Chapter #17

Non-Financial liabilities, Provisions and Contingencies

TRUE OR FALSE

1. “Best estimate” is a matter of judgment and is usually based on past experience with similar
transactions, evidence, provided by technical or legal experts, or additional evidence provided by
events after reporting period. T
2. Reimbursements by other parties should be taken into account when computing provision, only if it is
virtually certain that the reimbursement will be received. T
3. Under the expense warranty approach, companies charge warranty costs only to the period in which
they comply with the warranty. F
4. When provisions, contingent liabilities, and contingent assets are specifically addressed by other
standards, then they are not within the scope of PAS 37 Provision, Contingent Liabilities and
Contingent Assets. T
5. When it is no longer probable that an outflow of resources would be required to settle the obligation,
the provision should be reversed. T
6. PAS 37 does not apply to financial instruments (including guarantees) that are within the scope of
PFRS 9. T
7. Returnable deposits are classified as current liabilities if the entity expects to refund them within one
year, the current operating cycle notwithstanding. F
8. Where the effect of the time value of money is material, the amount of provision should be the present
value of the expenditure expected to be required to settle the obligation. T
9. Changes in provisions shall be reviewed at each reporting date, and the amount of the provision should
be adjusted accordingly as a change in accounting policy. F
10. The expected profit from a sales type warranty that covers several years should all be recognized in
the period the warranty is sold. F
11. The cause for litigation must have occurred on or before the date of the financial statements to report
a liability in the financial statements. T
12. A provision should be used only for the purpose for which it was originally recognized or set up. T
13. Future events that may affect the amount required to settle an obligation should be reflected in the
provision amount where there is sufficient objective evidence that such future will occur. T
14. Provisions for future operating losses can be recognized. F
15. A company discloses contingent assets in the notes only when a high probability exists for realizing
them. T
16. Gains from expected disposals of assets should be taken into account in arriving at the amount of the
provision. F
17. The fair value of an asset retirement obligation is recorded as both an increase to the related asset and
a liability. T
18. A contingent liability is a possible obligation arising from past events, the outcome of which will be
confirmed only on the occurrence or nonoccurrence of one or more uncertain future events. T
19. The amount to be recognized, as a provision, is the best estimate of the expenditure required to settle
the present obligation at the end of the reporting period. While a reliable estimate is usually possible,
in rare circumstances, it may not be possible to obtain a reliable estimate. In such cases, the liability is
to be disclosed as a contingent liability and not recognized as a provision. T
20. Companies report the amount of social security taxes withheld from employees as well as the
companies’ matching portion as current liabilities until they are remitted. T

MULTIPLE CHOICE QUESTIONS

1. It is an existing liability of uncertain amount or uncertain timing

A. Contingent liability
B. Discount on notes payable
C. Unearned income
D. Provision

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2. It is the statistical method of estimating a provision which means that where the provisions being
measured involves a large population of items, the obligation is estimated by “weighting” all possible
outcomes by their associated possibilities.
A. Extrapolation
B. Weighted average
C. Simple average
D. Expected value

3. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any
other, the range to be used is the
A. minimum
B. sum of minimum and maximum
C. maximum
D. midpoint

4. Which of the following sets of conditions would give rise to the accrual of a contingency?
A. Amount of loss is reasonably estimable and the 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 occurs infrequently

5. An estimated liability is an obligation that is uncertain as to

Amount Existence
A. Yes Yes
B. Yes No
C. No Yes
D. No No

6. Matic Company sells appliances that include a three-year warranty, Service calls under the warranty
are performed by an independent mechanic under a contract with Matic. Based on experience,
warranty costs are estimated at P300 for each machine sold. When should Matic Company recognize
these warranty costs?
A. Evenly over the life of the warranty
B. When the service calls are performed
C. When payments are made to the mechanic
D. When the machines are sold

7. Which of the following loss contingencies 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. A contingent liability
A. Has a most probable value of zero but may require a payment if given future event occurs.
B. Definitely exists as a liability but its amount or due date is indeterminate
C. Is commonly associated with operating loss carry forwards
D. Is not disclosed in the financial statements

9. Which of the following should be recognized?

Contingent Assets Contingent Liabilities Provisions
A. Recognized Recognized Recognized
B. Recognized Not Recognized Not Recognized
C. Not Recognized Not Recognized Recognized

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D. Not Recognized Recognized Recognized

