CABRIA CPA REVIEW CENTER

CURRENT LIABILITIES, PROVISIONS AND CONTINGENCIES Tel. Nos. (043) 980-6659

ERNIE M. LAT II

LECTURE
Liabilities
It represents amounts an entity owes for its debts or Constructive Obligation
obligations. It is one that derives from an enterprise’s actions whereby
an established pattern of past practice, published policies or
Definition and Nature of Liabilities a sufficiently specific current statement, the enterprise has
According to Conceptual Framework for Financial Reporting, indicated to other parties that it will accept certain
liability represents “present obligation of an enterprise responsibilities, and as a result, the enterprise has created
arising from past event the settlement of which is expected a valid expectation on the part of those other parties that it
to result in an outflow from the enterprise of resources will discharge those responsibilities.
embodying economic benefits.”
Example: Provision for clean-up costs where the enterprise
Essential Characteristics of a Liability has a widely published policy of cleaning up all
1. Present obligation; contamination that it causes.
2. Past event; and
3. Probable outflow of resources embodying economic Settlement of a Present Obligation may be:
benefits a. Payment of cash;
b. Transfer of other assets;
Obligation Defined c. Provision for services;
An obligation is a duty or responsibility to act or perform in d. Replacement of an obligation with another
a certain way which may be legally enforceable as a obligation; and
consequence of a binding contract or statutory requirement; e. Conversion of the obligation to equity
or it may be an obligation acknowledged by an enterprise
because other parties are made to believe that it will carry RECOGNITION OF LIABILITIES
an undertaking or certain action. A liability is recorded and reported in the SFP when a past
event has occurred and the following conditions are met:
Obligating Event Defined 1. It is probable* that an outflow of resources
An obligating event is one that results in an enterprise embodying economic benefits will result from the
having no realistic alternative to settling that obligation. It settlement of a present obligation; and
may be classified in either of the following: 2. The amount at which the settlement will take place
a. Legal obligation; or can be measured** reliably.
b. Constructive obligation
*An outflow of resources is considered probable when the
Legal Obligation event is more likely to occur than not to occur (i.e. the
It is one that derives from a contract (through its explicit or probability of occurrent is more than 50%).
implicit terms), legislation or other operation of law. **Measurement is the assigning of the peso amount to a
financial statement element.
Examples:
 Accounts payable (arising from a contract with a PROVISIONS DISTINGUISHED FROM CONTINGENT
supplier) LIABILITIES
 Withholding taxes payable and value-added taxes Obligations involving uncertainties are either:
payable (arising from a legislation and other 1. Provisions; or
operation of law) 2. Contingent Liabilities

Summary of Distinction Between a Provision and Contingent Liability

Provision Contingent Liability

Definition A liability of uncertain timing or amount Either
a) A possible obligation that arises from past
events and whose existence will be

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confirmed only by the occurrence or non-
occurrence of one or more future events not
wholly within the control of the enterprise;
or
b) A present obligation that arises from past
events but is not recognized because
 It is not probable that an outflow of
resources embodying economic
benefits will be required to settle the
obligation; or
 The amount of the obligation cannot
be measured reliably.
Recognition Recognized as a liability on the face of the SFP Not recognized as a liability on the face of the SFP
Presentation Presented separately in the SFP under liabilities Unless remote, disclosed in the notes to the FS

Status Measurement Recording and/or Disclosure

Reliably measurable Record by debiting an expense or a loss and crediting
1. Probable a liability
Not reliably measurable Disclose in the notes to FS
2. Reasonably Not applicable Disclose in the notes to FS
possible
3. Remote Not applicable Ignore

