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REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

CURRENT LIABILITIES
1. To increase sales, Quezon Company inaugurated a promotional campaign on June 30,
2005. Quezon placed a coupon redeemable for a premium in each package of cereal
sold at P200. Each premium costs P100. A premium is offered to customers who send
in 5 coupons and a remittance of P30. The distribution cost per premium is P20.
Quezon estimated that only 60% of the coupons issued will be redeemed. For the six
months ended December 31, 2005, the following is available:
Packages of cereal sold
Premiums purchased
Coupons redeemed

100,000
10,000
40,000

What is the estimated liability for coupons on December 31, 2005?

a. 1,080,000
b. 1,000,000
c.
720,000
d. 360,000
2. Sariaya 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 P5.
Data for the premium offer are:
Boxes of soap sold
Number of towels purchased at P50 per towel
Number of towels distributed as premium
Number of towels to be distributed as premium next period

2004
1,000,000
40,000
35,000
3,000

2005
1,500,000
65,000
58,000
5,000

In its 2005 income statement. Sariaya Company should report premium expense at
a. 3,000,000
b. 2,700,000
c. 2,610,000
d. 2,835,000
3. During 2004, Lucena Company introduced a new product carrying a two-year warranty
against defects. The estimated warranty costs related to peso sales are 5% within 12
months following sale and 10% in the second 12 months following sale. Sales and
actual warranty expenditures for the years ended December 31, 2004 and 2005 are as
follows:
2004
2005

Sales____
20,000,000
25,000,000

Actual expenditures
1,500,000
3,000,000

At December 31, 2005, Lucena would report estimated warranty liability of

a. 1,500,000
b. 2,250,000
c.
750,000
d. 500,000
4. Lucbans Music Emporium carries a wide variety of music promotion techniques warranties and premiums to attract customers.
Musical instrument and sound equipment are sold in a one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past
experience, is 2% of sales.

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The premium is offered on the recorded and sheet music. Customers receive a coupon
for each peso spent on recorded music or sheet music. Customers may exchange 200
coupons and P20 for an AM/FM radio. Lucban pays P34 for each radio and estimates
that 60% of the coupons given to customers will be redeemed.
Lucbans total sales for 2005 were P7,200,000 - P5,400,000 from musical instrument
and sound reproduction equipment and P1,800,000 from recorded music and sheet
music. Replacement parts and labor for warranty work totaled P164,000 during 2005.
A total of 6,500 AM/FM radio used in the premium program were purchased during the
year and there were 1,200,000 coupons redeemed in 2005.
The accrual method is used by Lucban to account for the warranty and premium costs
for financial reporting purposes. The balance in the accounts related to warranties and
premiums on January 1, 2005, were as shown below:
Inventory of Premium AM/FM radio
Estimated Premium Claims Outstanding
Estimated Liability from Warranties

P39,950
44,800
136,000

Determine the amounts that will be shown on the 2005 financial statements for the
following:
1. Warranty expense
a. P164,000
b.
80,000

c. P108,000
d. P144,000

2. Estimated liability from warranties

a. P108,000
b. P164,000

c. P136,000
d. P 80,000

3. Premium expense
a. P 75,600
b. P126,000

c. P183,600
d. P108,000

4. Inventory of AM/FM radio

a. P46,950
b. P39,950

c. P77,350
d. P56,950

5. Estimated liability for premiums

a. P75,600
b. P36,400

c. P63,450
d. P44,800

5. Pitogo Company sells gift certificates redeemable only when merchandise is

purchased. The certificates have an expiration date two years after issuance date.
Upon redemption or expiration, Pitogo recognizes the unearned revenue as realized.
Data for 2005 are as follows:
Unearned revenue, 1/1/2005
Gift certificates sold
Gift certificates redeemed
Expired gift certificates
Cost of goods sold
At December 31, 2005, Pitogo report unearned revenue of
a. 1,500,000
b. 1,000,000
c.
500,000
d.
0

1,000,000
5,000,000
4,000,000
500,000
60%

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6. On September 1, 2004, Pagbilao Company issued a note payable to National Bank in

the amount of P10,000,000, bearing interest at 15%, and payable in five equal annual
principal payments of P2,000,000. On this date, the banks prime rate was 12%. The
first payment for interest and principal was made on September 1, 2005. At December
31, 2005, Pagbilao should record accrued interest payable of
a. 1,400,000
b. 1,120,000
c.
400,000
d. 320,000
7. On December 31, 2005, Gumaca Company had a P15,000,000 note payable
outstanding, due July 31, 2006. Gumaca borrowed the money to finance construction
of a new plant. On March 1, 2006, the note was replaced by an 18-month note for the
same amount. On March 31, 2006, Gumaca issued its 2005 financial statements.
What amount of the note payable should Gumaca include in the current liabilities?
a. 15,000,000
b. 12,000,000
c. 3,000,000
d.
0
8. On November 5, 2005, a Calauag Company truck was in an accident with an auto
driven by Macalelon. Calauag received notice on January 15, 2006, of a lawsuit for
P4,000,000 damages for personal injuries suffered by Macalelon. Calauags counsel
believes it is probable that Macalelon will be awarded an estimated amount in the
range between P2,000,000 and P3,000,000, and no amount is a better estimate of
potential liability than any other amount. The accounting year ends on December 31,
and the 2005 financial statements were issued on March 31, 2006. What amount of
provision should Calauag accrue at December 31, 2005?
a. 4,000,000
b. 3,000,000
c. 2,000,000
d. 2,500,000
9. During January 2005, Tagkawayan Company won a litigation award for P2,000,000
which was tripled to P6,000,000 to include punitive damages. The defendant, who is
financially stable, has appealed only the P4,000,000 punitive damages. Tagkawayan
was awarded P1,000,000 in an unrelated suit it filed, which is being appealed by the
defendant. Counsel is unable to estimate the outcome of the appeals. In its 2005
income statement, Tagkawayan should report what amount of pretax gain?
a. 6,000,000
c. 2,000,000
b. 4,000,000
d. 3,000,000
10. Sariaya Company sells office equipment service contracts agreeing to service
equipment for a two-year period. Cash receipts from contracts are credited to unearned
service contract revenue and service contract costs are charged to service contract
expense as incurred. Revenue from service contracts is recognized as earned over
lives of the contracts. Information for the year 2005 is as follows:
Unearned service contract revenue 1/1/2005
Cash receipts from service contracts sold
Service contract revenue recognized
Service contract expense

3,000,000
5,000,000
4,500,000
2,500,000

What amount should Sariaya report as unearned service contract revenue at

December 31, 2005?
a. 3,500,000
c. 2,000,000
b. 1,000,000
d.
500,000
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