10. Which of the following circumstances would give rise to the recognition of provision?
A. The party to whom the obligation is owed must be identifiable and the amount can be reasonably
estimated
B. The outflow of economic benefits is probable and the amount is reliably estimable
C. The outflow of economic benefits is reasonably possible and the amount is reliably estimable
D. The event occurs infrequently and the amount of the loss is reliably estimable

11. Teferi Co. provides repair services for the Vision TV set. Customers prepay the fee on the standard one-
year service contract. The 2020 and 2021 contracts were identical, and the number of contracts was
insignificantly less than the balance at December 31, 2020. Which of the following situations might
account for this reduction in the deferred revenue balance?
A. Most 2021 contracts were signed later in the calendar year than were the 2020 contracts
B. Most 2021 contracts were signed earlier in the calendar year than were the 2020 contracts
C. The 2021 contract contribution margin was greater than the 2020 contract contribution margin
D. The 2021 contribution margin was less than the 2020 contract contribution margin

12. A competitor has sued an entity for unauthorized use of its patented technology. The amount that the
entity may be required to pay to the competitor if the competitor succeeds in the lawsuit is
determinable with reliability, and according to the legal counsel it is less than probable (but more than
remote) that an outflow of the resources would be needed to meet the obligation. The that was sued
should at year-end
A. Recognize a provision for this possible obligation
B. Make a disclosure of the possible obligation in the footnotes to the financial statements.
C. Make no provision or disclosure and wait until the lawsuit is finally decided and then expense the
amount paid on settlement, if any.
D. Set aside, as an appropriation, a contingency reserve, an amount based on the best of the possible
liability.

13. A factory owned by PDAC Inc. was destroyed by fire. PDAC Inc. lodged an insurance claim for the value
of the factory building, plant, and an amount equal to one year’s net profit. During the year, there were
a number of meetings with the representatives of the insurance company. Finally, before year-end, it
was decided that PDAC Inc. would receive compensation for 90% of its claim. PDAC but it was not
received a letter that the settlement check for that amount had been mailed, but it was not received
before year-end. How should PDAC Inc. treat this in its financial statements?
A. Disclose the contingent asset in the footnotes
B. Wait until next year when the settlement check is actually received and not recognized or disclose
this receivable at all since at year-end it is a contingent asset
C. Because the settlement of the claim was conveyed by a letter from the insurance company that
also stated that the settlement check was in the mail for 90% of the claim, record 90% of the claim
as receivable as it is virtually certain that the contingent asset will be received
D. Because the settlement of the claim was conveyed by a letter from the insurance company that
also stated that the settlement check was in the mail for 90% of the claim, record 100% of the
claim as a receivable at year-end as it is virtually certain that the contingent asset will be received,
and adjust the 10% next year when the settlement check is actually received.

14. On January 171 2021, an explosion occurred at a Sisay Co. plant causing extensive property damage to
area buildings. Although no claims had yet been asserted against Sisay by March 10, 2021, Sisay’s
management and counsel concluded that it is likely that claims will be asserted and that it is reasonably
possible Sisay will be responsible for damages. Sisay’s management believed that P1,250,000 would
be a reasonable estimate of its liability. Sisay’s P5,000,000 comprehensive public liability policy has a
P250,000 deductible clause. In Sisay’s December 31,2021, how should this item be reported?
A. As an accrued liability of p 250,000.
B. As a footnote disclosure indicating the possible loss of P250,000.
C. As a footnote disclosure indicating the possible loss of P1,250,000.

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D. No footnote disclosure or accrual is necessary.

15. On March 31, 2021, BRCI Co. received an advanced payment of 60% of the sales price for special-order
goods to be manufactured and delivered within five months. At the same time, BRCI subcontracted for
production of the special-order goods at a price equal to 40% of the main contract price. What
liabilities should be reported in BRCI’s March 31, 2021 balance sheet?
Deferred Revenue Payables to Subcontractor
A. None None
B. 60% of main contract price 40% of main contract price
C. 60% of main contract price None
D. None 40% of main contract price

16. 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 would the deferred revenue accout be affected
by each of the following transactions?
Redemption of Certificates Lapse of Certificates
A. Decrease No effect
B. Decrease Decrease
C. No effect No effect
D. No effect Decrease

17. When can a “provision” be recognized in accordance with PAS 37?

A. When there is a legal obligation arising from a past (obligating) event, the probability of the
outflow of resources is more than remote (but less than probable), and a reliable estimate can be
made of the amount of the obligation.
B. When there is a constructive obligation, as a result of a past (obligating event, the outflow of
resources is probable, and a reliable estimate can be made of the amount of the obligation.
C. When there is a possible obligation arising from a past event, the outflow of resources is probable,
and an approximate amount can be set aside toward the obligation.
D. When management decides that it is essential that a provision be made for unforeseen
circumstances and keeping in this year the profits were enough but next year there may be losses.

