[I N S E R T T I T L E H E R E]

I. Glamour, Inc., a publishing company, is preparing its December 31, 2022 financial
statements and must determine the proper accounting treatment for each of the
following situations:

1. Glamour sells subscriptions to several magazines for a one-year, two-year, or

three-year period. Cash receipts from subscribers are credited to magazine
subscriptions collected in advance, and this account had a balance of P2,500,000
at December 31, 2022. Outstanding subscriptions at December 31, 2022 expire
as follows:

During 2023 - P600,000

During 2024 - 900,000
During 2025 - 400,000

2. On January 3, 2022, Glamour discontinued collision, fire, and theft coverage on

its delivery vehicles and became self-insured for these risks, Actual losses of
P45,000 during 2022 were charged to delivery expense. The 2021 premium for
the discontinued coverage amounted to P100,000, and the controller wants to
set up a reserve for self-insurance by a debit to delivery expense of P55,000 and
a credit to the reserve for self-insurance of P55,000.

3. A suit for breach of contract seeking damages of P1,000,000 was filed by an

author against Glamour on July 13, 2022. The company’s legal counsel believes
that an unfavourable outcome is probable. A reasonable estimate of the court’s
award to the plaintiff is in the range between P100,000 and P500,000. No
amount within this range is a better estimate of potential damages than any
other amount.

4. During December 2022 a competitor company filed suit against Glamour for
industrial espionage claiming P2,000,000 in damages. In the opinion of
management and company counsel, it is reasonably possible that damages will
be awarded to the plaintiff. However, the amount of potential damages awarded
to the plaintiff cannot be reasonably estimated.

REQUIRED:
For each of the preceding situations, prepare the journal entry that should be recorded
as of December 31, 2022, or explain why an entry should not be recorded. Show
supporting computations in good form.
II. Fateful Company is preparing its annual financial statements at December 31, 2022, and
is concerned about application of PAS 37 Provisions, Contingent Liabilities and
Contingent Assets. Four unrelated situations are under consideration:

1. During 2022, a shopper sued the company for P500,000 for a claimed injury that
occurred on the premises owned by Fateful. No date for the trial has been set;
however, the lawyer employed by Fateful has completed a thorough
investigation. Because it can be proved that the customer did fall on the
premises, the legal counsel believes that it will not be difficult for the plaintiff to
prove injury. There is some evidence that it was due, at least partially, to
negligence by the plaintiff. The attorney believes that it is not probable, but is
reasonably possible, that the suit will be successful (for the plaintiff), but for a
significantly smaller amount that cannot be reasonably estimated at this time.

2. The company held a P10,000, 8 percent, one-year note receivable from a

customer. Fateful discounted the note, with recourse, at the bank to obtain cash
before its due date (due on June 1, 2022). If the maker does not pay the bank by
the due date, Fateful will have to pay it. The customer has an excellent credit
rating (having never defaulted on a debt).

3. An outside party has filed a suit against Fateful for P25,000, claiming that certain
actions by Fateful caused the party to lose a contract on which the estimated
profit was this amount. In the opinion of the legal counsel engaged by Fateful,
the probability that the claim will be successful is remote. Counsel does not
believe it will ever be brought to trial. If necessary, Fateful will defend itself in
court.

4. The company owns a small plant in a foreign country that has a book value of P3
million and an estimated market value of P4 million. The foreign government has
indicated its unalterable intention to expropriate the plant during the coming
year and to reimburse Fateful for 50 percent of the estimated market value.

REQUIRED:

For each situation, write a memo to the CEO giving your ideas on what should be done,
considering the following two points.

 What accounting recognition, if any, should be accorded each situation at the

end of 2022? Explain and give journal entries.
 Indicate how each situation should be reported in the balance sheet.
III. Miguel Inc. has a contract with its president, Nan Santos, to pay her a bonus during each
of the years 2019, 2020, 2021 and 2022. The income tax rate is 40% during the 4 years.
The profit before deductions for bonus and income taxes was P250,000 in 2019,
P308,000 in 2020, P350,000 in 2021, and P380,000 in 2022. The president’s bonus of
12% is deductible for tax purposes in each year and is to be computed as follows:

1. In 2019, the bonus is to be based on profit before deductions for bonus and
income tax.
2. In 2020 the bonus is to be based on profit after deduction of bonus but before
deduction of income tax.

3. In 2021 the bonus is to be based on profit before deduction of bonus but after
deduction of income tax.

4. In 2022 the bonus is to be based on profit after deductions for bonus and income
tax.

REQUIRED:
Compute the amounts of the bonus and the income tax for each of the 4 years.

IV. Cute People, Inc. has produced quality children’s appeal for over 25 years. The
company’s fiscal year is from April to March 31. The following information relates to the
obligations of Cute People as of March 31, 2022:

Bonds Payable. The company issued P4,000,000 of 7% bonds on July 1, 2016, at 98,
which yield proceeds of P3,920,000. The bonds will mature on July 1, 2016. Interest is
paid semi-annually on July 1 and January 1. Cute People uses the straight-line method to
amortize the bond discount.

Notes Payable. Cute People has signed several long-term notes with financial
institutions and insurance companies. The maturities of these notes are given below.
The total unpaid interest for all of these notes amounts to P90,000 on March 31, 2022.

