LIABILITIES

I. Provisions, Contingencies and other Liabilities

On November 30, 2022 an explosion occurred at the JR COMPANY’S plant totally damaging
the plant and causing additional damages to adjacent neighbors. The carrying value of the
plant on the company’s books on the date of the explosion was at P5M. It had a prevailing
fair value of P6M prior to the explosion. No claims had yet been asserted against the
company as of the date of authorization of the financial statements. The management as
corroborated by their counsel, however believes that it its probable that the company would
be responsible for damages to its neighbors and that P4,000,000 would be a reasonable
estimate of its liability. The company had an insurance covering this type of accident. The
insurance shall reimburse the company at 80% of the prevailing fair value of the asset prior
to the fire while it has a 40% participation/deductible clause on any payments to be made
for damages caused to neighbors. The reimbursements are virtually certain and that the
company is no longer principally liable over the portion to be reimbursed for damages to
other parties.

1. How much is the correct provision for unasserted claims to be accrued as of

December 31, 2022?
a. None
b. 4,000,000
c. 2,400,000
d. 1,600,000

Solution

Jesson Pokemon, president of the Jesson & Friends Company, has a bonus arrangement
with the company under which he receives 10% of the net income (after deducting taxes
and bonuses) each year. For the current year, the net income before deducting either the
provision for income taxes or the bonus is P4,650,000. The bonus is deductible for tax
purposes, and the tax rate is 32%.

2. The amount of Jesson Pokemon’s bonus is

a. P 465,000.00
b. P 364,285.71
c. P 339,270.39
d. P 296,069.42

3. The appropriate provision for income tax for the year is

a. P 1,488,000.00
b. P 1,393,258.43
c. P 1,371,428.57
d. P 1,379,433.48
 4. The entry to record the bonus (which will be paid in the following year) is
a. Bonus expense 296,069.42
Bonus payable 296,069.42
b. Bonus expense 339,270.39
Bonus payable 339,270.39
c. Bonus expense 465,000.00
Bonus payable 465,000.00
d. No entry

Solution
Answer: D
B = 10% (P4,650,000 – B – T)
T = 32% (P4,650,000 – B)
B = 10% (P4,650,000 – B – (32% x P4,650,000 – B)
= 10% (P4,650,000 – B – (P1,488,000 - .32B)
= 10% (P4,650,000 – B – P1,488,000 + .32B
= P465,000 - .10B – P148,800 + .032B
= P316,200 - .068B
1.068B = P316,200
= P296,097.42

Answer: B
T = 32% (P4,650,000 – P296,067.42)
= P1,393,258.43

During 2021, Paulira Company was sued by a competitor for P5,000,000 infringement suit
of a trademark. Based on the legal counsel’s advise, Paulira Company accrued the sum of
P3,000,000 as a provision. On February 15, 2022, the Supreme Court decided in favor of
the party alleging the infringement and ordered the defendant to pay the aggrieved party a
sum of P3,500,000. The financial statements of the company were approved by the BOD for
issue on April 15, 2022.

5. How much is the correct provision from litigation cases as of December 31, 2021?
a. None
b. 3M
c. 3,250,000
d. 3,500,000
Solution

Rhett Company has the following company information:

The accrued salaries payable include P500,000 liability for compensated absences accrued in
the previous year and a P532,056, 10% current year bonus to key officers computed based
on an unadjusted net income of P8,132,857 after bonus and after tax (30%)

2,500 days unused vacation leaves from 2021 were forwarded to 2022, from which 1,500
days were exercised. By the end of the current year, additional 3,000 days current year
leaves were unused by the employees. Unused leaves can be carried over 2 years,
thereafter it shall expire. The company also estimates, as per past experience, that only
80% of the unused leaves will ultimately be exercised. Salary rate in 2021 was at 250 per
day while salary rate in 2022 is at P275 per day. Payment of salaries including exercise of
leaves were appropriately debited to current year salaries expense.

