ACT1106

1st Exam_Midterm Period

A. Multiple Choices. Encircle the correct answer. ( Problem solving_2 pts each_ No computation, No credit)

1. Which of the following is a current liability?

a. Dividends in arrears on preference shares.
b. A dividend payable in the form of additional ordinary shares.
c. A cash dividend payable to preference shareholders.
d. all of these.
2. During 2023, Pau Company filed a suit against Camil Company seeking damages for patent infringement. At
December 31, 2023, Pau Company’s legal counsel believed it was probable that Pau Company would be
successful against Camil Company for an estimated amount in the of Php7,500,000 to Php15,000,000, with all
amounts in the range considered equally likely. In March 2024, Pau Company was awarded Php10 million and
received full payment thereof. In its 2023 financial statements issued in February 2024, how should Pau
Company report this award?
a. As a receivable and revenue of Php10 million.
b. As a receivable and deferred revenue of Php10 million.
c. As a disclosure of contingent gain of Php10 million.
d. As a disclosure of a contingent gain of an undetermined amount in the range of 7.5 million to 15
million.
3. Mari Company is being sued for illness caused to local residents as a result of negligence on the company’s
part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Mari Company’s
lawyer state that it is probable that Mari Company will lose the suit and be found liable for a judgment costing
Mari Company anywhere from Php400,000 to Php2,000,000. However, the lawyer states that the best estimate
of the expenditure required to settle the obligation is Php1,200,000. As a result of the foregoing facts. Mari
Company should accrue
a. a provision of Php400,000 and disclose an additional contingency of up to Php1,600,000.
b. a provision of Php1,200,000 and disclose an additional contingency of up to Php800,000.
c. a provision of Php1,200,000 and not disclose any additional contingency.
d. no provision but disclose a contingency of Php400,000 to Php2,000,000.
4. Nokia Company has co-signed the mortgage note on the residential house of its president guaranteeing the
indebtedness in the in the event that the president should default. Nokia considers the likelihood of default to be
remote. How should the guaranty be treated in Nokia’s financial statements?
a. accrued and disclosed
b. accrued only
c. disclosed only
d. neither accrued nor disclosed.
5. Which of the following sets of conditions would give rise to the accrual of a loss or an expense?
a. amount of loss is reasonably estimable and event occurs infrequently.
b. amount of loss is reasonably estimable and occurrence of event is probable.
c. event is unusual in nature and occurrence of event is probable.
d. event is unusual in nature and event occurs infrequently.
6. Which of the following contingencies need not be disclosed in the financial statements or the notes thereto?
a. probable losses not reasonably estimable
b. possible assessments of additional taxes
c. Guarantees of indebtedness of others, outflow of resources is reasonably possible
d. all of these must be disclosed.
7. Which of the following uncertainties is normally accrued?
a. Pending or threatened litigation
b. General or unspecified business risk
c. Obligations related to product warranties
d. Risk of property loss due to fire.
8. The Higher Company’s accounts payable balance at December 31, 2023 was Php540,000 before the year-
end adjustments relating to the following information:
a. Goods with an invoice cost of Php30,000 were in transit from the vendor to Higher Company on
December 31, 2023. The goods were shipped FOB shipping on December 29, 2023 and were received
on January 3, 2024.
b. Goods with an invoice cost of Php15,000, which were shipped FOB shipping point on December 22,
2023, from a vendor to Higher Company, were lost in transit. On January 4, 2024, Higher Company filed
a Php15,000 claim against the transportation company.
c. Goods with an invoice cost of Php9,000, which were shipped FOB destination from a vendor to higher
Company were received on January 5, 2024.
What amount should Higher Company report as accounts payable on its statement of financial position as of
December 31, 2023?
a. Php555,000
b. Php564,000
c. Php570,000
d. Php585,000.
Unadjusted balance of Accounts payable Php 540,000
(a) Goods shipped FOB shipping point on December 29 30,000
(b) Goods lost in transit 15,000
------------------------
Php 585,000
=============

9. On December 31, 2023, Ford, Inc. issued a Php100,000 face value notes payable to World , inc. in exchange
for services rendered to Ford. The note made at usual trade terms, is due in nine months and bears interest
payable at maturity, at the annual rate of 3%. The market interest rate is 8% The compound interest factor of
Php1 due in nine months at 8% is 0.943.
At what amount should the notes payable be reported in Ford’s December 31, 2023 statement of financial
position?
a. Php13,000
b. Php94,300
c. Php96,520
d. Php100,000
PV of Principal :Php100,000 x 0.943 = Php94,300

10. The effective interest on a 12-month zero-interest-bearing note payable of Php300,000, discounted at the
bank at 10% is
a. 11.11%
b. 10.87%
c. 10.00%
d. 9.09%
Interest: 300,000x 10% = 30,000
Effective interest: 30,000/(300,000-30,000)=11.11%

11. On August 1, 2023, Pau Company borrowed cash and signed a one-year interest-bearing note on which both
the principal and interest are payable on August 1, 2024. How will the note payable and the accrued interest be
classified in the statement of financial position at December 31, 2023?

