ACCA106-INTERMEDIATE ACCOUNTING 2

QUIZ- CURRENT LIABILITY 1st Sem., SY21-22

MULTIPLE CHOICE. Select the best answer for each of the following questions.
1. 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.
2. A retail store received cash and issued gift certificates that are redeemable in merchandise. The gift
certificates lapse one year after they are issued. How would the deferred revenue account be
affected by the redemption and lapse of certificates, respectively?
a. Decrease and No effect c. No effect and No effect
b. Decrease and Decrease d. No effect and Decrease
3. At the end of the current year, an entity received an advance payment of 60% of the sales price for
special order goods to be manufactured and delivered within five months. At the same time, the
entity subcontracted for production of the special order goods at a price equal to 40% of the main
contract price. What liabilities should be reported in the entity's year-end statement of financial
position?
a. None
b. Deferred revenue equal to 60% of the main contract price and payable to subcontractor equal to
40% of the main contract price.
c. Deferred revenue equal to 60% of the main contract price and no payable to subcontractor.
d. No deferred revenue but payable to subcontractor is reported at 40% of the main contract price.
4. An entity sells appliances that include a three-year warranty. Service calls under the warranty are
performed by an independent mechanic under a contract with the entity. Based on experience,
warranty costs are expected to be incurred for each machine sold. When should the entity recognize
these warranty costs?
a. Evenly over the life of the warranty
b. When the service calls are performed
c. When payments are made to the mechanic
d. When the machines are sold
5. The board of directors of an entity decided in the latter part of the current year to wind up
international operations in the Far East and move them to Australia. The decision wAs based on a
detailed formal plan of restructuring. This decision was conveyed to all workers and management
personnel at the headquarters in Europe. The cost of this restructuring plan can be estimated
reliably. How should the entity treat this restructuring in its financial statements for the current year-
end?
a. Because the entity has not announced the restructuring to those affected by the decision and thus
has not raised an expectation that the entity will actually carry out the restructuring and as no
constructive obligation has arisen, only disclose the restructuring decision and the cost of
restructuring.
b. Recognize a provision for restructuring since the board of directors has approved it and it has
been announced in the headquarters of the entity in Europe.
c. Mention the decision to restructure and the cost involve in the chairman's statement in the annual
report since it is a decision of the board of directors.
d. Because the restructuring has not commenced before year-end, based on prudence, wait until
next year and do nothing in this year's financial statements.
6. An entity has been served a legal notice at year end by the Department of Environment and Natural
Resources to fit smoke detectors in its factory on or before middle of next year. The cost of fitting
smoke detector can be measured reliably. How should the entity treat this in its financial statements
at year-end?
a. Recognize a provision for the current year equal to the estimated amount.
b. Recognize a provision for the current year equal to one half only of the estimated amount.
c. No provision is recognized .at year-end because there is no present obligation for the future
expenditure since the entity can avoid the future expenditure by changing the method of
operations but disclosure is required.
d. Ignore this for purposes of the financial statements at year-end.
7. Which of the following should be disclosed in the financial statements as a contingent liability?
a. 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.
c. The entity is involved in a legal case which it may possibly lose, although this is not probable.
d. The entity has not yet paid certain claims under sales warranties.
8. The balance in Stem Corporations accounts payable account at December 31 2011 was P1,350,000
before any necessary year-end adjustments relating to the following:
  Goods were in transit to Stem from a vendor on December 31, 2011. The invoice cost was
P75,000. The goods were shipped FOB shipping point on December 29, 2011 and were
received on January 2, 2012. Goods shipped FOB destination on December 21, 2011 from a
vendor to Stem, were received on January 6, 2012. The invoice cost was P37,500.
 On December 27, 2011, Stem wrote and recorded checks totalling P60,000 which were mailed
on January 10, 2012.
In Stem’s December 31, 2011 statement of financial position, how much should be the accounts
payable?
a) P1,410,000 c) P1,462,500
b) P1,425,000 d) P1,485,000
Answer. D
Accounts payable unadjusted P1,350,000
Goods in transit - FOB shipping point 75,000
Undelivered check 60,000
Adjusted Accounts payable balance P1,485,000
9. In November and December 2011, Adventure Company received P792,000 for 1,000, 3-year
subscriptions at P264 per issue per year, starting with the January 2012 issue. Adventure elected to
include the entire P792,000 in its 2011 income statement for tax purposes.
What amount should Adventure report in its 2011 statement of financial position as unearned
subscription revenue?
a) None c) P264,000
b) P44,000 d) P792,000
Answer: D
The full amount of P792,000 will be recognized as unrealized revenue during 2011 accounting period
since subscription will only start in January 2012.
