ee lL L=——<_— i;i i~- CHAPTER J PREMIUM LIABILITY Problem 1-1 (AICPA Adapted) ; In an effort to increase sales, Mill Company inaugurated a cales promotional campaign on June 30, 2018. The entity placed a coupon redeemuble for a premium in each package of cereal sold. Each premium cost P20 and five coupons must be ted by a customer to receive a jum, The entity estimated that only 60% of the coupons issued would be redecenes For the six months ended December 31, 2018, the following information is available: of coreal sold 160,000 Preatn packet 12,000 (Coupons redeemed 46,000 1. What is the premium expense for 2018? & 640,000 b.) 384,000 ‘c. 240,000 d 160,000 2. Whatis the estimated liability for premiums on December 31,2018? a. 160,000 b. 224,000 288,000 a 384,000 Sohation J-] Question | Answer b Question 2 Answer b ‘Coupons to be redeemed (160,000 x 60%) 96,000 Coupons redeemed (40,000) Coupons outstanding 56,600 Premium expense (96,000 / 5 = 19,200 x 20) 384,000 Estimated liability (56,000 5 = 11,200 x 20) 224,000 1 ae eeeProblem 1-3(AICPAAdapeed) In packages of the products, Curran Company ne! pany included coupons gg ibe current YORE gl progres. that may be presented at real stores to obtain discounts on oer Desce ee sales pomaioll Pr eid the customer 10a Silene coupon rr rhlmbursed forthe face amount of coupons redeemed ekg pa sndP' forhandng nd shipping and pies 10° of that amount fr handling cos id PSO pet PD yl be redeemed, even though The entity honored requests for coupon redemy tion by retailers up Sissel eel co eng Oe to three months after the consumer expiration date ny 300,000 coupons forthe current year? ‘The entity estimated that 70% ofall coupons issued would ultimately 1. What isthe premium expense be redeemed. The consumer expiration dats is December 31, 2018. 1 6,000,000 The total face amount of coupons issued was P600,000 and the total & 5'S00.000 Payments to retailers during 2018 amounted to P220,000, e Soe 1. Whatis the premium expense for 2018? © 290m" ability for waredeemed a 600,000 2. What amount should be reported as liability for b. 180,000 at year-end? «462,000 aaa 4. 198,000 a. 1,000, | 000 2. What amount should be reported as ibility for utedoemed coupons > Sooo. a December 31, 2018? 4. 5,000,000 | 308,000 b. 200,000 Solwion 1-2 | ) 242,000 Question I Answer a - e Net premium expense (50+ - 40) 3 | Solution 1-3 Coupons to be redeemed (80% x $00,000) 40,000 Question | Answer Capi redeemed enon | r ‘Coupons outstanding 100,000 | Question 2 Answer ¢ Premium expense (400,000 x 15) $,000,000 Total coupons to be redeemed , ne (600,000 a 70% x 110%) 462,000 Question 2 Answer b Total payments to retailers (220,000) Lin or sareeemedcopons(100,000218) 4, sang00 Liability for unredeemed coupons - December 31,2018 242,000 ee me SSbots ¢ 35 é } Na br Maiply by 7 be een 2000 Cee frtsing cons (10% x1 200,000) _ 120000 ‘Toul! for coupons 1,320,900 Ponce aes ee B 7) Estimated ily - December 31,2018 915900 [Te SevsA compar ahead xpi on Jue 30, 2018 an therefore ‘spore exited abiiy 4 Problem 1-5 (AICPA Adapted) Case Cereal Company distributed coupons to promote new products. On October 1, 2018, the entity malled 100,000 coupos# for P45 off each purchased ‘The entity expected 12,000 of these coupons to be redeemed before the December 31, 2018 expiration date. It takes 30 days from the redemption date for the entity to receive the coupons from the retailers. The entity reimbursed the retailers ‘an additional PS for each coupon redeemed. On December 31, 2018, the entity had paid retailers P250,000 related to theses coupons and had 5,000 coupons on and that had not been processed for payment. ‘What amount should be reported as liability for coupons on December 31, 2018? 350,000 . 290,000 . 250,000 4. 225,000 Solution 1-5 Answer a Coupoes expected to be redeemed 12,000 Multiply by payment for each coupon (45 + 5) Ey Total lisbility for coupons 600,000 Payments on December 31, 2018 (250,000) Liability for coupons - December 31, 2018 330,000 ‘The coupon liability on December 31, 2018 is not reduced by the ‘5,000 coupons on hand because the coupons had not been processed fox peyment.Problein 47 (Alepy Adapted) {et Company started an Sova cna ODO rogram. Forever 10 ey The entity : aire Does re ou rene AY Sic etx pci ena ctimated at the Theertity soPvoftbe box tops will be redeemed. the curent yay Thee sl 10,000 boxes ofthe product during Amount 100,000 30,000,000 redeemed during the year. ls pure} f : and 40,000 bax tops were Be $30 4.125400 expense forthe cuent / y 1, Whats the premiun 1 ‘Waste the premium expense rhe yar 3,750,000 D Aston 3,000,000 rapt syod jovnaee 6. 