PRELIMINARY MIDTERM EXAMINATION – Intermediate Accounting 2

Name: Date:

1. An entity shall measure initially a financial liability not designated at fair value through profit loss at
a. Fair value
b. Fair value plus directly attributable transaction costs
c. Fair value minus directly attributable transaction costs
d. Face amount
2. The fair value of a liability is defined as
a. The appraised value of the liability.
b. The price that would be received to assume the liability in an orderly transaction between market participants.
c. The amount that would be paid when transferring a liability in an orderly transaction between market participants.
d. The carrying amount of the liability on the date of transaction.
3. For a liability to exist
a. A past transaction or event must have occurred.
b. The exact amount must be known.
c. The identity of the party owed must be known.
d. An obligation to pay cash in the future must exist.
4. Conceptually, a short-term note payable with no stated rate of interest should be
a. Recorded at maturity value
b. Recorded at the face amount
c. Discounted to its present value
d. Reported separately from other short-term notes payable
5. Which of the following is not a liability?
a. Deposit received from customer
b. Unearned revenue
c. Zero interest-bearing not payable
d. Stock dividend payable
6. Dean Company has a P2,000,000 note payable due June 30, 2015. On December 31, 2014, the entity signed an agreement
to borrow up to P2,000,000 to refinance the note payable on a long-term basis. The financing agreement called for borrowing
not to exceed 80% of the value of the collateral the entity was providing. On December 31, 2014, the value of the collateral
was P1,500,000. On December 31, 2014, what amount of the note payable should be reported as current liability?
a. 2,000,000
b. 1,500,000
c. 800,000
d. 500,000
7. Jam Company had P5,000,000 note payable that is due on March 1, 2015. The entity borrowed P3,500,000 on February 1,
2015 which has a five-year term and used the proceeds to pay down the note and used other cash to pay the balance. The
2014 financial statements were issued on March 31, 2015. What amount of the note payable should be classified as
noncurrent on December 31, 2014?
a. 5,000,000
b. 3,500,000
c. 1,500,000
d. 0
8. Dana Company had P2,000,000 note payable due on June 30,2015. Under the existing loan facility, the entity had the
discretion to refinance or roll over the note payable for at least twelve months after the end of reporting period. On December
31, 2014, what amount of the note payable should be reported as noncurrent liability?
a. 2,000,000
b. 2,400,000
c. 3,000,000
d. 0
9. It is a marketing scheme whereby an entity grants award credits to customers and the entity can redeem the award credits in
exchange for free or discounted goods or services.
a. Customer loyalty program
b. Premium plan
c. Marketing program
d. Loyalty award
10. The award credits granted to customers under a customer loyalty program is often described as
a. Points
b. Awards
c. Credits
d. Royalty
11. Under a customer loyalty program, if the entity supplies the awards itself, the consideration allocated to the award credits
a. Shall be recognized as revenue immediately.
b. Shall not be accounted for as revenue separately.
 c. Shall be recognized as deferred revenue and amortized as revenue over a reasonable period not exceeding 5 years.
d. Shall be recognized initially as deferred revenue and subsequently recognized as revenue upon the redemption of
the award credits.
12. Under a customer loyalty program, if a third party supplies the awards and the entity is collecting the consideration for the
award credits as principal in the transaction
a. The entity shall not recognize revenue from the award credits.
b. The entity shall recognize initially a deferred revenue equal to the gross consideration allocated to the award credits.
c. The entity shall recognize initially a deferred revenue equal to the difference between the consideration for the award
credits and the amount paid by the entity to the third party.
d. The entity shall recognize immediately revenue equal to the gross consideration allocated to the award credits.
13. Which of the following best describes the accrual approach of accounting for warranty cost?
a. Expensed when paid
b. Expensed when warranty claims are certain
c. Expensed based on estimate in year of sale
d. Expensed when incurred
14. In an effort to increase sales, Mills Company inaugurated a sales promotional campaign on June 30, 2014. The entity placed a
coupon redeemable for a premium in each package of cereal sold. Each premium cost P20 and five coupons must be
presented by a customer to receive a premium. The entity estimated that only 60% of the coupons issued will be redeemed.
For the six months ended December 31, 2014, the following information is available:

Packages of Premiums purchased Coupons

cereal sold redeemed
160,000 12,000 40,000

What is the estimated liability for premium claims outstanding on December 31, 2014?

a. 169,000
b. 224,000
c. 288,000
d. 384,000
15. Topsy Company started a new promotional program. For every 10 box tops returned, customers receive a basketball. The
entity estimated that only 60% of the box tops reaching the market will be redeemed. Additional information is as follows:

Units Amount
Sales of product 100,000 30,000,000
Basketball purchased 5,500 4,125,000
Basketball distributed 4,000

What is the amount of year-end estimated liability associated with this promotion?

a. 4,125,000
b. 1,500,000
c. 3,000,000
d. 4,500,000
16. Bare Company included one coupon in each box of laundry soap it sold. A towel is offered as a premium to customers who
send in 10 coupons and a remittance of P20. Data for the premium offer are:

2014 2015
Boxes of soap sold 500,000 800,000
Number of towels purchased (P100 per towel) 20,000 25,000
Coupons redeemed 140,000 200,000

The entity’s experience indicated that only 30% of the coupons will be redeemed.

