AC13

PROVISIONS, CONTINGENCIES AND OTHER LIABILITIES

QUIZ 1:
1. HAWKINS COMPANY’s profit for the year before tax and bonus is Php 2,500,000. The
general manager is entitled to a year-end bonus of 10% of the profit before bonus
but after tax. Income tax rate is 30%. The manager’s bonus is?
a. 175,000 b. 180,412 c. 227,273 d. 250,000

ANSWER: B
B = .10 {2,500,000 – .30 (2,500,000 – B)}

2. EUSTASS COMPANY estimates is annual warranty expense at 4% of net sales. The

following balances are given by EUSTASS: Net sales – 1,500,000; warranty liability –
balance 12/31/2020 debit (before adjustment) of 10,000 ; warranty liability –
balance 12/31/2020 credit (after adjustment) of 50,000. Which of the following
entries was made to record the 2020 estimated warranty expense?
a. Warranty expense 60,000
Retained earnings 10,000
Warranty liability 50,000
b. Warranty expense 50,000
Retained earnings 10,000
Warranty liability 60,000
c. Warranty expense 40,000
Warranty liability 40,000
d. Warranty expense 60,000
Warranty liability 60,000

ANSWER: D (1.5M x 4%)

3. TRAFALGAR COMPANY has had a lawsuit filed against it by a competitor. The suit
alleges copyright infringements by the plaintiff and asks for compensatory damages.
TRAFALGAR’s legal counsel is convinced that the likelihood of losing the case is
possible, the potential amount of the loss, based on evidences, are as follows, 20%
that the liability would be ₱ 300,000; 50% that the liability would be ₱ 400,000; 30%
that the liability would be ₱ 500,000. In the Statement of Financial Position of
TRAFALGAR COMPANY, what amount will be recorded as provision?
a. 500,000 c. NIL, this is a contingent asset
b. 410,000 d. NIL, this is a contingent liability
ANSWER: D
4. In January 2020, XDRAKE Company gives a guarantee on a loan to KAIDO Corp.
amounting to Php 3,000,000. During the year, due to unstable financial condition
because of COVID-19 pandemic, KAIDO files a petition for bankruptcy. In its year-
end financial statements, XDRAKE should
a. Not accrue and need not to disclose the guarantee
b. Accrue a provision because it is an adjusting event under PAS 10
c. Accrue and disclose a provision because it is an adjusting event under PAS 10
d. Disclose a provision because it is an adjusting event under PAS 10

ANSWER: C

5. On December 18, 2020, BEGE COMPANY declared cash dividends of Php 2 per
share to its 100,000 stockholders on record on December 31, 2020. The dividends
will be paid on January 18, 2021. When will BEGE recognize the liability?
a. December 18, 2020
b. December 31, 2020
c. January 18, 2021
d. NIL, it is not classified as a liability but a deduction to equity

ANSWER: A

For numbers 6-10, please refer to the problem below:

APOO, INC., a grocery business, operates a customer loyalty program. APOO
grants its program members points when they spend a specified amount of
purchases. The points have no expiry date and they can use the points for further
purchases. During 2020, the customers earned 80,000 points, but management
expects that 75% of these points will be redeemed. The stand-alone selling price
of each loyalty point is estimated at Php 20. The sales during 2020 amounted to
Php 6,800,000 on stand-alone selling price.

On December 31, 2020, 28,800 points have been redeemed. In 2021, the
management revised its expectations and now expects 85% of the points to be
redeemed. In 2021, the 12,000 points were redeemed.

6. What amount of the transaction price should be allocated to the loyalty points?
a. 1,600,000 b. 1,200,000 c. 1,020,000 d. 1,360,000

ANSWER: C

7. What amount of the transaction price should be allocated to the groceries?

 a. 6,800,000 b. 5,780,000 c. 5,870,000 d. NIL

ANSWER: B

8. What is the revenue earned from the points for 2020?

a. 576,000 b. 489,600 c. 367,200 d. 432,000

ANSWER: B

9. What is the total revenue to be recognized for 2021?

a. 576,000 b. 489,600 c. 7,289,600 d. 6,269,600

ANSWER: D (489,600+5,780,000)

10. What is the revenue earned from the points for 2021?
a. 122,400 b. 612,000 c. 230,400 d. 144,000

ANSWER: A

Stand-alone Price Ratio Transaction Price Alloc.

Grocery 6,800,000 68/80 5,780,000
Loyalty Points 1,200,000* 12/80 1,020,000
Total 8,000,000 6,800,000

SAP of loyalty points: (80,000 * 75% = 60,000 * Php 20 = 1,200,000)

2020:
Loyalty points revenue: 1,020,000 * (28,800/60,000) = 489,600

Sales 5,780,000
Loyalty points revenue 489,600
Total sales revenue, 2020 6,269,000

2021:
Cumulative LPR: 1,020,000 * [(28,800+12,000)/(80,000*85%)] = 612,000
Loyalty points revenue earned in 2020 (489,600)
Loyalty points revenue, 2021 122,400
11. BONNIE Company manufactures noodles. To promote the sale of BONNIE’s
products, a premium is offered to customers who send in three wrappers and
remittance of Php 25. The freight-out per premium is Php5.
2020 2021
Sales 4,000,000 5,000,000
Premiums purchased at Php 80 each 400,000 416,000
Number of premiums distributed 4,000 5,500
Number of premiums to be distributed
next period 200 500

Assuming that premiums actually distributed is always less than management’s

estimates, what amount should be reported as premium expense for 2021?
a. 464,000 b. 348,000 c. 360,000 d. 330,000

12. Based on number 11, what amount should be reported as premium liability for
2021?
a. 12,000 b. 20,000 c. 30,000 d. 40,000

Net cost = ( ₱80 + 5 – 25 ) = ₱ 60

Est. premium liability, beg., 2020 ₱ 0

Premium expense, 2020
(4,000+200) * ₱60 252,000
Actual cost incurred on premiums
(4,000/ * ₱60) (240,000)
Est. premium liability, end., 2020 ₱ 12,000

Est. premium liability, beg., 2021 ₱ 12,000

Premium expense, 2021
[5,500+500-200] * ₱60 348,000
Actual cost incurred on premiums
(5,500 * ₱60) (330,000)
Est. premium liability, end., 2021 ₱ 30,000

13. How would the proceeds received from the advance sale of nonrefundable tickets
for a theatrical performance be reported in the statement of financial position
before the performance?
a. Revenue for the entire proceeds
b. Revenue to the extent of related costs expended
c. Unearned revenue for the entire proceeds
d. Unearned revenue to the extent of related costs expended
14. What is the third step on recognizing revenue from contracts with customer
under PFRS 15?
a. Determine the transaction price
b. Recognize revenue when (or as) the entity satisfies a performance
obligation
c. Allocate the transaction price to the performance obligations in the
contracts
d. NIL

15. All are considered as liabilities, except for one. Which is it?
a. Corporation A distributed to stockholders shares of Company C as
dividends
b. Corporation A distributed to stockholders shares of Company A as
dividends
c. Probable loss of Corporation A from a lawsuit filed by Corporation D
d. None of the above