Problem 1

Best Electronics operates a retail electronics company. Examine the following items and prepare the
current liability section of the companys December 31, 2017 balance sheet.

The beginning of year accounts payable was P150,000. Purchases on trade accounts during the year were
P975,000, and payment on account were P915,000.

The company incurs substantial costs for electricity to run its store and air conditioning systems. As of
December 31, 2017, it is estimated that P82,500 of electricity has been used, although the monthly billing
for December has not yet been received.

Best electronics sells service plans for as low as P25 per month. However, it requires its customers to prepay
in 6-month increments. As of the end of the year, P562,500 has been collected for 2018 web hosting plans.

Best electronics service plans are subject to sales taxes, and Best collected P97,500 during the year. All of
these amounts have been remitted to taxing authorities, with the exception of P7,5000 that is due to be
paid in January 2018.

The company has total bank loans of P2,250,000. This debt bears interest at 6% payable monthly. As of
December 31, 2017, all interest had been paid, with the exception of accrued interest for the last half of
December.

The companys bank loans (P2,250,000) are all due on June 30, 2018. However, Best electronics has a firm
lending agreement with the bank to renew and extend P1,500,000 of this amount on a 5-year basis, the
company intends to exercise this renewal option, but is not yet sure about the final disposition of the
remainder.

Problem 2
Included in Ingenuity Companys liability balances at December 31, 2008 were the following:

10% note payable issued on October 1, 2007, maturing October 1, 2009 3,000,000
12% note payable issued on March 1, 2006, maturing on March 1, 2009 5,000,000

Ingenuitys 2008 financial statements were issued on March 31, 2009. On January 31, 2009, the entire
P5,000,000 balance of the 12% note payable was refinanced through issuance of a long-term obligation
payable lump sum. Under the loan agreement for the 10% note payable, Ingenuity has the discretion to
refinance the obligation for at least twelve months after December 31, 2008. What amount of the note
payable should be classified as current on December 31, 2008?

Problem 3
Horner Company requires advance payments with special orders for machinery constructed to customer
specifications. These advances are nonrefundable. Data for the year are:
Customer advances 6,800,000
Advances received with orders in 2008 9,000,000
Advances applied to orders shipped in 2008 8,700,000
Advances applicable to orders canceled in 2008 2,600,000
The December 31, 2008 balance sheet should report current liability for advances at
Problem 4
To increase sales, Adversity Company inaugurated a promotional campaign on June 30, 2008. Adversity
placed a coupon redeemable for a premium in each package of cereal sold at P300. Each premium cost
P200. A premium is offered to customers who send in 5 coupons and a remittance of P50. The distribution
cost per premium is P10. Adversity estimated that only 80% of the coupons issued will be redeemed. For
the six months ended December 31, 2008, the following is available:

Packages of cereal sold 50,000

Premiums purchased 8,000
Coupons redeemed 30,000

What is the estimated liability for coupons on December 31, 2008?

Problem 5
Advisory Company includes one coupon in each box of laundry soap it sells. A towel is offered as a premium
to customers who send in 10 coupons and a remittance of P5. Data for the premium offer are:
2007 2008
Boxes of soap sold 1,000,000 1,500,000
Number of towels purchased at P50 per towel 40,000 65,000
Number of towels distributed as premium 35,000 58,000
Number of towels to be distributed as premium next period 3,000 5,000

In its 2008 income statement, Advisory Company should report premium expense at

Problem 6
Destination Company launched a sales promotional campaign on June 30, 2008. For every ten empty packs
returned to Destination, customers will receive an attractive food container. The company estimates that
only 30% of the packs reaching the market will be redeemed. Additional data are as follows:
Units Amount
Sales of food packs 3,000,000 9,000,000
Food containers purchased 60,000 1,800,000
Prizes distributed to customers 37,000

At the end of the year, Destination should recognize a liability equal to the estimated cost of potential
prizes at

Problem 7
During 2008, Luciana Company introduced a new product carrying a two-year warranty against defects.
The estimated warranty costs related to peso sales are 3% within 12 months following sale and 5% in the
second 12 months following sale. Sales and actual warranty expenditures for the years ended December
31, 2007 and 2008 are as follows:

Sales Actual expenditures

2007 40,000,000 1,000,000
2008 50,000,000 4,000,000

At December 31, 2008, Luciana would report estimated warranty liability of

Problem 8
Loyola Company issued a P5,000,000 notes payable on April 1, 2007 bearing an interest rate that is
compounded annually on March 31, 2009. If the principal and the interest is payable on maturity date,
what is the accrued interest to be reported on Loyolas December 31, 2008 balance sheet?

Problem 9
Patio Company sells gift certificates redeemable only when merchandise is purchased. The certificates have
an expiration date two years after issuance date. Upon redemption or expiration, Patio recognizes the
unearned revenue as realized. Data for 2008 are as follows:
Unearned revenue, 1/1/2008 2,500,000
Gift certificates sold 6,000,000
Gift certificates redeemed 6,500,000
Expired gift certificates 500,000
Cost of goods sold 60%

At December 31, 2008, Patio report unearned revenue for gift certificates of

Problem 10
On November 5, 2008, a Breakthrough Company truck was in an accident with an auto driven by McAllen.
Breakthrough received notice on January 15, 2009, of a lawsuit for P4,000,000 damages for personal
injuries suffered by McAllen. Breakthroughs counsel believes it is probable that McAllen will be awarded
an estimated amount in the range between P2,000,000 and P3,000,000, and no amount is a better estimate
of potential liability than any other amount. The accounting year, ends on December 31, and the 2008
financial statements were issued on March 31, 2009. What amount of provision should Breakthrough
accrue at December 31, 2008?

Problem 11
Northern Freeze Corporation manufactures and sells snow removal machines. These machines include a
complex heater module, and about 10% of all units sold require to subsequent repair under the warranty.
The average repair cost is P75 per unit.

Northern Freeze began the year with an accrued warranty liability of P150,000. During the year, 65,000
machines were sold. P340,000 was expenses on warranty services performed during the year.

Prepare Northerns journal entries to accrue additional warranty costs relating to current year sales and
account for monies expended on actual warranty work performed during the year. How much will appear
as warranty expense in the current year income statement, and how much will appear as the warranty
liability on the closing balance sheet?

Problem 12
Following are selected transactions or events of Alpine Company relating to its first month of operation.

Jun 1 Alpine borrowed P75,000 via note payable bearing interest at 1% per month. This note and all
accrued interest is due at the end of July.

Jun 10 Purchased P15,000 of inventory, terms 2/10, n/30. The purchase was initially recorded at the net
amount. The obligation was not paid during June.
Jun 15 The company adopted an employee health insurance plan. The total estimated cost is P75 per day.
none of this cost was funded during June.

Jun 20 Sold goods for P65,000 cash. Alpine offers a warranty on the goods, and anticipates that total
warranty cost will be 2% of sales.

Jun 25 one of Alpines vehicle was involved in an accident. Alpine expects to be held responsible for an
estimated P7,500 in damages.

Jun 30 at month end, it was estimated that employees are owed for P11,500 in accrued wages. In addition,
P275 was spent on warranty service work.

a. Prepare any initial entries necessary to record the above transactions.

b. Prepare month-end adjusting entries that are deemed appropriate related to the above
transactions.
c. Prepare the current liability section of the companys balance sheet as of the end of the month.