INTERMEDIATE ACCOUNTING 3 (CA51016)

PROVISIONS, CONTINGENCIES, AND OTHER CURRENT LIABILITIES REVIEWER

Prepared by the Mentors’ Circle Committee of the UST – Junior Philippine Institute of Accountants

I. Theories.

Multiple Choice. Choose the best answer.

1. When there is a need to adjust a previously recorded provision, then it is treated as a

A. Change in accounting policy
B. No treatment
C. Change in accounting estimate
D. Disclose in the Notes to Financial Statement

2. Which of the following will be allowed to be recorded in the statement of financial

position?
A. Contingent liability when there is a remote chance that it would occur
B. Provision hen there is a small possibility that it would occur
C. Contingent asset when it is not reliably measured
D. Provision when it is probable and reliably measured

3. Which of the following should be disclosed in the balance sheet?

A. A loss from an accident with an amount to be named by the court after trials
B. A lawsuit of patent without any reliable court evidence
C. A loss from lawsuit of a copyright with losses that would range from Php
1,000,000 to Php 3,000,000
D. An entity expecting to win a raffle draw

4. These are liabilities arising from the purchase of goods, materials, supplies, or services
on an open charge-account basis.
A. Accounts Payable
B. Trade Accounts Payable
C. Either A or B
D. Neither A nor B

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 5. Which of the following statements are correct?
Statement 1: According to IFRS 15, an entity shall recognize revenue when the
entity satisfies a performance obligation by transferring a promised good or service
to a customer.
Statement 2: In allocating the transaction price to each performance obligation,
an entity shall determine the estimated selling price less cost to sell in the contract
and allocate the transaction price in proportion to such amounts.
A. Both statements are correct.
B. Statement 1 only
C. Statement 2 only
D. None of the above.

6. The sale of gift certificates creates a liability in the books of the issuing store. Hence,
the liability is settled through
A. Expiration of gift certificates
B. Redemption of gift certificates in exchange for merchandise sold
C. Both A and B
D. Some other answer

7. All of the following are generally presented as part of current liabilities except:
A. Share dividends distributable
B. Property dividends payable
C. Scrip dividends payable
D. None of the above

8. Items usually found under the current liabilities section of the statement of financial
position includes the following except

A. Current portion of a bonds payable

B. Mortgage Loans Payable
C. Notes payable within one operating period
D. Both A and B

TRUE or FALSE.

9. Financial and non-financial liabilities are initially recognized at cost or when

necessary, at the fair value of the liability incurred at the date of initial recognition.
These amounts are always available and are never estimated.
10. The uncertainty of the timing and the amount of the obligation disqualifies the
obligation to be recognized as accounting liabilities.
11. When there is a remote chance of acquiring a contingent liability, then it should be
ignored.

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12. When a provision is no longer deemed as probable in a reporting period, then the entry
made to record the provision is reversed.
13. Bonuses payable resulting from bonuses granted to key officers and managers of a
company are generally presented as part of current liabilities.
14. Share options granted to key officers and managers as part of a bonus arrangement are
generally presented as part of current liabilities.
15. When the company has employee-related liabilities for mandatory contributions and
withholding taxes, the amount debited to the related expense account should be equal
to the amount of the employees’ net pay.

16. If at the end of the period, the company’s recorded VAT from purchases exceeds the
VAT on sales, the excess is recorded as an asset.
17. An entity whose product or service warranty are separately bought by its customers
treats such warranty as a performance obligation under the account of Unearned
Revenue from Warranty Contracts.
18. IFRS 15 states that the transaction price of a premium is not allocated for accounting
purposes. Instead, it is generally considered as an expense that should be matched with
the associated income during the period in which the sale occurred.
19. The corresponding liability for deposits and advances may be classified as current or
non-current depending on the activity that it resulted from.
20. The general rule for the presentation of assets and liabilities is to classify them into
current or non-current. In IAS 1, for each asset and liability where amounts are
expected to be recovered or settled more than twelve months after the reporting date,
it requires the disclosure of that amount expected to be recovered or settled after the
twelve months period.
21. For each class of contingent liability at the end of the reporting period, an entity should
disclose a brief description of the nature of the contingent of liability even if the
possibility of any outflow in settlement is remote.
22. The amount of any expected reimbursement should not be recognized as an asset
instead, it should be disclosed only in the notes.

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II. Problem Solving.
Supply the Answer.
PROBLEM 1
PROVISIONS
On March 2, 2020, LIGHTNING INDUSTRIES is faced with lawsuits of many companies of because of a
construction accident that occurred during the previous year. Lawyers of LIGHTNING INDUSTRIES
informed the company that based on reliability of evidence, it would highly possible that LIGHTNING will
have to pay damages. With data from court and police data, it is assumed that damages that will be paid by
LIGHTNING INDUSTRIES will range have a likely range the within the point of Php 2,400,000 to Php
3,200,000.

1. How much should LIGHTNING INDUSTRIES record the said provision, if

any?

