PREMIUM

Problem 2 (Premium)
Mangagat Co. includes one coupon in each bag of dog food it sells. In return for eight coupons and P 2,
customers receive a leash free of deliver costing P 5 per leash. The leashes cost P 20.00 each. Mangagat
estimates that 40 percent of the coupons will be redeemed. Data for 2014 and 2015 are as follows:
2014 2015
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

2014 Premium Expense (500,000 x .40) / 8 x (P 20 + 5 – 2) 575,000

Premium Liability 575,000

Premium Inventory (18,000 x 20) 360,000

Cash 360,000

Premium Liability ( 120,000 / 8 ) x (20 + 5 -2) 345,000

Premium Inventory 300,000
Cash (120,000 / 8) x (5-2) 45,000

2015 Premium Expense (600,000 x .40) / 8 x (P 20 + 5 -2) 690,000

Premium Liability 690,000

Premium Inventory (22,000 x 20) 440,000

Cash 440,000

Premium Liability ( 150,000 / 8 ) x (20+ 5 -2) 431,250

Premium Inventory (150,000 / 8) x 20 375,000
Cash ( 150,000/8) (5-2) 56,250

5. The premium expense for 2014 is

a. P250,000. b. P300,000. c. P350,000. d. P575,000.

6. The premium liability at December 31, 2014 is

a. P75,000. b. P100,000. c. P175,000. d. P230,000.

7. The premium expense for 2015 is

a. P250,000. b. P300,000. c. P690,000. d. P500,000.

8. The premium liability at December 31, 2015 is

a. P112,500. b. P212,500. c. P225,000. d. P488,750.

9. The inventory of leashes at the end of 2015

a. P 60,000 b. P 200,000 c. P 65,000 d. P 125,000

VALIX 2-1

2021 Cash/ Receivable 3,600,000

Sales 3,600,000
 Premium Inventory 390,000
Cash 390,000

Premium Expense 5,000 x ( 50 + 20 -10) 300,000

Cash ( 5,000 x 10) 50,000
Premium Inventory ( 5,000 x 50) 250,000
Cash ( 5,000 x 20) 100,000

Premium Expense 2,000 x ( 50 + 20 -10) 120,000

Premium Liability 120,000

2022 Cash/ Receivable 4,200,000

Sales 4,200,000

Premium Inventory 580,000

Cash 580,000

Premium Liability 2,000 ( 50 + 20 -10) 120,000

Premium Expense 7,000 x ( 50 + 20 -10) 420,000
Cash ( 9,000 x 10) 90,000
Premium Inventory ( 9,000 x 50) 450,000
Cash ( 9,000 x 20) 180,000

Premium Expense 3,000 x ( 50 + 20 -10) 180,000

Premium Liability 180,000

Premium Expense Premium Inventory Premium Liability

2021 P 420,000 P 140,000 120,000

(300,000 + 120,000) (390,000 -250,000)

2022 P 600,000 P 270,000 180,000

(420,000 + 180,000) (140,000 + 580,000 –

450,000)

VALIX 2-2

Cascade Company manufactures a special soap. A towel is offered as a premium to customers who send in
two proof of purchase seals from the soap boxes and a remittance of P 20. Distribution cost is P 5 per towel.

Data for the premium offer are.

2020 2021
Soap Sales P 2,500,000 P 3,125,000
 Towel purchases, P 100 per towel P 175,000 P 200,000
Number of towels distributed as premium 1,000 1,800
Number of towels expected to be distributed in subsequent period 600 800

1. Prepare Journal entries for 2020 and 2021.

2. Compute the following for each year
a. Premium Expense
b. Premium Inventory
c. Premium Liability

Expense Related to Sales

Premium Liability Beg liab. + Expense this period – Given this period
Premium Inventory Beg + Purchase - Distributed

VALIX 2-3

Cash ( 400,000 x 9) 3,600,000

Sales 3,600,000

Premium Inventory 900,000

Cash 900,000

Premium Expense (400,000 x .25) / 10= 10,000 x ( P 90 - P 5) 850,000

Premium Liability 850,000

Premium Expense 30,000

Cash 30,000

Premium Liability (8,000 x 85) 680,000

Cash ( 8,000 x 5 ) 40,000
Premium Inventory ( 8,000 x 90) 720,000

Premium Expense ( 400,000 x .25 = 100,000 / 10 / 100 = 1,000 x 5,000,000

5,000 =
Premium Liability 5,000,000

Premium Liability (30 x 5,000) 150,000

Cash 150,000

CURRENT / LONG TERM CATEGORIES

Problem 3 ( Current / Non Current)