4:125,000 4,000,000 a: 7300, ‘ Be cine edy yearend? 000 on 2 tape AMeUH of yearend ability esciad i a 3,000,000 ‘this promotion? ue 4,125,000 am . 1,500,000 a : 3/000,000 4. 4,500,000 Solution 1-6 Solution 1-7 Question ! Answer x0 Cos of pass Go Question | Answer a = 190 Basketballs to be distributed (100,000 x 60% / 10) 6000 Spee = Basketballs distributed 4,900 Sox tops to be redeemed (S0% x 100,000) 30,000 Balance 2000 baste 25,0007 8,500) lg Ccanansing 29900 Cost of basketball (4,125,00075; Prem expense ($0,000 /2 = 25,000 x 150) 3,750,000 Premium expense (6,000 x 750) Ss. 2 Answer Quescin 2 anwar € Question at, Estimated liability (2,000 x 750) am Estiomated ibility at yearend (10,000 2=5,000x150) 750,000 ‘of laundry 2099, saan exc sw HM in cae : ipstcetes thet cay 305, SMe ee es re old ps0 exch vows purchases ot 400,000 Coops re 2018? esperse 3 8 110 Question 3 Answer Coupons to be redeemed (2,500,000 x 30%) Premium expense for (780,000 / 10 x 45) Question 4 Answer Coupons outstanding - December 31, 2018 Coupons to be redeemed (2,500,000 x 30%) "Estimated liability ~ 12/31/2019 (250,000 / 10 x 45) | i | 8 lls l.58 3 3 Ewe ER Iwg 9M) ct up prone Oh Ng 10 2018 29). ee ota is 30,000 gare — 30,000 of eine 000 ae apc 3.0m Trenies *4 expense for 2014, amber of atte 1, Wastes 1,000,000 1,200,000 & a 4 c ga December 31, 20187 2. Whatistbepr } } | | Solution 1-9 Question} Answer a Namber of premiums distributed in 2018 Number of premiums to be distributed ia 2019 Total premiums in 2018 Premium expense for 2018 (25,000 x 49) Question 2 Answer b Extimated liability - 12/31/2018 (5,000 x 40) Question 3 Answer d Premiums distributed in 2019 Premiums to be distributed in 2020 Total Premiums arising from 2018 sales distributed in 2019 Premiums applicable to 2019 Premium expense for 2019 (48,000 x 40) Question 4 Answer c Estimated liability - 12312019 (3,000 x 40 es h 3 8 | r | | I 3S a legs2. kit Problem I-11 (IAA) Boergy offered a cash rebate of P20 on each P150 peckage ‘of batteries sold during the current year. Historically, 10% of customers mail in the rebate form. 1. What amount of rebate expense shouldbe reported for the current year? a. 1,200,000 '. 1/300,000 ¢, $00,000 4. 600,000 2. What smovat should be reported as rebate Liability at year-end? 700,000 . $00,000 ©. 350,000 4. 400,000 Solution |-1! Question | Answer a Rebase expense (10% x 600,000 x 20) Question 2 Answer a GE Rebats expense Rasbata paid (25,000 x 20) Redete lability NeW aaiseProblem 1-13 (IFRS) Arianne Company, a grocery retailer, operates a customer loyalty program. The entity grants program members loyalty points when they spend a specified amount on groceries. Program members can redeem the points for further groceries. The points have no expirty date. During 2018, the sales amounted to P7,000,000 based on stand-alone selling price. During the year, the entity granted 10,000 points. But management ‘expected that only 80% or 8,000 points will be redeemed. ‘The stand alone selling price of each loyalty point is P100, ‘On Becember 31, 2018, 4,800 points have been redeemed . In 2019, management revised its expectations and now expected that ‘90% or 9,000 points will be redeemed altogether. During 2019, the entity redeemed 2,400 points. 1. What amount should be reported as sales revenue including the revenue eared from points for 20187 ‘&. 7,000,000 ‘b. £,000,000 ¢ 6,125,000 6,650,000 I ‘2. What is the reverme camed from loyalty points for 20197 a 700,000 b. 210,000 ¢. 175,000 4. 200,000BERGER i GWG wes FT Problea 1-14 (IFRS) Jamaica Company, «retailer f electrical goods, participates in, ‘customer loyalty program opersiod by enalrfoe ‘Theentiy grass wpeton ‘Program members one air tavel pol for every 1,000 Program members can redeem the points fe travel with the airtir subject to vailablity. The entity pay the line PO lat each pols ‘Daring the current year, the entity sol eectcal goods fox coneration totaling Pd 500,000 bancd on oo sale nieloipeaca $,000 points with stand-alone selling price of P100 per point ‘What amount should be recognized as product sales revenue? 