6. What is the adjusted liability for compensated absences to be included in the accrued
salaries as of December 31, 2022?
a. 825,000
b. 880,000
c. 1,080,000
d. 1,100,000

7. What is the correct accrued bonus to be included in the accrued salaries payable as
of December 31, 2022?
a. 500,000
b. 551,546
c. 714,286
d. 764,286

8. What is the correct net income in 2022?

a. 5,000,000
b. 5,515,460
c. 7,142,860
d. 7,642,860

Solution (plus 2 years)

The December 31 trial balance of the Liezel Corporation includes, among others, the
following:

Long-term notes – which are payable in annual installment 
of P10,000 on February 1 of each year  P60,000

Rental income received in advance  16,000

Notes payable, which are trade notes, with the exception

of P20,000 Note payable to bank on June 30 of the following year  60,000 

Accounts payable which include account with debit balance of P2,000  80,000

Notes receivable which has been reduced by notes discounted
of P20,000 that are not yet due and on which the Corporation is contingently liable 
100,000 

Accounts receivable, which include accounts with credit

balances of P10,000 and past due accounts of P6,000 on 
which a loss of 80% is anticipated  200,000
Merchandise inventory, which includes goods held for
consignment, P8,000, and goods received on
December 31 of P12,000; neither of these items having been 
recorded as a purchase  180,000

9. What is the amount of the current liabilities on December 

a. 190,000
b. 184,000
c. 178,000
d. 170,000

10. The long-term debt at year-end is

a. 70,000
b. 50,000
c. 30,000
d. 0

Solution
Current Non-current
Long-term note 10,000 50,000
Rental income received in advance – unearned income 16,000 --
Note payable 60,000 --
Accounts payable – adjusted (80,000 + 2,000 + 12,000) 94,000 --
Note receivable discounted – contingent liability -- --
Customer’s credit balance – advances from customer 10,000 --
Goods held for consignment – not liability except when sold -- --_____
Total 190,000 50,000

NatNat Company had the following selected balances in the liability portion of its unaudited
balance sheet as of December 31, 2021:
Accrued compensated absences P238,000
Accrued bonus 113,490

The accrued compensated absences refers to the balance of the liability accrued in the prior
year for unavailed sick leaves and vacation leaves of the company’s employees. Company
records shows the
following information:

Sick leaves Vacation leaves

2020 leaves carried forward to 2021 500 days 350 days
2020 leaves used/availed in 2021 300 250
2021 leaves to be carried forward to 2022 300 200

a. Employees are entitled to accumulate unused sick and vacation leaves up to 2 years from
date of grant.
b. Prior year leaves availed during the current year were charged to current year salaries
and wages.
c. Average daily salaries in 2021 and 2022 amounted to P350 and P400, respectively.
d. Past experience indicate that 20% of the unused leaves ultimately expires.
The balance in the accrued bonus account is based on the accountants estimate on the
unadjusted net income. The company provides incentive bonus to its key officers based on
the net income after bonus and after tax. The company’s unadjusted net income amounted
to P1,277,500.

Additional information:
a. Bonus rate is at 15%
b. Income tax rate is 35%

11. What is the correct balance of the accrued compensated absences account?
a. 297,500
b. 320,000
c. 256,000
d. 280,000

12. What is the correct balance of the accrued bonus account?

a. 117,489
b. 116,814
c. 113,491
d. 111,892
 Solution

II. Premiums & Warranties

In the packages of its products, Dale Corp. includes coupons that may be presented at
retail stores to obtain discounts on other Dale Corp. products. Retailers are reimbursed for
the face amount of coupons redeemed plus 10% of that amount for handling costs. Dale
Corp. honors requests for coupon redemption by retailers up to 3 months after the
consumer expiration date. The company estimates that 60% of all coupons issued will
ultimately be redeemed. Information relating to coupons issued by the company during
2022 is as follows:

Consumer expiration date 12/31/22

Total payments to retailers as of 12/31/22 165,000
Liability for unredeemed coupons as of 12/31/22 99,000

13. The total face amount of coupons issued in 2022 is

a. P 600,000
b. P 440,000
c. P 400,000
d. P 240,000

14. Coupons expense at year-end is

a. P 440,000
b. P 400,000
c. P 264,000
d. P 240,000

15. Estimated liability for unredeemed coupons is

a. P 219,000
b. P 123,000
c. P 99,000
d. P 3,000

Solution
Coupons issued 400,000 – squeezed figure
X 60%
Coupons to be redeemed 240,000
Plus: Handling cost (10%) 24,000
Total Cost 264,000
Less: payment 165,000
Estimated liability 99,000

Eusebio Inc., a manufacturer of heavy machinery, grants a 2-year warranty on its products.
The Estimated Liability for Product Warranty account shows the following entries for the
year:

Beginning balance P225,000

Provision during the year (quarterly accrual) 200,000
Total P425,000

A review of the company’s policy of accounting for warranties revealed that based on the
company’s past experience, warranty claims averaged 5% on net sales. Moreover, the
company provides for a quarterly accrual of the estimated warranties expenditure based on
rough estimates.

The following additional information is available from the company’s records:

Gross sales P7,250,000

Sales returns and allowances 150,000
Cost of sales 3,678,000

The cost of sales included P415,500 cost of servicing the warranty claims for the year.

16. What is the correct balance of the estimated liability for product warranty at the end
of the year?
a. 164,500
b. 264,500
c. 355,000
d. 364,000
Solution

San Beda Home Depot carries a wide variety of promotion techniques to attract customers.

Kitchen and home appliances are sold in a one-year warranty for replacement of parts and
labor. The estimated warranty cost, based on past experience, is 5% of sales.

The premium is offered on the home furniture. Customer receive a coupon for each peso
spent on home furniture. Customers may exchange 2,000 coupons and P50 for a rice
cooker which the company purchased at P340 for each rice cooker and estimates that 60%
of the coupons given to customers will be redeemed.

The company’s total sales for 2021 were P115.2M – P86.4M from kitchen and home
appliances and P28.8M from home furniture. Replacement parts and labor for warranty
work totaled P2.624M during 2021. A total of 5,200 rice cookers used in the premium
program were purchased during the year and there were 9,600,000 coupons redeemed in
2021.

The accrual method is used by the company to account for the warranty and premium costs
for financial reporting purposes. The balance in the accounts related to warranties and
premiums on January 1, 2021, were as shown below:

Inventory of Premium items P340,000

Estimated liabilities for premiums 716,000
Estimated liabilities for warranties 2,176,000

Based on the information above, determine:

17. Promotional expense related to premiums for the current year 2021?
a. 1,392,000
b. 1,632,000
c. 2,505,600
d. 2,937,600

18. Estimated liabilities for premiums as of December 31, 2021?

a. 716,000
b. 1,829,600
c. 2,021,600
d. 1,589,600

19. Estimated liabilities for warranties as of December 31, 2021?

a. 2,624,000
b. 3,872,000
c. 4,320,000
d. 5,312,000

Solution
Sheng Company started a promotional program in 2022 whereby for every 5 product labels
a customer surrenders with P25 cash, a customer shall receive a specially designed
umbrella. The company sold 40,000 units of the product covered by the said promotional
program and purchased 5,000 umbrellas in anticipation for the premium’s redemption which
the company appropriately debited to premiums inventory account. Each umbrella costs
P95. The company estimates that 75% of the product labels accompanying sales shall
ultimately be presented for the redemption of premiums. 1,250 umbrellas remained on
hand as of December 31, 2022, as such the company accrued the cost of the remaining
umbrellas as the year-end estimated premiums liability:

Premiums expense 118,750

Estimated premiums liability 118,750

Actual redemptions during the year were appropriately recorded as:

Premiums expense 262,500

Cash 93,750
Premiums inventory 356,250

The company also has a two-year warranty on its products. The warranty estimate is at 8%
of the peso sales, two thirds of which is expected to be incurred during the year of sale and
one-third on the year following the year of sale. The summary of the company’s total sales
and actual warranty costs incurred for the past three years are presented below (Assume
sales were made evenly throughout the year):

2020 2021 2022

Net Sales P 4,000,000 4,525,000 5,275,000
Actual Costs paid 127,500 233,750 285,250

The company is yet to update its warranty liabilities as of December 31, 2022.

