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Quiz 1 October Spring 2020, questions and answers

BS Accountancy (New Era University)

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New Era University

College of Accountancy

Intermediate Accounting II

Long Quiz #1
THEORIES

1. Which of the following statements about liabilities is/are true?

I. A liability is recognized in the statement of financial position when it is possible that an
outflow of resources embodying economic benefits will result from settlement of present
obligation and the amount at which the settlement will take place can be measured
reliably.
II. Liabilities are past, present, and future obligations of an entity.
III. All accounting liabilities are legally enforceable.
a. All statements are true. c. Only statement I is true.
b. All statements are false. d. Only statements II and III are
true.
2. An accrued expense can best be described as an amount
a. Not paid and currently matched with earnings.
b. Not paid and not currently matched with earnings.
c. Paid and currently matched with earnings.
d. Paid and not currently matched with earnings.

3. All of the following are examples of refinancing, except

a. Bonds payable has been issued the proceeds from which are used to pay off currently
maturing long-term debt.
b. Preferred stock has been issued the proceeds from which are used to pay off currently
maturing long-term debt.
c. Common stock has been issued the proceeds from which are used to pay off currently
maturing long-term debt.
d. The enterprise has entered into a financing agreement.

4. Which of the following statements about the measurement of a financial liability is true?
a. An entity shall measure initially a financial liability designated as at fair value through
profit or loss at fair value minus directly attributable transaction costs.
b. The transaction costs are expensed immediately if the financial liability is not designated
initially as at fair value through profit or loss.
c. When an entity designated initially a financial liability as at fair value through profit or
loss, it can subsequently revoke its designation.
d. In practice, current liabilities are not discounted anymore but recorded at their face
amount.

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5. Which of the following is not acceptable treatment for the presentation of current liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of
working capital

6. Liabilities are
a. any accounts having credit balances after closing entries are made.
a. any accounts having credit balances after closing entries are made.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.

7. Why is the liability section of the balance sheet of primary importance to bankers?
a. To evaluate the entity's credit quality.
b. To assist in understanding the entity's liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.

8. What is the relationship between current liabilities and a company's operating cycle?
a. Liquidation of current liabilities is reasonably expected within the company's operating
cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can't exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.

9. Estimated liabilities are disclosed in financial statements by

a. Classifying them as regular liabilities in the statement of financial position.
b. Showing the amount among the liabilities but not extending it to the liability total.
c. An appropriation of retained earnings.
d. A footnote to the financial statements.

10.Which of the following statements about premiums and customer loyalty programs is false?
a. Remittances from customers shall be deducted from the cost of the premiums in
computing premium expense.
b. If the estimated premium liability is less than the actual cost, the difference is debited to
cash.
c. An entity shall account for award credits as a separate component of the initial sale
transaction.
d. The consideration allocated to award credits is measured at fair value.

11.Use of the accrual method in accounting for product warranty costs

I. Is not acceptable for income tax purposes.
II. Is frequently justified on the basis of expediency when warranty costs are immaterial.

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III. Finds the expense account being charged when the seller performs in compliance with the
warranty.
IV. Represents accepted practice and should be used whenever the warranty is an integral and
inseparable part of the sale.
a. I, II, III and IV c. III and IV
b. II and III d. I and IV

12.Assume that a manufacturing corporation has (1) good quality control, (2) a one-year
operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of
guaranteeing new products against defects for three years that has resulted in material but rather
stable warranty repair and replacement costs. Any liability for the warranty
a. Should be reported as long-term.
b. Should be reported as current.
c. Should be reported as part current and part long-term.
d. Need not be disclosed.

13.If the estimated warranty cost is more than the actual cost, the difference is credited to
a. Cash c. Miscellaneous income
b. Warranty expense d. Estimated warranty liability

14.As a minimum, the face of the statement of financial position shall include the following line
items for liabilities, except
a. Contingent liabilities
b. Provisions
c. Deferred tax liabilities
d. Liabilities included in disposal group classified as held for sale

15. Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with
the warranty.
d. represents accepted practice and should be used whenever the warranty is an integral
and inseparable part of the sale.

16. Which of the following situations may give rise to unearned revenue?
a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.

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17. What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.