4,500,000 : 4,050,000 5,000,000 2,500,000 ‘What s the net revenve from point 450,000 150,000 290,000 300,000 Solution 1-14 Question | Answer b Question 2 Antwerb Selling price Fraction Allocated Product sales 409 4390 43000 Points (5,000x 100) _"3900,000, S50 _450)000 Sepa seme Revenue from points ae Payment to airline (5,000 x 60) apo Net revenue from polats nme Jemaica Company has fulfilled its obligation by granting the points.1,200,000 S20,000 3,000,000 1,020,000 iB I ig it 3 8 R : | | AF ae 5Problem 2-2 (AICPA Adapted) Ou April 1, 2018, Ash Company began offering a new product for sale under a one-year warranty. (Of the 50,000 units in inventory on April 1, 2018, 30,000 hud been sold by June 30, 2018. Based on its experience with similar products, the entity estimated that the average warranty cost per unit sold would be P80. ‘Actual warranty costs incurred from April | through June 30, 2018 smounted to P700,000. 2 On June 30, 2018, what is the estimated warranty liability? Anne Actual warnraty cost Fg 1,700,000 saansur expense 125, Problem 2-4 (AICPA Adapted) 2 oo OE tO P 4,000, ‘Wall Company sold a product under a two. ‘year warranty. The estimated probes einai er porb amos %, cost of warranty repalrsis 29, ofc sae pa com ie uibty was 60.000 ang During the first p_Yea's in business, the entity made the following mt ate ne 30,000. ‘ales and incurred the following warranty rene tna 1, 2018 “0 xaled 20 2019 payments dun for 2018? Net sales 2,500,000 3,000,000 ra ne expent| Total repair costs incurred 45,000 50,000 coe 2 copegtt ould be rponed a waranty expense for 2010, a. 60, samo & 50,000 © 10,000 oe ‘on December 31, 20187 eee 2. Whatisthe waranty iby Solution 2-4 Answer g i Warranty expense for 2019 (2% x 3,000,000) 6, b nao Problem 2-5 (14.4) a @) 9000 Bass Company manufi . yeautes high-end home lectroni cat , systems. S Tae ev iseS 8 one-year paranty forall products sei bas Solution eaity estimated that the warrant Guenace (Ported a liability fae Fran F200 per uni ty Peeing ofthc yeas” CHimaed wareesn ie F f P650,000 smd Waray expense for 2018 2% 4,000,000) During the curreay, : ee ‘Question 2 Answer d Bim $2,000 B00 | 149,000 (sae | ae |4 Whatshe warany laity co December 31, 20197 & 330,000 b 440,000 & 490,000 & 80,000Adapted) (AICPA art company introduced & new : Namnasms Fy against defects. 2 Solution 2.7 carrying 810) sted to peso Sales are 494 . ec ue nth CeO drone g Tremont folowing ween MLR Chem cone “ £000,000 for 2018 and PE, O99 Overton 2 Answer g es ee The eat reported sales OFF?! * WATERY expense for 2018 for 2019. Warranty expenditer : t0P150,000 liture in 2019 300,000 Toc actus expendinas incurred amounted for 2g Warranty lability — Deceube (150,000) and PSS0,000 for 2019. Quests shots $0,000 3 Answer on for 2018? 1. What isthe warranty expense Warranty expense for 2019 10%, 0 * 6,000,000) 40, sno» Question 4 4, am «. 250,000 Warranty tabi 4 300,000 Warranty exper for seater 31 2018 350,000 ily on December 31, bal Sie 2. What eid waaay 20 Waren expentnin209 000 50,00 3200 Warrenty lability ~ December 31, 2019 laa 100,000 = a 50,000 3. Whats the warranty expense for 20197 650,000 600,000 «$00,000 4 $30,000 4. Whatis the estimated warranty liability on December 31,2019? acash flows. of would be PS,000,000 if all Saou 00,000 if all the products Solution 2.109 and P3,000,000 ifall had minor defect, Answer d Mimor 000 cai , repairs (3% x 10,000,000 = 3, Poet rcognined asa warranty provision? | wcpng eT 10000,000 = 260-900 & 30%) : foraate | Weighted probabilities 4 | tsk ac 29 in ties in to refiect the uncertaintics aids is an increment of O5e to the probability 30,000 189,000 210,000 111,300 —23CHAPTER 4 ACCRUED LIABILITIES Bonus computation Problew 4-1 (AICPA Adapted) Kemp Company must determine the December 31, 2018 accruals forthe following expenses: ° * A.P500,000 advertising bill was received January 7, 2019, comprising cost of P350,000 for advertisement in December 2018 issues, and P150,000 for advertisement in January 2019 issues of the newspaper. > Acne-year lease, effective Decesnber 16,2018, calls for fixed rent of P120,000 per month, payable one month from the effective date and monthly thereafter. “The entity estimated thatthe real property tax will amount to 600,000 fac the cys cal year ending June 30, 2019 On December 