Review Exercise 1. Moore Company estimates its annual warranty expense as 2% of annual net sales.

The following data relate to the calendar year 2004: Net sales Warranty liability account Balance, Dec. 31, 2004 Balance, Dec. 31, 2004 $1,800,000 $ 6,000 30,000 debit before adjustment credit after adjustment

Which one of the following entries was made to record the 2004 estimated warranty expense? a. Warranty Expense .............................................................. 36,000 Retained Earnings (prior-period adjustment) ............ 6,000 Warranty Liability ...................................................... 30,000 b. Warranty Expense .............................................................. 30,000 Retained Earnings (prior-period adjustment) ...................... 6,000 Warranty Liability ...................................................... 36,000 c. Warranty Expense .............................................................. 24,000 Warranty Liability ...................................................... 24,000 d. Warranty Expense .............................................................. 36,000 Warranty Liability ...................................................... 36,000 1. In 2004, Slimon Corporation began selling a new line of products that carry a two-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows: First year of warranty 2% Second year of warranty 5% Sales and actual warranty expenditures for 2004 and 2005 are presented below: 2004 2005 Sales $600,000 $800,000 Actual warranty expenditures 20,000 40,000 What is the estimated warranty liability at the end of 2005? a. $38,000. b. $58,000. c. $98,000. d. $16,000. 2. On January 1, 2004, Bleeker Co. issued eight-year bonds with a face value of $2,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% .......................................... Present value of 1 for 8 periods at 8% .......................................... Present value of 1 for 16 periods at 3% ......................................... Present value of 1 for 16 periods at 4% ......................................... Present value of annuity for 8 periods at 6% ................................. Present value of annuity for 8 periods at 8% ................................. Present value of annuity for 16 periods at 3% ............................... Present value of annuity for 16 periods at 4% ............................... .627 .540 .623 .534 6.210 5.747 12.561 11.652

 The present value of the principal is a. $1,068,000. b. $1,080,000. c. $1,246,000. d. $1,254,000. The present value of the interest is a. $689,640. b. $699,120. c. $745,200. d. $753,660. The issue price of the bonds is a. $1,767,120. b. $1,769,640. c. $1,779,120. d. $1,999,200. 4. On July 1, 2004, Risen Co. issued 500 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2004 and mature on April 1, 2014. Interest is payable semiannually on April 1 and October 1. What amount did Risen receive from the bond issuance? a. $507,500 b. $500,000 c. $495,000 d. $482,500 5. The 10% bonds payable of Jacobs Company had a net carrying amount of $1,140,000 on December 31, 2004. The bonds, which had a face value of $1,200,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2005, several years before their maturity, Jacobs retired the bonds at 102. The interest payment on July 1, 2005 was made as scheduled. What is the loss that Jacobs should record on the early retirement of the bonds on July 2, 2005? a. $24,000. b. $75,600. c. $67,200. d. $84,000. 6. Keane Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Keane $3.00 each. Keane estimates that 40 percent of the coupons will be redeemed. Data for 2004 and 2005 are as follows: Bags of dog food sold Leashes purchased Coupons redeemed 2004 500,000 18,000 120,000 2005 600,000 22,000 150,000

 The premium expense for 2004 is a. $37,500. b. $45,000. c. $52,500. d. $75,000. The estimated liability for premiums at December 31, 2004 is a. $11,250. b. $15,000. c. $26,250. d. $30,000. The estimated liability for premiums at December 31, 2005 is a. $16,875. b. $31,875. c. $33,750. d. $63,750. 7. Unruh Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Unruh's lawyer states that it is probable that Unruh will lose the suit and be found liable for a judgment costing Unruh anywhere from $800,000 to $4,000,000. However, the lawyer states that the most probable cost is $2,400,000. As a result of the above facts, Unruh should accrue a. a loss contingency of $800,000 and disclose an additional contingency of up to $3,200,000. b. a loss contingency of $2,400,000 and disclose an additional contingency of up to $1,600,000. c. a loss contingency of $2,400,000 but not disclose any additional contingency. d. no loss contingency but disclose a contingency of $800,000 to $4,000,000.

8. The effective interest on a 12-month, zero-interest-bearing note payable of $500,000, discounted at the bank at 12% is a. 13.04%. b. 12%. c. 8.93%. d. 13.64%.

ANSWERS 1. D 1. A 2. A B A 4. A 5. B 6. D D D 7. B 8. D

Junior Philippine Institute of Accountants Financial Accounting 2 Review Fitz Music Company carries a wide variety of musical instruments, sound reproduction equipment, recorded music and sheet music. To promote sale, Fitz uses two promotion techniques premiums and warranties. The premium is offered on the recorded and sheet music. Customers receive a coupon for each P10 spent on recorded music and sheet music. Customers may exchange 200 coupons and P200 for a CD player. Fitz pays 340 for each CD player and estimates that 60% of the coupon will be redeemed. A total of 6,500 CD players used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2010. Musical instrument and sound reproduction equipment are sold with a one-year warranty for replacement of parts and labor. The estimated warranty cost is 2% of sales. Replacement parts and labor for warranty work totaled P1,640,000 during 2010. Fitz sales for 2010 totaled P72,000,000 P54,000,000 from musical instruments and sound reproduction equipment and P18,000,000 from recorded and sheet music. The balances in the accounts related to warranties and premiums on Jan.1,2010 were: Inventory of premium CD players P399,500 Estimated premium claims outstanding 448,000 Estimated liability from warranties 1,360,000 Based on the preceding information, determine the amounts that will be shown on the 2010 financial statemens: 1. Warranty Expense a. 1,640,000 b. 1,080,000 c. 800,000 d. 360,000

2. Estimated liability from warranties a. 1,920,000 c. 240,000 b. 1,080,000 d. 800,000 3. Premium expense a. 1,836,000 b. 840,000 c. 756,000 d. 2,189,500

4. Inventory of premium CD players a. 399,500 c. 2,210,000 b. 569,500 d. 739,500 5, Estimated premium claims outstanding a. 364,000 c. 756,000 b. 840,000 d. 672,000