Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

FIRST COMPREHENSIVE TEST

Accounting 122
GENERAL INSTRUCTIONS. This test is composed of three parts each with their own sets of
instruction. Read them carefully before answering the questions. Erasures are strictly not allowed.
This test is good for four hours. God bless!
MULTIPLE CHOICE. Choose the best statement among the choices. Write your final answer on the
answer sheet provided with this questionnaire. Each item is worth 1 point.
1. The most conceptually appropriate method of valuing a liability under the historical cost
basis is to:
a. Discount the amount of expected cash outlfows that are necessary to liquidate
the liability using the market rate of interest at the date the liability was initially
incurred.
b. Discount the amount of expected cash outlfows that are necessary to liquidate
the liability using the market rate of interest at the date financial statements are
prepared subsequent to issuance.
c. Record as a liability the amount of cash or cash-equivalent value that the
company would be required to pay to eliminate the liability in the ordinary course
of business on the date of the financial statements.
d. Record as a liability the amount of cash or cash-equivalent proceeds actually
received when a liability was incurred.
2. For a liability to exist:
a. A past or future event must have occurred.
b. The exact amount need not be known.
c. The identity of the party owed must be known.
d. An obligation to pay cash in the future must exist.
3. Which of the following characteristics may result in the classification of a liability being
changed from current to noncurrent?
a. Violation of a subjective acceleration clause.
b. Violation of an objective acceleration clause.
c. A demand provision for payment.
d. Refinancing after the balance sheet date.
4. Which of the following represents a liability?
a. The obligation to pay for goods that a company expects to order from suppliers
next year.
b. The obligation to provide goods that customers have ordered and paid for during
the current year.
c. The obligation to pay interest on a five-year note payable that was issued the last
day of the current year.
d. The obligation to distribute share of a company's own common stock next year as
a result of a stock dividend declared near the end of the current year.
5. Which of the following characteristics may result in the classification of a liability as
current?
a. Short-term obligations expected to be refinanced with long-term debt.
b. Debts to be liquidated from funds that have been accumulated and are reported
as noncurrent assets.
c. Violation of provisions of a debt agreement.
d. Obligations for advance collections that involve long-term deferment of the
delivery of goods or services.
6. A contingent liability should be recorded when:
a. Any lawsuit is actually filed against a company.
b. It is certain that funds are available to pay the amount of the claim.
c. It is probable that a liability has been incurred even though the amount of the loss
cannot be reasonably estimated.
d. The amount of the loss can be reasonably estimated and it is probable prior to
issuance of financial statements that a liability has been incurred.

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 7. Which of the following circumstances would require recording an accrual for a loss
contingency under current generally accepted accounting principles?
a. Event is unusual in nature and occurrence of event is probable.
b. Event is unusual in nature and event occurs infrequently.
c. Amount of loss is reasonably estimable and occurrence of event is probable.
d. Amount of loss is reasonably estimable and event occurs infrequently.
8. Which of the following statements best describes a subsequent event?
a. A subsequent event affects only subsequent reporting periods.
b. A subsequent event may occur any time after financial statements are issued.
c. A subsequent event is, in some cases, reflected in the statements of the preceding
period.
d. A subsequent event is not covered by the independent auditor's report.
9. Pending litigation would generally be considered a(an):
a. Nonmonetary liability.
b. Contingent liability.
c. Estimated liability.
d. Current liability.
10. Jersey, Inc. is a retailer of home appliances and offers a service contract on each
appliance sold. Jersey sells appliances on installment contracts, but all service contracts
must be paid in full at the time of sale. Collections received for service contracts should
be recorded as an increase in a
a. Deferred revenue account.
b. Sales contracts receivable valuation account.
c. Stockholders’ valuation account.
d. Service revenue account.