18. In 2020, a personal injury lawsuit was brought against Urza Co. Based in counsel’s estimate, Urza
reported P50,000 liability in its December 31, 2020 balance sheet. In November 2021, Urza received a
favorable judgment requiring the plaintiff to reimburse Urza for expenses of P30,000. The plaintiff has
appealed the decision, and Urza’s counsel is unable to predict the outcome of the appeal. In its
December 31, 2021 balance sheet, Urza should report what amounts of asset and liability related to
these legal actions?
Asset Liability
A. P30,000 P50,000
B. P30,000 P0
C. P0 P20,000
D. P0 P0

19. Barrin Inc. has a self-insurance plan. Each year, retained earnings is appropriated for contingencies in
an amount equal to insurance premiums saved less recognized losses from lawsuits and oother claims.
As a result of a 2021 accident, Barrin is a defendant in a lawsuit in which it will probably have to pay
damages of P190,000. What are the effects of this lawsuit’s probable outcome on Barrin’s 2021
financial statements?
A. An increase in expenses and no effect on liabilities.
B. An increase in both expenses and liabilities
C. No effect on expenses and an increase in liabilities.
D. No effect on either expenses or liabilities

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20. In June 2021, Ertai retailers sold refundable merchandise coupons. Ertai received P10 for each coupon
redeemable from July 1 to December 31, 2021 for merchandise with a retail price of P11. At June 30,
2021, how should Ertai report these coupon transactions?
A. Unearned revenues at the merchandise’s retail price.
B. Unearned revenues at the amount of cash received.
C. Revenues at the merchandise’s retail price.
D. Revenue at the cash received amount.

21. The board of directors of SYNERGIUM Inc. has decided on December 15, 2021 to wind up international
operations in the Far East and move them to Australia. The decision was based on a detailed formal
plan of restructuring as required by PAS 37. This decision was conveyed to all workers and
management personnel at the headquarters in Europe. The cost of restructuring the operations in the
Far East as per this detailed in its financial statements for the year-end December 31, 2021?
A. Because of SYNERGIUM Inc. has not announced the restructuring to those affected by the decision
and thus has not raised an expectation that SYNERGIUM Inc. will actually carry out the
restructuring (and as no constructive obligation has arisen., only disclose the restructuring
decision and the cost of restructuring of P2 million in footnotes to the financial statements.
B. Recognize a provision for restructuring since the board of directors has approved it and it has been
in the headquarters of SYNERGIUM Inc. in Europe.
C. Mention the decision to restructure and the cost involved in the chairman’s statement in the
annual report since it’s a decision of the board of directors.
D. Because the restructuring has not commenced before year-end, based on prudence, wait until next
year and do nothing in this year’s financial statements.

22. Under PFRS, which of the following accounts would not be considered a “provision”?
A. Warranty liabilities
B. Bad debts
C. Taxes payable
D. Note payable

23. Management can estimate the amount of loss that will occur if a foreign government expropriates some
company assets. If expropriation is reasonably possible a loss contingency should be
A. Disclosed but not accrued as a liability
B. Disclosed and accrued as a liability
C. Accrued as a liability but not disclosed
D. Neither accrued as a liability nor disclosed

24. During 3033, Mangara filed suit against Volrath, Inc. seeking damages for patent infringement. At
December 31, 2022, Mangara’s legal counsel believed that it was probable that Mangara would be
successful against Volrath for an estimated amount in the range of P75,000 to P150,000 with all
amounts in the range considered equally likely. In March 2023, Mangara was awarded P100,000 and
received full payment thereof. In its 2022 financial statement, issued in February2023, how should this
award be reported?
A. As a receivable and revenue of P100,000
B. As a receivable and deferred revenue of P100,000
C. As a disclosure of a contingent gain of P100,000
D. As a disclosure of contingent asset of an undetermined amount in the range of P75,000 to
P150,000

25. In 2021, a contract dispute between Rashida Co. and Karn Co. was submitted to binding arbitration. In
2021, each party’s attorney indicated privately that the probable award in Rashida’s favor could be
reasonably estimated. In 2022, the arbitrator decided in favor of Rashida. When should Rashida and
Karn recognize their respective gain and loss?
Rashida’s Gain Karn’s Loss
A. 2021 2021
B. 2021 2022

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C. 2022 2021
D. 2022 2022

26. Under PFRS, a contingency is described as

A. An estimated liability
B. An event which is not recognized because it is not probable that an outflow will be required or the
amount cannot be reasonably estimated.
C. The same as it Is described by US generally accepted accounting principles.
D. A potentially large liability.

