Reference no: EM132876505

Questions -

Q1. Mill Company sells washing machines that carry a three-year warranty against manufacturer's defects. Based on the entity's experience, warranty costs are estimated at P300 per machine. During the current year, the entity sold 2,400 washing machines and paid warranty costs of P170,000.

1. What amount should be reported as warranty expense for the year?

a. 170,000

b. 240,000

c. 550,000

d. 720,000

2. What amount should be reported as warranty liability at year-end?

a. 550,000

b. 720,000

c. 170,000

d. 0

Q2. During 2016, Namnama Company introduced a new product carrying a two-year warranty against defects.

The estimated warranty costs related to peso sales are 4% within 12 months following sale and 6% in the second 12 months following sale.

The entity reported sales of P5,000,000 for 2016 and P6,000,000 for 2017.

The actual expenditures incurred amounted to P150,000 for 2016 and P550,000 for 2017.

1. What is the warranty expense for 2016?

a. 500,000

b. 200,000

c. 250,000

d. 300,000

2. What is the estimated warranty liability on December 31, 2016?

a. 350,000

b. 150,000

c. 100,000

d. 50,000

3. What is the warranty expense for 2017?

a. 650,000

b. 600,000

c. 500,000

d. 550,000

4. What is the estimated warranty liability on December 31, 2017?

a. 360,000

b. 400,000

c. 240,000

d. 100,000

Q3. Chato Company sold electrical goods covered by a one-year warranty for any defects. Of the sales of P70,000,000 for the year, the entity estimated that 3% will have major defect, 5% will have minor defect and 92% will have no defect.

The cost of repairs would be P5,000,000 if all the products sold had major defect and P3,000,000 if all had minor defect.

1. What amount should be recognized as a warranty provision?

a. 8,000,000

b. 5,600,000

c. 300,000

d. 190,000

Q4. Iriga Company issued the 2016 financial statements on March 1, 2017. The entity provided the following data for the year ended December 31, 2016:

Amount owing to another entity for services rendered during December 2016 300,000

Estimated long service leave owing to employees in respect of past services 1,200,000

Estimated cost of relocating an employee from head office to a branch in another city (employee will physically relocate in January 2017) 100,000

Estimated cost of overhauling machine every 5 years 150,000

What amount should be recognized as provision on December 31, 2016?

a. 1,200,000

b. 1,300,000

c. 1,600,000

d. 1,750,000

Q5. During 2016, Manfred Company guaranteed a supplier's P500,000 loan from a bank. On October 1, 2016, the entity was notified that the supplier had defaulted on the loan and filed for bankruptcy protection. Counsel believed that the entity would probably have to pay P250,000 under the guarantee.

As a result of the supplier's bankruptcy, the entity entered into a contract in December 2016 to retool its machines so that the entity could accept parts from other suppliers. Retooling costs are estimated to be P300,000.

What amount should be reported as a liability on December 31, 2016?

a. 250,000

b. 450,000

c. 550,000

d. 750,000

Q6. On November 1, 2016, Vienna Company was awarded a judgment of P1,500,000 in connection with a lawsuit. The decision is being appealed by the defendant and it is expected that the appeal process will be completed by the end of 2017. The attorney believed that it is highly probable that an award will be upheld on appeal but that the judgment may be reduced by 40%.

What amount should be reported as a receivable on December 31, 2016?

a. 1,500,000

b. 600,000

c. 900,000

d. 0

Theory

1. It is a marketing scheme whereby an entity grants award credits to customers and the entity can redeem the award credits in exchange for free or discounted goods or services.

a. Customer loyalty program

b. Premium Plan

c. Marketing program

d. Loyalty award

2. The award credits granted to customers under a customer loyalty program is often described as

a. Points

b. awards

c. Credits

d. Royalty

3. Under a customer loyalty program, if the entity supplies the award itself, the consideration allocated to the award credits

a. Shall be recognized as revenue immediately.

b. Shall not be accounted for as revenue separately.

c. Shall be recognized initially as deferred revenue and amortized as revenue over a reasonable period not exceeding 5 years.

d. Shall be recognized initially as deferred revenue and subsequently recognized as revenue upon the redemption of the award credits.

