Current Liabilities
1. Alhambra Company offers three payment plans on its 12-month contracts. Information on the
three plans and the number of children enrolled in each plan for September 1, 2005 through
August 31, 20
...
Current Liabilities
1. Alhambra Company offers three payment plans on its 12-month contracts. Information on the
three plans and the number of children enrolled in each plan for September 1, 2005 through
August 31, 2006 contract year follows:
Initial payment Monthly fees Number of
Plan per child per child children
#1 P500 P0 15
#2 200 30 12
#3 50 9
36
Alhambra received all initial payments on September 1, 2005, and P3,240 of monthly fees during the
period September 1 through December 31, 2005. In its December 31, 2005 balance sheet, what
amount should Alhambra report as deferred revenue?
a. 9,900
b. 3,300
c. 6,600
d. 4,380
C = initial payments (500 x 15) + 200 x 12)= 9,900 x 8/12 = 6,600
2. The following are taken from the records of ABC Co. as of year-end.
Accounts payable 2,000 SSS contributions payable 6,000
Utilities payable 7,000 Cash dividends payable 4,000
Accrued interest expense 6,000 Property dividends payable 7,000
Advances from customers 1,000 Share dividends payable 3,000
Unearned rent 9,000 Lease liability 35,000
Warranty obligations 5,000 Bonds payable 120,000
Income taxes payable 2,000 Discount on bonds payable (15,000)
Preference shares issued 10,000 Security deposit 2,000
Constructive obligation 11,000 Redeemable preferences
shares issued 14,000
Obligation to deliver a variable
number of own shares worth a
fixed amount of cash 10,000
Unearned interest on
receivables 3,000
How much is the total financial liabilities to be disclosed in the notes?
a. 172,000
b. 185,000
c. 192,000
d. 225,000
Solution:
P a g e | 2
Accounts payable 2,000
Utilities payable 7,000
Accrued interest expense 6,000
Obligation to deliver a variable number of own shares
worth a fixed amount of cash 10,000
Cash dividends payable 4,000
Finance lease liability 35,000
Bonds payable 120,000
Discount on bonds payable (15,000)
Security deposit 2,000
Redeemable preference shares 14,000
Total financial liabilities 185,000
Notes Payable
3. Entity A purchases a TV set on a 6-month installment basis. The installment price is ₱120,000.
However, if the TV set is purchased outright in cash, the cash price would have been ₱100,000.
The payable will be initially recognized at
a. 100,000
b. 120,000
c. Present value of 120,000 discounted at the current market rate using 6 periods
d. None of these
4. Entity A purchases goods for ₱250,000 under a special credit period of 1 year. The seller
normally sells the goods for ₱220,000 with a credit period of one month or with a ₱5,000
discount for cash basis (i.e., outright payment in cash). The initial measurement of the payable is
a. 250,000
b. 220,000
c. 215,000
d. 200,000
Normal purchase price with credit period of one month 220,000
Discount for cash on delivery (5,000)
Cash price equivalent of the goods purchased 215,000
5. On January 1, 20x1, ABC Co. acquired transportation equipment in exchange for ₱100,000 cash
and ₱1,000,000, noninterest-bearing note payable due in 4 equal annual installments. The first
installment is due on January 1, 20x1. The succeeding installment payments are due every
December 31. The prevailing rate of interest for this type of note is 12%. How much is the interest
income in 20x1?
a. 120,000
b. 102,055
c. 72,055
d. 50,702
Future cash flows – annual installments (₱1M ÷ 4) 250,000
Multiply by: PV of an annuity due of ₱1 @12%, n=4 3.401830
Present value of note payable - Jan. 1, 20x1 850,458
Amortization table: (Installment)
P a g e | 3
Date Payments
Interest
expense Amortization Present value
Jan. 1, 20x1 850,458
Jan. 1, 20x1 250,000 - 250,000 600,458
Dec. 31, 20x1 250,000 72,055 177,945 422,513
Dec. 31, 20x2 250,000 50,702 199,298 223,214
Dec. 31, 20x3 250,000 26,786 223,214 0
6. On January 1, 20x1, ABC Co. acquired machinery by issuing a 3-year, ₱1,200,000 noninterestbearing note payable due as follows:
Date Amount of installment
December 31, 20x1 600,000
December 31, 20x2 400,000
December 31, 20x3 200,000
Total 1,200,000
The prevailing rate of interest for this type of note is 10%.
