INTERMEDIATE ACCOUNTING 2

SEMI FINAL EXAMINATION

Compute what is being asked for each item. Show supporting computations in good form, computations must be
hand-written.
(Attached summary of answers and the supporting computations).

1. Dunn Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the year
stamps are sold to licensees. Dunn's past experience indicates that only 80% of the stamps sold to licensees will
be redeemed. Dunn's liability for stamp redemptions was ₱6,000,000 at December 31, 20x5. Additional
information for 20x6 is as follows:
Stamp service revenue from stamps sold to licensees 4,000,000
Cost of redemptions (stamps sold prior to 1/1/x6) 2,750,000

If all the stamps sold in 20x6 were presented for redemption in 20x7, the redemption cost would be ₱2,250,000. What
amount should Dunn report as a liability for stamp redemptions at December 31, 20x6?

2. During 20x1, Haft Co. became involved in a tax dispute with the BIR. At December 31, 20x1, Haft's tax advisor
believed that an unfavorable outcome was probable. A reasonable estimate of additional taxes was ₱200,000 but
could be as much as ₱300,000. After the 20x1 financial statements were issued, Haft received and accepted a
BIR settlement offer of ₱275,000. What amount of accrued liability should Haft have reported in its December 31,
20x1 balance sheet?

3. On February 5, 2000, an employee filed a ₱2,000,000 lawsuit against Steel Co. for damages suffered when one
of Steel’s plants exploded on December 29, 1999. Steel’s legal counsel expects the company will lose the
lawsuit and estimates the loss to be between ₱500,000 and ₱1,000,000. The employee has offered to settle the
lawsuit out of court for ₱900,000, but Steel will not agree to the settlement. In its December 31, 1999, balance
sheet, what amount should Steel report as liability from lawsuit.

4. During 20x7, Gum Co. introduced a new product carrying a two-year warranty against defects: The estimated
warranty costs related to peso sales are 2% within 12 months following the sale and 4% in the second 12 months
following the sale. Sales and actual warranty expenditures for the years ended December 31, 20x7 and 20x8,
are as follows:
Year Sales Actual warranty expenditures
20x7 150,000 2,250
20x8 250,000 7,500
400,000 9,750

What amount should Gum report as estimated warranty liability in its December 31, 20x8, balance sheet?

5. In packages of its products, the Kent Food Company includes coupons which may be presented to grocers for
discounts on certain products of Kent on or before a stated expiration date. The grocers are reimbursed when
they send the coupons to Kent. In Kent's experience, 40% of such coupons are redeemed, and one month
generally elapses between the date a grocer receives a coupon from a consumer and the date Kent receives it.
During 20x4, Kent issued two series of coupons as follows:
Consumer expiration Amount disbursed as of
Issued on Total value date 12/31/x4
1/1/x4 100,000 6/30/x4 34,000
7/1/x4 120,000 12/31/x4 40,000

Kent's December 31, 20x4, balance sheet should include a liability for unredeemed coupons of

This study source was downloaded by 100000836049865 from CourseHero.com on 03-30-2022 22:36:51 GMT -05:00

https://www.coursehero.com/file/97410671/IA2-SFEdocx/
 6. In December 20x1, Mill Co. began including one coupon in each package of candy that it sells and offering a toy
in exchange for 50 centavos and five coupons. The toys cost Mill 80 centavos each. Eventually 60% of the
coupons will be redeemed. During December, Mill sold 110,000 packages of candy and no coupons were
redeemed. In its December 31, 20x1, balance sheet, what amount should Mill report as estimated liability for
coupons?

7. In May 20x6, Caso Co. filed suit against Wayne, Inc. seeking ₱1,900,000 damages for patent infringement. A
court verdict in November 20x9 awarded Caso ₱1,5000,000 in damages, but Wayne’s appeal is not expected to
be decided before 2x10. Caso’s counsel believes it is probable that Caso will be successful against Wayne for an
estimated amount in the range between ₱800,000 and ₱1,100,000, with ₱1,000,000 considered the most likely
amount. What amount should Caso record as income from the lawsuit in the year ended December 31, 20x9?

8. During January 20x9, Haze Corp. won a litigation award for ₱15,000 which was tripled to ₱45,000 to include
punitive damages. The defendant, who is financially stable, has appealed only the ₱30,000 punitive damages.
Haze was awarded ₱50,000 in an unrelated suit it filed, which is being appealed by the defendant. Counsel is
unable to estimate the outcome of these appeals. In its 20x9 financial statements, Haze should report what
amount of pretax gain?

9. In 20x1, EXHAUSTIVE COMPLETE Co. received a court order requiring the cleanup of environmental damages
caused by one of EXHAUSTIVE’s factory. EXHAUSTIVE has no other realistic alternative but to comply with the
court order. Other entities have incurred around ₱60M for similar cleanup; however, EXHAUSTIVE’s best
estimate of the cost of cleanup is ₱80M. How much is the provision to be recognized?

10. In 20x1, LUMINOUS SHINING Co. recalled a product due to a possible defect caused by a malfunctioning
factory equipment. The products recalled will be repaired free of charge. LUMINOUS is uncertain whether all
products recalled will have the possible defect. However, the following estimate was made by LUMINOUS’s
engineers and managerial accountants and approved by the board of directors.
Repair cost Probability
80,000,000 5%
60,000,000 20%
40,000,000 35%
20,000,000 40%
100%

How much is the provision to be recognized?

11. In 20x1, a lawsuit was filed against WINSOME CAUSING PLEASURE Co. for patent infringement. The plaintiff is
claiming ₱400M in damages. WINSOME’s legal counsel believes that it is probable that WINSOME will lose the
lawsuit and pay damages of not less than ₱40M but not more than ₱400M. The probability of any amount within
the range is as likely as any other amount also within the range. The plaintiff has offered to settle the lawsuit out
of court for ₱360M but WINSOME did not agree to the settlement. How much is provision to be reported in
WINSOME’s year-end financial statements?