What amount should be reported as estimated premium liability on December 31,2015?

a. 500,000
b. 400,000
c. 320,000
d. 80,000
17. Energy Company offers a cash rebate of P10 on each P40 package of batteries sold during 2014. Historically, 10% of
customers mail in the rebate form. During 2014, 6,000,000 package of batteries are sold, and 210,000 P10 rebates are mailed
to customers. What amount of liability for rebates should be reported on December 31, 2014?
a. 6,000,000
b. 2,100,000
c. 3,900,000
 d. 0
18. At the beginning of current year, Daisy Company began marketing a new beer called “Serbesa”. To help promote the product,
the management is offering a special Serbesa beer mug to each customer for every 20 specially marked bottle caps of
Serbesa. The entity estimated that out of the 300,000 bottles of Serbesa sold during the year, only 50% of the marked bottle
caps would be redeemed. During the year, the entity purchased 8,000 beer mugs at a total cost of P360,000 or P45 each and
had already distributed 4,500 mugs to customers. What is the estimated premium liability at year-end?
a. 135,000
b. 337,500
c. 202,500
d. 360,000
19. Mile Company sells washing machines that carry a three-year warranty against manufacturer’s defects. Based on entity
experience, warranty costs are estimated at P300 per machine. During the current year, the entity sold 2,400 washing
machines and paid warranty costs of P170,000. What amount should be reported as warranty expense for the current year?
a. 170,000
b. 240,000
c. 550,000
d. 720,000
20. In 2014, Dubious Company began selling 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 peso sales are as follows:

First year of warranty 2%

Second year of warranty 5%

Sales and actual warranty expenditures are presented below:

2014 2015
Sales 5,000,000 7,000,000
Actual warranty costs 100,000 300,000

What is the estimated warranty liability on December 31, 2015?

a. 390,000
b. 440,000
c. 490,000
d. 840,000
21. Which is the correct definition of a provision?
a. A possible obligation arising from past events
b. A liability of uncertain timing or amount
c. A liability which cannot be easily measured
d. An obligation to transfer funds to an entity
22. Which of the following terms is associated with recognizing a provision?
a. Possible
b. Likely
c. Remote
d. Probable
23. A legal obligation is an obligation that is derived from all of the following, except
a. Legislation
b. A contract
c. Other operation of law
d. An established pattern of past practice
24. Which of the following statements is incorrect concerning a contingent liability?
a. A contingent liability is both probable and measurable.
b. An entity shall not recognize a contingent liability in the financial statements.
c. A contingent liability is disclosed only.
d. If a contingent liability is remote, no disclosure is required.
25. Contingent assets are usually recognized when
a. Realized
b. Occurrence is reasonably possible and the amount can be reasonably estimated
c. Occurrence is probable and the amount can be reasonably estimated
d. The amount can be reasonably estimated
26. Toyo Company owns a car dealership that it uses for servicing cars under warranty. In preparing its financial statements, the
entity needs to ascertain the provision for warranty that it would be required to provide at the end of the year.

The entity’s experience with warranty claims is as follows:

60% of all cars sold in a year have zero defect, 25% of all cars sold in a year have normal defect, and 15% of all cars sold in a
year have significant defect.
 The cost of rectifying a “normal defect” in a car is P10,000. The cost of rectifying a “significant defect” in a car is P30,000. The
entity sold 500 cars during the year.

What is the “expected value” of the warranty provision for the current year?

a. 3,500,000
b. 1,750,000
c. 1,400,000
d. 4,000,000
27. Chato Company sells electrical goods covered by a one-year warranty for any defects. Of the sales of P70,000,000 for the
year, the entity estimated that 3% will have major defect, 5% will have minor defect and 92% will have no defect. The cost of
repairs would be P5,000,000 if all the products sold had major defect and P3,000,000 if all had minor defect. What amount
should be recognized as a warranty provision?
a. 8,000,000
b. 5,600,000
c. 300,000
d. 190,000
28. During 2014, Odyssey Company is the defendant in a patent infringement lawsuit. The entity’s lawyers believe there is a 30%
chance that the court will dismiss the case and the entity will incur no outflow of economic benefits. However, if the court rules
in favor of the claimant, the lawyers believe that there is a 20% chance that the entity will be required to pay damages of
P200,000 and an 80% chance that the entity will be required to pay damages of P100,000. Other outcomes are unlikely. The
court is expected to rule in late December 2015. There is no indication that the claimant will settle out of court. A 7% risk
adjustment factor to the probability-weighted expected cash flows is considered appropriate to reflect the uncertainties in the
cash flow estimates. An appropriate discount rate is 5% per year. The present value of 1 at 5% for one period is 0.95. What is
the measurement of the provision for lawsuit on December 31, 2014?
a. 100,000
b. 84,000
c. 89,880
d. 85,386
29. Caress Company carried a provision of P2,000,000 in the draft financial statements on December 31, 2014 in relation to an
unresolved court case. On January 31, 2015, when the financial statements on December 31, 2014 had not yet been
authorized for issue, the case was settled and the court decided the damages payable by Caress Company to be P2,800,000.
What amount should be adjusted on December 31, 2014 in relation to this event?
a. 2,800,000
b. 2,000,000
c. 800,000
d. 0
30. On February 5, 2015, an employee filed a P2,000,000 lawsuit against Steel Company for damages suffered when a plant of
the entity exploded on December 29, 2014. The entity’s legal counsel believed the entity will probably lose the lawsuit and
estimated the loss to be P500,000. The employee has offered to settle the lawsuit out of court for P900,000 but the entity will
not agree to the settlement.

In the December 31, 2014 statement of financial position, what amount should be reported as accrued liability from lawsuit?
a. 2,000,000
b. 1,000,000
c. 900,000
d. 500,000