overdraft

300,000 customers’ accounts 200,000 Dividends payable

1,000,000Serial bonds payable 1,000,000 Withholding tax payable 100,000Accrued interest on Income tax payable 800,000 bonds payable 150,000 Estimated warranty liability 600,000Provision for tax Estimated damages payable 700,000

assessment 300,000 Accrued liabilities 900,000Unearned rent income 100,000 Estimated premium liability 200,000Total current liabilities 4,000,000 Total current liabilities 14,100,000

Problem 1-8

Accounts payable (500,000 + 100,000) 600,000Accrued liabilities 50,000Note payable - refinanced

1,000,000Note payable – due May 1, 2009 800,000Total current liabilities

2,450,000

Noncurrent liabilitiy: Bonds payable, due December 31, 2010

2,000,000 2

Problem 1-9

a. Current liabilities:Note payable – bank

700,000Note payable – shareholder 2,000,000Less: Discount on note payable 113,0001,887,000Accrued interest payable

189,000Total current liabilities2,776,000

b. Note payable – bank:January 1 – April 1, 2008 (2,800,000 x 12% x 3/12) 84,000April 1 – December 31, 2008 (2,100,000 x 12% x 9/12) 189,000

273,000 Note payable – shareholder:

Amortization of discount from July 1 – December 31, 2008(226,000 x 6/12)

113,000

Total interest expense 386,000

Problem 1-10

1. Current liabilities:Accounts payable 7,000,000Note payable – bank 12,000,000Accrued expenses 4,000,000

23,000,000

Noncurrent liabilities:Mortgage payable 4,000,000Note payable due 2010 3,000,000

7,000,000 Total liabilities 30,000,000

2. The note payable to bank is paid from the proceeds of the issuance of share capital of P4,000,000 on January 31, 2009 and the availment of a financing agreement on February 15, 2009 with a financially capable commercial bank on April 1, 2009 in the amount of P3,000,000. Nevertheless, the note payable should continue to be classified as current.

Problem 1-11 Answer B

Note payable, September 1, 20071,800,000

Less: Payment on September 1, 2008 600,000Balance, September 1, 2008

1,200,000

3

Accrued interest payable from September 1 to December 31, 2008(1,200,000 x 12% x 4/12)

48,000

Problem 1-12 Answer A

Note payable, October 1, 20071,200,000

Less: Payment on October 1, 2008 400,000

Balance, October 1, 2008 800,000

Interest paid from January 1 to September 30, 2008(1,200,000 x 15% x 9/12)

135,000Interest accrued from October 1 to December 31, 2008

(800,000 x 15% x 3/12) 30,000Interest expense for 2008 165,000


January 1 – October 31, 2008 (500,000 x 12% x 10/12) 50,000February 1 – July 31, 2008 (1,500,000 x 12% x 6/12) 90,000May 1 – December 31, 2008 (800,000 x 12% x 8/12) 64,000Total interest expense of 2008 204,000Less: Recorded interest expense 150,000Understatement of interest expense 54,000 Problem 1-14 Answer C

Accrued interest from March 1, 2007 to February 28, 2008 (1,000,000 x 12%) 120,000Accrued interest from March 1 to December 31, 2008 (1,000,000 + 120,000 x 12% x 10/12) 112,000Total accrued interest payable, December 31, 2008 232,000

If the interest is compounded annually, it means that the accrued interest for one year will also earn interest.


12% note payable – refinanced 5,000,000

4Problem 1-16 Answer A

Accounts payable6,500,000

Note payable – bank3,000,000

Interest payable 150,000Mortgage note payable

2,000,000Bonds payable 4,000,000

15,650,000Problem 1-17 Answer A

6% Note payable 500,0008% Note payable 800,000Total current liabilities

1,300,000

PAS 1, paragraph 63, provides that an entity shall classify its financial liabilities as current when they are due to be settled within twelve months after balance sheet date even if an agreement to refinance or reschedule payment on a long-term basis is completed after balance sheet date and before the financial statements are authorized for issue.

