Problem 8

Abam Corporation is selling audio and video appliances. The company’s fiscal year ends on
March 31. The following information relates the obligations of the company as of March 31,
2007.

Notes payable
Abam has signed several long- term notes with financial institutions. The maturities of
these notes are given below. The total unpaid interest for all of these notes amount to
P340,000 on March 31, 2007.

Due date Amount

April 31, 2007 P 600,000
July 31, 2007 900,000
September 1, 2007 450,000
February 1, 2008 450,000
April 1, 2008- March 31, 2011 2,700,000
P5,100,000
Estimated warranties:
Abam has one year product warranty on some selected items. The estimated warranty
liability on sales made during the 2005-2006 fiscal year and still outstanding as of March
31, 2006, amounted to P252,000. The warranty costs on sales made from April 1, 2006 to
March 31, 2007 are estimated at P630,000. The actual warranty costs incurred during
2006- 2007 fiscal year as follows:

Warranty claims honored on 2005- 2006 P252,000

Warranty claims honored on 2006- 2007 sales 285,000
Total P537,000

Trade payables
Accounts payable for supplies, goods and services purchases on open account amount to
P560,000 as of March 31, 2007.

Dividends
On march 10, 2007, Abam’s board of directors declared a cash dividend of P0.30 per
common share and a 10% common stock dividend. Both dividends were to be distributed
on Aptil 5, 2007 to common stockholders on record at the close of business on March 31,
2007. As of March 31, 2007, Abams has 5 million, P2 par value common stock shares issued
and outstanding.

Bonds payable
Abams issued P5,000,000, 12% bonds, on October 1, 2001 at 96. The bonds will mature on
October 1, 2011. Interest is paid semi- annually on October 1 and April 1. Abams uses
straight line method to amortize bond discount.

Based on the forgoing information, determine the adjusted balances of the following as of
March 31, 2007:
Questions
1. Estimated warranty payable
a. P252,000 b. P345,000 c. P630,000 d. P882,000

2. Unamortized bond discount

a. P110,000 b. P200,000 c. P100,000 d. P90,000

3. Bond interest payable

a. P0 b. P300,000 c. P150,000 d. P250,000

4. Total current liabilities

a. P6,445,000 b. P5,105,000 c. P5,445,000 d. P3,945,000

5. Total noncurrent liabilities

a. P7,700,000 b. P7,590,000 c. P7,500,000 d. P7,610,000

Solution
1. B
Total Warranty Expense 882,000
Less: Paid warranty 537,000
Est. liability 345,000
2. D
Discount on BP (P5M x 4%) 200,000
Amortization (200,000/120 x 66) 110,000
(Oct. 1, 1998 – March 31, 2004)______
Unamortized discount on BP 90,000
3. D P5M x 12% x 6/12 = P300,000
4. C
Notes payable 2,400,000
Interest payable 640,000 (340,000 + 300,000)
Est. liability 345,000
Trade payable 560,000
Dividends payable 1,500,000
Total Current Liability 5,445,000
5. D
Notes payable 2,700,000
Bonds payable 4,910,000
Total 7,610,000