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Problem 1
Free Cor 9 - 2S: (Current Llabllitles - Accrued Expense)
poratlon pays Its outside salespersons fixed monthly salaries and commlssio
sales · SaIes commissions are computed and paid on a month.IV basis · (I n th e month folio"' .o" ''1
mon th of sale), and the fixed salaries are treated as advances againS t commissions, Ho "''"i!'tn,
th e fixed salaries for salespersons exceed their sales commissions earned for a rnon~t'er, if
r 1
excess Is not charged back to them. Pertinent data for the mon th of Ap ll 20 11 for th ' "<\
th
salespersons In sales region 3 are as follows: • 'e,

Net Sales Commission Rate

Salesperson El!ed Sala!l,'. 4%
A Pl0,000 p 200,000
400,000 6%
B 14,000
600.000 6%
C 18.000
Totals ·WJ1,W!
For sales region 3 what total amount should Free Company accrue for sales commission Pay b
atApril 30, 20111' · a le
a) P26,000 c) P68,000
b) P28,000 d) P70,000

Answer: B .
Accrued Commission
Fixed (Excess of Commlssion_over
Sala!l,'. Fixed Salary)
Salesperson Commission
PB,000 Pl0,000 .P 0
A (P200,000 x 4%)
24,000 14,000 10,000
8 (P400,000 x 6%)
18,000 . 18.000
C (P600,000 x 6%) 36,000
Totals

Problem 19 - 26: (Current Liabilities - Returnable Containers)

Inter Company sells its products in reusable, expens,lv~ containers. The -customer charged
deposit for ea.ch container delivered and receives a refund for. each container returned with;"
two years after the year of delivery. ln\er acc~unts for the containers not_returned within th n
time limit .is being retired by sale at the deposit amount. Information for 2015 is as follows: e

Deposits for containers at December 31, 2014 from deliveries in:

2013 .......................... P 150,000
• 2014.......................... 430.000 PSB0,000
Deposits for containers delivered in 2015 780,000 ,
Deposits for containers returned in 2012 from deliveries in:
2013 ...........................90,000
2014 ......................... 250,000
2015 .......................... 286.000 626,000

What amount should Inter Company report as a liability for deposits on returnable containers at
December 31, 2015? ·
a) P494,000 c) P674,000
b) P644,000 d) P734,000
 -
A
Deposits -J91 -

2013 P 150,000 =~
P9o,ooo
2014 430,000 P60,000
250,000
2015 780,000 180,000
286,000
494,000
""t total amount of liobi//ty for dep
'" b h os1ts on return bl
balances}, ecause t e company's pol/ I a e containers Is P 674
within the two-year prior from the yeor,~f ~:: refund deposits only If co//:'"12021 and 2012
defive,Y not returned ot the end o• 2022 I very, as a result, the P 60 000 ba rs ore returned
. . . , s no longer , lance fro 20
rhe z-year expiration period had elapsed an occountlng ilablilty fo h m 10
· r t e reason that
problem 19 - 27: (Interest Payable)
on September 1, 2013, Crackers Comp .
.h h any issued a note bl
pz,400,000, wit t e stated rate of 12% and bl . paya e to PNB in the amount
01
the bank's prime rate is 11%. The first inte:e:;: in 3 e_qual annual installments. On this date,
I, 2014. n pnnc1pal payment was made on September

How much should Crackers record as accrued inter t bl

PS S 667 es paya eat December 31 2014?
aI , c) P88,000 '
b) P64,000 d) P96,000

Answer: B
Total present value cif note .
P2,400,000
Less: First principal payment - Sept~mbei 1, 2014
Balance as of December 31, 2014 ' ·
--..ml!22
Interest payable (Pl,600 000 x,12% x 4/1~)
1 f...W!!ll2
Problem 19 - 28: (Interest Payable) .
Urn Corporation's liability account balances' at June 30, 2014 included a 10% note payable in the
amount of Pl,800,000 . . The note is dated October 1, 2013 and is payable in three equal annual
payments of P600,000 plus interest.