4. Magazine subscriptions collected in advance are treated as

a. A contra account to magazine subscriptions receivable

b. Deferred Revenue in the liability section

c. Deferred revenue in the shareholders' equity section

d. Magazine subscription refund in the income statement in the period collected.

5. When an entity receives an advance payment for special order goods that are to be manufactured and delivered within 6 months, the advance payments shall be reported as,

a. Deferred charge

b. Contra asset account

c. Current Liability

d. Noncurrent Liability

6. Estimated liabilities are disclosed in financial statements by

a. Notes to the financial statements

b. Showing the amount among the liabilities but not extending to the liability total.

c. An appropriation of retained earnings.

d. Appropriately classifying them as regular liabilities in the statement of financial position

7. Unearned Rent Revenue would normally appear in the statement of financial position as

a. Plant Asset

b. Current Liability

c. Noncurrent Liability

d. Current Asset

8. Rent Revenue collected one year in advance should be reported as

a. Revenue in the year collected

b. Current liability

c. Separate item of shareholders' equity

d. Accrued Liability

Problem Solving

Q1. In December 2016, Milan Company began including one coupon in each package of candy that it sells and offering a toy in exchange for P50 and five coupons. The toys cost P80 each. Eventually 60% of the coupons will be redeemed. During December, the entity sold 110,000 packages of candy and no coupons were redeemed. On December 31,2016, what amount should be reported as estimated liability for coupons?

a. 198,000

b. 396,000

c. 528,000

d. 660,000

Q2. Charlene Company includes one coupon in each box of laundry soap it sells. A towel is offered as a premium to customers who send in 10 coupons and a remittance of P10. Distribution cost of premium is P5. Experience indicates that only 30% of the coupons will be redeemed.

	2016	2017
Boxes of soap sold	2,000,000	2,500,000
Number of towels purchased at P50 each	50,000	80,000
Coupons redeemed	400,000	700,000

1. What is the premium expense for 2016?

a. 2,500,000

b. 2,400,000

c. 1,800,000

d. 2,700,000

2. What is the estimated premium liability on December 31, 2016?

a. 1,000,000

b. 1,100,000

c. 800,000

d. 900,000

3. What is the premium expense for 2017?

a. 3,000,000

b. 3,750,000

c. 3,375,000

d. 4,000,000

4. What is the estimated premium liability on December 31,2017?

a. 1,000,000

b. 1,250,000

c. 1,125,000

d. 1,375,000

Q3. Arianne Company, a grocery, operates a customer loyalty program. The entity grants program members loyalty points when they spend a specified amount on groceries.

Program members can redeem the points for further groceries. The points have no expiry date.

During 2016, the sales amounted to P7,200,000 based on stand-alone selling price.

During the year the entity granted 10,000 points. But management expected that only 80% or 8,000 points will be redeemed. The stand-alone price of each loyalty point is estimated at P100.

On December 31,2016, 4,000 points have been redeemed.

In 2017, management revised its expectations and now expected that 90% or 9,000 points will be redeemed altogether.

During 2017, the entity redeemed 4,100 points.

1. What amount should be reported as sales revenue including the revenue earned from points in 2016?

a. 7,200,000

b. 8,000,000

c. 6,480,000

d. 6,840,000

2. What is the revenue earned from loyalty points for 2017?

a. 360,000

b. 648,000

c. 288,000

d. 400,000

Q4. Fell Company operates a retail grocery store that is required by law to collect refundable deposits of P5 on soda cans.

Information for the current year follows:

Liability for refundable deposit-January 1 150,000

Cans of soda sold 100,000

Soda cans returned 110,000

During the current year, the entity subleased space and received a P25,000 deposit to be applied against rent at the expiration of the lease in 5 years.

What amount should be reported as current liability for deposit on December 31?

a. 125,000

b. 140,000

c. 100,000

d. 25,000