Problem 1-18

20081. Cash 3,600,000

Sales3,600,000

2. Premiums 390,000Cash

390,000

3. Cash (5,000 x 10) 50,000 Premium expense (5,000 x 40) 200,000

Premiums (5,000 x 50) 250,0004. Premium expense (5,000 x 20) 100,000

Cash 100,000

5. Premium expense (2,000 x 60) 120,000

Estimated premiums payable 120,000

5 20091. Estimated premiums payable 120,000

Premium expense 120,000

Reversing entry.

Cash 4,200,000Sales4,200,000


580,000


Premiums (9,000 x 50) 450,000

4. Premium expense (9,000 x 20) 180,000Cash

180,000

5. Premium expense (3,000 x 60) 180,000Estimated premiums payable

180,000

Problem 1-19

1. Cash (400,000 x 9) 3,600,000Sales3,600,000


900,000

3. Premium expense 30,000

Cash 30,000


Premiums (8,000 x 90) 720,000 5. Premium expense (2,000 x 85) 170,000

Estimated premiums payable 170,000

Bottle caps to be redeemed (25% x 400,000) 100,000 Less: Bottle caps redeemed (8,000 pens x 10) 80,000 Bottle caps outstanding 20,000

6

Premiums to be distributed on the balance of bottle caps (20,000 /10) 2,000

6. Premium expense 150,000Cash (30 x 5,000)

150,000

Problem 1-20

20081. Cash 2,500,000

Sales2,500,000

2. Premiums - towels 175,000Cash

175,000

3. Cash (1,000 x 20) 20,000 Premiums expense 80,000

Premiums – towels (1,000 x 100) 100,000

4. Premium expense (1,000 X 5) 5,000

Cash 5,000

5. Premium expense 51,000

Estimated premiums payable (600 X 85) 51,000

20091. Estimated premiums payable 51,000

Premium expense 51,000

Cash 3,125,000Sales

3,125,000

2. Premiums - towels 200,000Cash

200,000

3. Cash (1,800 x 20) 36,000 Premiums expense 144,000

Premiums – towels (1,800 x 100) 180,000

4. Premium expense (1,800 X 5) 9,000Cash 9,000

7

5. Premium expense 68,000Estimated premiums payable (800 X 85)

68,000

Statement classification 2008 2009

Current asset: Premiums – towels 75,000 95,000Current liability: Estimated premiums payable 51,000 68,000Selling expense: Premium expense 136,000 170,000

Problem 1-21 Answer B Problem 1-22 Answer D

Coupons to be redeemed Premiums to be distributed (160,000 x 60%) 96,000 (250,000 x 80% / 10)

20,000Less: Coupons redeemed 40,000 Premiums distributed 15,000Balance 56,000 Balance 5,000

Number of premiums (56,000 / 5) 11,200 Premium liability (5,000 x 100) 500,000

Amount of liability (11,200 x 20) 224,000

Problem 1-23 Answer B Problem 1-24 Answer B

Premiums distributed in 2009 5,500 Coupons to be redeemed Estimated premiums in 2009 500 80% x 500,000) 400,000 Total 6,000 Less: Coupons redeemed 300,000Less: Estimated premiums in 2008 200 Coupons outstanding 100,000Premiums applicable to 2009 5,800

Liability for unredeemedPremium expense (5,800 x 60) 348,000 coupons (100,000 x 15) 1,500,000Problem 1-25 Answer C

Total coupons issued and to be redeemed (600,000 x 70% x 110%) 462,000Less: Total payments to retailer 220,000Liability for underdeemed coupons – 12/31/2008 242,000