Due Date Amount Due

April 1, 2022 P 100,000

July 1, 2022 200,000
Oct. 1, 2022 100,000
Jan. 1, 2023 200,000
April 1, 2023 – Mar. 31, 2024 600,000
April 1, 2024 – Mar. 31, 2025 400,000
April 1, 2025 – Mar. 31, 2026 400,000
 April 1, 2026 – Mar. 31, 2027 500,000
April 1, 2027 – Mar. 31, 2028 500,000

P 3,000,000

Estimated Warranties. Cute People has a one-year product warranty on selected items.
The estimated warranty liability on sales made during the 2020 – 2021 fiscal year and
still outstanding as of March 31, 2021, amounted to P55,000. The warranty costs on sale
made from April 1, 2021, through March 31, 2022, are estimated at P145,000. The actual
warranty costs incurred during the current 2021 – 2022 fiscal year are as follows:

Warranty claims honoured on 2020 – 2021 sales P 55,000

Warranty claims honoured on 2021 – 2022 sales 75,000
P 130,000

Additional Information:

1. Trade payables. Accounts for supplies, goods and services purchased on open
account amount to P325,000 as of March 31, 2022.

2. Payroll related items. The following outstanding obligations relate to Cute

People’s payroll as of March 21, 2022.

Accrued salaries and wages P 145,000

Income taxes withheld from employees 45,000
Other payroll deductions 3,000

3. Taxes. The following taxes are incurred but not due until the next fiscal year:

Income taxes P 250,000

Property taxes 100,000
Value-Added taxes 185,000

4. Miscellaneous accruals. Other accruals not separately classified amount to

P50,000 as of March 31, 2022.

5. Dividends. On March 15, 2022, the company’s board of directors declared a cash
dividend of P0.40 per common share and a 10% ordinary share dividend. Both
dividends were to be distributed on April 12, 2022, to the ordinary shareholders
of record at the close of business on March 31, 2022. Data regarding Cute
People’s ordinary shares are as follows:

Par value P5 per share

Number of shares issued and outstanding 2,500,000 shares
Market value of ordinary shares
 Mar. 15, 2022 P22.00 per share
Mar. 31, 2022 P21.50 per share
Apr. 12, 2022 P22.50 per share

REQUIRED:

 Prepare the current liability section of the balance sheet for Cute People, Inc., as
of March 31, 2022, as it should appear in the annual report to shareholders.

 If you have excluded any items from the presentation of current liabilities,
explain why you have done so.

V. You are supervising the audit field work of Potter’s Magic Shop. Potter maintains
perpetual inventory records and the inventory was counted and adjusted on December
31, 2022.

The list of vouchers payable for Potter’s Magic Shop at December 31, 2022 is as follows:

Vendor Invoice Date Amount

Andy Cleaning Services 11/15 P 8,644.86

Bea house of Jewelleries 12/02 4,335.52
Corrine Magic Books 12/31 12,978.22
Dianne Financial Consultants 12/28 47,505.26
Ellen Veterinary Supplies 12/23 9,181.20
Faith Mystical Capes 10/14 23,059.76
Genalyn Fancy Headwear 12/29 102,537.24
Honeylette Beauty Shop 12/28 72,304.90
Ingid Antique Collections 12/28 12,801.10
Jessa Footwear 12/15 106,000.00
Total Vouchers Payable P 399,348.06

Checks written in the following January, 2023 are as follows:

Check Invoice
Numbe Payee Descriptions Date Amount
r
1042 Dianne Financial Professional 12/28 P47,505.26
Consultants Services
1043 Andy Cleaning October Monthly 11/15 8,644.86
Services cleaning
1044 Jessa Footwear January rent 12/15 106,000.00
 1045 Corrine Magic Books Inventory 12/31 12,978.22
1046 Katherine Pastries Catering for 1/15 12,600
Office
Christmas party
1047 Ingrid Antique Inventory 12/28 12,801.10
Collections
1048 Lea Enterprises Trademark 1/1 20,000.00
1049 Ellen Veterinary Inventory 12/23 9,181.20
Supplies
1050 Genalyn Fancy Inventory 12/29 102,537.24
Headwear
1051 Ingrid Antique Inventory 12/31 12,801.10
Collections
1052 Bea House of Inventory 12/02 4,335.52
Jewelleries
1053 Corrine Magic Books Inventory 12/31 12,978.22
1054 Andy Cleaning November 12/15 8,644.86
Services Monthly cleaning
1055 Dianne Financial Professional 1/28 47,505.26
Consultants services

REQUIRED:
 The adjusting entity for check no. 1044 as of December 31, 2022 will involve
a. No accounts and amounts
b. A credit to rent expense
c. A debit to rent expense
d. A credit to rent payable

 The cost of goods sold for the year will have to

a. Be increased by P25,779.32
b. Be reduced by P25,779.32
c. Be reduced by P17,289.72
d. Be increased by P12,600.00

 The expenses for the catering of office Christmas party paid on January 15, 2023
a. Should be accrued as of December 31, 2022
b. Need not be adjusted as of December 31, 2022
c. Should be recorded as a January expense
d. Should be recorded as a liability as of January 15, 2023

 The professional services paid in January per check no. 1042

a. Should be recorded as an expense in January
b. Would require an adjusting entry for its accrual as of December 31, 2022
c. Requires no adjustment as of December 31, 2022
d. Requires setting up of a liability accounts as of December 31, 2022
 The total adjustment to Voucher/Accounts payable to take up unrecorded
liabilities as of December 31, 2022 would amount to
a. P54,769.04
b. P106,000.00
c. P43,069.04
d. P55,669.04