NON-FINANCIAL LIABILITIES

MODULE 4 :
PROVISIONS, CONTINGENCIES & OTHER LIABILITIES
Exercises
Intermediate Accounting Volume 3, 2019 edition based (Robles & Empleo)
 EXERCISE 1

Which of the following shall result in recognition of liabilities?

a.) Receipt of goods ordered from a supplier.
b.) Signing of employment contract by a new employee.
c.) Declaration of cash dividends on cumulative preference shares.
d.) Declaration of share dividends on ordinary shares.
e.) Declaration of property dividends on ordinary shares.
f.) Receipt of goods to be sold for the account of the consignor.
g.) Receipt of cash from a customer for goods to be delivered next month.
h.) Withholding taxes on employees compensation.
i.) Violation of the terms of a contract; it is more likely than not that there will be outflow of resources, amount
of such outflow can be reasonably estimated.
j.) Violation of the terms of a contract; it is more likely than not that there will be outflow of resources, amount
of such outflow cannot be reasonably estimated.
k.) Violation of the terms of a contract; it is less than probable but more than remote that there will be outflow of
economic benefits.
l.) Violation of the terms of the agreement and, as a result, it is not likely that there will be outflow of economic
benefits.
m.) Sale of goods with product warranty.
n.) Receipt of land and building from the city government.
o.) Sale of non-refundable tickets for a concert show that will be staged three months from now.
p.) Sale of gift certificates redeemable in merchandise.
 EXERCISE 2

Determine the amount that will be recognized as a liability in each of the following independent cases.
CASE 1
In August 2020, the XYZ commenced a suit against DEF for alleged violation of anti-trust laws seeking damages
of P 2,000,000. DEF denies the allegations, and as of December 31, 2020, it is not likely that DEF will pay any
damages as a result of this lawsuit.
CASE 2
In September 2020, the Garrison Company became involved in lawsuit. As a result of this litigation, it is more
likely than not that Garrison will have to pay an amount ranging from P 700,000 to P 1,000,000 but P 800,000 is
considered to be the best estimate of the obligation.
CASE 3
In the latter part of December 2020, Dallas Company’s vehicle was involved in a collision with a truck of Kansas
Corporation. In January 2021, Kansas filed a suit against Dallas for damages to the vehicle. Based on the police’s
incident report, it is probable that estimated damages between P 300,000 and P 500,000 will be incurred by
Dallas. Each point within that range of amounts is considered as likely as any other point. Dallas issued its 2020
financial statements in March 2021.
CASE 4
In the latter part of December 2020, Dallas Company’s vehicle was involved in a collision with a truck of Kansas
Corporation. In January 2021, Kansas filed a suit against Dallas for damages to the vehicle. Based on the police’s
incident report, it is probable that estimated damages between P 300,000 and P 500,000 will be incurred by
Dallas. In February 2021, Kansas accepted Dallas offer of P 350,000 for reimbursement of damages on its car.
Dallas issued its 2020 financial statements in March 2021.
CASE 5
During 2020, the Going Steady Company sold appliances that offer product warranties against defects. Based on
the entity’s and industry experience, it is estimated that 60% of the products sold have no defects, 30% have
minor defects and 10% have major defects. Estimated warranty costs were P 1,000,000 if all products sold have
major defects and P 200,000 if all products sold have minor defects. Going Steady has already incurred P 60,000
of warranty costs relating to appliances sold during 2020.
CASE 6
In October 2020, Manila City Government bought action against Harrison Company in the amount of P
1,900,000 for polluting Manila Bay. It is less than probable but more than remote that Manila City government
will be successful, but the amount of damages Harrison will have to pay is not reasonably determinable at
December 31, 2020.
 EXERCISE 3

Garfield Company pays its general manager an annual bonus. For the year 2020, the company reported profit of
P 8,000,000 before deductions for bonus and corporate income taxes. The corporate income tax is 30%.

REQUIRED: Determine the amount of bonus under each of the following assumptions:
a.) Bonus is 8% of profit before deductions for both bonus and income taxes.
b.) Bonus is 8% of profit after deduction for bonus but before deduction for income taxes.
c.) Bonus is 8% of profit before deduction for bonus but after deduction for income taxes.
d.) Bonus is 8% of profit after deduction for both bonus and income taxes.
 EXERCISE 4

Arthur Corporation pays bonuses to its sales manager and two sales agents. The company had profit for 2020 of
P 3,000,000 before bonuses and income taxes. Assume-
a.) The sales manager gets 8% and each sales agent gets 6% of profit before tax and bonuses.
b.) Each bonus is 12% of profit after income tax and bonuses.
c.) Sales manager gets 12% and each sales agent gets 10% of profit after bonuses but before income tax.

