Question

Problem Solving: Please answer the following problems showing your solutions, Double Rule and Encircle Final Answers. This must be done thru your handwriting placed in a Bond Paper. THANKYOU!!!

1. On July 1, 2019 J Corp acquired a machinery worth Php 2,500,000 from D Co. Term of the contract calls for a downpayment of Php 500,000 and signing a 2 year 10% note payable for the balance. Interest is payable quarterly. The existing loan agreement does not carry a provision to refinance. During September, J Corp was experiencing financial difficulty due to COVID-19 and was unable to pay the periodic interest. a. What amount of current liability should J Corp report in its December 31, 2019 balance sheet assuming D Co. agreed at balance sheet date not to demand payment as a consequence of the breach? b. What amount of current liability should J Corp report in its December 31, 2019 balance sheet assuming D Co. agreed to provide a grace period ending at least twelve months to rectify the breach?

2. A truck owned and operated by B Company was involved in an accident with an auto driven by Julia on January 12, 2019. B Company received notice on April 24, 2019 of a lawsuit for Php 800,000 damages for a personal injury suffered by Julia. B Company counsel believes it is reasonably possible that Julia will be successful against the company for an estimated amount in the range between Php 100,000 and Php 400,000. No amount within this range is a better estimate of potential damages than any other amount. It is expected that the lawsuit will be adjudicated in the latter part of 2020. What amount of loss should B Company accrue at December 31, 2019?

3. In November and December of 2020, adventure Company received Php 792,000 for 1,000, 3 year subscriptions at Php 264 per issue per year, starting with the January 2006 issue. adventure elected to include the Php 792,000 in its 2020 income statement for tax purposes. What amount should advneture report in its 2020 balance sheet as unearned subscription revenue?

4. In November and December 2020, Sweet Company, a newly organized magazine publisher, received Php 72,000 for 1,000 three year subscriptions at Php 24,000 per year, starting with the November 2020 issue of the magazine. Sweet elected to include the entire Php 72,000 in its 2020 income tax return. How much should Sweet report in its 2020 balance sheet as unearned subscriptions?

5. During 2019, S Company sold 500,000 boxes of hotcakes under a new sales promotional program. Each box contains one coupon, which when submitted with Php 16, entitles the customer to a baking pan. S Company pays Php 20 per pan and Php 2 handling and shipping. S Company estimates that 80% of the coupons will be redeemed, even though only 300,000 coupons had been processed during 2019. What amount should S Company report as liability for unredeemed coupons at December 31, 2019?

Answer 1

1.As per the accounting standards, any amount payable with in 12 months or less ae to be treated as current liability. Also liability refers to that amount which is due and payable. In the current scenario the loan was taken with terms for payment of quartelry interest. As per the accrual concept liability is to be paid when its due. Even if the garce period is allowe, it doesnt mean that the nature of liabiulity changes.

Grace period only allows some time to pay without penalty but doesot change the nature of liability. So, interest due for 2 quarters will be said as current liability as on 31st december.Grace period of 12 months is not bounding that he shall pay after 12 months. He can pay anytime within 12 months. Current liability =2000000*10%*2/4 =100000

2. As per the accounting standards, we shall make povision of the future losses and expenses which can be estimated and there is certaininty of occurence of that event. In case if such event is doubtful, then we will decide the nature and conditions of the expense and make provision accordingly.

In the given case, julia has filed a suit on the company for the damages because of an accident she met. But the company estimates the expense to range between 100000 to 400000 against the demand by julia for 800000. In this case which is pending before judiciary however doesnot give any certainity of such expense to occur. Inspite of the fact that company has estimated its part but the same is in case they loose. It can be shown as contingent liability and no provision of contingent liability is made.

3. Unearned subscription revenue will be 264*1000*2 = 528000

4. Estimated liability shall be booked because it is certain that coupons will come to copmany. So, liability to be booked =300000*80%*(20+2) =5280000