Quiz #1 (Questions)

Problem 1

The unadjusted trial balance of Sabina Company at December 31, 2019 included the following account balances.
The 2019 financial statements were issued on March 31, 2020.

Accounts receivable P2,000,000

Accounts payable 1,500,000
Bank note payable 600,000
Mortgage note payable 1,200,000
Deferred tax liability 1,000,000

 The bank note, issued August 1, 2019, is due on July 31, 2020 with interest at a rate of 10% payable at
maturity.

 The mortgage note is due on March 1, 2020. Interest at 9% has been paid up to December 31, 2019. The
entity intended at December 31, 2019 to refinance the note on due date with a new 10-year mortgage note.
On March 1, 2020, the entity paid P250,000 in cash on the principal balance and refinanced the remaining
P950,000.

 Included in the accounts receivable balance at December 31, 2019 were two subsidiary accounts that had
been overpaid and the credit balances totaling P200,000. The accounts were of two major customers who
were expected to order more merchandise from the entity and apply the overpayment to those future
purchases.

 On November 1, 2019, the entity rented a portion of its factory to a tenant for P300,000 per year, payable
in advance. The payment for the 12 months ended October 31, 2020 was received as required and was
credited to rent revenue.

1. What amount should Sabina Company report as current liabilities on December 31, 2019?

A. P2,550,000
B. P2,575,000
C. P2,825,000
D. P3,775,000

2. What amount should Sabina Company report as noncurrent liabilities on December 31, 2019?

A. P1,000,000
B. P1,950,000
C. P2,200,000
D. P2,800,000

Problem 2

Apple Corporation’s current liabilities at December 31, 2020 totaled P1,500,000 before any necessary year-end
adjustments relating to the following transactions:
 On December 23, 2020, a vendor authorized Apple Corporation to return for full credit, merchandise shipped
and billed at P45,000 on December 9, 2020. Apple Corporation shipped the returned items on December 29,
2020. A P45,000 credit memo was received and recorded by Apple Corporation on January 2, 2021.

 During December 2020, Apple Corporation received P75,000 from Beauty, a customer, as an advance
payment for a handicraft that Apple Corporation will make to Beauty’s specifications. From this transaction,
Apple Corporation has a P75,000 credit balance in its accounts receivable from Beauty at December 31,
2020.

3. What amount should Apple Corporation report as total current liabilities in its December 31, 2020 statement
of financial position?

A. P1,455,000
B. P1,470,000
C. P1,530,000
D. P1,575,000

Problem 3

Copper Company requires refundable advance payments with special orders for machinery constructed to
customers’ specifications. Information for 2019 is as follows:

Customers’ advances, December 31, 2018 P885,000

Advances received with orders in 2019 1,380,000
Advances applied to orders shipped in 2019 1,230,000
Advances applicable to orders canceled in 2019 375,000

4. What amount should Copper Company report as current liability for customers’ advances in its December
31, 2019 statement of financial position?

A. P660,000
B. P735,000
C. P1,035,000
D. P1,410,000

Problem 4

David Co. provides incentive compensation plan under which its president receives a bonus equal to 20% of the
corporation’s income in excess of P500,000 before income tax but after bonus. The income before income tax
and bonus is P2,000,000 and the effective tax rate is 30%.

5. Determine the amount of bonus.

A. P210,000
B. P250,000
C. P300,000
D. P400,000
Problem 5

Everlasting Co. includes one coupon in each box of laundry soap it sells. A towel is offered as a premium to
customers who send in 10 coupons and a remittance of P10. Distribution cost of premium is P5. Experience
indicates that only 30% of the coupons will be redeemed.

2020 2021
Boxes of soap sold 2,000,000 2,500,000
Number of towels purchased at P50 each 50,000 80,000
Coupons redeemed 400,000 700,000

6. What is the estimated premium liability on December 31, 2020?

A. P800,000
B. P900,000
C. P1,000,000
D. P1,100,000

7. What is the premium expense for 2021?

A. P3,000,000
B. P3,375,000
C. P3,750,000
D. P4,000,000

8. What is the estimated premium liability on December 31, 2021?

A. P1,000,000
B. P1,125,000
C. P1,250,000
D. P1,375,000

Problem 6

Fainted 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 expiry 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 will be
redeemed.

The stand-alone selling price of each loyalty point is P100.

On December 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 redemeed
altogether.
During 2019, the entity redeemed 2,400 points.

9. What amount should be reported as total sales revenue for 2018?

A. P6,150,000
B. P6,650,000
C. P7,000,000
D. P8,000,000

10. What is the revenue earned from loyalty points in 2019?

A. P175,000
B. P200,000
C. P210,000
D. P700,000

Problem 7

During 2020, Graceful Co. introduced a new product carrying a two-year warranty against defects. The estimated
warranty costs related to peso sales are 4% within 12 months following the sale and 6% in the second 12
months following the sale. The entity reported sales of P5,000,000 for 2020 and P6,000,000 for 2021. The actual
expenditures incurred and paid amounted to P150,000 for 2020 and P550,000 for 2021.