PROBLEM 2
PROVISIONS
On March 2, 2020, MAMI CO. is under a lawsuit due to violation of copyright laws. Lawyers of MAMI
CO. informed the company that they really did violate certain laws stated and is liable for damages. Payment
of damages may range from Php 200,000 to Php 600,000. The court highly expects that damages that will
be paid is at a reasonable estimate of Php 350,000.

2. How much should MAMI CO. record the said provision, if any?

PROBLEM 3
LIABILITY FOR BONUSES
STYLE COMPANY pays an annual bonus to each of its 5 key officers based on the profit of the company.
During 2021, the company earned a profit of P5,000,000 before deductions for the bonuses and income tax.
The company’s tax rate is 30%.

3. How much are the total bonuses if each key officer is granted a bonus of 2%
of the profit before deducting the bonuses but after income taxes?

PROBLEM 4
LIABILITY FOR BONUSES
BLANK SPACE COMPANY pays an annual bonus to its manager based on the profit of the company.
During 2021, the company earned a profit of P6,000,000 before deductions for the bonuses and income tax.
The company’s tax rate is 30%.

4. How much is the bonus if the manager is granted a bonus of 10% of the profit
after the bonus and income taxes? (Round off the final answer to the nearest
peso)

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PROBLEM 5
TAXES AND EMPLOYEE-RELATED LIABILITIES
DECKER COMPANY computed the following VAT amounts for the last quarter of its fiscal year ending
March 31, 2021:
VAT on Sales VAT from Purchases
January 120,000 96,000
February 144,000 102,000
March 60,000 84,000

Excess Input VAT from the previous quarter amounted to Php 10,000.

5. How much should DECKER Company record as VAT payable?

PROBLEM 6
TAXES AND EMPLOYEE-RELATED LIABILITIES
MORNINGSTAR CORPORATION’S payroll clerks prepared the following schedule regarding the
mandatory contributions of both the employees and the company for its last monthly payroll for 2021.
Remittance to the authorized agencies will be made in the following year.
Employee contributions MORNINGSTAR’s Contributions
SSS premiums Php 73,000 Php 146,000
Philhealth premiums 60,000 60,000
Pag-ibig premiums 37,000 40,000

6. Based on the schedule above, how much is the total employee benefit-related
liabilities to be reported by MORNINGSTAR in its December 31, 2021
statement of financial position?

PROBLEM 7
PRODUCT AND SERVICE WARRANTY
BAMMIE Co. sells laptops that are covered by a 3-year warranty against factory defects. This warranty
provides assurance that the company’s products will function as intended based on the agreed-upon
specifications. BAMMIE Co. estimates that warranty costs related to peso sales are as follows:
5% First year of warranty
10% Second year of warranty
15% Third year of warranty
The total sales and actual warranty expenses for the years 2021 to 2023 are shown below.
Year Sales Actual Warranty Expenses
2021 P8,000,000 P450,000
2022 10,000,000 700,000
2023 12,000,000 1,050,000

7. How much is the balance of warranty liability as of the year ended

December 31, 2022?

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PROBLEM 8
PRODUCT AND SERVICE WARRANTY
YAMMIE Co. sells laptops that are covered by a 3-year warranty against factory defects. This warranty
provides assurance that the company’s products will function as intended based on the agreed-upon
specifications. YAMMIE Co. estimates that the total warranty costs spend for repairs are incurred evenly
as follows:
20% First year of warranty
30% Second year of warranty
50% Third year of warranty
Assume that the 3-year warranty is an optional separate purchase at P3,000 each unit, with the company
selling 1,500 warranty contracts for the year 2021, 2,500 for the year 2022, and 3,500 for the year 2023.
Assume further that sales and repairs occur evenly throughout the year.

8. How much should be recognized as revenue from warranty contracts for the
year 2023?

PROBLEM 9
DISCOUNT VOUCHERS
P. SHOEMART sells Product X for P1,500 each. For each sale of P1,500, P. SHOEMART gives its
customers 15% discount voucher for future purchases up to P1,500 for the next 45 days. The company
estimated that there is 65% chance that the customers will use the voucher for the purchases within the
period allotted and that a customer will on the average purchase of 800 of additional products.
9. How much is allocated for Product X? Round to the nearest peso.

10. Assume that the total sales is 1,050,000, how much is the unearned revenue?

PROBLEM 10
PREMIUMS
G&P COMPANY increased its promotional efforts to boost its annual sales, penetrate new markets, and
beat one of its main competitors in the FMCG industry, Unilover Company. Because of this, on June 30,
2020, it launched a campaign that was based on the growing fan base of Korean boy bands in the
Philippines. For each liquid detergent sold, a customer receives a coupon. To redeem a limited edition BTS
Funko Pop, 10 coupons must be submitted. These collectibles retail for P80 each, and the company
estimates that 80% of the coupons will be redeemed. On December 31, 2020, the following data was
obtained:
Number of Coupons Redeemed – 250,000
Number of Liquid Detergent Bottles Sold - 1,000,000, P20 per bottle