18. These are given to customers as result of past sales or sales promotion activities
a. Warranty
b. Premium
c. Bonus
d. Refundable deposits
e.
19. Which of the following best describes the accrual method of accounting for warranty costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.

20. An electronics store is running a promotion where for every video game purchased, the
customer receives a coupon upon checkout to purchase a second game at a 50% discount.
The coupons expire in one year. The store normally recognized a gross profit margin of
40% of the selling price on video games. How would the store account for a purchase using
the discount coupon?
a. The reduction in sales price attributed to the coupon is recognized as premium expense.
b. The difference between the cost of the video game and the cash received is recognized
as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior to the
coupon is recognized as premium expense.

PROBLEMS

1. The balance in Orange Company’s accounts payable account at December 31, 2020 was
P1,170,000 before any year-end adjustments relating to the following:
• Goods were in transit from a vendor to Orange on December 31, 2020. The invoice cost
was P65,000 and the goods were shipped FOB shipping point on December 29, 2020.
The goods were received on January 2, 2021.
• Goods shipped FOB shipping point on December 20, 2020 from a vendor to Orange,
were lost in transit. The invoice cost was P32,500. On January 5, 2021, Orange filed a
P32,500 claim against the common carrier.
• Goods shipped FOB destination on December 31, 2020, from a vendor to Orange, were
received on January 6, 2021. The invoice cost was P19,500.

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• On December 27, 2020, Orange wrote and recorded checks totaling P60,000 which were
mailed on January 10, 2021.

What amount should Orange report as accounts payable on its December 31, 2020 statement of
financial position?

a. 1,327,500 c.1,347,000
b. 1,295,000 d. 1,262,500

2. Green Co. has the following three loans payable scheduled to be repaid in February of next
year. The company’s accounting year ends on December 31.
• 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.
• 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.
• 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.
As of December 31 of this year, with respect to the loans, what should be the total current
liabilities to be reported on the company’s statement of financial position?

a. 250,000 c.450,000

b. 350,000 d. 0

3. Blue Company reported liabilities totaling P1,230,000 as of December 31, 2020. The
following information relates to those liabilities:
• Blue reported a P100,000 bank loan payable. However, it intends to repay this loan on
January 10, 2021.
• Blue reported a P40,000 liability for the estimated cost of future warranty repairs based
on product sales for the past year.
• Blue is being sued for P350,000 by a disgruntled employee. The company’s legal counsel
thinks that it is reasonably possible that it will lose the case. The company has not yet
recorded any liability for this potential loss.
• Expected consulting services by a local CPA for the coming year will cost P35,000. No
liability has been recorded.
• Blue has reached an agreement with a major customer. It expects to provide services
totaling P400,000 over the coming three years. The customer has already paid P100,000.
No liability has been recorded.
After considering these items, what should be the total of Blue’s reported liabilities?

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a. 1,330,000 c. 1,580,000

b. 1,615,000 d. 1,715,000

4. The following information about Red Company is available at December 31, 2020:
Cash balance at Blake Bank P3,000,000
Cash overdraft at Blake Bank 600,000
Customers’ accounts with credit balances 200,000
Advances to employees 100,000
Employee income taxes withheld 800,000
Accounts payable, net of debit balances
amounting to P100,000 750,000
Mandatorily redeemable preference shares 450,000
Undistributed property dividends 300,000
Deferred serial bonds, issued at par and bearing
interest at 12%, payable in semiannual
installments of P 800,000 due April 1 and
October 1 of each year, the last bond to be paid
on October 1, 2026. Interest is also paid 8,000,000
semiannually.
Customers’ deposit 500,000
The December 31, 2020 statement of financial position should report current liabilities at
what amount?

a. 2,790,000 c. 3,340,000

b. 3,440,000 d.2,890,000

5. Pink Co. sells magazine subscriptions of one to three-year periods. Cash receipts from
subscribers are credited to magazine subscriptions collected in advance, and this account had
a balance of P2,400,000 on December 31, 2020 before year-end adjustment. Outstanding
subscriptions on December 31, 2020 expire as follows:

During 2021 600,000

During 2022 900,000
During 2023 400,000

On December 31, 2020, what amount should Pink report as magazine subscriptions collected in
advance?

a. 500,0000 c. 1,900,000
b. 1,200,000 d. 2,400,000

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6. Mr. Brown, Company President, has a bonus arrangement with the company under which he
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 bonus and income taxes is
P5,650,000.

