FINANCIAL ACCOUNTING & REPORTING 2

SEC – 7 – SHORT QUIZ 1 SOLUTION

1) Henry Company reported the following liabilities on December 31, 2018:

Accounts payable 3,000,000
Short-term borrowings 1,500,000
Bonds payable, current portion P500,000 4,000,000
Note payable, due June 30, 2019 2,000,000

The P2,000,000 note payable was refinanced with a 5-year loan on January 15, 2019. The financial statements
were issued February 28, 2019. What total amount should be reported as current liabilities on December 31,
2018?
A. 5,000,000 C. 4,500,000
B. 7,000,000 D. 3,500,000

SOLUTIONS: B
Accounts payable 3,000,000
Short-term borrowings 1,500,000
Current portion of long term debt 500,000
Currently maturing debt – refinanced not before December 31 2,000,000
Total current liabilities 7,000,000

2) At December 31, 2018, Dolphins Corporation owed notes payable of P2,000,000 with a maturity of April 30,
2019. These notes did not arise from transactions in the normal course of business. On February 1, 2019,
Dolphins issued P4,000,000 of ten-year bonds with the intention of using part of the bond proceeds to liquidate
the P2,000,000 of notes payable. Dolphins Company’s 2018 financial statements were issued on March 29,
2019. How much of the P2,000,000 notes payable should be classified as current liabilities in Dolphin Company’s
statement of financial position at December 31, 2018?
A. 6,000,000 C. 2,000,000
B. 4,000,000 D. 0

SOLUTION: C
Currently maturing obligation is classified as current liability – general rule, unless:
1. Refinance on or before December 31 – NO
2. Company as a discretion – NO
3. Grace period to rectify a breach of agreement is received on December 31 – NO

3) Life, Inc. is preparing its financial statements for the year ended December 31, 2019. Accounts payable amounted
to P200,000 before any necessary year-end adjustment related to the following:
• At December 31, 2019, Life has a P50,000 debit balance in its accounts payable to Twist, a supplier, resulting
form a P50,000 advance payment for goods to be manufactured to Life’s specifications.
• Checks in the amount of P25,000 were written to vendors and recorded on December 29, 2019. The checks
were dated January 5, 2020.

What amount should Life report as accounts payable in its December 31, 2019 statement of financial position?
A. 275,000 C. 200,000
B. 250,000 D. 125,000

SOLUTIONS: A
Recorded Accounts Payable – 12/31/19 200,000
a. Add back debit balance 50,000
b. Reversal of postdated check 25,000
Adjusted Accounts Payable – 12/31/19 275,000

4) Rachel Company is considering to give bonus for its new company CEO. The plan states that the bonus would be
equal to 15% based on profits after deducting bonus and tax. Profit before income tax and bonus for 2019 is
P10,000,000. Income tax rate is 30%. How much is the amount of bonus under the plan?
A. 1,304,348 C. 1,004,785
B. 1,099,476 D. 950,226

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SOLUTIONS: D,
T = 0.30 (10,000,000 – B – T)
B = 0.15 (10,000,000 – B – T)
B = 0.15 [10,000,000 – B – (0.30 (10,000,000 – B)]
B = 0.15 [10,000,000 – B – 3,000,000 + 0.30B]
B = 1,500,000– 0.15B – 450,000 + 0.045B
B = 1,050,000 – 0.105B
1.105B = 1,050,000
B = 950,226

Use the following information for the next two (2) questions:
Buffalo Company sells equipment service contracts that cover a two-year period. The sales price of each contract is
P5,000. Buffalo Company’s past experience shows that of the total pesos spent for repairs in service contracts, 40%
is incurred evenly during the first contract year and 60% evenly during the second contract year. Buffalo Company
sold 1,000 contract evenly throughout 2019 and 800 contracts evenly throughout 2020.
QUESTIONS:
5) In its December 31, 2019 statement of financial position, what amount should Buffalo Company report as
unearned revenue?
A. 4,000,000 C. 1,500,000
B. 3,000,000 D. 0

6) How much should Buffalo Company report as contract service revenue for the year ended December 31, 2020?
A. 4,500,000 C. 2,500,000
B. 3,300,000 D. 800,000

SOLUTION: A, B
Service contract sold in 2019 (1,000 x 5,000) 5,000,000
Revenue recognized in 2019 Jul. 1 to Dec. 31 from sale of 2019 (1,000 x 5,000 x 40% x 6/12) (1,000,000)
Unearned as of 12/31/19 4,000,000