MEASUREMENT OF LIABILITIES  Where the effect of the time value of money is

material, the amount of a provision should be the
Liabilities are initially measured present value of the expenditures to be required to
1) At amounts established in exchanges (amount to be settle the obligation.
paid or amount discounted); or
2) By estimates of a definitive character when the  Where some or all of the expenditure required to
amount of liability cannot be measured more settle a provision is expected to be reimbursed by
precisely. another party, the reimbursement should be
recognized when and only when, it is virtually
Measurement of Provisions certain that reimbursement will be received if the
 The amount recognized as a provision should be the enterprise settles the obligation. The
best estimate of the expenditure required to reimbursement, if virtually certain, should be
settle the obligation at the end of the reporting treated as a separate asset. The amount
period, considering recognized for the reimbursement should not
o Judgment of the management of the exceed the amount of the provision.
enterprise;
o Experience of similar transactions; or Review of the Amount Previously Recognized as
o Reports from independent experts Provision
If based on subsequent review of the amount of the
 If a single obligation is being measured, the amount provision, there is a need to adjust the previously recorded
to be recognized as a liability is the most likely amount, the adjustment is treated as a change in
outcome. accounting estimate and would affect profit or loss of the
current year. Thus, if based on the review of the provision,
 Where the amount of the obligation is still uncertain the amount needs to be decreased, the entry in a
as of the end of the reporting period, but the subsequent reporting period is to debit the provision and
obligation is settled subsequently before the credit an appropriate expense, loss or in some cases, an
issuance of the FS, the amount shown in the SFP is income account.
the amount actually settled subsequently.
If at the end of the reporting period, it is no longer probable
 Where the provision being measured involves a that an outflow of resources will be required to settle the
large population of items, the obligation is obligation, the provision recognized should be reversed.
estimated by weighing all possible outcomes by
their associated possibilities. Where there is a
continuous range of possible outcomes, and each CLASSIFICATION OF LIABILITIES
point in that range is as likely as any other, the
midpoint of the range is being used. An enterprise shall classify a liability as current when:
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a) It expects to settle the liability in its normal liability is classified as current, even if the lender has
operating cycle; agreed, after the reporting period and before the
b) It holds the liability primarily for the purpose of authorization of the financial statements for issue, not to
trading; demand payment as a consequence of breach.
c) The liability is due to be settled within twelve (12)
months after the reporting period; or Liability is classified as non-current if the lender agreed at
d) It does not have an unconditional right to defer or before the reporting date to provide a grace period
settlement of the liability for at least twelve (12) ending at least twelve (12) months from that date, within
months after the reporting period. which the entity can rectify the breach and during which the
lender cannot demand immediate payment.
Trade payables are generally classified as current
liabilities even if they are not due for settlement within Presentation Based on Liquidity
twelve (12) months from the end of the reporting period. IAS 1 requires for each asset and liability that combines
(e.g. trade accounts and notes payable extended within the 1) Amounts expected to be recovered or settled within
usual credit terms of the supplier, and accruals for twelve (12) months from the reporting date; and
employees’ wages and other operating costs) 2) Amounts expected to be recovered or settled more
than twelve (12) months after the reporting date
Non-trade obligations that are due for settlement within
twelve (12) months from the end of the reporting period disclosure of that amount expected to be recovered or
(regardless of the length of the operating cycle of the entity) settled after more than twelve months.
also form part of current liabilities. (e.g. short term, non-
trade notes payable, deposits and advances and portion of ACCOUNTING FOR DIFFERENT CURRENT
long-term debt due within twelve (12) months from the LIABILITIES
reporting date.
Accounts Payable
Liabilities are held for trading if they are incurred These are liabilities arising from the purchase of goods,
principally for the purpose of selling or repurchasing in the materials, supplies or service on an open account basis.
near term, or are part of the portfolio of identified FS that
are managed together and for which there is evidence of a Methods of Accounting for Cash Discounts
recent pattern of actual profit-taking. (e.g. deposits a. Under the gross method and when the entity adopts
received by banks that are held under trust funds and are the periodic inventory system, the Purchases
invested by banks, in behalf of the depositors, in some account and the Accounts payable are recorded at
short-term financial instruments) invoice price. A cash discount taken on purchases
is recorded upon payment as a credit to Purchase
A long-term liability maturing within twelve months discounts. Any balance of Purchase discounts is
from the reporting date is generally classified as part of reported in profit or loss as a deduction from gross
current liabilities. However, if at the reporting date, purchases. When the entity uses the perpetual
the entity has the right to defer settlement of the obligation inventory system, the purchase transaction is
for a period of more than twelve months from such date, recorded in Inventory account and any cash
the liability shall be classified as non-current. discount taken is credited to Inventory account, if
the related goods are still unsold (or to Cost of
The currently maturing obligation shall be reported as non- Goods Sold account, if the related goods have
current only if the agreement to refinance is completed already been sold).
on or before the reporting date.
b. Under the net method, and when the entity adopts
If an entity expects, and has the discretion, to refinance the periodic inventory system, both Purchases and
or roll over an obligation for more than twelve (12) months Accounts payable are initially recorded at invoice
after the reporting date under an existing loan facility, it prices less cash discounts available. A cash
classifies an obligation as non-current even if it would be discount not taken is recorded as Purchase
due within a short period. Discounts Lost, which is reported in profit or loss as
part of finance cost.
When an entity breaches an undertaking under a long-term
loan agreement on or before the reporting date with the c. Proforma Entries
effect that the liability becomes payable on demand, the

