Chapter 1 – Liabilities Problems

Problem 1-1 (IAA)

On December 31, 2020, Glare Company provided the following information:
Accounts payable, including deposits and advances from customer of P250,000 1,250,000
Notes payable, including note payable to bank due on December 31, 2022 of P500,000 1,500,000
Share dividend payable (equity) 400,000
Credit balances in customers’ accounts 200,000
Serial bonds payable in semiannual installment of P500,000 5,000,000
Accrued interest on bonds payable 150,000
Contested BIR tax assessment – possible obligation 300,000
Unearned rent income 100,000

Required:
Compute the total current liabilities on December 31, 2020.
Accounts payable (1,250,000 – 250,000 A/R with credit balance) 1,000,000
Deposits and advances from customers 250,000
Notes payable (1,500,000 – 500,000) 1,000,000
Credit balances in customers’ accounts 200,000
Serial bonds payable (500,000 × 2) 1,000,000
Accrued interest on bonds payable 150,000
Unearned rent income 100,000
Total current liabilities 3,700,000

Problem 1-2 (IAA)

Easy Company provided the following information on December 31, 2020:
Notes payable:
Trade 3,000,000
Bank loans 2,000,000
Advances from officers 500,000
Accounts payable – trade 4,000,000
Bank overdraft 300,000
Dividends payable 1,000,000
Withholding tax payable 100,000
Mortgage payable (long-term) 3,800,000
Income tax payable 800,000
Estimated warranty liability 600,000
Estimated damages payable by reason of breach of contract 700,000
Accrued liabilities 900,000
Estimated premium liability 200,000
Claim for increase in wages by employees covered in a pending lawsuit 3,500,000
Contract entered into for the construction of building (non-current) 5,000,000

Required:
Compute the total current liabilities on December 31, 2020.
Note payable – trade 3,000,000
Note payable – bank 2,000,000
Note payable – officers 500,000
Accounts payable – trade 4,000,000
Bank overdraft 300,000
Dividends payable 1,000,000
Withholding tax payable 100,000
Income tax payable 800,000
Estimated warranty liability 600,000
Estimated damages payable 700,000
Accrued liabilities 900,000
Estimated premium liability 200,000
Total current liabilities 14,100,000
Chapter 1 – Liabilities Problems

Problem 1-3 (IAA)

Manchester Company provided the following information on December 31, 2020:
Income taxes withheld from employees 900,000
Cash balance at First State Bank 2,500,000
Cash overdraft at Harbor Bank 1,300,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties on merchandise previously sold 500,000
Estimated damages as a result of unsatisfactory performance on a contract 1,500,000
Accounts payable 3,000,000
Deferred serial bonds, issued at par and bearing interest at 12% payable in
semiannual installment of P500,000 due April 1 and October 1 of each year, last
bond to be paid on October 1, 2026. Interest is also paid semiannually. 5,000,000
Stock dividend payable (shareholders’ equity, an addition to share capital) 2,000,000

Required:
Compute the total current liabilities on December 31, 2020.
Employee income taxes withheld 900,000
Cash overdraft 1,300,000
Accounts receivable with credit balance 750,000
Estimated warranty liability 500,000
Estimated damages payable 1,500,000
Accounts payable 3,000,000
Accrued interest on bonds payable from October 1 to December 31, 2020
(5,000,000 × 12% × 3/12) 150,000
Total current liabilities 8,100,000
The bonds will be paid over 5 years because the semiannual payment is P500,000. Since the last bond will be paid on
October 1, 2026, the first bond will be paid on April 1, 2022. Accordingly, there is no currently maturing bond in 2021.
The stock dividend payable is not an accounting liability but presented as part of shareholders' equity as an addition to
share capital.

Problem 1-4 (AICPA Adapted)

Multiple Company provided the following information on December 31, 2020:
Accounts payable after deducting debit balances in suppliers’ accounts of P100,000 500,000
Accrued liabilities 50,000
Note payable – due March 31, 2021 1,000,000
Note payable – due May 1, 2021 800,000
Bonds payable – due December 31, 2022 2,000,000
On March 1, 2021 before the 2020 financial statements were issued, the note payable of P1,000,000 was replaced by an
18-month note for the same amount.
The entity is considering similar action on the P800,000 note due on May 1, 2021. The financial statements were issued
on March 31, 2021.

Required:
1. Compute total current liabilities.
2. Compute total noncurrent liabilities.
Accounts payable (500,000 + 100,000) 600,000
Accrued liabilities 50,000
Note payable – refinanced 1,000,000
Note payable – due May 1, 2021 800,000
Total current liabilities 2,450,000
Noncurrent liability:
Bonds payable, due December 31, 2021 2,000,000
Chapter 1 – Liabilities Problems

Problem 1-5 (IAA)

On December 31, 2020, Cordillera Company reported the following liabilities:
Note payable – 9% 3,000,000
Note payable – 8% 6,000,000
Note payable – 10% 4,000,000
Note payable – 11% 5,000,000
The 9% note payable is noncancelable and matures on July 31, 2021. Sufficient cash is expected to be available to retire
the note at maturity.
The 8% note payable matures on May 31, 2026 but the creditor has the option of calling the note or demanding payment
on June 30, 2021.
However, the call option is not expected to be exercised given the prevailing market condition.
The 10% note payable is due on March 31, 2022. A debt covenant requires Cordillera Company to maintain current
assets at least equal to 150% of current liabilities.
On December 31, 2020, Cordillera Company is in violation of this covenant.
However, Cordillera Company obtained a waiver from the creditor until June 2021 having convinced the creditor that
Cordillera's normal 2 to 1 ratio of current assets to current liabilities will be reestablished during the first half of 2021.
The 11% note payable matures on June 30, 2021. On January 31, 2021 before the issuance of the 2020 financial
statements, the note payable was refinanced on a long-term basis.