REQUIRED:
Determine the amount of bonus of the sales manager and for each sales agent under the given independent
assumptions. Assume a tax rate of 30%.
 EXERCISE 5

Cleveland Inc. pays its general manager an annual bonus of 6% of profit after deduction for both bonus and
corporate income tax. For the year 2020, the company realized profit of P 9,000,000 before said deductions. The
income tax rate is 30%.

REQUIRED:
What is the corporate income tax liability at December 31,2020?
 EXERCISE 6

On January 1,2019, Jackson Company introduced a new line of product that carries a 3 year warranty against
factory defects. The product warranties provide assurance that the new line of product will function as intended
based on agreed-upon specifications.
Estimated warranty costs related to peso sales are as follows: 1% of sales in the year of sale, 2% of sales in the
year after sale, and 3% of sales in the second year after sale.
Sales and warranty expenditures for the period 2019 to 2021 were as follows:

2019 2020 2021

Sales P 1,000,000 P 2,500,000 P 3,500,000
Actual warranty
expenditures 8,000 38,000 112,500

REQUIRED:
Prepare journal entries to record the foregoing for year 2019 to 2021. The company’s reporting period is the
calendar year.
 EXERCISE 7

Filmore Company started selling a new product that carried a 2-year warranty against defects. The warranty
provides assurance that the new product will function as intended based on agreed-upon specifications. Based
on past experiences with other products, the estimated warranty costs related to peso sales are computed as
follows:
First year of warranty 3%
Second year of warranty 5%
Total sales and actual warranty repairs for 2019 and 2020 are given:
2019 2020
Sales P 4,200,000 P 6,960,000
Actual warranty expenditures 148,800 180,000
REQUIRED:
a.) What amount should Fillmore report as its estimated warranty liability as of December 31,2020?
b.) Based on the above data, assuming that sales and repairs occur evenly throughout the year, how much would
be the predicted warranty expense covering 2019 and 2020 sales still under warranty at December 31,2020?
 EXERCISE 8

Johnson Company sells personal computers. The company provides its customers an option to purchase a three
year of warranty for P 720 for each unit of computer purchased.
Sale of warranties and repairs are made evenly throughout each year. Based on industry trend, 20% of repairs are
done in the first year from the date of sale, 30% in the second year and 50% in the third year.
Information related to the service contracts for years 2019 and 2020 are as follows:
2019 2020
Number of warranty contracts 1,000 1,200
Costs of warranty services performed P 25,000 P 100,000

REQUIRED:
a.) Prepare entries, including year-end adjustments, related to the foregoing for years 2019 and 2020.
b.) Determine the balance of Unearned Revenue from Warranty Contracts at December 31,2020.
c.) Determine the profit from warranty contracts for the years 2019 and 2020.
 EXERCISE 9

Tyler Corporation embarked on a promotional program whereby a ” T” shirt costing P 150 and with a selling
price of P 250 each is given away for every 100 bottle caps of “Accountant Tea” returned plus P 50. Tyler
Corporation estimates that only 40% of the bottle caps in the hands of consumers will be presented for
redemption. The following information is available to you:

Quantity Amount
Bottles sold 1,000,000 P 15,000,000
” T” shirts bought for give away 1,500
” T” shirts distributed for customers 1,000

REQUIRED: Prepare the journal entries to record the following:

a.) purchase of premiums
b.) sale of bottles of Accountant tea
c.) distribution of T- shirts
 EXERCISE 10

Beginning the year 2020, the Polk Company began marketing a new beer called “ Serbesa”. Each bottle of beer
sells for P 30. To help promote the product, the management of Polk is offering a special Serbesa beer mug to
each customer for every 20 specially marked bottles of Serbesa. Polk estimates that out of the 300,000 bottles
of Serbesa sold during 2020, only 30% of the bottle caps will be redeemed. For the year 2020, 5,000 beer mugs
were purchased by the company at a total cost of P 140,000. These 5,000 mugs have a total sales value of P
200,000. A total of 4,000 mugs were distributed to customers during the year 2020.