Gross Method Net Method

To record the purchase Debit Credit Debit Credit

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Purchases xxx Purchases xxx
Freight in xxx Freight in xxx
Accounts payable* xxx Accounts payable** xxx
*Gross of discount **Net of discount

Payment within the discount period

Accounts payable xxx Accounts payable xxx
Purchase discount xxx Cash xxx
Cash xxx

Payment outside the discount period

Accounts payable xxx Accounts payable xxx
Cash xxx Purchase discount lost xxx
Cash xxx

Notes Payable
Note Bearing a Realistic Rate Customer Loyalty Awards
The present value of the note at the time of its issuance is Awards Supplied by the Entity
its face value. Under IFRS 15, Revenue from Contracts with Customers,
the revenues from contracts with customer shall be
Non-Interest Bearing Note recognized when (or as) the entity satisfied the performance
The PV of the non-interest bearing note at the date of obligations. The transaction price on the contract is
issuance is the amount of cash received or the fair value of apportioned to the performance obligations when the
the goods and services received. If the note is issued in contract requires series of performance obligation. The
exchange for goods and services whose fair value cannot be allocation shall be based on relative stand-alone selling
reliably determined, the note is initially measured based on prices of each distinct good or service promised in the
the prevailing market rate of interest for a similar obligation. contract.
The discounted amount (face value less an imputed interest
of the note should be used initially to record the liability) Awards Supplied by a Third Party
Note Bearing an Unrealistic Interest Rate The amount received as consideration for goods or services
Situations: sold is recognized as revenue in full, and an expense is
a. The interest rate appearing on the face of the note recognized for the points granted to customers.
is significantly different from the market rate of
similar notes; and Unearned Revenues
b. The consideration received on account of the note Under IFRS 15, an entity recognizes revenue by applying
issued has a fair value which is significantly different the following steps:
from the face value of the note. a) Identifying the contract with a customer;
b) Identifying the performance obligations;
In such case, the note and the interest to be paid based on c) Determining the transaction price;
the stated rate are discounted at the market rate of interest d) Allocating the transaction price to the performance
on the date of issuance. obligations
e) Recognizing revenue when (or as) the entity
Accrued Liabilities satisfies the performance obligations.
Consists of obligations for expenses incurred on or before
the end of the reporting period but payable at a later date. Liability for Bonuses
The amount of bonus may be based on the amount of
Provision for Product and Service Warranties revenue or profit of the enterprise. This bonus, is in effect,
Warranty agreements require the seller to correct any part of salaries or compensation expense and is reported as
deficiency in quality, quantity or performance of the an operating expense by the company.
merchandise sold, to replace the item, or to refund the
selling price over a specified period of time after the sale. Dividends Payable
Warranty expense is recognized based on associating cause It is an amount owed by a corporation to its shareholders
and effect. as a result of the board of director’s action on the
distribution of corporate earnings in the form of cash.
Provision for Premiums and Coupons
The cost of these premiums should be matched as expenses Deposits and Advances
against the revenues in the period of the sale. At the end These are cash or property received by which are returnable
of the reporting period during which the sale is made, an to the depositor or which have been collected or otherwise
estimate must be made of the end-of-year outstanding accumulated to be remitted to third parties (such as funds
premium offers that will be presented for future redemption. held for others).