In Urn's June 30, 2014 statement _o f financial position, what am~unt should be reported as
accrued interest payable for this note?
a) P30,000 c) P 90,000
b) P45,000 d) Pl:35,000

Answer: D
Pl,800,000
Total principal
x Interest rate .P 180,000
Interest expense (from 10/01/13 to lO/O,l /l 4) h _.2Lll
3
x No. of months from 10/01/13 - 06/ 0/l 4 2
~ mont s

~~=:~
Accrued interest

Problem 19 - 29: (Interest on Borro),Ylngs!he bank In order to maintain sufficient ~per:!

1

1
Ball Corporation frequently borrows from te with interest payable at matu~-
The following loans were at a F" t
intereS r~ ' .,
each loan on its scheduled maturity date.
 .; ::;,-------~==;----;::;:;:;-·~-
-392-
Mat1•rlty Date Term of ~n•
~---c~
.
_ l11
""
Date of Loan Amouot / 15 1 year -
11/01/14 p 500,000 l0/30 6 months ·,
07/31/15
02/01/15 1,500,000 , 9 months '/
800,000 01131116
05/01/15
h loans are repaid. As a result, · Interest e ·
Ball records interest expenses when t e " · q
PlS0,000 was recorded in 2015.

If no correction is made, by what amoun t would 2015 interest expense be understated?

· ',
a) P54 000 · c) P54,000
b) P62:ooo d) P72,000

Answer: A
January 1 to October 30, 2015 (P500,000 x 12% x 10/12) p 50,000
February 1 to July 31, 2015 (Pl,500,000 x 12% x 6/12) 90,000
May 1 'to December 31, 2015 (PS00,000 x 12% x 8/12) __M.QQQ
Total interest expense - 2015 P204,000 .
less: Recorded interest expense J2Q.QQQ
Understatement of interest expense ~ -- •-~r.
(\,.,,
Problem 19 - 30: (Interest Rate on Borrowings) · ·•
On July 1, 2014, Clear Company obtained a P3,000,000, 180-day bank loan 'at,,an aJ1~ua1 rated
12%, -The loan agreement requires Clear to maintain a P600,000 compensatl nee in ~
checking account at the lending bank. Clear woulil oth_e rwise ~ainta_i~''/ ,., t of Ollly
P300,000 in this account. The checking account earns interest at an annual rate.,-o f
' '

Based on a 360-day year, the effective interest rate on the borrowing is

a) 12.00% c) 13.33%
b) 12.67% d) 13.50%

Answer: B
Interest expense on the loan (P3,000,000 x 12% x 180/360) p 180,000
less: Interest Income on the additional compensating
balance (P300,000 x 6% x 180/360)
Net Interest _UlQQ
+ Principal loan less than additional compensating P 171,000
balance (P3,000,000 - P300,000)
Six months effective rate UQQ.QQ2
M~ltiplyby 6.33
Per annum effective rate _ _ _2

Problem 19 - 31: (Accrued Expenses)

Brown Eyes Company operates a retail store and - - ., ,, 2014,
year:'e nd accrual for the following expenses: st 31
mu determine the proper Oecel)l_~_~r,_ }

The store _lease calls for fixed rent of p6 _ _ ,. ,:·,, _1!~ of dJI
000
month, and an additional rent equal to 6 % Per month, payable atthe .~~8_
1
1,~P.-'Jaryear,
payable on January 31 of the following Y of net sales over ·Pl,250,000 ~-~~-~ 1~ ." .. ,
11 1
ear. Net sales for 2014 were P2)so;p<l(/:-, ,.'' ·
,.J,,,·,;1
 --- - ~ummt.io.ii&i.,
Cl An elect~ic bill of P4,250 covenn th •3 _
was received January 23 2012 g e Period December 17 93
Cl A P2,000 t eIephone blll was' recel
· d • 2014. throuI h January 16,
ve on January 2 2 2015
' • 012. covering·
service in advance for January ·
2015
Local and toll calls for December P 750
2014
1,250
in its December 31, 2014 statement of fl
hould Brown Eyes report? . nanclal position, what amount of .
s 63 375 accrued hablllties
a) : 64•l25 c) P65,SOO
b) ' d) P75,37S
Answer: A
Additional rent (P2,2S0,000- Pl,250,000 x G%)
Electric bill (P4,250 x 15/30 days) P60,000
Local and toll calls 2,125
Total accrued liabilities
w.m
PrOblem 19 - 32: (Accrued Expenses)
Johnson Apparel, Inc. operates a retail store and must determine the proper Decembe
year-end accrual for the following expenses: r 31• 2014

The store lease calls for.fixed rent of Pl0,000 per month, payable at the beginning of the month,
and additional rent equal to 6% of net sales over P2,000,000 per calendar year, payable on
January 31 of the following year. Net sales for 2014 are PS,000,000.