27. Which of the following is not a valid description for a liability?

A. Both the amount and the payee are known
B. The payee is unknown and the amount may have to be estimated.
C. The payee is unknown and the amount may have to be estimated.
D. The liability has been incurred due to a loss contingency.

28. On March 22, 2020, Squee Corporation received notification of legal action against the firm. Squee’s
attorneys determine that it is probable the company will lose the suit, and the loss is estimated as
P2,000,000. Squee’s accountants believe this amount is material and should be disclosed. Squee
prepares its financial statements in accordance with PFRS. How should the estimated loss be disclosed
in Squee’s financial statements at December 31, 2020?
A. As a loss recorded in other comprehensive income.
B. As a contingent liability reported in the balance sheet and a loss on the income statement.
C. As a provision for loss reported in the balance sheet and a loss on the income statement
D. In the footnotes to the financial statements as a contingency.

29. Joira Co. has cosigned the mortgage note on the home of its president guaranteeing the indebtedness
in the event that the president should default. Joira considers the likelihood of default to be remote.
How should the guarantee be treated in Joira’s financial statements?
A. Disclosed only.
B. Accrued only.
C. Accrued and disclosed.
D. Neither accrued nor disclosed.

30. Ashmira Corp. signed an agreement with Mishra, which requires that if Mishra does not meet certain
contractual obligations, Mishra must forfeit land worth P800,000 to Ashmira. Asmira’s accountants
believe that Mishra will not meet its contractual obligations, and it is probable. Ashmira will receive
the land by the end of 2021. Ashmira uses PFRS for reporting purposes. How should Ashmira report
the land?
A. As investment property in the asset section of the balance sheet.
B. As a contingent asset in the current asset section of the balance sheet.
C. In a footnote disclosure if the economic benefits are probable.
D. As a contingent asset and other comprehensive income for the period.

MULTIPLE CHOICE PROBLEMS

A. Burundy Company follows the 5-day (Monday-Friday) work week. It pays all salaried employees on a
biweekly basis every other Friday. Overtime pay, however, is paid in the next biweekly period.
Burgundy Company accrued salaries expenses only at its June 30 fiscal year-end. Data relating to
salaries earned in June 2021 were as follows:

● Last payroll was paid on June 24, 2021 for the two-week perios June 24, 2021.
● Overtime pay earned in the two-week period ended June 24, 2021 was P63,000.
● The recurring biweekly salaries total P720,000.

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● In the remaining work days of June, overtime pay earned amounted to P18,000.

(1) How much is Burgundy Company’s accrued salaries at June 30, 2021?
A. P299,000
B. P297,000
C. P351,000
D. P369,000

B. Apachi Company must determine the December 31, 2021 year-end accruals for advertising and rent
expenses. On January 3, 2022, Apachi Company received a P100,000 advertising bill, comprising of
P37,500 for newspaper advertisement that will be published monthly in the year 2022.

The store lease effective August 1, 2021 calls for fixed rent of P120,000 per month payable on or before
the 5th day of the current month. Included in the lease contract is contingent rent equal to 3% of net
sales over P2,000,000 per month that is requires to be paid on the 20th day of the following month. Net
sales for December 2021 were P5,500,000.

(2) In its December 31, 2021 statement of financial income, Apachi Company should report accrued
liabilities of
A. P105,000
B. P142,500
C. P167,500
D. P262,500

C. On September 1, 2020, Tom Company borrowed on a P1,650,000 note payable from PDAC Bank. The
note bears interest at 12% and is payable in three equal annual payments of P550,000. On this date,
the bank’s prime rate is 11%. The first annual payment for interest and principal was made in
September 1, 2021.