11. How much is the balance of estimated premiums to be distributed?

12. At year-end, at what amount should the unearned revenue for premium
claims to be recorded?

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PROBLEM 11
CUSTOMER LOYALTY AWARDS
A customer loyalty program is being operated by SAGITTARIUS COMPANY Loyalty awards are granted
for goods purchased by the members. The members can use their accumulated loyalty points in exchange
for goods of the entity. The said points have no expiry date. During 2020, the company was able to sell
goods for a total consideration of P4,000,000, from which 20,000 points were granted. Of the P4,000,000,
5% is considered to be allocable to member loyalty awards. The management expects that 80% of the
loyalty points would be redeemed. SAGITTARIUS CO. was able to redeem 4,000 points during the year.

13. What amount of liability shall be presented in the Statement of Financial

Position relating to customer loyalty awards at year-end?

PROBLEM 12
CUSTOMER LOYALTY AWARDS
VIRGO CAFÉ participates in a customer loyalty program operated by LEO’S BURGER HOUSE. The
VIRGO CAFÉ’S are granted two dining points for every P500 spent on signature-style drinks. The
customers can redeem the points for future dine-ins at LEO’S BURGER HOUSE. VIRGO CAFÉ’S total
sales during 2020 are P2,500,000. The entity pays the said burger house P500 for each point. In the same
year, 5,000 points were redeemed by customers at LEO’S BURGER HOUSE.

14. What amount of Liability for Customer Loyalty Awards must be recognized
at year-end?

PROBLEM 13
GIFT CERTIFICATES
EULA COMPANY sells gift certificates redeemable in merchandise and expire one year after issuance.
Upon redemption or expiration, Eula recognizes the unearned revenue from gift certificates as realized.
Data concerning the second year of operations are as follows:

Unearned Revenue from Gift certificate outstanding, Jan 1 937.500

Gift certificates issued during the year 3,750,000

Gift certificates redeemed during the year 3,500,000

Gift certificates expired during the year 187,500

Gift certificates expected to expire in the succeeding year 250,000

Gross profit rate 35%

15. How much is the balance of the Unearned Revenue as of year end?

16. How much revenue from expired gift certificates should be realized as of
year end?

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PROBLEM 14
DIVIDENDS PAYABLE
On December 31, 2020 when GORGEOUS COMPANY had 1,000,000 P100 par ordinary shares
outstanding, the company declared a bonus issue of 10% to its shareholders. On this date, the fair value of
each share was P120.

17. How much is presented in the current liabilities section as a result of the
above?

PROBLEM 15
DIVIDENDS PAYABLE
On December 03, 2021, WILLOW COMPANY declared a cash dividend of P0.25 per share to its
shareholders of record as of December 25, 2021, payable on January 6, 2022. The company had 2,650,000
ordinary shares outstanding.

18. How much is presented in the current liabilities sections as a result of the
above on December 31, 2021?

PROBLEM 16
DEPOSITS AND ADVANCES
POCHI Co. sells its products in reusable containers. The customer is charged a deposit when containers are
delivered and receive a refund when containers are returned within one year after the year of delivery.
Deposits for containers not returned within the time limit are accounted as proceeds from sale of containers.
Information for 2018 is as follows:
Container deposits on December 31, 2017, from deliveries in:
2016 P 75,000
2017 90,000 P 165, 000

Deposits for containers delivered in 2018 140,000

Deposits for containers returned in 2018 from deliveries in:
2016 P 50,000
2017 90,000
2018 70,000 210,000

19. Determine the amount of liability for deposits on returnable containers on

December 31, 2018.

20. How much is the proceeds from the sale of containers?

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 ANSWER KEY

THEORIES (2 pts each) PROBLEM SOLVING (3 pts each)

1. C 1. 2,800,000
2. D 2. 350,000
3. C 3. 360,825
4. C 4. 392,523
5. B 5. 32,000
6. C 6. 416,000
7. A 7. 4,250,000
8. B 8. 4,725,000
9. FALSE 9. 1,426
10. FALSE 10. 51,800
11. TRUE 11. 55,000
12. TRUE 12. 3,333,333
13. TRUE 13. 150,000
14. FALSE 14. 0
15. FALSE 15. 1,000,000
16. TRUE 16. 187,500
17. TRUE 17. 0
18. FALSE 18. 662,500
19. TRUE 19. 70,000
20. TRUE 20. 25,000
21. FALSE
22. FALSE

“Stick to the fight when you’re hardest hit —

It’s when things seem worse that you must not quit.”
– Don’t Quit by John Greenleaf Whittier
Prepared by:
Jen Margaret Hilario Jerald Patrick Reyes Rich Anne Magsombol
Vince Emmanuel Labeña Franz Emmanuel Cacatian Ghoseph Aleckzander Monzon
Liz Angela Ruiz Lyle Andrey Flores Francis Matthew Obligacion
Mika Chua Kristian Celson Abella Patricia Santos
Erika Carranza