Current Liabilities | PROBLEMS

Problem 1 | Current Liabilities Classification

The data below are from the records of Almanor, Inc. on December 31, 2018:
Accounts Payable 680,000
Cash Balance, ABC Bank 1,240,000
Cash overdraft with XYZ Bank 80,000
Customer’s account with credit balance 25,000
Dividends in arrears on preference shares 400,000
Employees’ income tax payable 100,000
Estimated warranty payable 50,000
Estimated premium claims outstanding 90,000
Income Tax payable 400,000
Notes Payable (issued in 2017 maturing in 20 semiannual 4,000,000
installments beginning April 1, 2019)
Salaries Payable 400,000

The amount to be shown as total current liabilities on Almanor’s statement of financial position at
December 31, 2018, is
a. P2,225,000
b. P2,025,000
c. P2,625,000
d. P2,145,000

Accounts Payable 680,000

Cash overdraft with XYZ Bank 80,000
Customer’s account with credit balance 25,000
Employees’ income tax payable 100,000
Estimated warranty payable 50,000
Estimated premium claims outstanding 90,000
Income Tax payable 400,000
Notes Payable ((4,000,000 ÷ 20) × 2) 400,000
Salaries Payable 400,000
Total Current Liabilities P2,225,000

Explanation
There is a cash balance in ABC Bank which shall be classified as an asset. On the other hand,
there is a cash overdraft in XYZ Bank which must be included as a liability.
Dividends in arrears on preference shares is assumed to be undeclared, otherwise, the account
should be entitled dividends payable. In such cases of undeclared dividends, it shall only be
disclosed in the notes to financial statements.
The Notes Payable matures in 20 semiannual payments two of which are due within the next
reporting period. Consequently, the P4,000,000 shall be divided by 20 to get the semiannual
payment and then be multiplied to 2 to get the total current portion of the notes payable.
 Problem 2 | Accrued Expenses
Anglin Corporation must determine the December 31, 2018, year end accruals for advertising and
rent expenses. A P50,000 advertising bill was received January 10, 2019, comprising costs of P37,500 for
advertisements in December 2018 issues, and P12,500 for advertisements January 2019 issues of the
newspaper.
A store lease, effective December 16, 2016, calls for fixed rent of P120,000 per month, payable
one month from the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over
P6,000,000 per calendar year us payable on January 31 of the following year: Net Sales for 2018 were
P7,500,000.
What is the total accrued liabilities that should be reported by Anglin Corporation in it’s statement of
financial position as at December 31, 2018?
a. P185,000
b. P172,500
c. P97,500
d. P110,000

Advertising 37,500
Fixed rent, December 16-31 (120,000 × 0.5) 60,000
Variable rent (7,500,000 – 6,000,000 = 1,500,000 × 5%) 75,000
Total Accrued Liabilities P172,500

Explanation

The 2018 accrued advertising expense should only include the P37,500 costs incurred in
December 2018 issues. The P12,500 for January 2019 issues shall be recognized in the year 2019.
The accrued lease liability runs from December 17 to December 31 of the year 2018 which
payment shall be due on January 16 the next year. P120,000 multiplied by ½ or 0.50, that is,
P60,000 for half a month accrual of lease liability.
The variable rent shall be computed by deducting the P6,000,000 from the 2019 Net Sales of
P7,500,000 and multiplying the difference by 5% which is the rate as per the term of the rent.