Johnson has property subject to·a city property tax. The city's fiscal year runs from July 1 to June
30 and the tax, assessed at 3% of property on hand at April 30, is payable on June 30. Johnson
estimates that its property tax will amount to PG0,000 for the fiscal year ~nding June 30, 2015.

In its December 31, 2015 statement of financial position, how much should Johnson report as
accrued expenses?
a) P390,000 · c) PSl0,000
b) P396,000 d) PS16,000

Answer: A
P360,000
Additional rent (PS,000,000 · P2,000,000 x 6%)
30.000
Property tax for July to Dec. (P60,000 x G/l 2)
Total accrued expens~s

P
roblem 19 -33: (Accrued Expenses) "d biweekly occasionally, advanees •made d·to
Brain Company salaried employees are . pa1 lnformatio~ relating to salaries for the ca 1en ar
employees are paid back by payro 11 deductions. • l' , ,
Year 2014 is as follows: · be 31 20 13 December 31,.~
0eeem r • . P 18,000
,. P12,000 ·. ?
Employee advances
Accrued salaries payable · , GS,OOO 815,000
Salaries expense during the year 780,000
Salaries paid during the year (gross)
 -394- : '· ~ ,19

At December , , what amount should Brain report as accrued salaries pay~ble? .

31 2014
a) P35,000 c) .P 94,000
. b) P82,000 d) Pl00,000

Anstwr: D
Accrued salaries payable, January 1, 2014 P 65,000
Add: Salaries Expense 815.000
P880,000
Total
Less: Salaries paid
Accrued salaries payable, December 31, 2014

Advances do not reflect the accrued salaries payable because when advances are-made, they 0,.
a cosh payment separate from payroll activities, .hence, .the advances are not reflected .os satar1,s
expense.

Problem 19 -34: (Provision - Product Premiums)

Lancer Company inaugurated a promotional campaign on January 2, 2014 to· promote. the
salabllity of their product. Lancer Company placed a coopon redeemable for a·premlum in'each
package of cereal sold at P200. Each premium costs P25 and .i.o coupons.roust be presented by·a
customer to receive a premium. Lancer estimated that only 70% of the coupons issued would.be
redeemed. For the 6 months ended July 31, 2014, the following transa.ctions occurred:,
Packages of cereal sold 120,000
Premium purchased 30,000
Coupons redeemed 54,000

How much should be reported as premium expense and estimated liability for coupons on the
fiscal year ended July 31, 2014, respectively? ·
a) P 75,000 and P 75,000 c) P135,000 and P210,000
b) P135,000 and P135,000 d) Pil0,000 and P 75,000

Ans-r: D
NetCostl
Coupons Premiums Premium
Total estimate
(70% X 120,000) 84,000 + 10 8,400 X 25

~-
Less: Redemptions 54,000 + 10 MQQ
Remaining/
Outstanding 30,000 3,000 X 25

Premium Expense P210.000 Premium liabili!l,: = P75.000

Problem 19--35: (Provision - Product Premiums) .

Bangkok Company inaugurated a sales promotion campaign on May 31, 2014, whereby Bangkok
placed a coupon In each package of chocolate sold, the coupons being redeemable . for a
premium. Each premium costs Bangkok PSO and a customer to receive a coupon must present
five coupons. Bangkok estimated that only 60% of the coup~n issued would be redeemed., for
the seven months ended December 31, 2014, the following information is available: ·
Packages of chocolates sold 400,000
Premiums purchased 30 000
Coupons redeemed . 100,000
 -395-
'tloW much is the estimated liability for premium claims outst d"
) PlOO 000 · an ing at December 31 2014?
a ' c) PlS0,000 '
.b) P140,000 d) P240,000
Answer: B
Total estimated number of coupons to be redeemed
(400,000 X 60%)
Less: Coupons redeemed 240,000
Number of coupons outstanding lQQ.QQQ
+ Number of coupons for every premium 140,000
Number of premiums to be distributed - preceding year --2
x Cost per premium 28,000
Estimated premium liability, December 31, 2014

