Solution manual financial accounting by valix ch1 4

FINANCIAL ACCOUNTING
Volume Two
Valix and Peralta
2008 Edition
SOLUTION MANUAL
1
CHAPTER 1
Problem 1-1
Problem 1-2
Problem 1-5
1. A
6. A
2. D
7. A
3. A
8. C
4. C
9. B
5. A
10. B

Problem 1-3

Problem 1-4

1. A

6. A

1. C

1. B

1. A

2. C

7. A

2. B

2. B

2. D

3. B

8. D

3. D

3. C

3. A

4. A

9. C

4. A

4. A

4. D

5. A

10. C

5. D

5. A

5. B

Problem 1-6
Accounts payable
3,000,000
Deposits and advances
2,000,000
from customers
500,000
Notes payable
4,000,000
Credit balances in
300,000
customers’ accounts
1,000,000
Serial bonds payable
100,000
Accrued interest on

800,000
bonds payable
600,000
Provision for tax
700,000

Problem 1-7
1,000,000

Note payable – trade
Note payable – bank

250,000
1,000,000

Note payable – officers
Accounts payable – trade
Bank overdraft

200,000
1,000,000

Dividends payable
Withholding tax payable
Income tax payable

150,000

Estimated warranty liability
Estimated damages payable

assessment
900,000
Unearned rent income
200,000
Total current liabilities
14,100,000

300,000

Accrued liabilities

100,000

Estimated premium liability

4,000,000

Total current liabilities

Problem 1-8
Accounts payable (500,000 + 100,000)
600,000
Accrued liabilities
50,000
Note payable - refinanced
1,000,000
Note payable – due May 1, 2009
800,000

Total 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
700,000
Note payable – shareholder
Less: Discount on note payable
1,887,000
Accrued interest payable
189,000
Total current liabilities
2,776,000

2,000,000
113,000

b. Note payable – bank:
January 1 – April 1, 2008 (2,800,000 x 12% x 3/12)
84,000
April 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
Note payable – bank
Accrued expenses
23,000,000
Noncurrent liabilities:
Mortgage payable
Note payable due 2010
7,000,000
Total liabilities
30,000,000

7,000,000
12,000,000
4,000,000

4,000,000
3,000,000

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, 2007
1,800,000
Less: Payment on September 1, 2008
600,000
Balance, 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, 2007
1,200,000
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)
135,000
Interest accrued from October 1 to December 31, 2008
(800,000 x 15% x 3/12)
30,000
Interest expense for 2008
165,000

Problem 1-13 Answer A
January 1 – October 31, 2008 (500,000 x 12% x 10/12)
50,000
February 1 – July 31, 2008 (1,500,000 x 12% x 6/12)
90,000
May 1 – December 31, 2008 (800,000 x 12% x 8/12)
64,000
Total interest expense of 2008
Less: Recorded interest expense
Understatement of interest expense

204,000
150,000
54,000

Problem 1-14 Answer C
Accrued interest from March 1, 2007 to February 28, 2008
(1,000,000 x 12%)
120,000
Accrued interest from March 1 to December 31, 2008
(1,000,000 + 120,000 x 12% x 10/12)
112,000
Total 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.
Problem 1-15 Answer B
12% note payable – refinanced

5,000,000

4
Problem 1-16 Answer A


Accounts payable
6,500,000
Note payable – bank
3,000,000
Interest payable
150,000
Mortgage note payable
2,000,000
Bonds payable
4,000,000
15,650,000
Problem 1-17 Answer A
6% Note payable
500,000
8% Note payable
800,000
Total 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 longterm basis is completed after balance sheet date and before the financial
statements are authorized for issue.
Problem 1-18
2008

1. Cash
Sales
3,600,000

3,600,000

2. Premiums
Cash
390,000

390,000

3. Cash (5,000 x 10)
Premium expense (5,000 x 40)
Premiums (5,000 x 50)
250,000
4. Premium expense (5,000 x 20)
Cash
100,000

50,000
200,000
100,000


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

120,000

5
2009
1. Estimated premiums payable
Premium expense
120,000
Reversing entry.
Cash
Sales
4,200,000