20. What is the correct estimated premiums liability as of December 31, 2022?
a. 38,750
b. 118,750
c. 157,500
d. 70,000

Solution
 21. What is the correct estimated warranties payable as of December 31, 2022?
a. 423,500
b. 411,750
c. 457,500
d. 421,750
Solution(plus 2 yrs)

Rudy Baldwin Corp includes one coupon having no expiration date with its deluxe snack
pack. Upon return of 10coupons, Chargers will send a silver chip clip, which cost Chargers
P1.50 each. Past experience indicates that 30% of coupons issued will be redeemed.
Chargers began this promotion in 2023 and sold 1,000,000 deluxe snack packs.
During 2023, 90,000 coupons were received and 9,000 chip clips were distributed to
customers.

22. The December 31,2023, statement of financial position should include a liability for
coupons outstanding of:
a. 13,500
b. 21,000
c. 31,500
d. 45,000

Solution:
III. Bonds Payable and Notes Payable

The following is an excerpt of Annegelo Inc.’s trial balance as of December 31, 2022:

10% Notes payable - Bank, 5 years P3,000,000

12% Bonds payable, 5 years 5,000,000
9% Bonds payable, 3 years 2,000,000

Additional information:

a. The Notes payable – Bank which was dated April 1, 2018 pays interest annually
every April 1. As of December 31, 2022, Freeday Inc. has the right to refinance the
said loan by issuing Bonds the proceeds shall be used to settle the obligation. On
March 1, 2019 the company issued P4,000,000 Bonds at face value and used one-
half of the proceeds to settle the notes on April 1, 2023. The balance of the maturing
obligation was settled out of working capital. The 2022 financial statement were
approved for issuance by the BOD on April 15, 2023.

b. The 12% bonds payable was issued on January 1, 2021 when the prevailing market
rate for bonds was at 10%. The company recorded the transaction as a debit to
cash for the bond proceeds, credit to the bonds payable account at face value,
charging any difference to interest expense. Interest on the bonds is payable
annually every December 31. Interest payments were recorded to the appropriate
interest expense account.

c. The 9% bonds payable which were issued at P2,948,685, is a serial bonds dated
January 1, 2022 and matures at P1,000,000 every December 31, starting 2022.
Interest based on the outstanding balance of the bonds are paid annually every
December 31. The prevailing market rate of interest on the issuance date was at
10%. The issuance was recorded as a debit to cash for the proceeds, credit to bonds
payable at face value with the difference being charged to interest expense. The first
principal and interest collection was recorded correctly at the end of the year.

23. How much from the 10% Notes payable should be presented as non-current liability
as of December 31, 2022?
a. None
b. 1,000,000
c. 2,000,000
d. 3,000,000

24. What is the correct carrying value of the 12% Bonds payable as of December 31,
2022?
a. 5,379,079
b. 5,316,987
c. 5,248,685
d. 5,173,554
25. What is the correct carrying value of the 9% Serial Bonds Payable as of December
31, 2022?
a. 2,948,685
b. 1,948,685
c. 1,973,554
d. 990,909

26. What is the correct interest expense on the 9% Serial Bonds Payable in 2023?
a. 270,000
b. 294,869
c. 197,355
d. 297,355

Solution(plus 2 years)
Tan Company is experiencing financial difficulties with NFC Bank. Tan negotiated with NFC
and arrived at an agreement to restructure its note payable at the end of the current period.
Tan owed NFC a note with principal amount of P8,000,000 and accrued interest of
P960,000. Based on the agreement, NFC will accept equipment with a fair value of
P1,600,000 and a note receivable from Tan’s customer with carrying amount of P6,000,000.
It was determined that the equipment had been acquired at P2,600,000 with a P600,000
residual value and had been 30%depreciated at the end of current period.

