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ACCTG: ACTIVITY ON CURRENT LIABILITIES, PROVISIONS AND CONTINGENCIES
1. Myser Neil, Inc. is a manufacturer and retailer of household furniture. The following are the debt obligations of the company for the year ended December 31, 2014. The financial statements are authorized for issuance on March 6, 2015.
a. A Php150,000 short-term obligation due on March 1, 2015. Its maturity could be extended to March 1, 2017, provided Boomerang agrees to provide additional collateral. On February 12, 2015, an agreement is reached to extend the loan’s maturity to March 1, 2017.
b. A short-term obligation of Php3,600,000 in the form of notes payable due February 5, 2015. The company issued 75,000 ordinary shares for Php36 per share on January 25, 2015. The proceeds from the issuance, plus Php900,000 cash, were used to fully settle the debt on February 5, 2015.
c. A long-term obligation of Php2,500,000 on December 1, 2014. On November 10, 2014, the Company breached 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, 2014.
d. A long-term obligation of Php4,000,000. The loan is maturing over 4 years in the amount of Php1,000,000 per year. The loan is dated September 1, 2014, and the first maturity date is September 1, 2015.
e. A debt obligation of Php1,000,000 maturing on December 31, 2017. The debt is callable on demand by the lender at any time.
Required:
(a) What amount of current liabilities should be reported on the December 31, 2014, statement of financial position?
(b) What amount of noncurrent liabilities should be reported on the December 31, 2014, statement of financial position?
2. Myser, president of Pogi 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 bonus is Php4,650,000. The bonus is deductible for tax purposes and the tax rate is 30%.
Required:
(a) Determine the amount of Myser’s bonus.
(b) Compute the appropriate provision for income tax for the year.
(c) Prepare the entry to record the bonus (which will be paid the following year).
3. Neil 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 the year of delivery. Neil accounts for the containers not returned within the time limit as being sold at the deposit amount. Information for 2014 is as follows:
Required:
(a) How much revenue from container sales should be recognized for 2014?
(b) What is the total amount of Neil Company’s liability for returnable containers at December 31, 2014?
4. Sarigumba Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. To promote the sale of its products, Sarigumba uses two promotion techniques – premiums and warranties.
Premiums
The premium is offered on the recorded and sheet music. Customers receive a coupon for each Php10 spent on recorded music and sheet music. Customers may exchange 200 coupons and Php200 for a CD player. Sarigumba pays Php340 for each CD player and estimates that 60% of the coupons given to customers will be redeemed. A total of 6,500 CD players used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2014.
Warranties
Musical instruments and sound reproduction equipment are sold with a one-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. Replacement parts and labor for warranty work totalled Php1,640,000 during 2014.
Sarigumba also uses the accrual method to account for the warranty and premium costs for financial reporting purposes. Sarigumba’s sales for 2014 totaled Php72,000,000 – Php54,000,000 from musical instruments and sound reproduction equipment and Php18,000,000 from recorded music and sheet music. The balances in the accounts related to warranties and premiums on January 1, 2014, were shown below:
Inventory of premium CD players
Php399,500
Estimated premium claims outstanding
448,000
Estimated liability from warranties
1,360,000
Based on the preceding information, determine the amounts that will be shown on the 2014 financial statements for the following:
(a) Warranty expense
(b) Estimated liability from warranties
(c) Premium expense
(d) Inventory of premium CD players
(e) Estimated premium claims outstanding
5. Your company, Handsome Co., is involved in the situations described below. Handsome’s accounting year ends on December 31, 2014, and its financial statements are authorized for issue on March 20, 2015.
a. Handsome is involved in a lawsuit resulting from a dispute with a customer. On January 28, 2015, judgment was rendered against Handsome in the amount of Php20 million. Handsome plans to appeal the judgment and is unable to predict its outcome though management believes that it will not have a material adverse effect on the company.
b. On April 25, 2015, the Bureau of Internal Revenue (BIR) is in the process of examining Handsome’s tax returns for 2012 and 2013, but has not proposed a deficiency assessment. Management feels an assessment is reasonably possible, and if an assessment is made, an unfavourable settlement of up to Php5 million is reasonably possible.
c. On January 5, 2015, inventory purchased FOB shipping point from a foreign country was detained at that country’s border because of political unrest, The shipment is valued at Php1 million. Handsome’s lawyers have stated that it is probable that Handsome will be able to obtain the shipment.
d. On November 1, 2014, a lawsuit was filed by a disgruntled customer who discovered a safety hazard in one of Handsome’s best-selling products. Handsome’s lawyers feel it is probable that the company will be liable for Php500,000.
e. On December 5, 2014, Handsome initiated a lawsuit seeking Php1 million in damages from a patent infringement.
Required: Determine the appropriate means of reporting each situation.
(Answers will be posted later. This thread will be updated as conditioned.)
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