SHORT PROBLEMS. Compute for the amount/s asked by each problem. Final answers should be
written on the answer sheet provided with this questionnaire. Solutions are to be written in a
separate sheet of paper to be submitted along with the answer sheet. Each item is worth 2
points.
PROBLEM 1: Case Corporation had accounts payable of P5,000,000 recorded in the general
ledger as of December 31, 2011 before consideration of the following unrecorded transactions:
Invoice Date Amount Date Shipped Date Received FOB Terms
1/3/2012 P 400,000 12/22/2011 12/24/2011 Destination
1/2/2012 650,000 12/28/2011 1/2/2012 Shipping point
12/26/2011 600,000 1/2/2012 1/3/2012 Shipping point
1/10/2012 450,000 12/31/2011 1/5/2012 Destination
1. In the December 31, 2011 statement of financial position, the accounts payable should
be reported in the amount of: P6,050,000
PROBLEM 2: The balance in Iwig Company’s accounts payable account at December 31, 2011
was P400,000 before any necessary year-end adjustments relating to the following:
A. Goods were in transit to Iwig from a vendor on December 31, 2011. The invoice cost
was P50,000. The goods were shipped FOB shipping point on December 29, 2011 and
were received on January 4, 2012.
B. Goods shipped FOB destination on December 21, 2011 from a vendor to Iwig were
received on January 6, 2012. The invoice cost was P25,000.
C. On December 27, 2011, Iwig wrote and recorded checks to creditors totaling P30,000
that were mailed on January 10, 2012.
2. In Iwig’s December 31, 2011 statement of financial position, the accounts payable should
be: 480,000
PROBLEM 3: Gear Company’s accounts payable balance at December 31, 2011 was P1,100,000
before considering the following transactions:
A. Goods were in transit from a vendor to Gear on December 31, 2011. The invoice price
was P80,000 and the goods were shipped FOB shipping point on December 29, 2011.
The goods were received on January 4, 2012.
B. Goods shipped to Gear, FOB shipping point on December 20, 2011 from a vendor were
lost in transit. The invoice price was P50,000. On January 5, 2012, Gear filed a P50,000
claim against the common carrier.
3. In its December 31, 2011 statement of financial position, Gear should report accounts
payable of: 1,230,000

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PROBLEM 4: Pythagoras Company must determine the December 31, 2011 year-end accruals for
advertising and rent expenses. A P2,000 advertising bill was received on January 7, 2012. It
related to costs of P1,500 for advertisements in December 2011 issues and P500 for
advertisements in January 2, 2012 issues of the newspaper. A store lease effective December 16,
2010 calls for fixed rent of P4,800 per month payable 1 month from the effective date and
monthly thereafter. In addition, rent equal to 5% of net sales over P1,200,000 per calendar year is
payable on January 31 of the following year. Net sales for 2011 and 2010 were P2,200,000 and
P1,500,000 respectively.
4. In its December 31, 2011 statement of financial position, Pythagoras should report
accrued liabilities of: 53,900
PROBLEM 5: Ross Company pays all salaried employees on a Monday for the 5-day workweek
ended the previous Friday. The last payroll recorded for the year ended December 31, 2012 was
for the week ended December 25, 2012. The payroll for the week ended Friday, January 1, 2013
included regular weekly salaries of P80,000 and vacation pay of P25,000 for vacation time
earned in 2012 but not taken by December 31, 2012. Ross had accrued a liability of P20,000 for
vacation pay at December 31, 2011.
5. In its December 31, 2012 statement of financial position, what amount should Ross report
as accrued salary and vacation pay? 89,000
PROBLEM 6: Daye Company’s salaried employees are paid biweekly. Occasionally, advances
made to employees are paid back by payroll deductions. Information relating to salaries for the
calendar year 2011 is as follows:
12/31/2010 12/31/2011
Employee advances P 12,000 P 18,000
Accrued salaries payable 91,000 ?
Salaries expense during the year 910,000
Salaries paid during the year (gross) 875,000
6. At December 31, 2011, what amount should Dave report for accrued salaries payable?
126,000
PROBLEM 7: At December 31, 2010, Kisu Company’s liabilities include the following:
A. P10 million of 10% notes are due on March 31, 2015. The financing agreement contains
a covenant that requires Kisu to maintain current assets at least equal to 200% of its
current liabilities. As of December 31, 2010, Kisu has breached this loan covenant. On
February 10, 2011, before Kisu’s financial statements are authorized for issue, Kisu
obtained a period of grace from Mayumi Bank until January 31, 2012, having
convinced the bank that the company’s normal 3 to 1 ratio of current assets to current
liabilities will be reestablished during 2011.
B. P15 million of non-cancelable 12% bonds were issued at face value on September 30,
1989. The bonds mature on August 31, 2011. Kisu expects to have sufficient cash
available to redeem the bonds at maturity.
C. P20 million of 10% bonds were issued at face value on June 30, 1991. The bonds mature
on June 30, 2020, but bondholders have the option to call or demand payment on the
bonds on June 30, 2011. However, the call option is not expected to be exercised,
given prevailing market conditions.
7. What portion of Kisu Company’s debt should be reported as part of current liabilities?
45,000,000
PROBLEM 8: Namekus Company has the following three loans payable scheduled to be repaid
in February of next year. The company’s accounting year ends on December 31.
A. The company intends to repay Loan 1 for P100,000 when it comes due in February. In
the following October, the company intends to get a new loan for P80,000 from the
same bank.
B. The company intends to refinance Loan 2 for P150,000 when it comes due in February.
The refinancing agreement, for P180,000, will be signed in April, after the financial
statements for this year have been authorized for issue.
C. The company intends to refinance Loan 3 for P200,000 before it comes due in February.
The actual refinancing, for P175,000, took place in January, before the financial
statements for this year have been authorized for issue.
8. As of December 31 of this year, the total noncurrent liabilities to be reported on the
company’s statement of financial position should be: 0
PROBLEM 9: The data below are from the records of Almanor, Inc. on December 31, 2011:
Accounts payable net of supplier’s accounts with debit P 680,000