Problem 3 | Debt Classification

Boomerang, Inc. is a manufacturer and retailer of household furniture. Your audit of the
company’s financial statements for the year ended December 31, 2018 discloses the following debt
obligations of the company at the end of its reporting period. Boomerang’s financial statements are
authorized for issuance on March 6, 2019.
1. A P150,000 short-term obligation due on March 1, 2019. Its maturity could be extended to March
1, 2021, provided Boomerang agrees to provide additional collateral. On February 12, 2019, an
agreement is reached to extend the loan’s maturity to March 1, 2021.
 2. A short-term obligation of P3,600,000 in the form of notes payable due February 5, 2019. The
company issued 75,000 ordinary shares for P36 per share on January 25, 2019. The proceeds
from the issuance plus P900,000 cash, were used to fully settle the debt on February 5, 2019.
3. A long-term obligation of P2,500,000 due December 1, 2028. On November 10, 2018,
Boomerang breaches a covenant on its debt obligation and the loan becomes payable on demand.
An agreement is reached to provide a waiver of the breach on December 11, 2018.
4. A long-term obligation of P4,000,000. The loan is maturing over 4 years in the amount of
P1,000,000 per year. The loan is dated September 1, 2018, and first maturity date is September 1,
2019.
5. A debt obligation of P1,000,000 maturing on December 31, 2021. The debt is callable on demand
by the lender at any time.
What amount of current liabilities should be reported on the December 31, 2017, statement of financial
position?
a. P8,250,000
b. P5,750,000
c. P4,750,000
d. P3,750,000

1. Obligation due March 1, 2019 150,000

2. Obligation due February 5, 2019 3,600,000
4. Long-term Obligation – Current Portion 1,000,000
5. Obligation due December 31, 2021 - Callable 1,000,000
Total Current Liabilities P5,750,000

Explanation

The P150,000 short-term obligation due on March 1, 2019 still forms part of current
liabilities despite the agreement of extending the loan’s maturity to March 1, 2021 since such
agreement was reached beyond the reporting date which was on February 12, 2019.
P3,600,000 notes payable is appropriately classified as a short-term obligation since it is due
within one year from the end of the reporting date, specifically on February 5, 2019.
Regardless of the breach of contract on its debt obligation making it payable on demand, the
P2,500,000 due December 1, 2028 still stands since a waiver agreement was reached within the
year 2018. Hence, it should still be classified as a long-term obligation.
The current portion of the loans payable of P4,000,000 shall be classified as current
liabilities. Such loan is maturing in 4 years having September 1, 2019 as the first maturity date.
Accordingly, the P4,000,000 shall be divided by 4 to arrive at the current portion of the loan, that
is, P1,000,000.
Despite having a maturity beyond one year, December 31, 2021, the P1,000,000 debt
obligation shall be classified as current since it is callable on demand.

Problem 4 | Bonus
 Ana Rosa, president of the Apopka Company, has a bonus arrangement with the company under
which she 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 30%. The bonus will be paid in the following
year.
Determine the amount of Ana Rosa’s bonus. P304,206
Compute the appropriate provision for income tax for the year. P1,303,738
B = 10% (P4,650,000 – B – T)
T = 30% (P4,650,000 – B)
T = 1,395,000 – 0.30B
B = 10% (P4,650,000 – B – (1,395,000 – 0.30B))
B = 10% (P4,650,000 – B – 1,395,000 + 0.30B)
B = 465,000 – 0.1B – 139,500 + 0.03B
B = 325,500 – 0.07B
1.07B = 325,500
B = 325,500 / 1.07
B = P304,206

T = 30% (P4,650,000 – B)
T = 30% (P4,650,000 – 304,206)
T = 30% × P4,345,794
T = P1,303,738

Explanation

First, the equations for bonus (B) and tax (T) shall be established. It is stated that the bonus
arrangement renders Ana Rosa 10% of the net income (after deducting taxes and bonuses). Hence,
appropriately presented as B = 10% (P4,650,000 – B – T). The T = 30% (P4,650,000 – B) also
shows the proper accounting for tax where the bonus allocated to Ana Rosa shall be deducted from
the net income prior to applying the tax rate if 30%. Algebraic method is then employed in arriving
at the income tax and bonus amounts for the year.