(Expected to be settled within entity’s operating cycle, Primarily for trading, settled within 12 months after
reporting period, does not have an unconditional right to defer settlement of the liability for at least 12 months
after the balance sheet date)

On December 31, 2017, Victoria Corporation has the following information:

Accounts Payable, including customer advances of P 100,000 and net of debit balance of P 50,000 3,000,000
Notes Payable , including Bank loan of P 500,000 due on December 31, 2020 1,500,000
Notes Payable- Advances from Officers 600,000
Income Tax Withheld from Employees 900,000
Stock Dividend Payable 300,000
Bank Overdraft- Hero’s Bank 100,000
Bank Balance – Veterans Bank 250,000
Accrued liabilities 50,000
Credit balance of Customers’ Account 200,000
Dividend Payable 60,000
Estimated Expenses on warranties for products sold 160,000
Serial bonds payable semiannual installment of P 250,000 3,000,000
Withholding Tax Payable 40,000
12% serial bond issued at par, interest and P 500,000 semiannual installment payable every April 1 4,000,000
and October 1. The last installment payment is scheduled October 1, 2022
Estimated damages payable for breach of contract 180,000
Contested BIR tax assessment for possible obligation 20,000
Employees’ claim for increase in wages covered in the pending lawsuit 100,000
Unearned Rent Income 150,000
Contract signed for the construction of company’s plant site 200,000
Face Value of Bonds Payable due on early 2020, there was an unamortized discount of P 50,000 1,000,000
Advances to Employees 45,000
Cash Surrender Value 60,000
Deferred Tax liability 40,000
Income Tax Payable 150,000
Possible Contingent liability 60,000
Trade Accounts Payable , including goods on consignment of P 150,000 600,000
Victoria Company as guarantor of Victory Company who did not pay his obligation amounting to 100,000

10. The amount to be presented as current liabilities in the December 31, 2017 balance sheet is
a. P 7,960,000 b. P 8,560,000 c. P 7,810,000 d. P 8,460,000

Accounts Payable, including customer advances of P 100,000 and net of debit balance of P 50,000 2,950,000
Customer Advances 100,000
Notes Payable , including Bank loan of P 500,000 due on December 31, 2020 1,000,000
Notes Payable- Advances from Officers 600,000
Income Tax Withheld from Employees 900,000
Bank Overdraft- Hero’s Bank 100,000
Accrued liabilities 50,000
Credit balance of Customers’ Account 200,000
Dividend Payable 60,000
Estimated Expenses on warranties for products sold 160,000
Serial bonds payable semiannual installment of P 250,000, starting June 1 and December 1, 2018 500,000
Withholding Tax Payable 40,000
12% serial bond issued at par, interest and P 500,000 semiannual installment payable every April 1 Long term
and October 1. The last installment payment is scheduled October 1, 2022
Accrued Interest on the above bonds ( 4M x .12 x 3/12) - Unrecorded 120,000
Estimated damages payable for breach of contract 180,000
Contested BIR tax assessment for possible obligation Possible
Employees’ claim for increase in wages covered in the pending lawsuit Claims
Unearned Rent Income 150,000
Contract signed for the construction of company’s plant site Not
Face Value of Bonds Payable due on early 2020, there was an unamortized discount of P 50,000 Long Term
Advances to Employees Asset
Cash Surrender Value Investment
Deferred Tax liability Long Term
Income Tax Payable 150,000
Possible Contingent liability Contingent
Trade Accounts payable , including goods on consignment of P 150,000 450,000
Victoria Company as guarantor of Victory Company who did not pay his obligation amounting to 100,000
TOTAL 7,810,000

11. The amount to be presented as long term liabilities in the December 31, 2017 balance sheet is
a. P 3,000,000 b. P 7,000,000 c. P 7,950,000 d. P 7,990,000