Note Payable Accrued Interest

a Current liability Non-current liability
.
b Non-current liability Current liability
.
 c. Current liability Current liability
d Non-current liability No entry
.
12. A retail store received cash and issued gift certificates that are redeemable in merchandise. The gift
certificates lapse one year after they are issued. How should the deferred revenue account be affected by each
of the following transactions?

Redemption of certificates Lapse of certificates

a. No effect Decrease
b. Decrease Decrease
c. Decrease No effect
d. No effect No effect

13. During 2022, Mari Company became involved in a tax dispute with the BIR. At December 31, 2022, Mari’s tax
advisor believed that an unfavorable outcome was probable and a reasonable estimate of additional taxes was
Php500,000 but could be as much as Php650,000. After the 2022 financial statements were issued, Mari
Company received and accepted a BIR settlement offer of Php550,000. What amount of accrued liability would
Mari Company have reported in its December 31, 2022 statement of financial position?
a. Php650,000
b. Php575,000
c. Php550,000
d. Php500,000.
Midpoint: (500,000+650,000)/2= 575,000
14. Use the information given in No. 13. Assume that the company accepted the BIR settlement offer of
Php550,000 before the 2022 financial statements were issued. What amount of accrued liability would Mari
Company have reported in its December 31, 2022 statement of financial position?
a. Php650,000
b. Php575,000
c. Php550,000
d. Php500,000.
15. During 2022, Pau Company sold 500,000 boxes of cake mix under a new sales promotional program. Each
box contains one coupon , which when submitted with Php40.00 entitles the customer to a baking pan. Pau
Company pays Php50.00 per pan and Php5.00 for handling and shipping. Pau Company estimates that 80% of
the coupons will be redeemed, even though only 300,000 coupons had been processed during the year.
What amount should Pau Company report as liability for unredeemed coupons at December 31, 2022?
Estimated coupons to be redeemed (500,000 x 80%) 400,000
Coupons processed (300,000)
------------
To be redeemed in the future 100,000
X( 55-40) Php15
-------------
Liability for unredeemed coupons Php1,500,000
===========
Coupons processed
Cash (300,000 xPhp40) 12,000,000
Premium expense (300,000 x Php15) 4,500,000
Premium (300,000 x Php55) 16,500,000

Accrual at year end

Premium expense 1,500,000
Estimated premium liability 1,500,000
16. The Marcos Company launched a new sales promotional program. For every 10 chewing gum box tops
returned to Marcos, customers received an attractive prize. Marcos estimates that 40% of the chewing gum box
tops reaching the consumer market will not be redeemed. Additional information is as follows:
Units Amount
Sales of chewing gum (in boxes) 3,000,000 Php3,600,000
Purchase of prizes 80,000 40,000
Prizes distributed 42,000
At the end of the year, Marcos recognized a liability equal to the estimated cost of potential prizes outstanding.
What is the amount of this estimated liability?
Box tops to be redeemed (3,000,000x60%) 1,800,000
Divide by 10
---------------
Prizes to be distributed 180,000
Prizes distributed 42,000
---------------
Prizes to be distributed in the future 138,000
X Cost of prizes per unit (Php40,000/80,000 units) Php.50
---------------
Estimated Liability Php 69,000
=========
Journal entries:
Sales of chewing gum
Cash/AR 3,600,000
Sales 3,600,000

Purchase of prizes
Premium 40,000
Cash/AP 40,000

Prizes distributed
Premium expense 21,000
Premium 21,000
42,000 x Php.50 = Php21,000

Accrual at year end

Premium expense 69,000
Estimated liability 69,000

17. Leni Company inaugurated a sales promotional campaign on August 31, 2022 in its desire to improve sales.
Leni Company placed a coupon redeemable for a premium in each ream of bond papers sold. Each premium
costs Leni Company Php20 and five coupons must be presented by a customer to receive a premium. Leni
estimated that only 70% of the coupons issued would be redeemed. For the four months ended December 31,
2022, the following information is available:
Reams of bond paper sold 400,000
Premiums purchased 30,000
Coupons redeemed 100,000
How much is the estimated liability for premium claims outstanding at December 31, 2022?
Reams of bond paper sold (400,000 x 70%) 280,000
Coupons redeemed 100,000
-----------
To be redeemed in the future 180,000
 Divide by 5 coupons
-----------------
36,000
X Php20
-----------
Estimated liability Php720,000
============