120,000

4,200,000

2. Premiums
Cash
580,000

580,000

3. Cash (9,000 x 10)
Premium expense (9,000 x 40)
Premiums (9,000 x 50)
450,000

90,000
360,000

4. Premium expense (9,000 x 20)

Cash
180,000

180,000

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

180,000

Problem 1-19
1. Cash (400,000 x 9)
Sales
3,600,000
2. Premiums
Cash
900,000

3,600,000

900,000


3. Premium expense
Cash
30,000

30,000

4. Cash (8,000 x 5)
Premium expense (8,000 x 85)
Premiums (8,000 x 90)
720,000

40,000
680,000

5. Premium expense (2,000 x 85)
Estimated premiums payable
170,000

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
Cash (30 x 5,000)
150,000

150,000

Problem 1-20
2008
1. Cash
Sales
2,500,000
2. Premiums - towels
Cash
175,000
3. Cash (1,000 x 20)
Premiums expense
Premiums – towels (1,000 x 100)
100,000
4. Premium expense (1,000 X 5)

2,500,000

175,000

20,000
80,000

5,000


Cash
5,000
5. Premium expense
Estimated premiums payable (600 X 85)
51,000
2009

1. Estimated premiums payable
Premium expense
51,000
Cash
Sales
3,125,000
2. Premiums - towels
Cash
200,000
3. Cash (1,800 x 20)
Premiums expense
Premiums – towels (1,800 x 100)
180,000

51,000

51,000

3,125,000

200,000

36,000
144,000

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

9,000
9,000

7
5. Premium expense
Estimated premiums payable (800 X 85)
68,000

68,000

Statement classification
Current asset:
Premiums – towels
Current liability:
Estimated premiums payable
Selling expense:
Premium expense
Problem 1-21 Answer B

2008

2009

75,000

95,000

51,000

68,000

136,000

170,000

Problem 1-22 Answer D


Coupons to be redeemed
(160,000 x 60%)
20,000
Less: Coupons redeemed
15,000
Balance
5,000

96,000

Premiums to be distributed
(250,000 x 80% / 10)

40,000

Premiums distributed

56,000

Balance

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
300,000
Less: Estimated premiums in 2008
200
Coupons outstanding
100,000
Premiums applicable to 2009
5,800
Liability for unredeemed
Premium expense (5,800 x 60)
348,000
coupons (100,000 x 15)
1,500,000
Problem 1-25 Answer C

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

220,000
242,000

8
Problem 1-26
Accrual approach
2008
1. Cash (300 x 15,000)
Sales
4,500,000
2. Warranty expense

4,500,000
144,000


Estimated warranty liability (60% x 300 = 180 x 800)
144,000
3. Estimated warranty liability
Cash
40,000

40,000

2009

1. Cash (500 x 15,000)
7,500,000
Sales
7,500,000
2. Warranty expense
240,000
Estimated warranty liability (60% x 500 = 300 x 800)
240,000
3. Estimated warranty liability
Cash
150,000

150,000

Expense as incurred approach
2008
1. Cash
Sales
4,500,000

4,500,000

2. Warranty expense
Cash
40,000

40,000

2009
1. Cash

Sales
7,500,000

7,500,000

2. Warranty expense
Cash
150,000

150,000

9
Problem 1-27
Accrual approach
2008


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

5,000,000

3. Estimated warranty liability
Cash
390,000
2009

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

390,000

3. Estimated warranty liability
Cash
900,000

700,000

9,000,000
1,260,000

900,000

“Expense” approach
2008
1. Cash
Sales
5,000,000
2. Warranty expense
Cash
390,000
2009
1. Cash

Sales
9,000,000
2. Warranty expense
Cash
900,000

5,000,000

390,000

9,000,000

900,000


10
Problem 1-28
Units sold:
October
32,000
November
28,000
December
40,000
Total
100,000
Multiply by
2%
Total failures expected
2,000

Less: Failures already recorded:
October sales
November sales
December sales
Expected future failures
Multiply by
Estimated cost
Warranty expense
Estimated warranty liability
123,000
Problem 1-29 Answer D

640
360
180

1,180
820
150
123,000

123,000

Warranty expense (2,400 x 300)
Problem 1-30 Answer C

720,000
Problem 1-31 Answer A

Warranty expense (3,000 x 80) 240,000

Warranty expense
Less: Actual warranty cost
70,000
(5% x 5,000,000)
250,000
Warranty liability–June 30, 2008 170,000
Problem 1-32 Answer B
Warranty expense:
2008 (5,000,000 x 7%)
2009 (7,000,000 x 7%)

350,000
490,000
840,000


Warranty costs:
2008
2009
Warranty liability – December 31, 2009

100,000
300,000

400,000
440,000

11
Problem 1-33 Answer A
Net sales (640,000 / 8%)

8,000,000
Problem 1-34 Answer A
Normal defect (500 x P10,000 x 25%)
1,250,000
Significant defect (500 x P30,000 x 15%)
2,250,000
3,500,000
Problem 1-35
1. Cash
Gift certificates payable
500,000
2. Gift certificates payable
Sales
400,000
3. Gift certificates payable
Forfeited gift certificates (8% x 500,000)
40,000