Problem 19- 36: (Provision - Product Premiums)

' Broad Company includes in packages of its products, coupons that may be presented to retail
stocks to obtain discounts on other Broad Company products. Retailers are reimbursed for the
face amount of coupons redeemed plus 10% of that amount for handling costs. The company
honors requests for coupon redemption by retailers up to thre~ months after the coupon
expiration date. The company estimates that 70% of all coupons issued will ultimately be
redeemed. Information relating to coupons issued by the company during 2014 is as follows:

Consumer expiration date

Dec. 31, 2014
Total face amount of coupons issued - P600,000
Total payments to retailers as of Dec. 31, 2014 P220,000

What amount should Broad Company report as a liability for unredeemed coupons at December
31, 2014?
a) None c) P242,000
b) P200,000 d) P308,000

r Answer: C .
. Total estimated face amount of coupons to be redeemed
,

(P600,000 x 70%) P420,000

Add: Handling cost (P420,000 x 10%) 42.000
Total · P462,000
Less: Actual reimbursements to retailers in 2014 220.000
Estimated liability for unredeemed coupons, 12131114

Probl~m 19- 37: (Provision - Product Premiums) . f h tcakes unde~ a new sales promotional
O 0
During 2014 Mallow Company sold SOO,OOO boxes b ·tt d with P16 entitles the customer
' . , pon which when su m, e .' .
program. Each box contains one cou , nd p
for handling and shipping. Mallow estimates
r
to a baking pan. Mallow pays P2P per pan a
2
that 80% of the coupons will be redeemed, even t oug
h h only 300 000 coupons had been
, ,
processed during 2014. '
· · d s at December 31,
W.hat amount shou Id Mallows report as a liability for unredeeme co~pon
.
2014? c) p 600,000
a) P300,000 d) Pl,000,000
b) P400,000
 -J96-

Answ~r: C to be redeemed (500,000 ·x 80%) 400,ciOO

Total estimated coupon~/redeemed 300.000
C upons processe
Less: o . pons still to be redeemed/
Remaining cou d 100,000
# of premiums to be distribute .
x Net cash outlay for every premium: P20
purchase price
Handling and shipping
· Remittance
Estimated liability for unredeemed coupons

Problem 19 _ 38: (Provlslo"! - Prqduct Premiums) . ·

on July 1, 2014, Sydney Company started a sales promotional campaign, In each box of cereal
sold, Sydney inserted a coupon redeemable for a, premium, To receive a premium, each _
customer must submit five coupons. Sydney's cost for each premium Is P6. Sydney estimated
that 60% of the coupons Issued would be redeemed. For the six months ended December 31,
2014, the following information Is available:

Boxes of cereal sold 800,000

Coupons redeemed 200,000

How much should be the estimated liability for premium claims outstanding at December 31,
2014?
a) P240,000 c) P432,000
b) P336,000 d) P576,000

Answer: B
Total estimated coupons to be redeemed (800,000 x 60%) 480,000
Less: Coupons redeem_ed 200.000
Estimated coupons still outstanding 280,000
+ Number of coupons for every premium __ 5
Balance of estimated premiums to be distributed 56,000
x Units cost per premium ______f§
Estimated liability for premiums claims outstanding

Problem 19 -39: (Provision - Product Premiums) '

The Puncher Corporation launched a sales promotional campaign on June 30; 2014. Forevery
ten empty packs returned to Puncher, customers will receive an attractive food container.' The
company estimates that only 30% of the packs reaching the market will be redeemed. Addl tlonal
data are as follows: ·
Units ·Amount
Sales of food packs 3,000,000 P9,000,000
Food containers purchased 60,000 180,000
Prizes distributed to customers 37,000

