PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL

1. A - A contingent gain that is probable is disclosed only.

2. A ₱200,000 – the reasonable estimate as at year-end. The actual settlement amount of

₱275,000 is disregarded because the settlement occurred after the financial statements have
been issued.

3. D

4. C (100M x 80%)

5. D
Minor repairs (4M x 10% defective x ½ x 20%) 40,000
Major repairs (4M x 10% defective x ½ x 70%) 140,000
Total warranty costs 180,000
Multiply by: 30%
Amount to be settled in 20x2 54,000
Multiply by: Risk adjustment factor (100% + 3%) 103%
Total 55,620
Multiply by: Discount factor 0.95238
Warranty provision on Dec. 31, 20x1 52,971

6. B

7. D (60 x 48,000) = 2,880,000

8. D
Warranty liability
Actual warranty Warranty expense - 20x7
costs - 20x7 2,250 9,000 (150K x 6%)
Actual warranty Warranty expense - 20x8
costs - 20x8 7,500 15,000 (250K x 6%)
end. 14,250

9. A
No. of packages sold 110,000
Multiply by: Estimate of redemption 60%
Total 66,000
Divide by: No. of coupons for each toy offering 5
Estimated no. of toys to be given out 13,200
Multiply by: Net cost per toy (.80 - .50) 0.30
Premium expense 3,960
10. C
Liability for premiums
6,000,000 Jan. 1, 20x1
Premium expense in 20x1 (2,250,000 x
Actual cost 2,750,000 1,800,000 80%)
Dec. 31, 20x1 5,050,000