8

Problem 1-26Accrual approach

20081. Cash (300 x 15,000) 4,500,000

Sales4,500,000

2. Warranty expense 144,000

Estimated warranty liability (60% x 300 = 180 x 800) 144,000

3. Estimated warranty liability 40,000 Cash

40,000

20091. Cash (500 x 15,000) 7,500,000

Sales 7,500,000

2. Warranty expense 240,000Estimated warranty liability (60% x 500 = 300 x 800)

240,000


150,000

Expense as incurred approach

20081. Cash 4,500,000

Sales4,500,000

2. Warranty expense 40,000Cash

40,000

20091. Cash 7,500,000

Sales7,500,000


150,000

9Problem 1-27

Accrual approach

2008

1. Cash 5,000,000Sales 5,000,000

2. Warranty expense 700,000Estimated warranty liability (14% x 5,000,000)

700,000

3. Estimated warranty liability 390,000 Cash 390,000

2009

1. Cash 9,000,000Sales 9,000,000

2. Warranty expense 1,260,000Estimated warranty liability (14% x 9,000,000)1,260,000


900,000

“Expense” approach

20081. Cash 5,000,000

Sales5,000,000


390,000

20091. Cash 9,000,000

Sales9,000,000


900,000

10Problem 1-28

Units sold:October

32,000November

28,000December

40,000Total

100,000Multiply by 2%Total failures expected 2,000Less: Failures already recorded:

October sales 640November sales 360December sales 180 1,180

Expected future failures 820Multiply by 150Estimated cost 123,000

Warranty expense 123,000Estimated warranty liability

123,000Problem 1-29 Answer D

Warranty expense (2,400 x 300) 720,000

Problem 1-30 Answer C Problem 1-31 Answer A

Warranty expense (3,000 x 80) 240,000 Warranty expenseLess: Actual warranty cost 70,000 (5% x 5,000,000) 250,000Warranty liability–June 30, 2008 170,000


Warranty expense:2008 (5,000,000 x 7%) 350,0002009 (7,000,000 x 7%) 490,000

840,000Warranty costs:

2008 100,0002009 300,000 400,000

Warranty liability – December 31, 2009 440,000

11


Net sales (640,000 / 8%)8,000,000


Normal defect (500 x P10,000 x 25%) 1,250,000

Significant defect (500 x P30,000 x 15%)2,250,000

3,500,000Problem 1-35

1. Cash 500,000Gift certificates payable

500,000

2. Gift certificates payable 400,000Sales

400,000

3. Gift certificates payable 40,000Forfeited gift certificates (8% x 500,000)

40,000

Problem 1-36

1. Cash 900,000Gift certificates payable

900,000

2. Gift certificates payable 780,000Sales

780,000

3. Gift certificates payable 40,000

Forfeited gift certificates 40,000

Unearned revenue – January 1 260,000Add: Gift certificates sold 900,000Total

1,160,000Less: Gift certificates redeemed 780,000 Expired gift certificates 40,000 820,000Unearned revenue – December 31 340,000

12

Problem 1-37 Answer C

Unearned revenue – January 1 650,000Add: Gift certificates sold 2,250,000Total 2,900,000Less: Gift certificates redeemed 1,950,000 Expired gift certificates 100,000 2,050,000Unearned revenue – December 31 850,000

Problem 1-38 Answer D

2008 Sales of gift certificates (2,500,000 x 90%)2,250,000

Less: 2007 Redemption of current year sales1,750,000

Unearned revenue – December 31, 2008 500,000

Unredeemed – January 1, 2008 750,000Less: 2008 Redemption of prior year sales 250,000Expired gift certificates 500,000


1. Cash 980,000Unearned service contract revenue

980,000

Service contract expense 520,000Cash

520,000

Unearned service contract revenue 860,000Service contract revenue

860,000 2. Unearned revenue – January 1 600,000 Cash receipts from contracts sold 980,000 Total

1,580,000 Less: Service revenue recognized 860,000 Unearned revenue – December 31 720,000

13


Outstanding contracts on December 31, 2008 that will expire during

2009 150,000

2010 225,000

2011 100,000Unearned service contract revenue 475,000


The entire amount of P720,000 will be considered deferred revenue on December 31, 2008 because the subscriptions start with the January 2009 issue.


Monthly subscriptions (7,200,000 / 12) 600,000

The subscriptions after the September 30 cut-off are:October

600,000November

600,000December

600,000Total unearned subscription revenue – December 31, 20081,800,000

The above subscriptions will be served in the next publication in 2009.

Problem 1-43 Answer C

Subscriptions received in 2008 that will expire in 2010 125,000Subscriptions received in 2009 that will expire in 2010 200,000Subscriptions received in 2009 that will expire in 2011 140,000Unearned subscription revenue – December 31, 2009 465,000


Liability for refundable deposit – January 1 150,000Deposits made in 2008 (100,000 x 5) 500,000

Total 650,000Less: Deposits refunded in 2008 (110,000 x 5) 550,000Balance – December 31(current liability) 100,000

The lease deposit is a noncurrent liability.