At the end of the year, Puncher recognized a liability equal to the estimated cost of potential
prizes outstanding. What Is the ~mount of this estimated liability?
a) P69,000 c) P159,000
b) P90,000 d) P180,000
 Non-'FiMndal I.ia.ii/itiu- Cumnt I.ia.ii/itiu
-397-
Answer: · C
Estimated number of packs to be redeemed (3,000,000 x 30%)
+ Number of packs for every premium
900,000
__lQ
·Estimated number of premiums to be distributed
90,000
Less, Premiums distributed
Balance of estimated premiums to be distributed
JU!QQ
53,000
x-Unlt cost per premium (PlS0,000 + 60,000)
Estimated liability for premiums ---..fi
. ,'..;L"
m.ggg
·Problem 1~ 40: (Provision - Product Premiums)
The Top Bottling Corporation embarked on a promotional program whereby a key chain costing
PlS each is given away for every 10 bottle crowns returned plus PS. Top Bottling Corporation
· estimates that only 40% of the bottle crowns in the hands of consumers will be presented for
redemption. The following information Is available:

Bottles sold &n9Jm1

1,000,000 PS,000,000
· Key chains bought for giveaways 15,000 225,000
Key chains distributed to customers 10,000

At the close of the first year, how much should Top Bottling Corporation recognize as estimated
liability1for promotional items outstanding?
a) ' P2so;ooo c) P375,000
b) P300,000 d) P450,000

Answer: B
Estimated number of bottle crowns to be
redeemed (1,000,000 x 40%) 400,000
'"C· '
+ Number of bottle crowns for every key chain --1Q
Tot.ii estimated key chains to be distributed '40,000
Less: Key chains distributed 1Q.QQQ
Balance of estimated key chains to be distributed 30,000
x Net cash outlay for every key chain :
Purchase price PlS
Remittance Lll _f!2
Estimated liability for key chains outstanding

Probiem 19 • 41: (Provision - Product Warranty) .

Th~ s~ll!Jig price of Appliances Company's units is PS0,000 each. The b~~ers are provided with a
2-year warranty that is expected to cost the company P2,000 per unit on the year of sale a~d
P6,000 per unit in the year following the sale. _The company sold 80 units In 2014 and 100 units
In the 2015. Actual payments for warranty claims were PS0,000 and P520,000 on 2014 and 2015,
respectively.

· ·How m~ch would be the warranty expense for 2014 and 2015, respectively?
a) , ~200,000 and P600,000 c) P680,000 and P280,000
b) P640,000 and PS00,000 d) PS00,000 and P840,000

Ansiwr: B
-398-

Warranty Expense:
2014 = P6,000 + P2,000 = PS,000 x so units =
2015 = P6,000 + P2,000 = PS,000 x 100 units = f§l!!2.llll!2

Warranty· expense' Is based on the total units sold in a particular year multiplied by' total
estimated warranty cost per unit. '

Problem 19 -42: (Provision - Product Warranty)

Male Company sells calculators that carry a one-year warranty against manufacturer's defetts
Based on company experience, warranty costs are estimated at P300 per calculator. Du~ni
2014, Male sold 24,000 calculators and paid warranty costs of Pl 70,000,

In its income statement for the year ended December 31, 2014, how much should Male .report as
warranty expense?
a) Pl, 700,000 c) P5,500,000
b) P2,400,000 d) P7,200,000

Answer: D ·
warranty expense (24,000 x P300)

·Problem 19-43: (Provision - Product Warranty) ·

A new product introduced by Beauty Promotion_s carries a two-year warranty against defects,
The estimated warranty costs related to sales are as follows:

Year of sale ' 3%

Year after sale 5%

Sales and actual warranty expenditures for the years ended December 31, 2014 and 2015 are as
follows: ·
Actual Warranty Expenditures
2014 P 800,000 P20,000
2015 1,000,000 70,000

What amount should Beauty report as its estimated liability as of December 31, 2015?
a) P 4,000 c) P54,000
b) P24,000 d) P74,000

Answer: C
Warranty expense:
2014 (P 800,000 x 8%) P64,000
2015 (Pl,000,000 x 8%) 80.000 ~144,000
Less: Actual warranty expenditures:
2014 P20,000
2015 70.000 90,000
Estimated warranty liabUity, December 31, 2015