UNIVERSITY OF LUZON

PEREZ BLVD. DAGUPAN CITY

COLLEGE OF ACCOUNTANCY
S.Y 2019-2020- 1ST SEM
FAR 2- SEATWORK 1
NAME: ______________________________________ DATE & TIME: JULY 4, 2019, 1:00-2:30
Direction: Encircle the best answer. 30 minutes to answer. No solution required.

1. Hydration-on-the-Go makes stylish water bottles. Each water bottle includes a one-year warranty against
manufacturing defects. Based on five years’ worth of data, the company estimates that 3% of the water bottles sold
will be returned because of a defect. When this occurs the company replaces the water bottle. Each water bottle costs
P4 to produce. In 2019, the company sold 25,000 water bottles. Record the amount of warranty expense that the
company should record for 2019.

2. During 2017, Younger Co. introduced a new line of machines that carry a three-year warranty against manufacturer’s
defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 4% in the year
after sale, and 6% in the second year after sale. Sales and actual warranty expenditures for the first three-year period
were as follows:

Sales Actual Warranty Expenditures

2017 600,000 9,000
2018 1,500,000 45,000
2019 2,100,000 135,000
P4,200,000 P189,000
What amount should Younger report as a liability at December 31, 2019?

a. P0 c. P204,000
b. P15,000 d. P315,000

3. Milner Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Milner
Frosted Flakes boxes and P1.00. The company estimates that 60% of the boxtops will be redeemed. In 2019, the
company sold 675,000 boxes of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If
the bowls cost Milner Company P2.50 each, how much liability for outstanding premiums should be recorded at the
end of 2019?
a. P25,000 c. P62,500
b. P37,500 d. P87,500

ANSWER THE FOLLOWING QUESTIONS USING THE INFORMATION BELOW:

Kent Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash.
The leashes cost Kent P2.00 each. Kent estimates that 40 percent of the coupons will be redeemed. Data for 2018 and
2019 are as follows:
2018 2019
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

4. The premium expense for 2018 is

a. P25,000 c. P35,000
b. P30,000 d. P50,000

5. The estimated liability for premiums at December 31, 2018 is

a. P7,500 c. P17,500
b. P10,000 d. P20,000

6. The estimated liability for premiums at December 31, 2019 is

 UNIVERSITY OF LUZON
PEREZ BLVD. DAGUPAN CITY
COLLEGE OF ACCOUNTANCY
S.Y 2019-2020- 1ST SEM
a. P11,250 c. P22,500
b. P21,250 d. P42,500

7. Vernon 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. Vernon's lawyer states that it is
probable that Vernon will lose the suit and be found liable for a judgment costing Vernon anywhere from P1,200,000
to P6,000,000. However, the lawyer states that the most probable cost is P3,600,000. As a result of the above facts,
Vernon should accrue
a. A loss contingency of P1,200,000 and disclose an additional contingency of up to P4,800,000
b. A loss contingency of P3,600,000 and disclose an additional contingency of up to P2,400,000
c. A loss contingency of P3,600,000 but not disclose any additional contingency
d. No loss contingency but disclose a contingency of P1,200,000 to P6,000,000

8. On January 3, 2019, Alton Corp. owned a machine that had cost P200,000. The accumulated depreciation was
P120,000, estimated salvage value was P12,000, and fair market value was P320,000. On January 4, 2019, this
machine was irreparably damaged by Reed Corp. and became worthless. In October 2019, a court awarded damages
of P320,000 against Reed in favor of Alton. At December 31, 2019, the final outcome of this case was awaiting
appeal and was, therefore, uncertain. However, in the opinion of Alton’s attorney, Reed’s appeal will be denied. At
December 31, 2019, what amount should Alton accrue for this gain contingency?
a. P320,000 c. P200,000
b. P260,000 d. P0

9. In 2018, 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 2018 and 2019 are presented below:

2018 2019
Sales P300,000 P400,000
Actual warranty expenditures 10,000 20,000
What is the estimated warranty liability at the end of 2019?
a. P19,000 c. P49,000
b. P29,000 d. P8,000

10. In March 2019, an explosion occurred at Howe Co.'s plant, causing damage to area properties. By May 2019, no
claims had yet been asserted against Howe. However, Howe's management and legal counsel concluded that it was
reasonably possible that Howe would be held responsible for negligence, and that P4,000,000 would be a reasonable
estimate of the damages. Howe's P5,000,000 comprehensive public liability policy contains a P400,000 deductible
clause. In Howe's December 31, 2018 financial statements, for which the auditor's fieldwork was completed in April
2019, how should this casualty be reported?
a. As a note disclosing a possible liability of P4,000,000
b. As an accrued liability of P400,000
c. As a note disclosing a possible liability of P400,000
d. No note disclosure of accrual is required for 2018 because the event occurred in 2019