(3) At December 31, 2021, what amount should Tom Company report as accrued interest payable?
A. P66,000
B. P60,500
C. P44,000
D. P40,333

D. In its 2021 financial statements, Toronto Company reported interest expense of P85,000 in its
statement of comprehensive income and cash payments for interest at P68,000 in its statementof cash
flows. There was no prepaid interest or interest capitalization either at the beginning or end of 2021.
Accrued interest payable at December 31, 2020 was P15,000

(4) What amount should Toronto Company report as accrued interest payable in its December 31, 2021
statement of financial of financial position?
A. P32,000
B. P17,000
C. P15,000
D. P2,000

E. On July 31, 2021, Joe Company issued a five-year note payable with a face amount of P2,400,000 and
an interest rate of 10%. The terms of the note require Joe Company to make five equal annual payment
of accrued interests, with the first payments due on July 31, 2022.

(5) With respect to the note, the current liabilities section of Joe Company’s December 31, 2021 statement
of financial income include
A. P480,0000
B. P580,000

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C. P620,000
D. P720,000

F. Dexter Company requires advanced payments with special orders for machinery constructed to
customer specifications. These advances are refundable. Data for the year are

Customer advances, January 1 P 5,800,000

Advances received with orders 12,000,000
Advances applied to orders shipped 10,700,000
Advances applicable to orders cancelled 2,500,000

(6) How much is the liability for customer advances at the end of the year?
A. P2,000,000
B. P2,500,000
C. P4,600,000
D. P7,100,000

G. During 2021, Mega Publishing, a newly organized magazine publisher, received payment of P44,000
for the subscriptions of their two high-end magazines that were being issued monthly (twelve times a
year).

Number of Annual
Magazine Subscriptions Subscription Price
Universal Time 100 P3,000
Condo International 60 2,400

Of the 100 Universal Time subscriptions, effectivity date of the 55 subscriptions was January 1, 2021,
while the remainder had April 1, 2021 effectivity. All of the Condo international magazine
subscriptions started with the maiden issue published in May 2021.

(7) What amount should Mega Publishing report in its December 31, 2021 statement of financial position
as unearned subscriptions revenue?
A. P197,250
B. P129,750
C. P89,250
D. P81,750

H. Mega Department Store sells gift certificates that are redeemable only when the merchandise is
purchased from its stores. It is the company policy to recognize the amount redeemed as realized.
During 2021, Mega Department Store sold gift certificates amounting to P1,800,000 and redeemed gift
certificates worth P1,560,000. Gift certificates outstanding at January 1, 2021 is P520,000. The
company’s gross profit rate is 40%.

(8) What is the liability for outstanding gift certificates at December 31, 2021?
A. P760,000
B. P720,000
C. P680,000
D. P520,000

I. Dan Company sells contracts agreeing to service air-conditioners for a three-year period. Information
for the year ended December 31, 2021 is as follows:

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Unearned service contracts revenue, January 1 P270,000
Cash receipts from service contracts sold 480,000
Service contracts revenue recognized in profit or loss 390,000

(9) What amount should Dan Company report as unearned service contract revenue in its December 31,
2021 statement of financial position?
A. P120,000
B. P195,000
C. P275,000
D. P360,000

J. Rye Company sells equipment service contracts that cover a two-year period. The sales price of each
contract is P5,000. Rye Company’s past experience shows that of the total pesos spent for repairs in
service contracts, 40% in incurred evenly during the first contract year and 60% evenly during the
second contract year. Rye Company sold 1.000 contracts evenly throughout 2020 and 800 contracts
evenly throughout 2021.

(10) In its December 31, 2020 statement of financial position, what amount should Rye Company report
as unearned revenue?
A. P4,000,000
B. P3,000,000
C. P1,500,000
D. P0

(11) How much should Rye Company report as contract service revenue for the year ended December 31,
2021?
A. P4,500,000
B. P3,300,000
C. P2,500,000
D. P800,000

K. Computerlinks Company sells personal computers. For each unit of personal computer sold, the
company sells a service contract for P1,000 each. The contract provides that the personal computers
sold will be repaired by the company within a period of three years from the date of sale. Sale of service
contracts and repairs are made evenly throughout the year.