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Employers are required by law to withhold from the salaries
Current Portion of Long Term Debt of each employee an amount representing income taxes
The portion of long term debt that is due within twelve (12) payable by employees, as well as employee’s share for SSS
months after the reporting period is classified as part of premiums, PhilHealth contribution, Pag-IBIG contribution,
current liabilities. group insurance, union dues, and various other amounts
payable by the employees to third parties.
Taxes and Employee-Related Liabilities
Value-added Taxes CONTINGENT ASSETS
These are levied on the sale of goods and certain services. A contingent asset is a possible asset that arises from past
VAT must be collected by the seller and remitted on a events and whose existence will be confirmed only by the
monthly basis, to proper government authority occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the enterprise.
Payroll Taxes It is not recognized in the FS since this may result in the
recognition of income that may never be realized.

REVIEW QUESTIONS

1. Which of the following is an essential characteristic payable. The bank discounted the note at 10% and
of a liability? remitted the proceeds to the company. Which of
I. It is a present obligation that requires the following statements is true?
settlement by probable future transfer or a. The effective interest rate is equal to the stated
use of cash, goods or services. discount rate of 10%.
II. The liability must be an unavoidable b. The effective interest rate is more than the
obligation. stated discount rate of 10%.
III. The transaction or other event creating the c. The effective interest rate is less than the
obligation must have already occurred. stated discount rate of 10%.
IV. The obligation must be settled to a d. The effective interest rate cannot be
specifically identifiable party. determined from the information given.
a. I, II, III, and IV 6. If an amount being measured involves a large
b. I, II and IV population of items and an outflow of resources
c. II, III, and IV embodying economic benefits is probable and can
d. I, II, and III be reasonably estimated to be within a continuous
2. Which of the following is a valid statement range of possible outcomes, and each point in the
regarding recognition of liabilities? range is as likely as any other, the amount to be
a. A non-interest-bearing note is initially accrued is
recognized at face value. a. the mid-point of the range
b. A provision should not be recognized for future b. the upper limit of the range
operating losses. c. the lower limit of the range
c. A promissory note issued with a stated interest d. zero
rate higher than the realistic rate is initially 7. Which of the following statements is correct?
recognized at face value. I. An enterprise should not recognize a
d. The estimated future costs of supplying awards contingent liability.
for customer loyalty program shall be II. The amount recognized as a provision
recognized as an expense in the period the should be the best estimate of the
award credits are availed of by customers. expenditure required to settle the present
3. Which of the following is a current liability? obligation at the end of the reporting
a. Dividends in arrears on preference shares period.
b. A dividend payable in the form of additional III. A provision is a liability of certain timing and
ordinary shares amount.
c. A cash dividend payable to preference IV. Accruals are liabilities to pay for goods or
shareholders services that have been received or
d. All of these supplied but have not been paid.
4. A provision is an obligation that is uncertain as to a. I, II, III and IV d. I, II and IV
a. Timing or amount  Yes; Existence  Yes b. I and IV only
b. Timing or amount  Yes; Existence  No c. II and IV only
c. Timing or amount  No; Existence  Yes 8. Which of the following uncertainties is normally
d. Timing or amount  No; Existence  No accrued?
5. A company borrowed cash from a bank and issued a. Pending or threatened litigation
to the bank a short-term non-interest bearing note b. General or unspecified business risk

