PROBLEM NO.

The following information relates to Sonic Companys obligations as of

December 31, 2005. For each of the numbered items, determine the amount
if any, that should be reported as current liability in Sonics December 31,
2005 balance sheet.

1. Accounts payable:
Accounts payable per general ledger control amounted to P5,440,000, net
of P240,000 debit balances in suppliers accounts. The unpaid voucher
file included the following items that not had been recorded as of
December 31, 2005:
A Company P224,000 merchandise shipped on December 31, 2005,
FOB destination; received on January 10, 2006.
B, Inc. P192,000 merchandise shipped on December 26, 2005, FOB
shipping point; received on January 16, 2006.
C Super Services P144,000 janitorial services for the three-month
period ending January 31, 2006.
MERALCO P67,200 electric bill covering the period December 16,
2005 to January 15, 2006.

On December 28, 2005, a supplier authorized Sonic to return goods billed

at P160,000 and shipped on December 20, 2005. The goods were returned
by Sonic on December 28, 2005, but the P160,000 credit memo was not
received until January 6, 2006.
a. P5,923,200 c. P5,601,600
b. P5,712,000 d. P5,841,600

2. Payroll:
Items related to Sonics payroll as of December 31, 2005 are:
Accrued salaries and wages P776,000
Payroll deductions for:
Income taxes withheld 56,000
SSS contributions 64,000
Philhealth contributions 16,000
Advances to employees 80,000

a. P776,000 b. P992,000 c. P832,000 d.

P912,000

3. Litigation:
In May, 2005, Sonic became involved in a litigation. The suit is being
contested, but Sonics lawyer believes it is possible that Sonic may be held
liable for damages estimated in the range between P2,000,000 and
P3,000,000, and no amount is a better estimate of potential liability than
any other amount.

a. P0 b. P2,000,000 c. P3,000,000 d.
P2,500,000

4. Bonus obligation:
Sonic Companys president gets an annual bonus of 10% of net income after
bonus and income tax. Assume the tax rate of 30% and the correct income
before bonus and tax is P9,600,000. (Ignore the effects of other given items
on net income.)

a. P722,600 b. P395,000 c. P2,240,000 d.

P628,000

5. Note payable:
A note payable to the Bank of the Philippine Islands for P2,400,000 is
outstanding on December 31, 2005. The note is dated October 1, 2004,
bears interest at 18%, and is payable in three equal annual installment of
P800,000. The first interest and principal payment was made on October 1,
2005.

a. P800,000 b. P908,000 c. P72,000 d. P872,000

6. Purchase commitment:
During 2005, Sonic entered in a non-cancellable commitment to purchase
320,000 units of inventory at fixed price of P5 per unit, delivery to be made
in 2006. On December 31, 2005, the purchase price of this inventory item
had fallen to P4.40 per unit. The goods covered by the purchase contract
were delivered on January 28, 2006.

a. P0 b. P1,600,000 c. P1,408,000 d.
P192,000

7. Deferred taxes:
On December 31, 2005, Sonics deferred income tax account has a 2005
ending credit balance of P772,800, consisting of the following items:
Caused by temporary differences in accounting Deferred tax
For gross profit on installment sales P376,000 Cr.
For depreciation on property and equipment 576,000 Cr
For product warranty expense 179,200 Dr

P772,800 Cr.

a. P772,800 b. P952,000 c. P196,800 d. P0

8. Product warranty:
Sonic has a one year product warranty on selected items in its product line.
The estimated warranty liability on sales made during 2004, which was
outstanding as of December 31, 2004, amounted to P416,000. The warranty
costs on sales made in 2005 are estimated at P1,504,000. Actual warranty
costs incurred during the current 2005 fiscal year are as follows:
Warranty claims honored on 2004 sales P 416,000
Warranty claims honored on 2005 sales 992,000
Total warranty claims honored P1,408,000

a. P0 b. P1,504,000 c. P96,000 d. P512,000

9. Premiums:
To increase sales, Sonic Company inaugurated a promotional campaign on
June 30, 2005. Sonic placed a coupon redeemable for a premium in each
package of product sold. Each premium costs P100. A premium is offered to
customers who send in 5 coupons and a remittance of P30. The distribution
cost per premium is P20. Sonic estimated that only 60% of the coupons
issued will be redeemed. For the six months ended December 31, 2005, the
following is available:
Packages of product sold 160,000
Premiums purchased 16,000
Coupons redeemed 64,000

a. P1,728,000 b. P1,152,000 c. P1,600,000 d.

P576,000

10. Due to Five Six Finance company:

Sonics accounting records show that as of December 31, 2005, P1,280,000
was due to Five Six Finance Company for advances made against
P1,600,000 of trade accounts receivable assigned to the finance company
with recourse.
a. P0 b. P1,600,000 c. P320,000 d.
P1,280,000