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 balances
Cash balance in ABC Bank 1,240,000
Cash overdraft with XYZ Bank 80,000
Customers’ accounts with credit balances 25,000
Supplier’s accounts with debit balances 65,000
Dividends in arrears on preference shares 400,000
Employees’ income tax payable 100,000
Estimated warranty payable 50,000
Estimated premium claims outstanding 90,000
Income tax payable 320,000
Notes payable issued in 2010 maturing in 20 quarterly
installments beginning April 1, 2011 8,000,000
Salaries payable 140,000
Deferred tax liability 80,000
9. The amount to be shown as total current liabilities on Almanor’s statement of financial
position at December 31, 2011 is: 3,150,000
PROBLEM 10: The accounts payable per general ledger control of Sonic Company amounted to
P5,440,000, net of P240,000 debit balances in suppliers’ accounts. The unpaid voucher file
included the following items that not had been recorded as of December 31, 2010:
A. A Company: P224,000 merchandise shipped on December 31, 2010, FOB destination;
received on January 10, 2011.
B. B Corporation: P192,000 merchandise shipped on December 26, 2010, FOB shipping
point; received on January 16, 2011.
C. C Super Services: P144,000 janitorial services for the three-month period ending January
31, 2011.
D. Meralco: P67,200 electric bill covering the period December 16, 2010 to January 15,
2011.
On December 28, 2010, a supplier authorized Sonic to return goods billed at P160,000 and
shipped on December 20, 2010. The goods were returned by Sonic on December 28, 2010, but
the P160,000 credit memo was not received until January 6, 2011.
10. Determine the amount, if any, which should be reported as current liability in Sonic’s
December 31, 2010 statement of financial position. 5,841,600
PROBLEM 11: The following information about Manchester Company is available on December
31, 2011.
Income taxes withheld from employees P 900,000
Cash balance at First State Bank – Account 101 2,500,000
Accounts receivable with credit balance 750,000
Cash overdraft at Second State Bank 1,310,000
Estimated expenses of meeting warranties on
merchandise previously sold 500,000
Estimated damages as a result of unsatisfactory
performance on a contract 1,500,000
Cash overdraft at Third State Bank – Account 102 10,000
Accounts payable 3,000,000
Deferred serial bonds, issued at par and bearing interest
at 12%, payable in semi-annual installment of
P500,000 due April 1and October 1 of each year ,
the last bond to be paid October 1, 2016. Interest
will be paid fully on maturity of the note. 5,000,000
Stock dividends payable 2,000,000
11. Compute the total current liabilities on December 31, 2011. 8,970,000
PROBLEM 12: In an effort to increase sales, Blue Company inaugurated a sales promotion
campaign on June 30, 2011, whereby Blue Company placed two coupons in each package of
razor blades sold, the coupons being redeemable for a premium. Each premium cost P50 and 5
coupons must be presented by a customer to receive a premium. Blue Company estimated
that only 60% of the coupons issued will be redeemed. For the six months ended December 31,
2011, the following information is available:
Packages of razor blades sold 300,000
Premiums purchased 36,000
Coupons redeemed 150,000