27. What amount of gain from extinguishment of debt should Tan recognize?
a. 1,360,000
b. 1,560,000
c. 960,000
d. 0

Solution
Carrying amount note payable 8,000,000
Accrued interest 960,000
Carrying amount of total liability 8,960,000

Carrying amount of asset transferred:

Equipment, 2,600,000 – [(2,600,000 – 600,000) x 30%] 2,000,000
Note receivable 6,000,000
8,000,000
Gain on asset swap 960,000

Enhypen Company owes SVT Bank P4,000,000 plus accrued interest of P360,000. The
unamortized discount on the loan is P80,000. The debt is a 10 year, 12% loan. During
2022, Enhypen’s business deteriorated due to loss of demand for its services. On December
31, 2022, SVT Bank agrees to accept old equipment and cancel the entire debt. The
equipment has a cost of P12,000,000, accumulated depreciation of P8,800,000, and fair
value of P3,600,000.

28. How much is the gain (loss) on the extinguishment of the debt?
a. 1,800,000
b. 1,800,000 gain
c. 1,080,000 gain
d. 760,000 gain
Solution
Face amount 4,000,000
Discount (80,000)
Carrying amount of the note 3,920,000
Accrued interest 360,000
Total carrying amount of the liability 4,280,000

Carrying amount of asset transferred

(12,000,000 – 8,800,000) 3,200,000
Gain 1,080,000
When the EK Manufacturing Company was expanding its metal window division, it
did not have enough capital to finance the expansion. So, management sought and
received approval from the board of directors to issue bonds. The company planned to
issue P5,000,000 of 8 percent, five-year bonds in 2022. Interest would be paid on June 30
and December 31 of each year. The bonds would be callable at 104, and each P1,000 bond
would be convertible into 30 shares of P10 par value common stock.

On January 1, 2022, the bonds were sold at 96 because the market rate of interest for
similar investment was 9 percent. The company decided to amortize the bond discount by
using the effective interest method.

On July 1, 2024, management called and retired half the bonds, and investors converted the
other half into common stock. As inducement, the company agrees to pay additional
P100,000 to the holders of the convertible bonds.

29. Carrying value of the bonds at December 31, 2022 is:

a. P 4,840,000
b. P 4,832,720
c. P 4,832,000
d. P 4,816,000

30. Carrying value of the bonds at December 31, 2023 is:

a. P 4,880,000
b. P 4,868,451
c. P 4,866,880
d. P 4,850,000

31. Interest expense at December 31, 2023 is:

a. P 432,000
b. P 432,720
c. P 435,731
d. P 437,339

32. Carrying value of the bonds converted is:

a. P 2,500,000
b. P 2,456,235
c. P 2,450,000
d. P 2,443,765

33. Additional paid-in capital in the conversion of bonds is:

a. P 1,706,234
b. P 1,793,766
c. P 1,693,766
d. P 1,684,225

34. Carrying value of retired bonds is:

a. P 2,500,000
b. P 2,456,235
c. P 2,450,000
d. P 2,443,765
 35. Loss on early retirement of bonds is:
a. P 156,235
b. P 150,000
c. P 143,765
d. P 100,000

36. Interest expense on the bonds at December 31, 2024 is:

a. P 438,161
b. P 400,000
c. P 219,080
d. P 200,000

37. The company should record gain or loss on conversion of:

a. Loss of P100,000
b. Gain of P100,000
c. Loss of P50,000
d. No gain or loss on conversion
Solution
July 1, 2024
Bonds payable 2,500,000
Loss on bond retirement 156,235
Discount on BP 56,235
Cash 2,600,000