Problem 5 | Premiums
In packages of its products, Placid, Inc. includes coupons that may be presented at retail stores to
obtain discounts on other Placid products. Retailers are reimbursed for the face amount of coupons
redeemed plus 10% of that amount for handling costs. Placid honors requests for coupon redemption by
retailers up to 3 months after the consumer expiration date. Placid estimates that 60% of all coupons
issued will ultimately be redeemed. Information relating to coupons issued by Placid during 2018 is as
follows:
Consumer expiration date December 31, 2018
Total payments tor retailers as of December 31, 2018 165,000
Liability for unredeemed coupons as of December 31, 2018 99,000
What is the total face amount of coupons issued by Placid, Inc. in 2018?
a. P440,000
b. P400,000
c. P600,000
d. P264,000

Liability for unredeemed coupons, December 31,2018 99,000

Add: Total payments to retailers 165,000
Total Cost 264,000
Less: Handling charges (264,000 – (264,000/110%)) 24,000
To be redeemed 240,000
Divide by redemption rate 60%
Total face amount of coupons issued P400,000

Explanation

To arrive at the total face amount of coupons issued the solution called for is a work back. The
sum of liability for unredeemed coupons and total payments to retailers entails the total cost of the
coupons which is P264,000. Next, the handling charges of P24,000 shall be deducted since the goal
is to find the face amount of coupons issued. It is computed by deducting the amount to be
redeemed (P264,000/110%) from the total cost (P264,000). The amount therein, P240,000, is
divided by the redemption rate of 60%. Recall that in problems requiring the liability for
unredeemed coupons, the total number of coupon is multiplied with the redemption rate to arrive at
the total coupons redeemable. Since this problem requires a work back, it shall be divided. Hence,
the total face amount of coupons issued is P400,000.

Problem 6 | Liability for Returnable Containers

Omega Company sells its products in expensive, reusable containers. The customer is charged a
deposit for each container delivered and receives a refund for each container returned within two years
after year of delivery. Omega accounts for the containers not returned within the time limit as being sold
at the deposit amount. Information for 2018 is as follows:
Containers held by customers at December
31, 2017, from deliveries in: 2016 85,000
2017 240,000 325,000
Containers delivered in 2018 430,000
Containers returned in 2018 from
deliveries in: 2016 57,500
2017 140,000
2018 157,000 354,500

1. How much revenue from container sales should be recognized for 2018?
a. P127,500
b. P265,500
c. P27,500
 d. P85,000
2. What is the total amount of Omega Company’s liability for returnable containers at December 31,
2018?
a. P373,000
b. P400,500
c. P267,500
d. P430,000

Containers held by customers at December 31, 2017 from deliveries in 2016 85,000
Containers returned in 2018 from deliveries in 2016 57,500
Revenue from container sales 27,500

Liability for returnable containers, December 31, 2017 325,000

Add: Deliveries in 2018 430,000
Total 755,000
Less: 2018 container returns 354,500
2018 container sales 27,500
Liability for returnable containers, December 31, 2018 P373,000

Explanation

Omega accounts for the containers not returned within the time limit as being sold at the
deposit amount. Having two years as a time limit, the unreturned containers held by customers
from deliveries in 2016 shall be recognized as sale in the year 2018. Therefore, to find the revenue
from container sales to be recognized in 2018, the Containers returned in 2018 from deliveries in
2016 of P57,500 should be deducted from the Containers held by customers at December 31, 2017
from deliveries in 2016 of P85,000.
Omega Company’s liability for returnable containers at December 31, 2018 consists of those
unreturned containers still satisfying the time limit of two years from the date of delivery. First, all
the containers held by the customers at the end of 2017, representing liability for returnable
containers in 2017, must be summed up with the deliveries made in 2018. P325,00 plus P430,000
equals P755,000. Then, both the returns made in 2018 (P354,500) and the revenue from container
sales (P27,500) previously calculated are deducted from P755,000 arriving with P373,000 liability
for returnable containers in December 31, 2018.