31,2018, what amount should be reported as accrued expenses? a. 950,000 sent from December 1619 ed rent from eer coember 31, 2018 (120,000 x 1/2) 60,000 20.0, ‘Accrued real property tax (600,000 x 6/12) Total accrued expenses 219,000 47were 7% og 0 eS the tt ss tieliy joousry 31-2018 hy seca gaat el bly 000 Juding VAT : : sce = am Se NVAT (1,400,000 1-12) ae S55 payable employee 35,00 | VAT 150,000 fz 4 Paymeat of VAT in February * (60,000) Parl x expense 35,000 | var, — March 31, 2018 0,000 Sip eae sso | lave 49acre joyees 01 8 iWeekiy ne ai eet FOL TR reese et ioe ’ Bare: oe pecember 2018 ate: oa ings ps zsforte ome Tene ee epee packet ALDI EE eet, sini overt 1p7,500,000. ast yes oe ‘Thesecuig Solution 4-4 Answer 0 . 0 and 3 _Acered salaries for Doser 29,3 (G/10x 7,500,000) an ‘Accrued overtime pay = ‘Accrued salaries payable December 31, 2018 26mm Since hee isa 5-day work week, he recurring biweelay salaries PYSU,000 relate o 10 dys. The thee remaining work dyad fier coche The overtime pay for the 2-week period ended December 26, 2018 sccrued on December 31, 2018 because overtime pay is paid ind ‘text biweekly period. 0 Problem 4-6 (AICPA Adapted) Ronald Corapany has an incentive compensation plan under whic branch manager received 10% of te brnch income afer deuction ‘of the bonus but before deduction of income tax. Branch income for the current year before the bonus and income tax was P1,650,000. The tax rate is 30%. Solution 4-5 Answer b Income after bonus before tax (1,650,000/ 110%) Bonus (1% x 1,500,000) Problem 4-6 (AICPA Adapted) 1,500,000 100 ‘After three profitable years, Cairo Company decided to offer bonus Lot trand mage of 2 ofc over? ON Oey ‘The income for the branch was P1,600,000 before tax and before ‘bonus forthe current year, ‘The bonus is computed on income in excess of P1,000,000 after deducting the bonus but before deducting tax. ‘What is the bonus of the branch manager for the current year? 120,000 b. 150,000 & 250,000 4. 320,000 Solution 4-6 Answer Income after bonus but before tax (600,000/ 125%) ‘Bonus (25% x 480,000) Stprovides that the p 10) pcosising cos poof the net incon ty ¥ int’ of Costs 0% ty Problem 4-9 (AICPA Adapted) ve gan or TEATS Kent Realty Company maintains an escrow account and pays real i us? estate taxes for the mortgage customers. Escrow funds are kept in poset interest-bearing accounts. Interest, less a 10% service fee, is credited to the mortgagee’s account and used to reduce future escrow payments. Escrow account liability — January 1 700,000 Escrow payments received during the year 1,580,000 moe Real estate taxes paid during the year 1,720,000 so b row Ay, Interest on escrow funds 50,000 a erp. + 240,00) ang tneome vee bos on ‘What is the escrow account liability on December 31? a 510,000 aren SO topayits sales manage a, eee eras lS FS2S0 iy Boies eee he current year? panes es manger for Ne SUEDE 4 261,00 “bw 2 iss 186,548 = 05(5,250,000-B - 1,575,000 + 308) = 262500-.05B-78,750+.015B B+.0SB~015B = 262500-78.750 14053 = 183759 = 18,150/1.035 B= ims 2ted) nes mark compan a. 1,150,000 b. 2,250,000 c. 850,000 d. . 450,000 Solution 4-10 Answer d Escrow liability — January |, 2018 Escrow deposit received from January to September 30, 2018 (250,000 x 9 months) Total Less: Payment for real estate tax from January 1 to September 30, 2018 or three quarters (2,800,000 x 3/4) Escrow liability - September 30, 2018 i B yy received from 1, SyCHAPTER 45 LIABILITIES Premium, warranty and deferred revenue QUESTION 45-1 Define liabilities. ANSWER 45-1 Liabilities are present obligations of an entity arising from past fransactions or events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. The essential characteristics of an accounting liability are: a. The liability is the present obligation of a particular entity. - b. The liability arises from past transaction or event. c. The settlement of the liability requires an outflow of resources embodying economic benefits. QUESTION 45-2 Explain the measurement of current liabilities. ANSWER 45-2 Conceptually, all Liabilities are initially measured at present value rend subsequently measured at amortized cost: or, in practice, current liabilities or short-term Sepaes ae not discounted anymore but measured and reported at face amount. is that the disccunt or the difference between the aoe repent bad the present