SAIMAA CORP.

Record its purchases at gross amounts but wishes to change to

recording purchases net of purchase discounts. Discounts on purchases recorded from
January 1, 2021 to December 31, 2021, totalled P80,000. Of this amount, P8,000 is still
available in the accounts payable balance. The balances in Saimaa’s accounts as of
and for the year ended December 31, 2021, before conversions are:
Purchases P 4,000,000
Purchase discounts 32,000
Accounts payable 1,200,000

1. The amount of purchase discounts lost to be recognized is

A. P8,000 C. P32,000
B. P 0 . D. P40,000

1. Discounts on 2021 purchases P 80,000

Less: Discounts taken P 32,000
Discounts will available in the accounts payable balance 8,000 40,000
Purchase discounts lost P 40,000

2. The accounts payable balance should be reduced by

A. P8,000 C. P32,000
B. P80,000 D. P40,000

2. The accounts payable should be reported net of discounts still available at the
end of the reporting period which amounts to P8,000.

3. The purchases account should be reduced by

A. P32,000 C. P40,000
B. P80,000 D . P8,000

3. Under the net method, purchases are reported net of discounts, regardless of
whether the discounts are taken or not. Hence, the purchases account should be
reduced by P80,000.

4. The entry to record the conversion is

A.Accounts payable 80,000
Purchases 80,000
B.Purchase discounts lost 32,000
Purchases 32,000
C.Purchase discounts lost 40,000
Purchase discounts 32,000
Accounts payable 8,000
Purchases 80,000
D.Purchase discounts lost 32,000
Accounts payable 8,000
Purchases 40,00

4. The entry to record the conversion is:

Purchase discounts lost 40,000
Purchase discounts 32,000
Accounts payable 8,000
Purchases 80,000
Accounting for Warranties and Premiums
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, Olson 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 60% 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 one-year warranty
for replacement of parts and labor. The estimated warranty cost, based on past
expenditure, is 2% of sales. Replacement parts and labor or 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 shown below:

Inventory of premium CD players P399,500

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 statement for the following:

1. Warranty expense
a. P1,640,000 b. P1080,000
c. P800,000 d. P360,000

1. Sales of musical instruments and sound reproduction equipment P54,000,000

Estimated warranty cost x2%
Warranty expense for 2009 P1,080,000

2. Estimated liability from warranties

a. P1,920,000 b. P1,080,000
c. P240,000 d. P800,000

2. Estimated liability from warranties, Jan. 1, 2010 P1,360,000

Add: 2010 warranty expense (see no.1) 1,080,000
Total 2,440,000
Less: Actual warranty costs during 2010 1,640,000
Estimated liability from warranties, Dec.31, 2010 P800,000
3. Premium expense
a. P1,836,000 b. P840,000
c. P756,000 d. P2,189,500

3. Coupons issued(P18,000,000/10) P1,800,000

Multiply by estimated redemption rate x 60%
Estimated number of coupons to be redeemed 1,080,000
Divide by exchange rate (200 coupons for a CD player) ÷200
Estimated number of CD player to be issued 5,400
Multiply by net cost of a CD player (340-200) x P140
Premium expense for 2010 P756,000

4. Inventory of premium CD players

a. P399,500 b. P569,500
c. P2,210,000 d. P739500

4. Inventory of premium CD player P399,500

Add: Premium CD players purchased during 2010 (340*6, 500) 2,210,000
Total 2,609,500
Less: Premium CD players distributed to customers during 2010
(1,200,000/200=6,000*340) 2,040,000
Inventory of premium CD players, Dec. 31, 2010 P569,500

5. Estimated premium claims outstanding

a. P364,000 b. P840,000
c. P756,000 d. P672,00

5. Estimated premium claims outstanding, Jan.1, 2010 P448,000

Add: 2010 premium expense (see no.3) 756,000
Total 1,204,000
Less: 2010 actual redemptions (1,200,000/200=6,000*140) 840,000
Estimated premium claims outstanding Dec. 31, 2010 P364,000
Bond Redemption Prior to Maturity Date
The long-term debt section of ELMO COMPANY's statement of financial position as of
December 31,2009, included 9% bonds payable of P400,000, less unamortized
discount of P32,000. Further examination revealed that these bonds were issued to
yield 10%. The amortization of the bond discount was recorded using the effective
interest method. Interest was paid on January 1 and July 1 of each year. On July
1,2010, Elmo retired the bonds at 105 before maturity.

What is the amount of loss to be recognized on the retirement of bonds?

A. P52,400 C. P51,600
B. P20,000 D. P0

Effective interest (P400,000-P32,000=P368,000 X 10% X 1/2) 18,400

Nominal interest (P400,000 X 9% X 1/2) 18,000
Discount amortization, Jan.1,2010-July 1,2010 400
Retirement price (P400,000 X 105%) 420,000
Carrying value of bonds:
Face value 400,000
Less: Unamortized discount (P32,000-P400) 31,600 368,400
Loss on retirement of bonds 51,600