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c. Obligations related to product warranties b. Amount of loss is reasonably estimable and
d. Risk of property loss due to fire occurrence of event is probable.
9. Calayan Company has a P4.0 million note payable c. Event is unusual in nature and occurrence of
due March 31, 2020. Calayan expects, and has the event is probable.
d. Event is unusual in nature and event occurs
discretion to refinance the obligation for fifteen (15)
months from its due date. How should Calayan infrequently.
classify the note in its December 31, 2019 FS? 15. Which of the following shall generally be classified
a. As a current liability with separate disclosure of as current even if they are due to be settled more
the note refinancing than twelve (12) months after the end of the
b. As a non-current liability with separate reporting period?
disclosure of the note refinancing a. Bonds payable
c. As a current liability with no separate disclosure b. Trade payables and accrued operating
required expenses
d. As a non-current liability with no separate c. Notes payable to bank
disclosure required d. Deferred revenues
10. On August 1, 2019, ABC Company borrowed cash 16. Consider the following facts. After a wedding in
and signed a one-year interest-bearing note on 2015, ten people possibly died as a result of food
which both the principal and interest are payable on poisoning during the wedding from products sold by
August 1, 2020. How will the note payable and the the enterprise. Legal proceedings are started
accrued interest be classified in the SFP at seeking damages from the enterprise but the
December 31, 2019? enterprise disputes the liability. Up to the date of
Note Payable Accrued Interest authorization of the financial statements for the
a. Current liability Non-current liability year ended December 31, 2015 issue, the
b. Noncurrent liability Current liability enterprise’s lawyers advise that it is probable that
c. Current liability Current liability the enterprise will not be found liable. However,
d. Noncurrent liability Not presented when the enterprise prepares the financial
statements for the year ended December 31, 2016,
11. Which of the following need not be disclosed in the its lawyers advise that, owing to developments in
FS or notes thereto? the case, it is probable that the enterprise will be
a. Probable losses not reasonably estimable found liable.
b. Possible assessments of additional taxes
c. Guarantees of indebtedness of others, outflow What is the proper disposition for the foregoing
of resources is reasonably possible facts for the years 2015 and 2016?
a. No provision is recognized in 2015, though the
d. Possible loss as a result of unspecified business
matter may be disclosed as a contingent liability; a
risk provision is recognized in 2016.
12. A retail store received cash and issued gift b. No provision is recognized both in 2015 and 2016,
certificates that are redeemable in merchandise. though the matter may be disclosed as a contingent
The gift certificates lapse one year after they are liability.
issued. How should the deferred revenue account c. A provision is recognized both in 2015 and 2016 for
be affected by each of the following transactions? the best estimate of the amount to settle the
obligation.
Redemption of certificates Lapse of certificates
d. A provision is recognized in 2015; no provision is
a. No effect Decrease recognized in 2016
b. Decrease Decrease
c. Decrease No effect 17. Which of the following is a current liability?
a. A long-term debt maturing currently which is
d. No effect No effect
refinanced on a long term basis before the end of the
13. How would the proceeds received from the advance reporting period.
b. A long-term debt maturing currently which is
sale of nonrefundable tickets for a theatrical
refinanced on a long-term basis after the reporting
performance be reported in the seller’s financial period but before issuance of the FS.
statements before the performance? c. A long-term debt maturing currently where the
a. Revenue for the entire proceeds enterprise has the discretion and intention to
b. Revenue to the extent of related costs refinance on a long-term basis.
expended d. A long-term debt maturing currently where the
c. Unearned revenue to the extent of related cost creditor waives the right to demand immediate
expended payment and grants the enterprise at least 18
d. Unearned revenue for the entire proceeds months of extension of maturity date.
14. Which of the following sets of conditions would give 18. A contingent liability
rise to the accrual of a loss or an expense? a. is not recognized in the FS, but is disclosed in
a. Amount of loss is reasonably estimable and the notes, unless the outflow of resources
event occurs infrequently.