10. Gallery Department Store sells gift certificates redeemable for store merchandise that expires one
year after their issuance. Gallery has the following information pertaining to its gift certificates sales
and redemptions:
Unearned at December 31, 2011 600,000
2012 sales 2,000,000
2012 redemptions of prior year’s sales 200,000
2012 redemptions of current-year sales 1,400,000
Gallery's experience indicates that 10% of gift certificates sold will not be redeemed. In its
December 31, 2012 statement of financial position, what amount should Gallery report as unearned
revenue'?
a) P400,000 c) P 800,000
b) P600,000 d) P1,000,000
Answer: A
Expected-gift certificates to be redeemed (90% x 2,000,000) P1,800,000
Less: Gift certificates redeemed-2012 sales 1,400,000
Unearned revenue on gift certificates P 400,000
Any unearned gift certificate from prior year sale, which has yet to be presented as of December 31,
2012, should be reversed due to expiration.
11. Strand, Inc. provides an incentive compensation plan under which its president receives a bonus
equal to 10% of the corporation’s income in excess of P600,000 before income tax but after
deduction of the bonus.
If income before income tax and bonus is P1,920,000 and the tax rate is 32%, the amount of
the bonus would be
a) P120,000 c) P174,360
b) P132,000 d) P192,000
Answer: A
B =.10 [1,920,000- 600,000-B]
B = .10[1,320,000-B]
B = [132,000-.10B
B +.10B= 132,000
B = 132,000/1.1
B = 120,000
12. The Puncher Corporation launched a sales promotional campaign on June 30, 2011. For every ten
empty packs returned to Puncher, customers will receive an attractive food container. The company
estimates that only 30% of the packs reaching the market will be redeemed. Additional data are as
follows:
Units Amount
Sales of food packs 3,000,000 P9,000,000
Food containers purchased 60,000 180,000
Prizes distributed to customers 37,000
At the end of the year, Puncher recognized a liability equal to the estimated cost of potential prizes
outstanding. What is the amount of this estimated liability?.
a) P69,000 c) P159,000
b) P90,000 d) P180,000
Answer C
Estimated number of packs to be redeemed (3,000,000 x 30%) 900,000
Divided by number of packs for every premium 10
Estimated number of premiums to be distributed 90,000
Less Premiums distributed 37,000
Balance of estimated premiums to be distributed 53,000
x Unit cost per premium (P180,000 /60,000) P3
Estimated liability for premiums 159,000
13. Dix Company operates a retail store and must determine the proper December 31, 1998, year-end
accrual for the following expenses:
 The store lease calls for fixed rent of P12,000 per month, payable at the beginning of the
month, and additional rent equal to 6% of net sales over P2,500,000 per calendar year,
payable on January 31 of the following year. Net sales for 1998 are P4,500,000.
 An electric bill of P8,500 covering the period 12/16/98 through 1/15/99 was received January
22, 1999.
 A P4,000 telephone bill was received January 7, 1999, covering,
Service in advance for January 1999 1,500
Local and toll calls for December 1998 2,500
In its December 31,1998, balance sheet, Dix should report accrued liabilities of
a. 150,750 c. 128,250
b. 131,000 d. 126,750
1998 is as follows
Unearned revenue, 1/1/98 65,000
Gift certificates sold 225,000
Gift certificates redeemed 195,000
Expired gift certificates 10,000
Cost of goods sold 60%
On December 31, 1998 what amount should Cobb report as unearned revenue?
a. 51,000 c. 85,000
b. 57,000 d. 95,000
65+225=290-(195+10) =85k
14. East Corporation manufactures stereo systems- that carry, a two- year warranty against defects.
.Based on past experience, warranty costs are estimated at 4% of sales for the warranty period.
During 1998, stereo system sales totaled P3,000,000, and warranty costs of P67,500 were incurred.
In its income statement for the year ended December 31, 1998, East should report warranty
expense of
a. 52,500 c. 67,500
b. 60,000 d. 120,000
3M x 4% = 120k
15. Ryan Company sells major household appliance service contracts for cash. The service contracts
are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to
unearned service contract revenue. This account had a balance of P720,000 at December 31,1998
before year-end adjustment. Service contract costs are charged as incurred to the service contract
expense account, which had a balance of P180,000 at December 31, 1998. Outstanding service
contracts at December 31, 1998 expire as follows:
During 1999 150,000
During 2000 225,000
During 2001 100,000
What amount should be reported unearned service contract revenue in Ryan's December 31, 1998
balance sheet?
a 540,000 c. 295,000
b. 475,000 d. 245,000
150 +225+100=475k
16. Dix Company operates a retail store and must determine the proper December 31, 1998, year-end
accrual for the following expenses:
 The store lease calls for fixed rent of P12,000 per month, payable at the beginning of the
month, and additional rent equal to 6% of net sales over P2,500,000 per calendar year,
payable on January 31 of the following year. Net sales for 1998 are P4,500,000.
 An electric bill of P8,500 covering the period 12/16/98 through 1/15/99 was received January
22, 1999.
 A P4,000 telephone bill was received January 7, 1999, covering,
Service in advance for January 1999 1,500
Local and toll calls for December 1998 2,500
In its December 31,1998, balance sheet, Dix should report accrued liabilities of
a. 150,750 c. 128,250
b. 131,000 d. 126,750
Solution 16. Answer D
Accrued additional rent (6% x 2,000,000) 120,000
Accrued electric bill December 16-31 (8,500 x 1/2) 4,250
Accrued telephone bill for 1998 2,500
Total accrued liabilities 126,750