Bonds payable 2,500,000

Debt conversion expense 100,000
Discount on BP 56,235
Common stock 750,000
APIC 1,693,765
Cash 100,000

Date Interest expense Interest paid Amortization Carrying Value

4,800,000
June 2022 215,000 200,000 16,000 4,816,000
Dec 2022 216,720 200,000 16,720 4,832,720
June 2023 217,472 200,000 17,472 4,850,192
December 2023 218,259 200,000 18,259 4,868,451
June 2024 219,080 200,000 19,080 4,887,531

Answer: 1. b 2. b 3. c 4. d 5. c
6. d 7. a 8. c 9. d

On January 1, 2022, CPA NAKO company issued eight-year bonds with a face value of
P2,000,000 and a stated interest rate of 6% payable semiannually on June 30 and
December 31. The bonds were sold to yield 8%.

Table values are:

Present value of 1 for 8 periods at 6% 00.627
Present value of 1 for 8 periods at 8% 00.540
Present value of 1 for 10 periods at 3% 00.623
Present value of 1 for 10 periods at 4% 00.534
Present value of annuity of 1 for 8 periods at 6% 6.210
Present value of annuity of 1 for 8 periods at 8% 5.747
Present value of annuity of 1 for 10 periods at 3% 12.561
Present value of annuity of 1 for 10 periods at 4% 11.652
 38. The present value of the principal is
a. P 1,068,000
b. P 1,080,000
c. P 1,246,000
d. P 1,254,000

39. The present value of the interest is

a. P 689,640
b. P 699,120
c. P 745,200
d. P 753,660

40. The issue price of the bonds is

a. P 1,767,120
b. P 1,769,640
c. P 1,779,120
d. P 1,999,200

Solution
1. B P2,000,000 x .54 = P1,080,000
2. B P2M x 6% x 6/12 = P60,000; P60,000 x 11.652 = P699,120
3. C P1,080,000 + P699,120 = P1,779,120
EXTRAS

On January 1, 2007, LACEA COMPANY issued 7% term bonds with a face amount of
P1,000,000 due January 1, 2015. Interest is payable semiannually on January 1 and July 1.
On the date of issue, investors were willing to accept an effective interest of 6%.

Questions
1. The bonds were issued on January 1, 2007 at
a. A premium c. Book value
b. An amortized value d. A discount
2. Assume the bonds were issued on January 1, 2007, for P1,062,809. Using the effective
interest amortization method, LACEA COMPANY recorded interest expense for the 6
months ended June 30, 2007, in the amount of
a. P 70,000 b. P 63,769 c. P 35,000 d. P 31,884

3. Same information in number 2. LACEA COMPANY recorded interest expense for the 6
months ended December 31, 2007, in the amount of
a. P 70,000 b. P 63,769 c. P 31,884 d. P 31,791
4. The carrying value of the bonds on July 1, 2008 is:
a. P 1,056,578 b. P 1,056,484 c. P 1,053,276 d. P 1,053,179
5. A bond issue sold at a premium is valued on the statement of financial position at the
a. Maturity value.
b. Maturity value plus the unamortized portion of the premium.
c. Cost at the date of investment.
d. Maturity value less the unamortized portion of the premium.
Solution
1. B
If nominal rate is less than the yield rate, there is discount

If nominal rate is more than the yield rate, there is premium

2. D
Date Interest expense Interest paid Amortization Carrying Value
1,062,809
July 2007 31,884 35,000 3,116 1,059,693
December 2007 31,791 35,000 3,209 1,056,484
July 2008 31,695 35,000 3,305 1,053,179
Interest expense = Carrying value of the note X yield rate x 6/12
Interest paid = Face value of the note X nominal rate x 6/12
Amortization = Interest expense – Interest paid
Carrying value – end = Carrying value – beg. – Amortization
3. D 4. D 5. B