How much is the carrying amount of the note on December 31, 20x1?
a. 1,026,296
b. 867,312
c. 528,926
d. 489,762
Date Collections PV of ₱1 @ 10%, n= 1 to 3* Present value
Dec. 31, 20x1 600,000 0.90909 545,455
Dec. 31, 20x2 400,000 0.82645 330,579
Dec. 31, 20x3 200,000 0.75131 150,263
Totals 1,200,000 1,026,296
* PV of ₱1 @10%: n=1 is 0.90909; n=2 is 0.82645; and n=3 is 0.75131
Amortization table: (Installment)
Date Payments Interest expense Amortization Present value
Jan. 1, 20x1 1,026,296
Dec. 31, 20x1 600,000 102,630 497,370 528,926
Dec. 31, 20x2 400,000 52,893 347,107 181,818
Dec. 31, 20x3 200,000 18,182 181,818 0
7. On January 1, 20x1, ABC Co. issued a ₱1,200,000 noninterest-bearing note due on December 31,
20x1 in exchange for inventory with a list price of ₱1,100,000 and a cash price of ₱1,000,000. How
much is the carrying amount of the note on December 31, 20x1?
a. 987,234
b. 1,000,000
c. 1,062,695
d. 1,129,321
First trial: (at 10%)
Future cash flows x PV factor at x% = PV of note
1,200,000 X PV of ₱1 @ 10%, n=3 = 1,000,000
(1,200,000 x 0.751315) = 901,578 is not equal to 1,000,000
P a g e | 4
We need a substantially higher amount of present value. Therefore, we need to decrease
substantially the interest rate. Let’s try 6%.
Second trial: (at 6%)
Future cash flows x PV factor at x% = PV of note
1,200,000 X PV factor at 6%, n=3 = 1,000,000
(1,200,000 x 0.839619) = 1,007,543 is not equal to 1,000,000
We need a slightly lower amount of present value. Therefore, we need to increase slightly the
interest rate. Let’s try 7%.
Third trial: (at 7%)
Future cash flows x PV factor at x% = PV of note
1,200,000 X PV factor at 7%, n=3 = 1,000,000
(1,200,000 x 0.816298) = 979,558 is not equal to 1,000,000
In here, we need to perform interpolation. Looking at the values derived above, we can
reasonably expect that the effective interest rate is a rate between 6% and 7%.
To perform the interpolation, we will use the following formula:
x% - 6%
7% - 6%
Where: x% again is the effective interest rate.
1,000,000 - 1,007,543
=
(7,543)
=
0.269
979,558 - 1,007,543 (27,985) 5
The amount computed is added to 6% to derive the effective interest rate. The effective
interest rate is 6.2695% (6% + .2695%).
Date Interest income Unearned interest Present value
Jan. 1, 20x1 200,000 1,000,000
Dec. 31, 20x1 62,695 137,305 1,062,695
Dec. 31, 20x2 66,626 70,679 1,129,321
Dec. 31, 20x3 70,803 (124) 1,200,124
8. On January 1, 20x1, ABC Co. issued a 3-year, ₱1,000,000 noninterest-bearing note payable to XYZ,
Inc., a related party. The prevailing interest for similar type of obligation is 12%.The proceeds
received from the note is ₱1,000,000, equal to the face amount. How much is the “Day 1”
difference? Gain (Loss)
a. 288,220
b. (288,220)
c. 222,880
d. (222,880)
Future cash flow 1,000,000
Multiply by: PV of ₱1, @12%, n=3 0.71178
Present value 711,780
The entry to record the note is as follows:
P a g e | 5
Jan. 1,
20x1
Cash
Discount on note payable (1M – 711,780)
Note payable
Unrealized gain – “Day 1” Difference
1,000,000
288,220
1,000,000
288,220
9. On January 1, 20x1, ABC Co. issued a 3-year, 3%, ₱1,000,000 note payable in exchange for a
machine. Principal is due on January 1, 20x4 but interest is due annually every January 1. The
prevailing interest rate for this type of note is 12%. How much is the carrying amount of the note
on December 31, 20x1?
a. 783,835
b. 883,664
c. 847,895
d. 919,643
Future cash flows Present value factors @12%, n=3 Present value
Principal 1,000,000 0.71178 a
711,780
Annual interest (1M x 3%) 30,000 2.40183 b 72,055
Total 783,835
a
(PV of ₱1 @12%, n=3)
b (PV of ordinary annuity of ₱1 @12%, n=3
Amortization table: (Installment)
Date
Payments for
interests Interest expense
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