This study source was downloaded by 100000836049865 from CourseHero.com on 03-30-2022 22:36:51 GMT -05:00

https://www.coursehero.com/file/97410671/IA2-SFEdocx/
 12. A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the contract
of sale, the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that
become apparent within one year from the date of sale. On the basis of experience, it is probable (i.e., more
likely than not) that there will be some claims under the warranties.

Sales of ₱40 million were made evenly throughout 20X1.

At December 31, 20x1 the expenditures for warranty repairs and replacements for the product sold in 20x1 are
expected to be made 50% in 20x1 and 50% in 20x2. Assume for simplicity that all the 20x2 outflows of economic
benefits related to the warranty repairs and replacements take place on June 30, 20x2.

Experience indicates that 95% of products sold require no warranty repairs; 3% of products sold require minor repairs
costing 10% of the sale price; and 2% of products sold require major repairs or replacement costing 90% of sale
price. The entity has no reason to believe future warranty claims will be different from its experience.

At December 31, 20x1, the appropriate discount factor for cash flows expected to occur on June 30, 20x2 is 0.95238.
Furthermore, an appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an
increment of 6 per cent to the probability-weighted expected cash flows.

How much is the warranty provision at December 31, 20x1?

13. On January 1, 20x1, DECRY Co. signed a three year, noncancelable purchase contract, which allows DECRY
Co. to purchase up to 60,000 units of a microchip annually from BELITTLE Co. at ₱100 per unit and guarantees
a minimum annual purchase of 15,000 units. At year-end, it was found out that the goods are obsolete. DECRY
had 10,000 units of this inventory at December 31, 20x1, and believes these parts can be sold as scrap for ₱20
per unit. How much is the loss on purchase commitment?

14. As of December 31, 20x1, ROUSE AWAKEN Co. has adopted a detailed formal plan to close one of its toys
divisions and put up a new division to manufacture warfare weapons. The plan was communicated through a
public announcement and all of those affected by the closure were informed. ROUSE estimates the following
costs in relation to the closure of the division:

Termination benefits of employees terminated as a

result of the closure ₱4,000,000
Costs of retraining and relocating retained employees 8,000,000
Payment for unpaid purchases made by the division 16,000,000
New systems and distribution networks for the weapons
division 80,000,000
Marketing costs for the weapons to be manufactured by
the new division 24,000,000
Expected losses during the first year of operations of
the weapons division 80,000,000

How much is the provision to be recognized?

Use the following information for the next two questions:

RISIBLE FUNNY Co. provides 3-year warranty for the products it sells. RISIBLE estimates that warranty costs ₱400
per unit sold. As of January 1, 20x1, the liability for warranty has a balance of ₱800,000 for units sold in 20x0. During
the year RISIBLE sold 5,000 units and actual warranty costs incurred were ₱1,240,000.

15. How much is the warranty expense to be recognized in 20x1?

16. How much is the balance of the warranty obligation as of December 31, 20x1?

This study source was downloaded by 100000836049865 from CourseHero.com on 03-30-2022 22:36:51 GMT -05:00

https://www.coursehero.com/file/97410671/IA2-SFEdocx/
 17. GENESIS BEGINNING provides 2-year warranty for products sold. Estimated cost of warranty is 2% in the year
of sale and 4% after the year of sale. Information on GENESIS’s sales is shown below:
Year Sales Actual warranty costs
20x1 40,000,000 1,600,000
20x2 48,000,000 2,000,000

How much is the balance of the warranty obligation as of December 31, 20x2 assuming those pertaining to 20x1
sales have not yet expired as of 20x2 year-end?

18. PROFUSE EXTRAVAGANT Co. launched a sales promotion in 20x1. For every ten empty packs returned to
PROFUSE plus ₱200, customers will receive a set of kitchen knives. PROFUSE estimates that 40% of the packs
sold will be redeemed. Information on transactions during the year is as follows:
Units Amount
Sales 500,000 3B
Sets of kitchen knives purchased (₱800 per set) 300,000 240M
Number of packs redeemed 45,000

How much is the premium expense in 20x1?

19. CANDID FRANK Co. launched a sales promotion in 20x1. For every five bottles returned to CANDID, customers
will receive a T-shirt. The unit cost of T-shirt is ₱400. CANDID estimates that 80% of sales will be redeemed.
Additional information is as follows:
Units
Sales in 20x1 500,000
Sales in 20x2 900,000
T-shirts distributed in 20x1 60,000
T-shirts distributed in 20x2 147,600

How much is the liability for premiums as of December 31, 20x2?

20. AUDACIOUS RECKLESSLY BOLD Co. has a policy of refunding purchases to unsatisfied customers even
though AUDACIOUS is under no legal obligation to do so. AUDACIOUS’s policy of making refunds is made
known to the public. Past experience shows that 10% of sales are returned and customers are refunded. It is
also estimated that 60% of sales returns are from sales on account. In 20x1, AUDACIOUS Co. had ₱4,000,000
total sales, 60% of which were on account. How much is the provision to be recognized?

This study source was downloaded by 100000836049865 from CourseHero.com on 03-30-2022 22:36:51 GMT -05:00

https://www.coursehero.com/file/97410671/IA2-SFEdocx/
 This study source was downloaded by 100000836049865 from CourseHero.com on 03-30-2022 22:36:51 GMT -05:00

https://www.coursehero.com/file/97410671/IA2-SFEdocx/
Powered by TCPDF (www.tcpdf.org)