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 12. What is the estimated liability for premium claims outstanding on December 31, 2011?
2,100,000
13. What amount of premium expense will Blue recognize for 2011? 3,600,000
PROBLEM 13: Topsy Company started a new promotional program. For every 10 box tops
returned to Topsy, customers receive a basketball. Topsy estimates that only 60% of the box tops
reaching the market will be redeemed. Selling price of Topsy’s product is P300. Additional
information is as follows:
Sales of product P 30,000,000
Purchases of basketballs at P750 each 4,125,000
Basketballs distributed 4,100 units
14. What is the amount of year-end estimated liability associated with this promotion?
1,425,000
PROBLEM 14: Opus sells sports goods and clothing through a chain of retail outlets. It offers
customers a full refund facility for any goods returned within 28 days of their purchase provided
they are unused and in their original packaging. In addition, all goods carry a warranty against
manufacturing defects for 12 months from their date of purchase. For most goods, the
manufacturer underwrites this warranty such that Opus is credited with the cost of goods that
are returned as faulty. Goods purchased from one manufacturer, Header, are sold to Opus at a
negotiated discount which is designed to compensate Opus for manufacturing faults of these
goods.
Opus makes a uniform mark up on cost of 25% on all goods it sells, except for those supplied
from Header which it makes a mark up on cost of 40%. Sales of goods manufactured by Header
consistently account for 20% of all Opus’ sales. Sales in the last 28 days of the trading year to
December 31, 2012 were P1,750,000. Past trends reliably indicate that 10% of all goods are
returned under the 28 day return facility. These are not faulty goods. Of these, 70% are later sold
at the normal selling price and the remaining 30% are sold as “sale” items at half the normal
retail price. In addition to the above expected returns, an estimated P160,000, at selling price, of
the goods sold during the year will have manufacturing defects and have yet to be returned by
customers. Goods returned as faulty have no resale value.
15. Compute the provision that the company is required to make as of December 31, 2012
for goods subject to the 28 day return policy. 52,850
16. Compute the provision that the company is required to make as of December 31, 2012
for goods that are likely to be faulty. 57,600
PROBLEM 15: Sony Company sells stereos under a 2 year warranty contract that requires Sony
Company to replace defective parts and provide free labor on all repairs. During 2010, 1,000
units were sold at P9,000 each. In 2011, Sony Company sold an additional 900 units at P9,250
each. Sales occurred on the last day of the year for both 2010 and 2011. Based on past
experience, the estimated 2-year warranty costs are P200 for parts and P250 for labor per unit. It
is also estimated that 40% of the warranty expenditures will occur in the first year and 60% in the
second year. Actual warranty expenditures were as follows:
2011 2012
Stereos sold in 2010 P 180,000 P 280,000
Stereos sold in 2011 190,000
17. What is the total warranty expense for 2011 is: 405,000
18. What is the balance of the estimated warranty liability at December 31, 2012 before any
adjustment? 205,000
19. After performing an analysis of the estimated warranty liability account, provide the
necessary journal entry to correct the balance of the account.
WE 38,000
EWL 38,000
PROBLEM 16: Erika Company operates a customer loyalty program. The entity grants loyalty
points for goods purchased. The loyalty points can be used by the customers in exchange for
goods of the entity. The points have no expiry date. During 2011, the entity issued 50,000 award
credits and expects that 80% of these award credits shall be redeemed. The fair value of the
award credits is reliably measured at P2,000,000. In 2011, the entity sold goods to customers for a
total consideration of P9,000,000 including the fair value of the award credits. The award credits
redeemed and the total award credits expected to be redeemed each year are as follows:
Redeemed Expected to be Redeemed
2011 15,000 80%
2012 7,950 85%