Quantity Amount
Bottles sold 1,000,000 P 15,000,000
” T” shirts bought for give away 1,500
” T” shirts distributed for customers 1,000

REQUIRED:
a.) What amount of unearned revenue for unredeemed premiums should Polk report on its December 31,2020
statement of financial position?
b.) How much additional sales should Polk recognize upon distribution of the 4,000 mugs?
 EXERCISE 11

During the year 2019, the Taylor Company started a promotional campaign for the sale of its car wax products.
A coupon is attached for each unit of car wax sold. For every five coupons plus P 50, a customer can avail of a
bottle of tire black which sells for P 150. Each tire black costs the company P 100. The following information
relates to the sale of car wax and coupons redeemed and expected to be redeemed in the future:
2019 2020
Sale of car wax 140,000 units 200,000 units
Selling per unit of car wax
Coupons redeemed 40,000 90,000
Coupons expected to be redeemed in the 30,000 80,000
future ( year-end estimates)

REQUIRED: Compute for the following:

a.) Provision for unredeemed coupons at the end of 2019 and 2020.
b.) The amount of total revenue recognized for each year 2019 and 2020 as a result of the foregoing.
 EXERCISE 12

Van Department store grants loyalty awards to its customers. For every P 500 purchase made by the customer,
the customer receives a credit of 10 points equivalent to P 10. The accumulated points may be used by the
customer as part or full payment for merchandise purchased in the future.
During the year 2019, the company made sales aggregating P 5,000,000 on which 100,000 points were awarded
to customers. Of the p 5,000,000 on which 100,000 points were awarded to customers. Of the P 5,000,000, 2%
is considered to be allocable to the customer loyalty awards. During the same year, 25,000 points were
redeemed, and at December 31,2019, it is expected that a total of 90,000 points would be redeemed relating to
2019 sales.
During 2020, an additional 35,000 points awarded in 2019 were redeemed and Van Department store revised its
estimate of total redemption for points granted in 2019 at 95,000 points.
REQUIRED:
a.) Determine the amount of revenue recognized as a result of redemption of reward points in years 2019 and
2020.
b.) Determine the amount of liability to be presented in the statement of financial position relating to customer
loyalty awards at December 31,2019 and December 31, 2020.
 EXERCISE 13

Pierce Corporation issues gift certificates in denominations of P 300, P 500 and P 1,000. These gift certificates
are redeemable in merchandise and expire one year after the issue date. The company’s gross profit is an average
of 30%.
Based on past experience, an average of ½ of 1% of total gift certificates sold will not be redeemed by reason of
expiration. The company records revenue as certificates expire.

During 2020, the company sold P 2,000,000 gift certificates through its licensed distributors. At the end of the
year, total redeemed gift certificates had a sales value of P 1,280,000.
REQUIRED:
Prepare all journal entries pertaining to the above information. Assume that Pierce uses periodic inventory
system.
 EXERCISE 14

Buchanan Company sells gift certificates redeemable only when merchandise is purchased. The certificates have
an expiration date of two years after issuance. Upon redemption or expiration, Buchanan recognizes the
unearned revenue as realized. Data for the year are as follows:
Unearned revenue, January 1- P 750,000
Gift certificates sold – P 3,000,000
Gift certificates redeemed - P 2,750,000
Expired gift certificates – P 150,000
Cost of goods sold rate is 75%.

REQUIRED:
Prepare all journal entries to the foregoing.
 EXERCISE 15

Lincoln Company sells its products in returnable containers. The customers are given a period of 2 years from
the year of delivery to return the containers. Containers not returned within the prescribed period are
considered sold at the amount of deposits forfeited. At January 1,2020, the balance of the account Refundable
Deposits on Returnable Containers is P 250,000, consisting of the following:
For containers delivered to customers in :
2018 P 100,000
2019 150,000
During 2020, the company received additional deposits of P 200,000 for containers delivered to customers
during 2020 for return of containers amounted to P 267,000,as follows:
Deliveries in 2018 P 82,000
Deliveries in 2019 110,000
Deliveries in 2020 75,000
REQUIRED:
Compute the balance of Refundable Deposits for Returnable Containers at December 31,2020.
 EXERCISE 16

The Grant Publication sells magazine subscriptions for one to 3 year periods. Information relating to sales and
expiration are as follows:
2017 2018 2019 2020
Subscription sold P 5,000,000 P 4,500,000 P 5,500,000 P 7,000,000
Expiring in
2017 P 1,000,000
2018 2,800,000 P 1,200,000
2019 1,200,000 2,000,000 P 1,800,000
2020 1,300,000 2,400,000 2,000,000
2021 1,300,000 2,800,000
2022 2,200,000
REQUIRED:
a.) What is the balance of Unearned Subscriptions Revenue at January 1,2019?
b.) Prepare journal entries to record the receipt of the subscriptions and the revenue from magazine subscriptions for
years 2019 and 2020.
c.) What is the balance of the Unearned Subscriptions Revenue at December 31,2019 and December 31,2020?