Based on industry trend, 10% of repairs are done in the first year from the date of sale, 30% in the
second year and 60% in the year. Information related to the service contracts for years 2019, 2020,
and 2021 is as follows:

2019 2020 2021

Number of service contracts sold 800 1,000 1,200
Service contract expense incurred P50,000 P200,000 P350,000

(12) How much is the unearned service contract revenue at December 31, 2021?
A. P2,130,000
B. P1,930,000
C. P1,200,000
D. P300,000

(13) How much is the service contract revenue for the year ended December 31, 2020?
A. P210,000
B. P600,000
C. P620,000

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D. P1,000,000

(14) What is the net revenue from service contracts for the year 2021?
A. P270,000
B. P520,000
C. P620,000
D. P850,000

L. An entity sells goods that carry two-year warranty. If minor repairs were to be required on all goods
in 2021, the repair cost would be P100,000. If major repairs were needed on all goods sold, the cost
would be P500,000. It is estimated that 80% of the goods sold in 2021 will have no defects, 15% will
have minor defects and 5% will have major defects.

(15) The provision for repairs required on December 31, 2021 is

A. P40,000
B. P100,000
C. P300,000
D. P500,000

M. Des Moines Company introduced during 2020, a new television model with a two-year warranty
against defects. Des Moines Company estimates the warranty costs at 2% of peso sales within 12
months following the sale. Sales and actual warranty expense for the year ended December 31, 2020
are P3,000,000 and P45,000, respectively, and for the year ended December 31, 2021 are P5,000,000
and P150,000, respectively.

(16) Des Moines Company should report an estimated warranty liability in its December 31, 2021
statement of financial position of
A. P285,000
B. P225,000
C. P85,000
D. P50,000

N. Sam Company started business in 2020. It sells printers with a three-year warranty. Sam Company
estimates its warranty cost as a percentage of peso sales. Based on past experience, it is estimated that
2% will be repaired during the first year of warranty, 4% will be repaired during the second year of
warranty and 6% will be repaired in the third year.

In 2020 and 2021, the company was able to sell 7.500 units and 8,400 units, respectively at a selling
price of P5,000 per unit. The company also incurred actual repair costs of P53,000 and P1,176,000 in
2020 and 2021, respectively.

(17) What amount should Sam Company report as warranty expense in 2020?
A. P7,834,000
B. P5,040,000
C. P4,500,000
D. P3,970,000

(18) What is the amount of liability for warranty reported in Sam Company’s December 31, 2021
statement of financial position?
A. P7,834,000
B. P5,040,000
C. P4,500,000
D. P3,024,000

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(19) Assuming that sales and repair occur evenly throughout the period, how much would be the
predicted warranty expense covering 2020 and 2021 sales still under warranty at December 31,
2021?
A. P8,790,000
B. P7,834,000
C. P7,620,000
D. P6,450,000

O. The Nice Food Company is engaged in a sales promotion, giving a rebate of P4.00 for every food box
returned. It is estimated that 80% of the food boxes will be returned and receive the rebate. Included
in the promotion and sold are 50,000 boxes with the selling price of P1,250,000. Rebates already given
amounted to P48,000.

(20) How much is the remaining liability?

A. P160,000
B. P152,000
C. P112,000
D. P48,000

P. With the end goal of attracting as much customers as possible in the NCR region, Abeson Appliance
Company engaged in a customer satisfaction program and marketing strategy for two of their major
lines of products: (1) electrical appliances and (2) household and office furniture. All branched in the
region are participating in the company’s promotions.

In the customer satisfaction program, Abeson Company provides one-year warranty for replacement
of parts and replacement of parts and labor of the electrical appliances sold. Based on past experience,
the estimated warranty cost is 3% of sales. During 2021, total sales of electrical appliances was
P7,200,000. Replacement parts and labor for warranty work totaled P184,000 during 2021.

In the company’s marketing strategy for the household and office furniture section, customers are
given a coupon for every P1,000 spent on these items. Customers may exchange 10 coupons for every
P500 for a “hot and cold” water dispenser. Each water dispenser cost Abeson Company P1,200 and
estimates that 40% of the coupons given to the customers will be redeemed. During 2021, sales of
household and office furniture totaled P2,600,000. A total of 100 water dispensers used in the promo
were purchased and there were 800 coupons redeemed in 2021.