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 2013 2,550 85%
2014 15,000 90%
20. The unearned revenue from points as of December 31, 2013 is: 800,000
21. The total revenue to be recognized in relation to the points in 2014 is: 600,000
PROBLEM 17: Jeane Company participates in a customer loyalty program operated by an
airline. The entity grants program members one air travel point for every P1,000 spent on goods
purchased. Program members can redeem the points for travel with the airline subject to
availability. Jeane Company pays the airline P110 for each point. During 2011, Jeane Company
sold goods for consideration totaling P9,000,000 and granted the equivalent points immediately.
The fair value of each point is P15 higher than the amount being paid by Jeane to the airline.
22. If the entity has collected the consideration allocated to the points on its own account
as principal, what is the amount of revenue to be recognized in 2011 in relation to the
points? 1,250,000
23. If the entity has collected the consideration allocated to the points in behalf of the
airline, what is the amount of revenue to be recognized in 2011 in relation to the points?
135,000
PROBLEM 18: James Company operates a customer loyalty program. The entity grants program
members loyalty points when they spend a specified amount on purchases. Program members
can redeem the points for further purchases. The points have no expiry date. During 2011, the
entity granted 80,000 points. Management expects that 90% of these points will be redeemed.
The fair value of each loyalty point is estimated at P20. The sales during 2011 amounted to
P9,000,000 including the loyalty points. On December 31, 2011, 28,800 points have been
redeemed in exchange for purchases. In 2012, the management revised its expectations and
now expects 85% of the points to be redeemed altogether. During 2012, the entity redeemed
12,000 points.
24. The total revenue earned by James Company in 2011 is: 8,040,000
PROBLEM 19: An entity reported the following payroll of the employees for the month of January,
half of which was paid on the same month:
Gross payroll P 500,000
Income tax withheld 20,000
SSS contribution 4,000
Philhealth contribution 2,000
Pag-ibig contribution 1,000
In relation to the payroll for the month of January, the entity is required to make the following
additional contribution:
SSS contribution P 6,000
Philhealth contribution 3,000
Pag-ibig contribution 2,000
On the first week of February, the amounts withheld and the additional contributions were
remitted to the concerned agencies.
25. As of January 31, 2011, how much of the amount above will be included as part of
current liabilities? 274,500
PROBLEM 20: Angel Company sells agricultural products. Angel Company pays its salespeople a
salary plus a commission. The salary is the same for each salesperson, P10,000 per month. The
commission varies by length of employment and is a percentage of the entity’s total gross sales.
Each salesperson starts with a commission of 1%, which is increased by an additional ½ % for
each full year of employment with Angel Company to a maximum of 5%. The total gross sales for
the month of January amounted to P2,400,000. Angel Company has 6 salespeople as follows:
Number of Years Employed
Jay Anthony 10 years
Soraya 9 years
Sharalyn 8 years
Shara Mae 6 years
Jairus 3 years
Imaduddin ¾ years
26. Compute the total salaries and commission expense for the month of January. 600,000
PROBLEM 21: Under the National Internal Revenue Code, an entity is required to collect value
added taxes from customers on sales of tangible personal property and certain services. Such
value added taxes are remitted monthly to the Bureau of Internal Revenue. One entity subject

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to the 12% VAT is CM Perez Enterprise which recorded VAT payable of P180,000 for the month of
May. Its purchases during the same month was P4,000,000, net of VAT.
27. Determine CM Perez’ total sales for May, inclusive of the related VAT. 6,160,000
PROBLEM 22: Shoemart Company issues gift certificates in denominations of P50, P100, P500 and
P1,000. These certificates are redeemable in merchandise having an average gross profit of 30%
of selling price. During the current year, the entity sold P500,000 worth of gift certificates and
redeemed certificates having a sales value of P400,000. It is estimated that 8% of the certificates
issued will not be redeemed by reason of expiration.
28. The balance of the gift certificates payable account as of year-end is: 60,000
PROBLEM 23: The Generous Corporation’s president has a profit sharing agreement with the
company. The agreement states that the president is to receive a bonus consisting of a basic
amount and equivalent to 10% of the company’s net income before deduction of bonus but
after deduction of income tax. In addition, the basic bonus shall be increased by the
company’s tax savings on bonus because the total amount of bonus is deductible in computing
the company’s taxable income. The company registered a net income of P5,000,000 before
deduction of the president’s bonus and income tax. The company is subject to corporate
income tax of 30%.
29. The total bonus due to the president is: 522,388