value is usually not material and therefore ignored.xample, bond payabyy ANSWER 45-5 entities use a customer loyalty prograih to build brand Ioyalty, rerain their valuable customers and of course, increase sales volume. ‘The customer loyalty program is generally designed to reward customers for pest purchases and to pi ‘them sili Incentives to make further purchases. If a customer buys goods or services, the entit ts customer award credits often described as Spout = ‘The entity can redeem the “points” by distributi farm eng lig merhee by distributing tthe — — a. wal z point Otises and a liability is ineurrea. QUESTION 45-7 Explain 2 deferred revenue ANSWER 45-7 Deferred revenue may be reslz2! more than one year from the en f reporting P classified as current revenue are unearned al income and unearned ‘Typical examples of current jnterest income, uneerned subscription reve! deferred revenue is realizable in more than one Ye8t Jascified as noncurrent liabilit Typical exam! TyParned revenue from long-term & Jong-term leasehold advancesQUESTION 45-8 Multiple choice (LAA) 1. Which ia not considered a characteristic'og gy, abi obligation iy, 5. The concept, ast event Uiabiity ig tg 8 opproprin cc. Ret ‘outflow of resources am easuring 9 d. Liquidatic reasonably expected to : requ existing resourees classified as current ad 2 2. For a liability to exist a. A’past transaction or event must have b. The exact amount must be known, UPd, ¢. ‘The identity ofthe party owed must be know, : of the financial 4. An obligation to pay eash in the future must erg lability the amoun Teatired to ay the tat cash that would be 3, Which of the following represents a liability? ‘a. The obligation to pay for goods that an entity to oeder from suppliers next year. Seat b. The obligation to provide goods that customers jg ordered-and paid for during the current year, “"" lationship between present value and the liability? present value and th i 2 is used to measure ce ica «. The obligation to pay interest on a five-year not b. toate near sein aii payable that was issued at year-end. g; Pret ae ued w nese al eae 4. The obligation to distribute an entity's own shares nex, Parvent value is uted to measure noncurrent liabilities year as a result of a share dividend. y. 4, Which does not meet the definition of a liability? ‘The signing of a three-year employment contract at fixed annual salary b. An obligation to provide goods or services in the future ¢. A note payable with no specified maturity date |. An obligation that is estimated in amount8 What is the 10, Which statement relationship between current linbily. an operating cycle? 2. Liquidation of current ni ‘quidarwithin the operating cycle or on, bly tq expecte whichever is longor ue, b. Current I ros are the result of ope, : Ahing bilities cannot exceed the amou, t ligbilities nt i cc. Current incur, in one operating cycle «4, There is no relationship between the two ‘ich iit Listing current liabilities in the order of matuy isting current liabilities according to ene Offsctting current liabilities against assets thay ta be applied to their liquidation ry 4. Showing current libiitee inthe order of liquidatigg preference ot an acceptable presentation of curs, nt not true regarding the presentation of current liabilities in accordance with IFRS? a. The noncurrent liabilities follow the current Liabilitie, b. Current liabilities may be listed in the order of maturity, in descending order of magnitude or in the order of liquidity preference. c. Current liabilities are generally recorded at face a 6 a a he b 8 8 a % © a * 10 «. ALI recognition and refleet . ng term Whe one-term debt becomes callable du served spay the di Retained earnings muat be revtnite ‘ amount of the debt, ee 4, What is the classification of debt cal a. Noncurrent liability b. Current liability c. Current libilty ifthe creditor intends tocall the the creditor vwithin one ye 4. Current lab probable thatthe creditor vill call the debt within one year ANSWER 45-9 Ld Re 3. 