The accrual method is used by Abeson to account for the warranty and premium costs for financial
reporting purposes. The balances in the accounts related to warranties and premiums on January 1,
2021 were as follows:

Inventory of “hot and cold” water dispensers 30 units

Estimated premium claims outstanding P17,500
Estimated liability for warranty P80,000

(21) How much is the warranty expense for the year ended December 31, 2021?
A. P290,000
B. P216,000
C. P184,000
D. P112,000

(22) How much is the estimated liability for warranty at December 31, 2021?
A. P290,000
B. P216,000
C. P112,000
D. P32,000

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(23) How much is the premium expense for the year ended December 31, 2021?
A. P72,800
B. P60,000
C. P43,300
D. P34,300

(24) How much is the estimated premium claims outstanding at December 31, 2021?
A. P72,800
B. P60,000
C. P34,300
D. P27,800

(25) How much is the premium inventory (prepaid expense) reported at December 31, 2021?
A. P35,000
B. P60,000
C. P120,000
D. P124,800

Q. In packages of its products, Candy Company includes coupons that may be presented at retail stored
to obtain discounts on other candy products. Retailers are reimbursed for the face amount of coupons
redeemed plus 10% of that amount for handling costs. Candy Company honors requests for coupon
redemptions by retailers up to three months after the consumer expiration date/ Candy Company
estimates 70% of all coupons issued will be redeemed. Information relating to coupons issued by
Candy Company during 2021 is as follows:

Consumer expiration date December 31, 2021

Total face amount of coupons issued P300,000
Total payments to retailers as of December 31, 2021 P110,000

(26) What amount should Candy Company report as a liability for unredeemed coupons at December 31,
2021?
A. P0
B. P100,000
C. P121,000
D. P154,000

R. The Jones Company enjoys profitable operations for its past ten years of existence. The company
president proposed to the Board of Directors an incentive compensation plan where the general
manager would be entitles to a year=end bonus the following alternative schemes.

Alternative 1: 8% bonus based on profit before bonus and income tax in excess
of P5,000,000.
Alternative 2: 5% bonus based on profit after both bonus and income tax.
Alternative 3: 3% bonus based on profit after bonus but before income tax.

Jones Company’s profit before bonus and income ta for the year-ended December 31, 2021 is
P8,000,000. Assume an income tax rate of 30%.

(27) How much is the general manager’s bonus for 2021 under Alternative 1?
A. P240,000
B. P320,000
C. P400,000

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D. P640,000

(28) How much is the general manager’s bonus for 2021 under Alternative 2?
A. P215,835
B. P262,911
C. P270,531
D. P290,155

(29) How much is the general manager’s bonus for 2021 under Alternative 3?
A. P247,423
B. P240,000
C. P233,010
D. P184,615

S. Buffy Company provides an incentive compensation plan under which its president is to receive a
bonus equal to 10% of the profit in excess of P1,000,000 before deducting income tax but after
deducting the bonus. Profit after income tax of 30% is P2,100,000

(30) How much is the president’s bonus?

A. P129,888
B. P200,000
C. P210,000
D. P220,000

T. Toyonda Cubao, Inc. (TCI) is a dealer of Toyonda trucks and automobiles. TCI distributes annual
bonuses to its Vice President for Sales and three division managers, namely: Truck Division, SUV
Division and AUV and Sean Division. The company reported P12,000,000 profit for 2021 before
bonuses and income tax. Income tax rate is 30%.

(31) How much should the vice president and each division managers receive, respectively, if the vice
president gets 3% and each division manager gets 1% of profit after bonuses but before income taxes?
A. P339,623 and P113,208
B. P169,811 and P169,911
C. P382,979 and P127,659
D. P191,489 and P191,489

(32) Assume that the bonus for the vice president and three division managers is 2% each based on profit
after bonuses but before income taxes, how much is the income tax payable at the end of the year?
A. P3,286,957
B. P3,317,647
C. P3,333,333
D. P3,600,000

U. Jel Company sells its products in reusable expensive containers. The customer is charged a deposit for
each container delivered and receives a refund for each container returned within two years after the
year of delivery. Jel Company accounts for any containers not returned within the time limit as being
retired by sale at the deposit amount. Information relating to customer deposits follows:

Containers held by customers at December 31, 2020 from deliveries in

2019 P 75,000
2020 215,000
Containers delivered in 2021 P290,000
Containers returned in 2021 from deliveries in
2019 P 45,000
2020 125,000
2021 143,000 313,000

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(33) What amount should Jel Company report as a liability for deposits on returnable containers at
December 31, 2021?
A. P247,000
B. P322,000
C. P337,000
D. P367,000

V. On the first day of each month, Jake Realty receives from Carlo Company an escrow deposit of P25,000
for real estate taxes. Jake Realty records the P25,000 in an escrow account. Carlo Company’s estate tax
for the year ended December 31, 2021 is P280,000, payable in equal installment on the first day of
each calendar quarter. On December 31, 2020, the balance in the escrow account of Carlo Company
was P30,000. Realty’s fiscal year ends on September 30.