11. What is the warranty expense for 2021?

A. P650,000
B. P600,000
C. P550,000
D. P500,000

12. What is the estimated warranty liability on December 31, 2021?

A. P100,000
B. P240,000
C. P260,000
D. P400,000

Problem 8

Heathens Inc. manufactures and sells pagers and radio paging systems which include a 180-day warranty on
product defects. It also sells an extended warranty which provides an additional two years of protection. On May
10, it sold a paging system for P3,850 and an extended warranty for another P1,200.

13. The journal entry would include

A. a credit to service revenue of P1,200.

B. a credit to unearned service revenue of P1,200.
C. a credit to service revenue of P5,050.
D. a credit to sales of P3,850 and a credit to service revenue of P1,200.
Problem 9

In 2019, Indian Corp. goods were sold for P10,000,000. Experience indicates that 90% of products sold requires
no warranty repairs; 6% of products require minor repairs costing 30% of the sales price; and 4% of products
sold require major repairs costing 70% of sales price. The expenditures for warranty repairs and replacements
for products sold in 2019 are expected to be made 60% in 2020, 30% in 2021, and 10% in 2022, in each case
at the end of the period. Because the cash flows already reflect the probabilities of cash flows and assuming
there are no other risks or uncertainties that must be reflected, to determine the present value of cash flows,
the entity uses a “risk-free” discount rate based on government bonds with the same term as expected cash
flows (6% for 1-year bonds and 7% for 2-year and 3-year bonds).

14. What is the initial estimated cost of warranty?

A. P460,000
B. P540,000
C. P670,000
D. P1,000,000

15. What amount of provision on warranty should Indian Corp. report in its statement of financial position for
the year ended December 31, 2019?

A. P320,529
B. P360,378
C. P380,996
D. P418,457

Problem 10

As of December 31, 2018, Jeffrey Company is the defendant in a patent infringement lawsuit. The entity’s
lawyers believe that 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 P2,000,000, the amount sought by the claimant,
and an 80% chance that the entity will be required to pay damages of P1,000,000, the amount that was recently
awarded by the same judge in a similar case. Other outcomes are unlikely. The court is expected to rule in late
2019. 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 10% per year.

16. What amount of provision should the entity recognize in December 31, 2018?

A. P817,090
B. P840,000
C. P840,018
D. P898,800

Problem 11

On December 25, 2019, an employee filed a P3,000,000 lawsuit against Keicy Company for damages suffered
when one of Keicy’s equipment malfunctioned in August of 2019. The legal counsel of the company believes
that it is probable that Keicy will pay the damages ranging between P500,000 to P1,000,000. Each point within
the range is as likely as any other. On March 1, 2020, the employee has offered to settle the lawsuit out of court
for P900,000 and the company accepted the offer and settled the amount.

17. How much is the provision that should be recognized as of December 31, 2019, assuming that the financial
statements were authorized to be issued on February 29, 2020?

A. P500,000
B. P750,000
C. P900,000
D. P1,000,000

18. How much is the provision that should be recognized as of December 31, 2019, assuming that the financial
statements were authorized to be issued on March 31, 2020?

A. P500,000
B. P750,000
C. P900,000
D. P1,000,000

Problem 12

Lion Corp. operates in a city where there is no environmental legislation. However, the company has a widely
published policy in which it undertakes to clean up all contamination it causes. As of the date of the issuance of
its 2014 financial statements, a reasonable estimate of the cost of this clean-up related to 2014 operations is
P2,000,000.

19. How should the transaction be disclosed or recorded?

A. The transaction should not be disclosed in the notes nor recorded as a provision.
B. The transaction should be disclosed in the notes amounting to P2,000,000.
C. The transaction should be recorded as a provision amounting to P2,000,000.
D. The transaction lacks information and the appropriate action could not be identified.

Problem 13

During 2018, Manila Company filed suit against Notion Corp. seeking damages for patent infringement. On
December 31, 2018, Manila’s legal counsel believed that it was probably that Manila would be successful against
Notion for an estimated amount of P1,000,000.

On March 1, 2019, Manila Company was awarded P750,000 and received full payment thereof. The 2018 financial
statements were issued March 31, 2019.

20. How should the award be reported on its 2018 financial statements?

A. The award should be reported as a cash and revenue of P750,000.

B. The award should be reported as a receivable and revenue of P750,000.
C. The award should be reported as a disclosure of a contingent asset of P750,000.
D. The award should be reported as a disclosure of a contingent asset of P1,000,000.

END