4b orle chdice (IFRS) BS 5-10 Multip! QUESTION 4 1. Ttis.a marketing sche credits to customers credits in exchange Customer loyalty program b. Premium plan . ¢. Marketing progra a. bo e whereby an entity gry, and the entity can regent m the for free or discounted ost aye Finds the enn’ mate ; anted to customers under gg, ‘eller perforpeht? aecount being charged when the - rn n des d as “atone, 4. Reprove, {orms in Compliance with the warranty. yalty a Pheer Accepted practice Parranty ig an in le, ad should be used gral and inseparable 2 ch best 4 scribes the accrual approach of ue for warranty te, pe: nsed when pa 8. The consideration allocated to the points is meaning ” buena when 2 can ¢ Expensed i Wrrany claims are catia Stand-alone gelling price of the points pen don cay ine are ert b. Carrying umount of goods tobe recerved in exchang, 4. Expense when scat g Far ale ofthe gpods tobe revived in exe 2 Whe hn see ie & Te peperton of the stand le sting pres Becounting for warranty grey ZPERSE APP: ~~ points relative to the total of the stand-alone sal ty cost? Price of the points and the stand-alone selling ling §, BtPensed based on estimate in year of sale of the goods Price b- Expensed when lability iy eg « : 4 Expenced when warranty claims are certain , Under a customer loyalty program, the consideration "pensed when incurred located to the points 4. When an entity has a continuing policy of guaranteeing @ Shall be recognized as revenue immediately, ring meets aGainstdefes for three years, the ity b. Shall not be accounted for as revenue separately, i from the warranty © Shall be recognized initially as deferred Tevenue and 8. Should be reported as noncurrent amortized as revenue over @ reasonable Period, b. Should be reported as current. —4. Shall be recognized initially as deferred revenue and ©. Should be reported as part current and part fubseauently recognized as revenue upon tht oneurrent, redemption of the points, 4. Need not be disclosed. ANSWER 45.10 ‘SWER 45-11 la ad Ld ad Ra adQUESTION 45-12 Multiple choice (AICPA Ada eived cash and issued gife i sredeemable in merchandise, Hoy © that are rvenue account be affected by the dcffonredemption of certificates, respeqg te “ea LAr crease and No effect _£ Decrease and Decrease © Rovafict and No effect §. No effect and Decrease A retail store received eash and issued a gift og, that 1s redeemable in merchandise, Whey ty, certificate was issued Rig, Deferred revenue account should be decreageg Deferred revenue account should be increase Revenue account should be decreased . Revenue account should be increased pode Magazine subscriptions collected in advance’ are treaty as tA contra acount to magazine subscriptions receiygy, b. Deferred revenue in the liability section & Deierzed revenue inthe shareholdere’ equity seg, 4. Magazine subscription refund inthe income statemst in the period collected When en entity received an ‘advance payment fo; order goods that are to be manufactured and within six mont special delivered » the advance payment is reported as & Deferred charge b. Contra asset account . Current liability 4. Noneurrent liability eof al ice contracts shel fave eres Be ray aeeenen indise's retail price ceived 8. How would the prooseds received from the advance eale of nonrefundable tickets for a theatrical performonce be Teported before the performance? a. Revenue for the entire proceeds 'b. Revenue to the extent of related costs expended © Unearned revenue to the extent of related costs expended 4, Unearned revenue for the entire proceeds onCHAPTER 46 PROVISION ble to subcontractor no Pen but payable to sul No ted at. 40% of the main contract pri re’ iis appliances that include his under the Warranty are ner an entity 36 0A anty, Service for under a conti 4 there is uncertainty arronjependent mechanic un Fact wit tesco we indents experience, warranty costs arg Maly tare expendi to be incurred for each machine sold. When should ly, provision may be tbe inti these warranty costs? probable and mensuratie” 4. Brenly over the life of the warranty b. When the service calle are performed QUESTION 46.2 » When payments are made to the mec nen d. When the machines are sold itions for the re ANSWER 45-12 ANSWER 46-2 nto t be recogrined re ‘as linbility under the following condi Bb 8 d aoe he 1. Theentity has a present obligation ae a result of a past event 5a 10 4 2. tis probable that an outflow of coo! required to settle the obligation. ita shall be 3, ‘The amount of the cbligation car be measured rel oa ot‘an obligt Speration of FAW. tion i an obligation that i derived fy, as created a valid expectation oq, that it will discharge thos: QUESTION 46-4 What is an “obligating event”? ANSWER 46-4 ‘The past event that leads to a present obligation is called an an event that creates a legal or ecause the entity has no realistic the obligation created by the event. 