(34) On September 30, 2021, what amount should Jake Realty show as an escrow liability to Carlo
Company?
A. P 15,000
B. P 45,000
C. P 85,000
D. P115,000

W. Snoopy Company is engaged in the manufacture of chemicals that it exports to other countries. On
December 20, 2021, one of its storage tanks in the plant exploded. Unfortunately, one of its employees
was caught by the accident and suffered burns all over his body. For damages sustained because of the
explosion, the employees sued Snoopy Company and claimed an amount totaling P3 million for
physical injuries sustained. The lawyer of Snoopy Company expects that the company will probably
lose the lawsuit and estimates that the company may have to pay the amount of P2.5 million.

On March 10, 2022, upon advice of the lawyer, the injured employee offered to have an out-of-court
settlement of P2 million. The offer was tendered on the same date and Snoopy accepted the offer on
March 12, 2022 upon advice of its legal counsel. The financial statements for the year 2021 were issued
on March 31, 2022.

(35) What amount should be reported by Snoopy as liability from the legal case at December 31, 2021?
A. P3,000,000
B. P2,500,000
C. P2,000,000
D. P0

X. On November 5, 2021, Tim Truck Rental Company was in an accident with an automobile driven by
Jayson. Tim Ruck notice on January 12, 2022 of a lawsuit for P700,000 damages for personal injuries
suffered by Jayson. Tim Truck’s counsel believes it is probable that Jayson will be awarded an
estimated amount in the range between P200,000 and P450,000 and that P300,000 is a best estimate
of potential liability. Tim Truck’s account year ends on December 31 and the 2021 financial statements
were issued on March 2, 2022.

(36) How much loss should Tim Truck accrue at December 31, 2021?
A. P0
B. P200,000
C. P300,000
D. P450,000

Y. On December 17, 2021, an explosion occurred at Action Fireworks plant in Bulacan causing extensive
property damage to area buildings. Although no claims had yet been asserted against Action Fireworks
by March 10, 2022, the management and counsel concluded that it is reasonably possible that Action
Fireworks will be responsible for damages and that P2,500,000 would be a reasonable estimate of its

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liability. Action Fireworks’ P10 million comprehensive public liability has a P500,000 deductible
clause.

(37) In Action Fireworks’ December 31, 2021 financial statements that were issued on March 25, 2022,
how should this item be reported?
A. As a footnote disclosure indicating the possible loss of P500,000.
B. As an accrued liability of P500,000.
C. As a footnote disclosure indicating the possible loss of P2,500,000.
D. As an accrued liability of P2,500,000.

Z. On November 1, 2021, Corn Company was awarded judgment of P3 million 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 2022. Corn Company’s attorney feel that it is highly probable that an award
will be upheld on appeal, but the judgment may be reduced by an estimated 40%.

(38) In addition to a footnote, what amount should be reported as a receivable in Corn Company’s
statement of financial position?
A. P3,000,000
B. P1,800,000
C. P1,200,000
D. P0

AA. Mother, Inc 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. Mother,
Inc.’s lawyer states that it is probable that Mother, Inc. will lose the suit and be found liable for a
judgment costing Mother, Inc. anywhere from P400,000 to P2,000,000. However, the lawyer states
that the most probable cost is P1,200,000.

(39) As a result of the given facts, Mother, Inc. should accrue

A. A loss contingency of P400,000 and disclose an additional contingency of up to P1,600,000.
B. A loss contingency of P1,200,000 and disclose an additional contingency of up to P800,000.
C. A loss contingency of P1,200,000 but not disclose any additional contingency.
D. No loss contingency but disclose a contingency of P400,000 to P2,000,000.

BB. Hay Company won a litigation for P45,000 tripled to P135,000 to include punitive damages during
January 2021. Only the P90,000 punitive damages were appealed by the defendant. In an unrelated
suit it filed, which is still on appeal by the defendant, Hay was awarded P145,000. The outcome on
these appeals could not be estimated by the counsel.

(40) How much should Hay Company report as pretax gain in 2021?
A. P45,000
B. P135,000
C. P150,000
D. P285,000

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