Revenue recognized in 2020 Jan. 1 to Jul. 31 from sale of 2019 (1,000 x 5,000 x 40% x 6/12) 1,000,000
Revenue recognized in 2020 Jul. 1 to Dec. 31 from sale of 2019 (1,000 x 5,000 x 60% x 6/12) 1,500,000
Revenue recognized in 2020 Jul. 1 to Dec. 31 from sale of 2020 (800 x 5,000 x 40% x 6/12) 800,000
Total revenue recognized in 2020 3,300,000

7) Gayle Company a division of Charis Realty Inc., maintains escrow account and pays real estate taxes for Charis
mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is
credited to the mortgagee’s account and used to reduce future escrow payments. Additional information follows:
Escrow accounts liability, January 1, 2019 P 700,000
Escrow payments received during 2019 1,580,000
Real estate taxes paid during 2019 1,720,000
Interest on escrow funds during 2019 50,000

What amount should Gayle report as escrow accounts liability in its December 31, 2019 balance sheet?
A. 610,000 C. 515,000
B. 605,000 D. 510,000

SOLUTION: B
Liability for escrow accounts
Taxes paid 1,720,000 700,000 Beginning balance
1,580,000 Escrow payments received
*45,000 Interest on escrow funds net of service fee
605,000 Ending balance

8) On December 31, 2014, Cristel Company had the following liabilities:

Trade accounts payable 200,000
11% note payable, maturing in 5 equal installments on December 30, 2015 through 2019 300,000
12% note payable, issued October 15, 2014, maturing February 15, 2015 80,000

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 On December 31, 2014 Cristel signed a binding agreement with its bank to refinance the 12% note through
February 14, 2017, at a variable interest rate. What is the amount of Cristle’s current liabilities on December 31,
2014?
A. 580,000 C. 260,000
B. 500,000 D. 200,000

SOLUTION: C
Current Non-current
Trade accounts payable 200,000 ---
11% note payable C=(300,000 / 5) NC=(300,000 – Current) 60,000 240,000
12% note payable* --- 80,000
Total 260,000 320,000

Currently maturing obligation is classified as current liability – general rule, unless:

1. Refinance on or before December 31 – YES*
2. Company as a discretion
3. Grace period to rectify a breach of agreement is received on December 31
9) The accounts and balances shown below were gathered from Zechariah Corporation’s trial balance on December
31, 2019. All adjusting entries have been made.
Wages Payable 25,600
Cash 17,700
Mortgage Payable 151,600
Dividends Payable 14,000
Prepaid Rent 13,600
Inventory 81,800
Sinking Fund Assets 52,400
Short-term Investment 15,200
Premium on Bonds Payable 4,600
Stock Investment in Subsidiary 102,400
Taxes Payable 22,800
Accounts Payable 24,800
Accounts Receivable 36,600

The amount that should be reported as current liabilities on Zechariah Corp’s statement of financial position is
A. 91,800 C. 87,200
B. 238,800 D. 73,200

SOLUTIONS: C
Wages Payable 25,600
Dividends Payable 14,000
Taxes Payable 22,800
Accounts Payable 24,800
Total 87,200

10) Apalit Company reported accounts payable on December 31, 2019 at P800,000 before any necessary year-end
adjustments relating to the following transactions:
• On December 27, 2019, Cheema wrote and recorded checks to creditors totaling P350,000 causing an
overdraft of P100,000 in Cheema’s bank account on December 31, 2019. The checks were mailed on
January 10, 2020.
• On December 28, 2019, Cheema purchased and received goods for P200,000, terms 2/10, n/30. Cheema
records purchases and accounts payable at net amount. The invoice was recorded and paid January 3, 2020.
• Goods shipped F.O.B. destination on December 20, 2019 from a vendor to Cheema were received January 2,
2020. The invoice cost was P65,000.

On December 31, 2019, what amount should be reported as accounts payable?

A. 1,096,000 C. 1,281,000
B. 1,246,000 D. 1,346,000

SOLUTION: D
Unadjusted Accounts Payable – 12/31/19 800,000
1. Reversal of unreleased check 350,000

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 2. Unrecorded purchases as of 12/31/19 (200,000 x 98%) 196,000
3. No adjustment ---
Adjusted Accounts Payable – 12/31/20 1,346,000

J END OF SEC – 7 – SHORT QUIZ 1 SOLUTION J

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