PROBLEM 24: Ana Rosa, president of the Apoka Company, has a bonus arrangement with the
company under which she receives 10% of the net income after deducting taxes and bonuses
each year. For the current year, the net income before deducting either the provision for
income taxes or the bonus is P4,650,000. The bonus is deductible for tax purposes, and the tax
rate is 30%.
30. Determine the amount of Ana Rosa’s bonus. 304,205.61
31. Compute the appropriate provision for income tax for the year. 1,303,738.32
PROBLEM 25: Omega Company sells its products in expensive, reusable containers. The customer
is charged a deposit for each container delivered and receives a refund for each container
returned within two years after the year of delivery. Omega accounts for the containers not
returned within the time limit as being sold at the deposit amount. Information for 2010 is as
follows:
A. Containers held by customers at December 31, 2009 from deliveries in: 2008, P85,000;
and 2009, P240,000.
B. Containers delivered in 2010: P430,000.
C. Containers returned in 2010 from deliveries in: 2008, P57,500; 2009, P140,000; and 2010,
P157,000.
32. How much revenue from container sales should be recognized for 2010? 37,500
33. What is the total amount of Omega Company’s liability for returnable containers at
December 31, 2010? 373,000
PROBLEM 26: In November and December 2011, Print Company, a newly organized magazine
publisher, received P72,000 for 1,000, three-year subscriptions at P24 per year, starting with the
December 2011 issue. Print elected to include the entire P72,000 in its 2011 income tax return.
34. What amount should Print report in its 2011 income statement for subscriptions revenue?
2,000
PROBLEM 27: On July 1, 2011, the city government issued realty tax assessments for its fiscal year
ended June 30, 2012. On September 1, 2011, Gina Company purchased a warehouse within the
city. The purchase price was reduced by a credit for accrued realty taxes. Gina Company did
not record the entire year’s real estate tax obligation but instead records tax expenses at the
end of each month by adjusting prepaid real estate taxes or real estate taxes payable as
appropriate. On November 1, 2011, Gina Company paid the first of two equal installments of
P12,000.
35. What amount of the payment should be recorded as a debit to real estate taxes
payable? 8,000
PROBLEM 28: Small Company sells magazine subscriptions for one to three year periods. The
account unearned magazine subscriptions has a balance of P1,800,000 at December 31, 2011.
Information for the year 2012is as follows:
Cash receipts from subscribers P 2,300,000
Unearned magazine subscriptions revenue, 12/31/2012 1,600,000

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 36. In the December 31, 2012 statement of financial position, how much did Small report as
magazine subscriptions revenue? 2,500,000
PROBLEM 29: Brave Company sells appliance service contracts, agreeing to repair appliances
for a two-year period. Brave’s past experience is that, of the total pesos spent for repairs on
service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the
second contract year. Receipts from service contract sales for the two years ended December
31, 2012 are as follows: 2011, P500,000 and 2012, P600,000. Receipts from contracts are credited
to unearned service contract revenue. All contract sales were made evenly during the year.
37. What amount should Brave Company report as unearned service contract revenue at
December 31, 2012? 495,000
PROBLEM 30: During 2011, Manfred Company guaranteed a supplier’s P500,000 loan from a
bank. On October 1,2011, Manfred was notified that the supplier had defaulted on the loan and
filed for bankruptcy protection. Counsel believes Manfred will probably have to pay an amount
not less than P250,000 but not more than P400,000 under its guarantee. As a result of the
supplier’s bankruptcy, Manfred entered into a contract in December 2011 to retool its machines
so that Manfred could accept parts from other suppliers. Retooling costs are estimated to be
P300,000.
38. What amount should be reported as liability on December 31,2011? 325,000
PROBLEM 31: During 2011, Odyssey Company is the defendant in a patent infringement lawsuit.
The entity’s lawyers believe there is a 60% chance that the court will dismiss the case. However, if
the court rules in favor of the claimant, the lawyers believe there is a 70% chance that the entity
will be required to pay damages of P200,000 and 30% chance that the entity will be required to
pay damages of P100,000. Other outcomes are unlikely. The court is expected to rule in late
December 2012. An 8% 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 5% per year. The present value of 1 at 5% for one period is 0.95.
39. What is the measurement of the provision for lawsuit at December 31, 2011? 0
PROBLEM 32: On April 15, 2011, the Bureau of Internal Revenue is in the process of examining
Chala’s tax returns for 2008 and 2009 but has not proposed a deficiency assessment.
Management feels an assessment is reasonably possible and if an assessment is made, an
unfavorable settlement of up to P5,000,000 is reasonably possible.
40. Chala will accrue (disclose) in relation to the BIR examination an amount of: 0
PROBLEM 33: Eastern Company has several contingent liabilities on December 31,2011. The
auditor obtained the following brief description of each liability. In May 2011, Eastern Company
became involved in a litigation. In December 2011, the court assessed a judgment for P1,600,000
against Eastern. Eastern is appealing the amount of the judgment. Eastern’s attorneys believe it
is possible that they can reduce the assessment on appeal by 50%. In July 2011, Pasig City
brought action against Eastern for polluting the Pasig River with its waste products. It is probable
that Pasig City will be successful but the amount of damages Eastern might have to pay should
not exceed P1,500,000.
41. What total amount should be accrued as provision on December 31,2011? 3,100,00
PROBLEM 34: On January 1, 2011, Camille Company purchased a gas detoxification facility for
P9,000,000. The cost of cleaning up the routine contamination caused by the initial location of
gas on the property is estimated to be P1,500,000. This cost will be incurred in 10 years when the
entire existing stockpile of gas is detoxified and the facility is decommissioned. Additional
contamination may occur in succeeding years that the facility is in operation. On January 1,
2013, an additional contamination cleanup cost is estimated at P200,000. The appropriate
discount rate is 6%. The present value of 1 at 6% is 0.63 for 8 periods and 0.56 for 10 periods.
42. The carrying value of the decommissioning liability as of December 31, 2012 is: 943,824
43. The interest expense that will be recognized on the decommissioning liability in 2013 is:
64,189
44. The depreciation expense that will be recognized on the detoxification policy in 2014:
999,750
PROBLEM 35: The audit of Anne Company for the year ended December 31, 2011 was
completed on March 1, 2012. The financial statements were authorized for issue on March 15,
2012 by the board of directors and approved by the shareholders on March 31, 2012. The events
listed below occurred after the reporting period.