Notes Payable , including Bank loan of P 500,000 due on December 31, 2020 500,000
Serial bonds payable semiannual installment of P 250,000 2,500,000
12% serial bond issued at par, interest and P 500,000 semiannual installment payable every April 1 4,000,000
and October 1. The last installment payment is scheduled October 1, 2022
Face Value of Bonds Payable due on early 2020, there was an unamortized discount of P 50,000 950,000
Deferred Tax liability 40,000
TOTAL 7,990,000

Problem 4 ( Refinancing on a Long Term basis)

Rule : Refinancing on a long term basis is completed on or before the end of reporting period, entity has a
discretion to refinance or roll over for at least 12 months after the reporting period under an existing
facility, or a conditional right to defer settlement of liability for at least twelve months after the reporting
period)
On December 31, 2017, International Company is planning to refinance the following short term obligations on
a long term basis as follows:
Liabilities Refinancing Conditions
Notes Payable No. 1, P 12,000,000 The bank informally agreed to extend maturity date in the next 2 years
Notes Payable No.2, P 3,000,000 On February 2018 entered a financing agreement with bank permitting
the entity to borrow the total amount to payable in the next two years
Note Payable No. 3, P 5,000,000 The entity issue shares of stocks for the total amount on January 1,
2018 for the payment of this liability
Note Payable No. 4, P 2,000,000 Entity negotiated on a written agreement with a bank on December 31,
2017 to replace this note to a 2-year note to be issued on January 2018
Note Payable No. 5, P 1,000,000 The entire amount was refinance on a 5-year note on January 15, 2018
before the issuance of financial statements on March 1, 2018
Note Payable No. 6, P 10,000,000 As of balance sheet date, the entity has a discretion to refinance this
note for 18 months after December 31, 2017
Notes Payable No. 7, P 6,000,000 On December 31, 2017, the entity consummated a non-cancellable
agreement to refinance this note on a six month note starting reporting
period

12. The amount to be reported as long term liabilities at December 31, 2017 is
a. P 18,000,000 b. P 12,000,000 c. P 10,000,000 d. P 8,000,000

WARRANTIES

Problem 5 (Free Warranty)

An entity sells computer that carry a 2-year warranty against defects. The sales are made evenly throughout
the year. Based on past experience, the entity projects an estimated warranty cost as a percentage of sales as
follows:
First year of warranty 4%
Second year of warranty 10%
Sales and actual warranty repairs for two years are as follows:
2014 2015

Sales P 5,000,000 P 6,000,000

Actual Warranty Expense 140,000 300,000

13. The Warranty Expense in 2015 under expense as incurred approach is

a. P 140,000 b. P 160,000 c. P 300,000 d. P 0

14. The Warranty Expense in 2014 under the accrual method

a. P 140,000 b. P 700,000 c. P 840,000 d. P 0

15. The warranty liability at December 31,2015 under expense as incurred approach
a. P 1,100,000 b. P 560,000 c. P 540,000 d. P 0

16. The warranty liability at December 31, 2015 under the accrual method
a. P 1,100,000 b. P 560,000 c. P 540,000 d. P 0

17. If the sales are made evenly during the year, the adjustment for warranty liability account in 2015 is
a. P 150,000 b. P (150,000 ) c. P (315,000) d. 315,000

2014 Sales –
2014 - 2,500,000 x .04 = 100,000
2,500,000 x .04 x ½ = 50,000

2015 - 2,500,000 x. 04 x ½ = 50,000

2,500,000 x .10 = 250,000
2,500,000 x .10 x ½ = 125,000

2016 2,500,000 x .10 x ½ 125,000

2015 Sales –
2015 - 3,000,000 x .04 = 120,000
3,000,000 x .04 x ½ = 60,000

2016 - 3,000,000 x. 04 x ½ = 60,000

3,000,000 x .10 = 300,000
3,000,000 x .10 x ½ = 150,000

2017 3,000,000 x .10 x ½ 150,000

Warranty liability per record 2015 1,100,000

Warranty liability should be 785,000
Decrease 315,000

WARRANTY

A. Free Warranty
Company A sells 1,000 television sets for P 9,000 each. Each unit is under free warranty. The
average cost per unit of warranty is estimated to be P 500. Also estimated that only 60% of our
customers will avail of the warranty. The company incurs P 180,000 for repairs during the year.
Prepare entries.
 A. 1 ACCRUAL BASIS