500,000

400,000

40,000

Problem 1-36
1. Cash
Gift certificates payable
900,000
2. Gift certificates payable
Sales

780,000

900,000

780,000


3. Gift certificates payable
Forfeited gift certificates
40,000
Unearned revenue – January 1
260,000
Add: Gift certificates sold
900,000
Total
1,160,000
Less: Gift certificates redeemed
Expired gift certificates
820,000
Unearned revenue – December 31
340,000

40,000

780,000
40,000

12
Problem 1-37 Answer C
Unearned revenue – January 1

650,000
Add: Gift certificates sold
2,250,000
Total
2,900,000
Less: Gift certificates redeemed
Expired gift certificates
2,050,000
Unearned 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 sales
1,750,000

1,950,000
100,000


Unearned revenue – December 31, 2008
500,000
Unredeemed – January 1, 2008
750,000
Less: 2008 Redemption of prior year sales
250,000
Expired gift certificates
500,000
Problem 1-39 Answer D
1. Cash

Unearned service contract revenue
980,000

980,000

Service contract expense
Cash
520,000

520,000

Unearned service contract revenue
Service 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

860,000

13
Problem 1-40 Answer B
Outstanding contracts on December 31, 2008 that will expire during

2009
150,000
2010
225,000
2011
100,000
Unearned service contract revenue
475,000
Problem 1-41 Answer A
The entire amount of P720,000 will be considered deferred revenue on
December 31, 2008 because the subscriptions start with the January 2009 issue.
Problem 1-42 Answer A
Monthly subscriptions (7,200,000 / 12)
600,000
The subscriptions after the September 30 cut-off are:
October
600,000
November
600,000
December
600,000
Total unearned subscription revenue – December 31, 2008
1,800,000
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
125,000
Subscriptions received in 2009 that will expire in 2010

200,000
Subscriptions received in 2009 that will expire in 2011
140,000
Unearned subscription revenue – December 31, 2009
465,000
Problem 1-44 Answer B


Liability for refundable deposit – January 1
150,000
Deposits made in 2008 (100,000 x 5)
500,000
Total
650,000
Less: Deposits refunded in 2008 (110,000 x 5)
550,000
Balance – December 31(current liability)
100,000
The lease deposit is a noncurrent liability.

14
Problem 1-45 Answer C
Advances – January 1
1,180,000
Advances received
Total
3,020,000
Advances applied
(1,640,000)
Advances canceled

( 500,000)
Advances – December 31
Problem 1-46 Answer B
B
B
B + .10B
1.10B
B
B

=
=
=
=
=
=

.10 (1,650,000 – B)
165,000 - .10B
165,000
165,000
165,000 / 1.10
150,000

Problem 1-47 Answer A
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
Proof

1,840,000

880,000


Income before bonus and tax
4,260,000
Less: Bonus
260,000
Income before tax
4,000,000
Less: Tax (35% x 4,000,000)
1,400,000
Income after bonus and tax
2,600,000
Problem 1-48 Answer B
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
Containers’ deposit
390,000

390,000

Containers’ deposit
Cash
313,000

313,000

Containers’ deposit
Containers

30,000
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
Total
Less: Containers returned in 2008
Containers not returned and expired
Containers’ deposit – December 31, 2008

390,000
680,000
313,000
30,000

343,000
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
Estimated liability for income tax
200,000

200,000

3. Accounts receivable – Sunset

Loss on guaranty
Note payable – bank

120,000
80,000
200,000

16
Problem 1-51
1. Unearned subscription revenue
Subscription revenue (3,000,000 – 2,300,000)
700,000
2. Loss on damages
Estimated liability for damages
1,500,000
3. Loss on damages
Estimated liability for damages
1,000,000

700,000

1,500,000

1,000,000

Problem 1-52 Answer A
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.
Problem 1-54 Answer D
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.
Problem 1-55 Answer D
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.
Problem 1-56 Answer A
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.

1
7
Problem 1-57 Answer A
The loss on the first lawsuit is both probable and measurable and therefore can
be accrued as a provision.
Problem 1-58 Answer B
Environmental cost
500,000
Litigation cost
300,000

Total accrued liability
800,000


Both are accrued as provision because the loss is probable and measurable.
Problem 1-59 Answer D
Assessment on appeal (50% x 1,600,000)
800,000
Environmental cost
1,500,000
Total provision
2,300,000
The loss from the guaranty is not accrued because it is remote.