Problem 7 | Currently Maturing Debt Expected to be refinanced

Namekus Company has the following three loans payable scheduled to be repaid in February of next year.
The company’s accounting year ends on December 31.
a. The company intends to repay Loan 1 for P100,000 when it comes due in February. In the
following October, the company intends to get a new loan for P80,000 from the same bank.
 b. The company intends to refinance Loan 2 for P150,000 when it comes due in February. The
refinancing agreement, for P180,000, will be signed in April, after the financial statements for
this year have been authorized for issue.
c. The company intends to refinance Loan 3 for P200,000 before it comes due in February. The
actual refinancing, for P175,000 took place in January, before the financial statements for this
year have been authorized for issue.
As of December 31, this year, the total current liabilities to be reported in the company’s statement of
financial position should be
a. P100,000
b. P250,000
c. P450,000
d. P125,000

Loan 1 100,000
Loan 2 150,000
Loan 3 200,000
Total Current Liabilities P450,000

Explanation
All of the above loans are appropriately classified under current liabilities since all these loans
are due to be settled within twelve months after the end of the reporting period. PAS 1:
Presentation of Financial Statements further states that financial Liabilities where an agreement to
refinance, or to reschedule payments, on a long-term basis is completed after the end of the
reporting period and before financial statements are authorized for issue shall be classified as
current.
a. The mere intention of getting a new loan of P80,000 from the same bank does not qualify for
classification as a liability.
b. Again, the refinancing agreement for P180,000 actually signed in April the following year
after the financial statements are authorized for issue does not affect the classification of
Loan 2
c. In the case of Loan 3, where refinancing for P175,000 took place before financial statements
for the current year is authorized for issue, PAS 10 shall apply. In accordance to this, the
event qualifies for disclosure as a non-adjusting event.

Problem 8 | Classification of Debt

At December 31, 2018, Kisu Company liabilities include the following:
1. P10 million of 10% notes are due on March 31, 2023. The financing agreement contains a covenant
that requires Kisu to maintain current Assets at least equal to 200% of it’s current liabilities. As of
December 31, 2018, Kisu has breached this loan covenant. On February 10 2019, before Kisus’s
financial statements are authorized for issue, Kisu obtained a period of grace from Mayumi Bank
until January 31, 2020, having convinced the bank that the company’s normal 3 to 1 ratio of current
Assets to current liabilities will be reestablished during 2019.
2. P15 million of no cancelable 12% bonds were issued at face value on September 30, 1997. The bonds
mature on August 31, 2019, Kisu expects to have sufficient cash available to redeem the bonds
maturity.
3. P20 million of 10% bonds were issued at face value on June 30, 1999. The bonds mature on June 30,
2028, but bondholders have the option to call (demand payment on) the bonds in June 30, 2019.
However, the call option is not expected to be exercised, given prevailing market conditions.
What portion of Kisu Company’s debt should be reported as current liability
a. P10 million
b. P30 million
c. P45 million
d. P20 million

Notes 10,000,000
Bonds 15,000,000
Callable Bonds 20,000,000
Total Current Liabilities P45,000,000

Explanation

a. The P10 million notes shall be classified as a current liability despite having a maturity beyond
twelve months after the end of the reporting period due to the breach of loan covenant.
Moreover, the period of grace was given by the bank only after Kisu’s reporting date. Hence, as
of December 31, 2018, Kisu does not have an unconditional right to defer settlement of its
liability for at least 12 months from the end of the reporting period.
b. P15 million non-cancellable bonds are payable in the succeeding year, August 31, 2019. As of
the end of the reporting period, no long-term refinancing has been made by Kisu.
c. P20 million Callable bonds is a current liability. By definition, these bonds are callable or
payment is demandable by the creditor in the succeeding year. Kisu does not have an
unconditional right to defer its settlement beyond 12 months from the end of the reporting
period even if the debt is not expected to be called.

Problem 9 | Premiums
To increase sales, Candelaria Company inaugurated a promotional campaign on June 30, 2010.
Candelaria placed a coupon redeemable for a premium in each package of product sold. Each premium
costs P100. A premium is offered to a customer who send in 5 coupons issued will be redeemed. The
distribution cost per premium is P20. Candelaria estimated that only 60% of the coupons issued will be
redeemed. For the six months ended December 31, 2010, the following is available:

Packages of products sold 160,000

Premiums purchased 16,000
Coupons redeemed 64,000
What is the estimated liability for coupons?
a. P1,728,000
b. P1,600,000
c. P1,152,000
d. P576,000
Estimated coupons to be redeemed (160,000 × 60%) 96,000
Less: Coupons redeemed 64,000
Coupons outstanding 32,000
Divided by: exchange rate 5
Premiums to be issued 6,400
Multiplied by: net premium cost (100+20-30) 90
Estimated liability for coupons, 12/31/10 P576,000

Explanation

First, the coupons outstanding must be known. To get this, the estimated coupons to be
redeemed, which is 96,000 computed by multiplying the packages of product sold (160,000) by
the estimated rate of redemption (60%), should be deduced by the coupons redeemed of 64,000.
Since a premium is only offered to customers who send in 5 coupons, the coupons outstanding
should be divided by 5 to get the premiums to be issued. Each premium costs a total of P120
including the distribution cost of P20. It is also provided that a remittance of P30 should be sent
by the customer together with the 5 coupons to get a premium. Hence, the estimated liability for
coupons is calculated by multiplying the premiums to be issued (6,400) by the net premium cost
of P90 (P120-P30), that is, P576,000.

Problem 10 | Liability under Finance Lease

On December 31, 2017, Leman Co. signs a 10-year no cancelable lease agreement to lease a storage
building from Storage Company.
The following information pertains to this lease agreement:
1. The agreement requires equal rental payments of P720,000 beginning on December 31, 2017.
2. The fair value of the building on December 31, 2017, is P4,400,000.
3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of
P100,000. Leman depreciates similar buildings on the straight-line method.
4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
5. The interest rate implicit in the lease is 12% per year.
6. The yearly rental payment includes P24,705 of executory costs related to taxes on the property.
The following present value factors are for 10 periods at 12% annual interest rate:
 Present value of an annuity due of 1 6.32825
Present value of an ordinary annuity of 1 5.65022
Present value of 1 0.32197
1. What amount should be capitalized as the cost of the right of use of asset?
a. P4,556,340
b. P4,400,000
c. P4,432,197
d. P0

2. What is the total lease-related expenses to be reported in Leman’s income statement for the year
ended December 31, 2018?
a. P909,270
b. P879,182
c. P1,160,000
d. P464,705

3. What amount should be included in the current liabilities section of Leman’s statement of financial
position at December 31, 2018?
a. P720,000
b. P414,477
c. P695,295
d. P280,818

Present value of minimum lease payments:

P4,400,000
((P720,000 – P24,705) x 6.32825)

Interest expense P444,565

Executory costs – property tax 24,705
Depreciation expense (P4,400,000/10) 440,000
Total Lease-related expense for 2018 P909,270

Date Annual Payment Interest on Unpaid Balance of Lease

Less Executory Costs Lease Liability Liability
12/31/17 - - P4,400,000
12/31/17 695,295 - 3,704,705
12/31/18 695,295 444,565 3,453,975
12/31/19 695,295 414,477 3,173,157

Lease liability, December 31, 2018 current portion

P280,818
(P695,295 - P414,477)
 Explanation

To compute for the cost of the right of use of asset to be capitalized. The annual rental
payments net of the yearly rental payment of P24,705 of executory costs related to taxes on the
property shall be multiplied by the present value factor for 10 periods at 12% annual interest rate -
present value of an annuity due of 6.32825. This will result to P4,400,000 which is the fair value of
the building on December 31, 2017.
The lease-related expense is comprised of the interest expense, executory costs related to
property taxes and the depreciation expense of the building. The 2018 interest expense is computed
by multiplying the balance of lease liability on December 31, 2017 by 12% (P3,704,705 x 12% =
P444,565). On the other hand, the depreciation expense of P440,000 is derived from dividing the
fair value of P4,400,000 by the life of lease agreement of 10 years which is lower than the
building's estimated economic life of 12 years.
The current liabilities section of Leman’s statement of financial position at December 31, 2018
is derived from subtracting the interest on unpaid lease liability from the annual payment net of
executory costs (P695,295 - P414,477 = P280,818). These amounts are accounted for as current
since these are amounts of concern within the following year, 2019.