18. Cam Corporation sells washing machines that carry a three-year warranty against manufacturer’s defects.
Based on company experience, warranty costs were estimated at Php300 per machine. During 2022, Cam
Corporation sold 24,000 washing machines and paid warranty costs of Php1,700,000.
In its profit or loss for the year ended December 31, 2022, Cam Corporation should report warranty expense of
_____________. 7,200,000
Sales
Accounts receivable/Cash xxx
Sales xxx
Recognition of warranty expense at the point of sale
Warranty expense 7,200,000
Warranty payable 7,200,000
24,000 washing machines x Php300= Php7,200,000
Paid warranty costs
Warranty payable 1,700,000
Cash 1,700,000

19. Use the information given in No. 18. Assuming that the company’s operations started in 2022, what is the
liability for warranty reported by Cam Corporation at December 31, 2022?
7,200,000-1,700,000= 5,500,000

20. Ronal company estimates its annual warranty expense as 4% of annual net sales. The following data relate
to the calendar year 2022:
Net sales Php 1,500,000
Warranty liability account
Balance, 12/31/22 (debit, before adjustment) Php 10,000
Balance, 12/31/22 (credit, after adjustment) Php 50,000
Which one of the following entries was made to record the 2022 estimated warranty expense?
Warranty expense: 1,500,000 x 4% = 60,000
Warranty liability
---------------------------------------------------------
12/31/22 before adj 10,000 :
: 60,000 Provision
:
---------------------------------------------------------
: 50,000 After adjustment
Warranty expense 60,000
Warranty liability 60,000

21. Kinchay Inc. distributed annual bonuses to its sales manager and two sales agents. The company reported
Php2,000,000 profit for the 2022 before bonuses and income taxes. Income taxes of Kinchay average 30%.

How much is the total amount of bonus of each is computed at 15% of profit after taxes and bonuses? 479,087
B= Bonus rate (NI_B-T)
T= 30% (NI-B); T= .30(2,000,000-B)
B= .45 [2,000,000-B-.30(2,000,000-B)]
B= .45[2,000,000-B-600,000+.30B]
 B= 900,000-.45B-270,000+.135B
B=630,000-.315B
B+.315B=630,000
1.315B=630,000
B= 479,087

Checking:
B= Bonus rate (NI-B-T)
B= 45%[2,000,000-479,087-.30(2,000,000-479,087)]
479,087= 45%[2,000,000-479,087-600,000+143,726]
479,087= .45(1,064,639)
479,087=479,087

22. Use the same information in No. 21. How much should the sales manager and each sales agent receive ,
respectively, if the sales manager gets 15% and sales agent gets 10% of profit after bonuses but before income
taxes? Php222,222 and Php148,148
Bonus rate = 35%
B= 35% (NI-B)
B=.35 (2,000,000-B)
B= 700,000-.35B
B+.35B =700,000
1.35B = 700,000
B= 518,518

Sales manager: 15/35x518,518 = Php222,222

Each sales agent: 10/35x518,518 = Php148,148

23. The profit for 2022 of Pau Company before any deductions for bonus and income tax amounted to
Php2,500,000. Under an incentive compensation plan, the general manager is entitled to a year-end bonus of
10% of the profit before deducting the bonus but after deducting the income tax rate is 30%.
The manager’s bonus for 2022 was __________.
B= 10% ( NI -T)
T= 30% (NI-B)
B = .10[2,500,000-.30 (2,500,000-B)]
B = .10 [ 2,500,000-750,000+.30B]
B= .10 (1,750,000+.30B)
B= 175,000+.03B
B-.03B = 175,000
.97B=175,000
B = Php180,412

Checking
B = .10 [2,500,000-.30(2,500,000-B)]
180,412 = .10 [ 2,500,000-750,000+.30B]
180,412 = .10 [ 1,750,000+.30B]
180,412 = 175,000 + .03(180,412)
180,412 = 175,000 + 5,412
180,412 = 180,412

24. Franka Company sells magazine subscriptions for one-to-three year periods. Cash receipts from subscribers
are credited to magazine subscriptions collected in advance, and this account had a balance of Php2,400,000 at
December 31, 2022, before year end adjustments. Outstanding subscriptions at December 31, 2022 expire as
follows:
During 2023 - Php 600,000
2024 - 900,000
2025 - 400,000
In its December 31, 2022 statement of financial position, what amount should Franka report as the balance for
magazine subscription collected in advance? Bonus

25. Use the same information given in No.24. What amount should Franka report as magazine subscriptions
revenue for the year ended December 31, 2022? Bonus