What is the amount of bonus of Mr. Brown?

a. P369,626 c. P565,000

b. P369,159 d. P513,636

7. Black Co. must determine the December 31, 2020 accruals for advertising and rent expense. A
P50,000 advertising bill was received January 7, 2021, comprising cost of P35,000 for
advertisements in December 2020 issues, and P15,000 for advertisements in January 2021 issues
of the newspaper.

A store lease, effective December 16, 2020, calls for fixed rent of P120,000 per month, payable
one month from the effective date and monthly thereafter. In addition, rent equal to 5% net of
sales over P6,000,000 per calendar year is payable on January 31 of the following year. Net sales
for 2020 totaled P9,000,000. On December 31, 2020, what amount should be reported as accrued
liabilities?

a. 260,000 c. 210,000
b. 185,000 d. 245,000

8.During 2019, Yellow Co. introduced a new line of machines that carry a three-year warranty
against manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2%
of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales
and actual warranty expenditures for the first three-year period were as follows:

Sales Actual Warranty Expenditures

2019 P 600,000 P 9,000
2020 1,500,000 65,000
2021 2,100,000 135,000
P4,200,000 P209,000
What amount should Yellow Co. report as a liability at December 31, 2021?
a. P0
b. P12,000
c. P54,000
d. P169,000

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9-10. Teal Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost Teal P3 each. Teal estimates that 40 percent of the
coupons will be redeemed. Data for 2020 and 2021 are as follows:
2020 2021
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

9.The premium expense for 2020 is

a. P37,500.
b. P45,000.
c. P52,500.
d. P75,000.

10. The premium liability at December 31, 2020 is

a. P11,250.
b. P15,000.
c. P26,250.
d. P30,000.

11. In 2020, Aqua Co. began selling a new line of products that carry a two-year warranty against
defects. Based upon past experience with other products, the estimated warranty costs
related to dollar sales are as follows:
First year of warranty 2%
Second year of warranty 5%
Sales and actual warranty expenditures for 2020 and 2021 are presented below:
2020 2021
Sales P600,000 P800,000
Actual warranty expenditures 20,000 40,000

What is the estimated warranty liability at the end of 2021?

a. P38,000.
b. P58,000.
c. P98,000.
d. P16,000.

12. Magenta Company offers its customers a pottery cereal bowl if they send in 3 boxtops from
Magenta Flakes boxes and P1. The company estimates that 60% of the boxtops will be redeemed.
In 2020, the company sold 675,000 boxes of Magenta Flakes and customers redeemed 330,000
boxtops receiving 110,000 bowls. If the bowls cost Magenta Company P3 each, how much liability
for outstanding premiums should be recorded at the end of 2020?
a. P270,000

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b. P50,000
c. P75,000
d. P138,000

13.Cyan Co. offers a cash rebate of P1 on each P4 package of light bulbs sold during 2020.
Historically, 10% of customers mail in the rebate form. During 2020, 3,000,000 packages of light
bulbs are sold, and 160,000 P1 rebates are mailed to customers. What is the rebate expense and
liability, respectively, shown on the 2020 financial statements dated December 31?
a. P300,000; P300,000
b. P300,000; 140,000
c. P140,000; P140,000
d. P160,000; P140,000

14. Amber Co.’s payroll for the month of January 2020 is summarized as follows:

Total wages 500,000

Income tax withheld 60,000

All wages paid were subject to SSS. The SSS tax rates were 7% each for employee and
employer. Amber remits payroll taxes on the 15th of the following month. In the financial
statements for the month ended January 31, 2020, what amount should be reported respectively
as total payroll tax liability and payroll tax expense?

a.60,000 and 70,000 c. 95,000 and 35,000

b.95,000 and 70,000 d. 130,000 and 35,000

15. Purple Co. requires advance payments with special orders for machinery constructed to
customer specifications. These advances are nonrefundable. Information for the current year is
a follows:

Advances from customers – January 1 1,180,000

Advances received with orders 1,840,000
Advances applied to orders shipped 1,640,000
Advances applicable to orders canceled 500,000

What amount should be reported as current liability for advances at year-end?

a.1,480,000 c. 1,380,000

b. 880,000 d. 0

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