4. The setclement of the obligation can be enforced by law. The event creates valid expectation on the part of other parties that the entity will discharge the obligati the case of constructive obligation. s cl measurement of a provision, ANSWER 46-6 nized as a provision 6! enditure required to he end of reporting penod. rv be the best the present ‘The best estimate isthe amount that an entity would rationally pay to sett the obligation at the reporting date or to transfer We to a third party at that time Where a single obligation is being measured, tne individual most likely outeome may be the best estimate, However, even in such 2 case, the entity shall consider other possible outcomes. ‘Where there isa continuous range of possibble outcomes and Per an fot range cs key as any other, the madporat of the range is used. ‘the provision being ‘measured involves a large population Where er etmnted Wy Sweniing a oun Ofer by thelr axeccated possiblities. tN a Se tes Beg os hie ole eTsur 0308 many reise, tn ve amount required to settle aq, ‘amount of 8 provis oe depos oi asets Shall NOL We taken suring « provision. fe required to settle @ provision ig, party, the, itis The reimburse as a separate asset and ene against the ectmated ability forthe provision, ‘shall not exceed the amount of the provision, c expense relating to f the reimbursement ve rescgnized for future operating losses. contract, the present obligation gnized and 8. Fondom ‘and Significant ampan QUESTION 469 wally What is the amo ANSWER 469, “Tre expentinores are necewsatly ‘and. not associated withthe ongsing we Yor example, salaries and benetits of exagloyers 0" ‘incurred fur operations cease wht ‘he doware ofthe operations ds rena a5 Sie fae BRSATAA WH, a Antsd The MMA the ATU RONEN. PAS Bi, yarngragh BL, eshadly exsades Nhe Wowsy ‘engentivtes tom the TRUSTS PASAT a. Coa oh rere, T qireating coming A, Tp, Marketing ot Sven QOing, PORT An prone Us entahy WARE. c. Laveen WN 28 an td Suen WHE W¢. Multiple onotoe (PAs 7) inition of # provision? QUESTION 46-1 ve correct ant event eognind ao Habit hon Hon inkl pabinrn of pn prnetien 1. A canetruotive obligation In ttt ” obo Loment thar ttefrom a singl «prio mn Be Obligay,, . When the realization of inesme xe Virtually certain, the related asset is no longer contingent seset wna ny, recognition is appropriate A contingent asset is only di of the future event is possible or remote 4. ‘Tho related gain arising from the contingent asset is recognized usually when it is realized. ‘losed when the occurrence ANSWER 47-5 lb ad wa doe 819| a multiple choice en EOE 7 QUESTION ¢ ord an accrual £0 a py y did not FeO" ature of the obligatisc™n A 1 An entity, did Per ge the nature of the obligation sR D entity oper, beathy: te but ly is the lose’ robal. ates a in a foreign country. It i: { obligation Tne loss. How Likely = Brobable thatthe plac ‘sted. Hower Teceive a definite ccs a. Remote ‘The amount of E Rewsonabiy possible but exceeds the $ ral le contingent asset 6} srobable and for whi % As 2 valuation allowance as a part of shareholder: 2. A present obligation Pneamured ‘should ich the 4 my ‘amount can As a fixed asset valuation allowance account , n the notes to financial statements Nov beac red but disclosed in the notes to the finan 4. In the statement of financial pox st d by debiting an appropriated retai, 6. Reserves for conti 1 or unspecified b. Be accrue a i cute ati anune ned, Reperves for contingencies for general or unspecific. Be accrued by ane! i ¢ Be sccrued by a etaned earnings account" Be accrued in the nancial statements and disclosed 4. Beauerund by deiting an expense account and crediting Nat be geqjued in the financial statements and need 2 liability account «. Not be accrued in the financial statements but should zt 3. An entity has a selfinsurance plan. Each year, the entity 4. Be accrued in the financial statements but need not appropriated retained earnings for contingencies in 2), be disclosed. amount equal to insurance premiums saved less recognized losses from lawsuits and tae! claims. As a result of an 7. Contingent assets are usually recognized when accident