Required:
Explain the appropriate classification of the notes payable as current or noncurrent in the statement of financial position
on December 31, 2020.
Current liability: P3,000,000
The debt should be reported as a current liability because it is payable in the upcoming year and will not be refinanced
with long-term obligations.
Current liability: P6,000,000
The requirement to reclassify currently maturing debt as a current liability includes debt that is callable by the creditor in
the upcoming year – even if the debt is not expected to be called.
Noncurrent liability: P4,000,000
The current liability classification includes situation in which the creditor has the right to demand payment because an
existing violation of a provision of the debt agreement makes it callable unless it is probable the violation will be corrected
within the grace period. In this case, the existing violation is expected to be corrected within 6 months and therefore the
liability should be classified as noncurrent.
Current liability: P5,000,000
The note payable was refinanced on a long-term basis on January 31, 2021 after the end of the current reporting period.
Thus, the note payable should still be classified as current liability.
Chapter 1 – Liabilities Problems

Problem 1-6 (IAA)

Intercon Company is planning to refinance certain short-term obligations on a long term basis. The 2020 financial
statements are issued on March 15, 2021.
On December 31, 2020, before reclassification of short-term debt, the liabilities are:
Accounts payable 7,000,000
Note payable – bank 12,000,000
Accrued expenses 4,000,000
Mortgage payable 4,000,000
Note payable – due in 2022 3,000,000
The entity intends to refinance P9,000,000 of the P12,000,000 bank note payable on a long term basis.
Although the entire P12,000,000 is due on June 30, 2021, the bank has informally agreed to extend the maturity date for
P6,000,000 to June 30, 2022, if necessary.
On January 31, 2021, the entity issued share capital for P4,000,000, net of issue costs and underwriting fees of P500,000.
On February 15, 2021, the entity entered into a financing agreement with a financially capable commercial bank,
permitting the entity to borrow up to P3,000,000.
Borrowings available at the entity's option on April 1, 2021 will mature five years after the loan date.
The entity used the entire proceeds of the issue of share capital to retire part of the current note payable and now
intended to draw down the entire available commitment of the five-year debt on April 1, 2021.

Required:
1. Present the liabilities on December 31, 2020.
2. Describe any financial statement disclosures.
1. Current liabilities:
Accounts payable 7,000,000
Note payable – bank 12,000,000
Accrued expenses 4,000,000 23,000,000

Noncurrent liabilities:
Mortgage payable 4,000,000
Note payable due 2022 3,000,000 7,000,000
Total liabilities 30,000,000

2. The note payable to bank is paid from the proceeds of the issuance of share capital of P4,000,000 on January 31.
2021 and the availment of a financing agreement on February 15, 2021 with a financially capable commercial bank on
April 1, 2021 in the amount of P3,000,000. Nevertheless, the note payable should continue to be classified as current.
Chapter 1 – Liabilities Problems

Problem 1-7 (IAA)

Cavalier Company provided the following information on December 31, 2020:

Accounts payable 7,000,000

Note payable – bank 12,000,000
Accrued expenses 4,000,000
Mortgage payable 4,000,000
Note payable – due in 2022 3,000,000

* Bank notes payable include two separate notes payable to First Bank.

A P3,000,000, 10% note issued March 1, 2019, payable on demand. Interest is payable every six
months.

A one-year, P5,000,000, 11% note issued January 2, 2020. On December 31, 2020, the entity
negotiated a written agreement with First Bank to replace the note with a 2-year, P5,000,000, 10%
note to be issued January 2, 2021.

* The 10% mortgage note was issued October 1, 2019 with a term of 10 years.

Terms of the note give the holder the right to demand immediate payment if the entity fails to make a
monthly interest payment within 10 days of the date the payment is due.

On December 31, 2020, the entity is three months behind in paying the required interest payment.

* The bonds payable are 10-year, 8% bonds, issued June 30, 2011. Interest is payable semiannually
on June 30 and December 31.

Required:
Compute the total current liabilities on December 31, 2020.

Accounts payable 6,500,000

Note payable – bank 3,000,000
Interest payable 150,000
Mortgage not payable 2,000,000
Bonds payable 4,000,000
Total current liabilities 15,650,000
Chapter 1 – Liabilities Problems

Problem 1-8 (IAA)

Burma Company disclosed the following information about liabilities at year-end:

Accounts payable, after deducting debit balances in suppliers’ accounts amounting to

P100,000 4,000,000
Accrued expenses 1,500,000
Credit balances of customers’ accounts 500,000
Share dividend payable 1,000,000
Claims for increase in wages and allowance by employees of the entity, covered in a
pending lawsuit 400,000
Estimated expenses in redeeming prize coupons presented by customers 600,000

What total amount should be presented as current liabilities at year-end?

Note payable – trade 3,000,000
Note payable – bank 2,000,000
Note payable – officers 500,000
Accounts payable – trade 4,000,000
Bank overdraft 300,000
Dividends payable 1,000,000
Withholding tax payable 100,000
Income tax payable 800,000
Estimated warranty liability 600,000
Estimated damages payable 700,000
Accrued liabilities 900,000
Estimated premium liability 200,000
Total current liabilities 14,100,000