14Problem 1-45 Answer C

Advances – January 11,180,000

Advances received 1,840,000Total

3,020,000Advances applied (1,640,000)Advances canceled ( 500,000)Advances – December 31 880,000


B = .10 (1,650,000 – B)B = 165,000 - .10BB + .10B = 165,0001.10B = 165,000B = 165,000 / 1.10B = 150,000


Income after bonus and tax (260,000 / 10%)2,600,000

Income before tax (2,600,000 / 65%)4,000,000

Income before bonus and tax (4,000,000 + 260,000)4,260,000

ProofIncome before bonus and tax

4,260,000Less: Bonus 260,000

Income before tax4,000,000

Less: Tax (35% x 4,000,000)1,400,000

Income after bonus and tax2,600,000


B = .05 (5,000,000 – B – T) T = .35 (5,000,000 – B) B = .05 [5,000,000 – B - .35 (5,000,000 – B)] B = .05 (5,000,000 – B - 1,750,000 + .35B) B = 250,000 – .05B - 87,500 + .0175B

B + .05B - .0175B = 250,000 – 87,500 1.0325B = 162,500

B = 162,500 / 1.0325 B = 157,385

15 T = .35 (5,000,000 – 157,385) T = 1,694,915

Proof of bonus B = .05 (5,000,000 – 157,385 – 1,694,915) B = 157,385

Problem 1-49

1. Cash 390,000Containers’ deposit

390,000

Containers’ deposit 313,000Cash

313,000

Containers’ deposit 30,000Containers

30,000

Containers’ deposit on January 1, 2008 applicable to 2006 deliveries 75,000 Less: Containers returned in 2008 applicable to 2006 deliveries 45,000 Balance – expired and no longer refundable 30,000

2. Containers’ deposit – January 1, 2008 290,000 Add: Containers’ deposit in 2008 390,000 Total 680,000 Less: Containers returned in 2008 313,000 Containers not returned and expired 30,000 343,000 Containers’ deposit – December 31, 2008 337,000

Problem 1-50

1. Only a disclosure is necessary because it is not probable that the company will be liable, although the amount can be measured reliably.

2. Retained earnings 200,000Estimated liability for income tax 200,000

3. Accounts receivable – Sunset 120,000 Loss on guaranty 80,000

Note payable – bank 200,000

16Problem 1-51

1. Unearned subscription revenue 700,000Subscription revenue (3,000,000 – 2,300,000)

700,000

2. Loss on damages 1,500,000Estimated liability for damages1,500,000

3. Loss on damages 1,000,000Estimated liability for damages1,000,000


The probable loss is recorded but the possible loss is only disclosed.`Problem 1-53 Answer C

The best estimate is recorded. The accepted BIR offer is not recorded because it was made after the statements are issued.


The provision should be accrued because it is probable and measurable. The accrued amount is P350,000 which is the midpoint of the range in the absence of the best estimate within the range.


The contingent asset is disclosed only because the case is unresolved on December 31, 2008. The issue is what amount of asset will be disclosed. Since the case is settled in March 2009 after the issuance of the 2008 financial statements, the amount P1,500,000 should be disclosed. However, if the case is settled before the issuance of the statements, the actual award of P1,000,000 should be disclosed.


Haze can report a gain of P1,500,000 in its 2008 income statement because this amount is already settled on December 31, 2008. However, the remainder of P3,000,000 is only disclosed because the defendant has appealed the said amount.

17


The loss on the first lawsuit is both probable and measurable and therefore can be accrued as a provision.


Environmental cost 500,000Litigation cost 300,000Total accrued liability 800,000

Both are accrued as provision because the loss is probable and measurable.


Assessment on appeal (50% x 1,600,000) 800,000Environmental cost

1,500,000Total provision

2,300,000

The loss from the guaranty is not accrued because it is remote.

financial accounting baysa and lupisan 2008 volume 2 edition

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