SOUTHERN LUZON STATE UNIVERSITY

College of Administration, Business, Hospitality, and Accountancy

Bachelor of Science in Accountancy

INTERMEDIATE ACCOUNTING SERIES

Daily Grind No. 18

Topics: Provisions and Contingent Liabilities

1. Expected future operating losses can generally be accrued as part of a restructuring provision
a. True b. False
2. What condition is necessary to recognize an environmental liability?
a. Company has an existing legal obligation and can reasonably estimate the amount of the liability.
b. Company can reasonably estimate the amount of the liability.
c. Company has an existing legal obligation.
d. Obligation event has occurred.

Use the following information to answer the next three (3) questions:
During 2014, Vanpelt 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, 4% in the year after
sale, and 6% in the second year after sale. Sales and actual warranty expenditures for the first three-year
period were as follows:
Sales Actual Warranty Expenditures
2014 P 600,000 P 9,000
2015 1,500,000 45,000
2016 2,100,000 135,000
P4,200,000 P189,000

3. Compute the warranty expense to be recognized on 2015.

4. Compute the balance of warranty liability as of December 31, 2015.
5. Compute the balance of warranty liability as of December 31, 2016.