in the current year, the entity is a defendant ina a. Reali iis ed Sour of dais probably have to pay measurable B. Occurrence is reasonably possible and the amount ean ages. What are the effects of the lawauity bbe reliabl " Frbable gutcome cn the entity's financial statements for pammaalineoar ©. Occurrence is probable and the amount can be reliably measured ££ inaeeseinesenses and uo eect on lishltios 4. The amount can be reliably measured mecaad ect on & No effect on expenses ind an es tt 8. Which of the following is the proper accounting treatment 4. No effect on either expenses of hese biites of a contingent asset? + An expropriation of which the amount of loss ca. Sree at a. An accrued account hich is imminent and for oes b. Deferred earnings : should be can be reasonably estimated ¢. An sccount receivable with an additional disclosure explaining the nature of the transaction f. Accrued 4. A disclosure only b. Disclosed ¢ Accrued and @ ignored “"4 “slosedb. Receivat eher recoé! of 3d, the contin le So ecurenee ° Fiy measured, the contingt mount cat a contingent a80et i9 prog nt i ined earni coprition of retained earnin an aia’ in the statement red in the statement of finangig, nor disclosed. fear ae rca et ioe M ably measured. ‘The entity's Financ eid ceport the expected award ag 4. Disclosure only ANSWER 47-6 1b 6 b 2d La ab &d 4c Xe 5c 10. d QUESTION 47-7, my choice (IAA) 1. Contingent 1) liabilities depending en 1 on will not become actus &. Whether probable and measurable b. The degree of uncertainty 4; The present condition suggesting » lability ‘The outcome of a future event. 2 A Contingent liability shall be recognized when 9. Any lawouit is actually filed against an entity bb. Itis certain that funds are available to pay the emoun of the claim. ©. Ibis probable that a liability has been incurred ever. though the amount of the loss cannot be reliably measured. 4. The amount of the loss can be reliably measured and it is probable prior to issuance of financial statements than a liability has been incurred. 3. How should a contingent liability be reported in the financial statements when it is reasonably possible that the entity will have to pay the liability at a future date? a. As a deferred liability b. Asan accrued liability c. Asa disclosure only a. As an account payable with an additional disclosure explaining the nature of the transaction 4, Disclosure usually is not required for a. Contingent gains that are probable and can be reliably measured, b. Contingent losses that are reasonably possible and cannot be reliably measured. c. Contingent losses that are probable and cannot be reliably measured. d. Contingent losses that are remote and can be reliably measured.ye financial statement 18 required fop porting in the a erat ago tnt ae probable and can bg may, a. Losscont a gata agencies that are probable and can be ray, "measured. ¢, Loss contingenci yured. * a. ‘Al Toes contingencies. je that are ponible and can be rig, 6 Gain contingencies that aro remota and can be rolgyy, measured Rata, jaclosed in a note to the Financial statements i Maybe dadoned in a not tothe financial statement ¢. Must be reported inthe body of the financial statements, 4. ‘Should not be reported or disclosed. 7. A contingent liability a. Has a most probable value of zeré but may require payment if a given future event occurs, b. Definitely exists as a liability but the amount or due date ia indeterminate. ¢. Is commonly associated with loss carryforward, 4. Is:not disclosed in the financial statements, 8. Which of the following should be disclosed in the financial statements as a contingent liability? The entity has accepted liability prior to the year-end for unfair dismissal of an employee and is to pay damages. b. The entity has received a letter from a supplier complaining about an old unpaid invoice, ¢. The entity is involved in a legal case which it may Possibly lose. 4. The entity has not yet paid certain clai product warranty, Paid certain claims under to recognize and the mated ¢ amount of the wis not considered when evaluating cord a lability for pending litigation’ ‘Time period in which the underlying cause of action occurred b. The type of litigation involved © The probability of an unfavorable outcome 4. The ability to make a reliable estimate of the loss ANSWER 47-7 la za Be 4d 5a