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 A. Anne Company had reported a contingent liability on December 31, 2011 related to a
court case in which Anne was the defendant. The case was not heard until the first
week of February 2012. On February 11, 2012, the judge handed down a decision
against Anne Company. The judge determined that Anne Company was liable to pay
damages and costs totaling P3,000,000.
B. A shipping vessel of Anne Company with carrying amount of P5,000,000 was
completely lost at sea on February 14, 2012 because of a hurricane.
C. On December 31, 2011, Anne Company had a receivable from a large customer in the
amount of P3,500,000. On April 31, 2012, Anne Company was advised by the liquidator
that the customer was insolvent and would be unable to repay the full amount owed
to Anne Company. The liquidator advised Anne Company in writing that only 10% of
the receivable will be paid on April 30, 2012.
D. One of Anne’s factories with a carrying amount of P15,000,000 was completely razed
by forest fires that erupted in its vicinity on March 14, 2012.
E. On February 15, 2012, a dividend of P1,750,000 was declared by Anne and a
contractual profit share payment of P350,000 was made both based on the profit for
the year ended December 31, 2011.
45. What net amount should be recognized in profit or loss for the year ended December 31,
2011 to reflect adjusting events after the end of reporting period? 3,350,000

LONG PROBLEMS. Compute for the amount/s asked by each problem. Final answers should be
written on the answer sheet provided with this questionnaire. Solutions are to be written in a
separate sheet of paper to be submitted along with the answer sheet. Each item is worth 2
points.
PROBLEM 1: Olson Music Emporium carries a wide variety of musical instruments, sound
reproduction equipment, recorded music, and sheet music. To promote the sale of its products,
Olsen uses two promotion techniques – premiums and warranties.
PREMIUMS
The premium is offered on the recorded and sheet music. Customers receive a coupon for each
P10 spent on recorded music and sheet music. Customers may exchange 200 coupons and
P200 for a CD player. Olson pays P340 for each CD player and estimates that 70% of the
coupons given to customers will be redeemed. A total of 6,500 CD players used in the premium
program were purchased during the year and there were 1,200,000 coupons redeemed in 2010.
WARRANTIES
Musical instruments and sound reproduction equipment are sold with a one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past experience, is 3%
of sales. Replacement parts and labor for warranty work totaled P1,640,000 during 2010.
Olson uses the accrual method to account for the warranty and premium costs for financial
reporting purposes. Olson’s sales for 2010 totaled P72,000,000 – P54,000,000 from musical
instruments and sound reproduction equipment and P18,000,000 from recorded music and sheet
music. The balances in the accounts related to warranties and premiums on January 1, 2010,
were as shown below:
Inventory of premium CD players P 399,500
Estimated premium claims outstanding 448,000
Estimated liability from warranties 1,360,000
Based on the preceding information, determine the amounts that will be shown on the 2010
financial statements for the following:
1. Warranty expense. 1,620,00
2. Estimated liability from warranties. 1,340,000
3. Premium expense. 882,000
4. Inventory of premium CD players. 569,500
5. Estimated premium claims outstanding. 490,000
PROBLEM 2: At the financial statement date of December 31, 2010, the liabilities outstanding of
Angono Corporation included the following:
 Cash dividends on ordinary shares, P55,000, payable on January 15, 2011.
 Note payable to London State Bank, P470,000, due January 20, 2011.
 Serial bonds, P2,000,000, of which P500,000 mature during 2011.
 Note payable to Third National Bank, P400,000, due January 27, 2011.
The following transactions occurred early in 2011:
January 15 The cash dividends on ordinary shares were paid.
January 20 The note payable to London State Bank was paid.
January 25 The corporation entered into a financing agreement with London