Cash 9,000,000
Sales ( 1,000 x P 9,000) 9,000,000
Warranty Expense (1,000 x .60 x P 500) 300,000
Estimated Warranty Liability 300,000
Estimated Warranty Liability 180,000
Cash 180,000

B. 2 EXPENSE AS INCURRED BASIS

Warranty Expense 180,000

Cash / Supply 180,000

Problem 3-1

1. Expense as Incurred

2020 Cash ( 300 x P 15,000) 4,500,000

Sales 4,500,000
Warranty Expense 40,000
Cash 40,000

2021 Cash ( 500 x P 15,000) 7,500,000

Sales 7,500,000
Warranty Expense 150,000
Cash 150,000

2. Accrual Basis

2020 Cash ( 300 x P 15,000) 4,500,000

Sales 4,500,000
Warranty Expense (300 x .60 x P 800) 144,000
Estimated Warranty Liability 144,000
Estimated Warranty Liability 40,000
Cash 40,000

2021 Cash (500 x P 15,000) 7,500,000

Sales 7,500,000
Warranty Expense (500 x .60 x P 800) 240,000
Estimated Warranty Liability 240,000
Estimated Warranty Liability 150,000
Cash 150,000

Liability :

2020 – (144,000 – 40,000) = 104,000

2021- (104,000 + 240,000 – 150,000) = 194,000

3. Analysis
 Evenly During the Year = half of the sales happened at the beginning of the year and
half happened at the middle of the year.
2020 2021 2022
1/2 1/2 ½ 1/2
150 150 250 250
As of Dec. 150 x .40 x ½ x P 800 = 24,000
31, 2021 250 x .40 x 1 x P 800 = 80,000
250 x .20 x ½ x P 800 = 20,000
250 x .40 x 1 x P 800 = 80,000
Est. Liability 204,000
Per Record 194,000
Increase in Liability 10,000

Adjustment Warranty Expense 10,000

s Estimated Warranty Liability 10,00

3-2

1. Expense as Incurred

2020 Cash 5,000,000

Sales 5,000,000
Warranty Expense 200,000
Cash 200,000

2021 Cash 9,000,000

Sales 9,000,000
Warranty Expense 560,000
Cash 560,000

2. Accrual Basis

2020 Cash 5,000,000

Sales 5,000,000
Warranty Expense (5M x .14) 700,000
Estimated Warranty Liability 700,000
Estimated Warranty Liability 200,000
Cash 200,000

2021 Cash 9,000,000

Sales 9,000,000
Warranty Expense (9M x .14) 1,260,000
Estimated Warranty Liability 1,260,000
Estimated Warranty Liability 560,000
Cash 560,000

Liability end of 2021 = ( 700,000 -200,000 + 1,260,000 -560,000) = 1,200,000

3.
 2020 2021
2.5M(1) 2.5M (2) 4.5M (3) 4.5M (4)

(2) - 2,500,000 x .10 x 1/2 125,000

(3) - 4,500,000 x .10 x 1 450,000
(4) - 4,500,000 x .04 x 1/2 90,000
(4) - 4,500,000 x .10 x 1 450,000
Per Analysis 1,115,000
Per Record 1,200,000
Decrease (85,000)

Estimated Warranty Liability 85,000

Warranty Expense 85,000

B. PAID WARRANTY

3-7
2017 Cash 2,943,000
Sales (300 x 9,000) 2,700,000
Unearned Warranty Revenue (270 x 900) 243,000
2018 Warranty Expense 60,000
Cash 60,000
Unearned Warranty Revenue (270 x 900) / 3 81,000
Warranty Revenue 81,000

3-11

1. 2,400 x 300 = 720,000

Warranty Expense 720,000
Estimates Warranty Liability 720,000

2. (720,000 – 170,000) = 550,000

3-12

1. 4,000,000 x .02 = 80,000

2. (60,000 + 80,000 -50,000) = 90,000

3-17
1. 5M x .07 = 350,000
2. 350,000 -100,000 = 250,000
3. 7M x .07 = 490,000
4. 250,000 + 490,000 – 300,000 = 440,000

3-14

(100,000) + ? = 540,000
? = 540,000 + 100,000 = 640,000
X ( .08) = 640,000
X = 640,000 / .08 = 8,000,000