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 9
 State Bank, enabling it to borrow up to P500,000 at any time through
the end of 2012. Amounts borrowed under the agreement would
bear interest at 1% above the bank’s prime rate and would mature 3
years from the date of the loan. The corporation immediately
borrowed P400,000 to replace the cash used in paying its January 20
note to the bank.
January 26 40,000 ordinary shares were issued for P500,000. P400,000 of the
proceeds was used to liquidate the note payable to Third Bank.
February 1 The financial statements were issued.
Based on the preceding information, compute for the following as of December 31, 2010:
6. Total non-current liabilities. 1,500,000
7. Total current liabilities. 1,425,000
PROBLEM 3: Eleanor Corporation has been producing quality disposable diapers for more than
two decades. The company’s fiscal year runs from April 1 to March 31. The following information
relates to the obligations of Eleanor as of March 31, 2010.
NOTES PAYABLE
Eleanor has signed several long-term notes with financial institutions. The maturities of these notes
are given in the schedule below. The total unpaid interest for all of these notes amounts to
P600,000 on March 31, 2010.
Due Date Amount
April 1, 2010 P 400,000
July 1, 2010 600,000
October 1, 2010 300,000
January 1, 2011 300,000
April 1, 2011 – March 31, 2012 1,200,000
April 1, 2012 – March 31, 2013 1,000,000
April 1, 2013 – March 31, 2014 1,400,000
April 1, 2014 – March 31, 2015 800,000
April 1, 2015 – March 31, 2016 1,000,000
ESTIMATED WARRANTIES
Eleanor has a one-year product warranty on some selected items in its product line. The
estimated warranty liability on sales made during the 2008-2009 fiscal year and still outstanding
as of March 31, 2009 amounted to P180,000. The warranty costs on sales made from April 1, 2009
through March 31, 2010, are estimated at P520,000. The actual warranty costs incurred during
the current 2009-2010 fiscal year are as follows:
Warranty claims honored on 2008-2009 sales P 180,000
Warranty claims honored on 2009-2010 sales 178,000
PROVISIONS
A. Eleanor determined that part of its plant and equipment needed an overhaul – the
conveyer belt on one of its machines would need to be replaced in about March 29 at
an estimated cost of P500,000. The carrying amount of the conveyer belt at March 31,
2009 was P280,000. Its original costs was P400,000.
B. Eleanor was unsuccessful in its defense of the peanut allergy case and was ordered to
pay P2,000,000 to the plaintiffs. As at March 31, 2010, Eleanor had paid P1,500,000.
C. Eleanor commenced litigation against one of its advisers for negligent advise given on
the original installation of the conveyers belt referred to above. In January 2010 the court
found the favor to Eleanor. The hearing of damages had not been scheduled as at the
date the financial statements for 2010 were authorized for issue. Eleanor estimated that it
would receive about P500,000.
D. Eleanor signed an agreement with Choc Bank to the effect that Eleanor would
guarantee a loan made by Choc Bank to Eleanor’s subsidiary, Capuches Ltd.
Capuches’ loan with Choc Bank was P3,000,000 as at March 31, 2010. Capuches was in
a strong financial position at March 31, 2010.
OTHER INFORMATION
A. TRADE PAYABLES: Accounts payable for supplies, goods and services purchased on open
account amount to P740,000 as of March 31, 2010.
B. PAYROLL RELATED ITEMS:
Accrued salaries and wages P 300,000
Withholding taxes payable 94,000
Other payroll deductions 10,000

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 C. MISCELLANEOUS ACCRUALS: Other accruals not separately classified amount to P150,000
as of March 31, 2010.
D. DIVIDENDS: On March 15, 2010, Eleanor’s board of directors declared a cash dividend of
P0.20 per ordinary share and a 10% stock dividend. Both dividends were to be distributed
on April 12, 2010, to the shareholders of record at the close of business on March 31,
2010. Data regarding Eleanor ordinary share capital are as follows:
Par value P 5.00 per share
Number of shares issued and outstanding 6,000,000 shares
Market values of ordinary shares:
March 15, 2010 P 22.00 per share
March 31, 2010 21.50 per share
April 12, 2010 22.50 per share
Based on the preceding information, answer the following questions:
8. The total provisions to be reported in the March 31, 2010 statement of financial position is:
342,000
9. The balance of the estimated warranties payable at March 31, 2010 is: 342,000
10. On March 31, 2010, Eleanor’s statement of financial position would report total current
liabilities of: 5,536,00

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