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embodying economic benefits is considered was probable that C would be successful against
remote. Cupper for an estimated amount in the range of
b. definitely exists as a liability but its amount or P7.5 million to P15 million, with all amounts in the
due date is indeterminate. range considered equally likely. In March 2017, C
c. is commonly associated with operating loss was awarded P10 million and received full payment
carryforwards. thereof. In its 2016 financial statements issued in
d. is not disclosed in the financial statements. February 2017, how should C report this award?
19. P Inc. is being sued for illness cause to local a. As a receivable and revenue of P10 million.
residents as a result of negligence on the company’s b. As a receivable and revenue of P11.25 million.
part in permitting the local residents to be exposed c. As a disclosure of contingent gain of P10
to highly toxic chemicals from its plant. P’s lawyer million.
states that it is probable that P will lose the suit and d. As a disclosure of a contingent gain of an
be found liable for a judgment costing P anywhere undetermined amount in the range of P7.5
from P400,000 to P2,000,000. However, the lawyer million to P15 million.
states that the best estimate of the expenditure to 23. The H Co. accounts payable balance at December
settle the obligation is P1,200,000. As a result of 31, 2019 was P540,000 before year-end
the foregoing facts, P should accrue? adjustments relating to the following:
a. a provision of P400,000 and disclose an a. Goods with an invoice cost of P30,000 were in
additional contingency of up to P1,600,000. transit from the vendor to H on December 31,
b. a provision of P1,200,000 and disclose an 2019. The goods were shipped FOB shipping
additional contingency up to P800,000. point on December 29, 2019 and were received
c. a provision of P1,200,000 and not disclose any on January 3, 2020.
additional contingency. b. Goods with an invoice cost of P15,000, which
d. no provision but disclose a contingency of were shipped FOB shipping point on December
P400,000 to P2,000,000 22, 2019 from a vendor to H, were lost in
20. Some borrowing agreements incorporate transit. On January 4, 2020, H filed a P15,000
undertakings by the borrower, which have the claim against the transportation company.
effect that the liability becomes payable on demand c. Goods with an invoice cost of P9,000, which
if certain conditions related to the borrower’s were shipped FOB destination from a vendor to
financial position are breached. In these H were received on January 5, 2020.
circumstances, the liability is classified as: What amount should H report at accounts payable
a. non-current on its SFP as of December 31, 2019?
b. current, unless it is not probable that further a. P555,000
breaches or violations will occur within twelve b. P564,000
months after the reporting period c. P570,000
c. current, unless the lender has agreed, before d. P585,000
the end of the reporting period, not to demand 24. The effective interest on a 12-month zero-interest-
payment as consequence of the breach or bearing note payable of P300,000, discounted at
violation, and it is not probable that further the bank at 10% is
breaches or violations will occur within twelve a. 11.11%
months from the end of the reporting period. c. 10.00%
d. Current, unless the lender has agreed, prior to b. 10.87%
the approval of the financial statements, not to d. 9.09%
demand payment as a consequence of the
breach or violation, and it is not probable that 25. During 2019, T Co. became involved in a tax dispute
further breaches or violations will occur within with the BIR. At December 31, 2019, T’s tax advisor
twelve (12) months from the end of the believed that an unfavorable outcome was probable
reporting period. and a reasonable estimate of additional taxes was
P5,000,000 but could be as much as P6,500,000.
21. N Co. has co-signed the mortgage note on the residential After the 2019 FS were issued, T received and
house of its president guaranteeing the indebtedness in accepted a BIR settlement offer of P5,500,000.
the event that the president should default. N considers
the likelihood of default to be not likely. How should the
What amount of accrued liability would T have
guaranty be treated in N’s financial statements?
a. Accrued and disclosed reported in its December 31, 2019 SFP?
b. Accrued only a. P6,500,000 c. P5,500,000
c. Disclosed only b. P5,750,000 d. P5,000,000
d. Neither accrued nor disclosed 26. Using the same information in previous number.
22. During 2016, C Co. filed a suit against Cupper Co. Assume that the company accepted the BIR
seeking damages for patent infringement. At settlement offer of P5,500,000 before the 2019
December 31, 2016, C’s legal counsel believed it financial statements were issued.

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In its December 31, 2016 SFP, what amount should
What amount of accrued liability would T have J report as unearned service contract revenue?
reported in its December 31, 2019 SFP? a. P480,000
a. P6,500,000 b. P780,000
b. P5,750,000 c. P1,100,000
c. P5,500,000 d. P1,440,000
d. P5,000,000
30. N Co. sells 3-year service contracts for air
27. E Co’s salaried employees are paid biweekly. conditioning units for P1,500 each. Sales of service
Occasionally, advances made to employees are paid contracts and repairs are made evenly throughout
back by payroll deductions. Information relating to each year. The company estimates that 15% of
salaries for the calendar year 2016 is as follows: repairs done in the first year from the date of sale,
35% in12/31/2015
the second year and12/31/2016
50% in the third year.
Employee advances Service contracts
P 24,000sold are asPfollows:
36,000
Accrued salaries payable 130,000 ?
Salaries expense during the year 1,630,000
Salaries paid during the year (gross) Number of service contracts1,560,000
sold

On December 31, 2016, what amount should E How much is the unearned revenue from service
report for accrued salaries payable? contracts as of December 31, 2015?
a. P200,000 a. P1,417,500
b. P188,000 b. P2,525,250
c. P164,000 c. P3,942,750
d. P 70,000 d. P4,657,125

28. K Co. operates a retail store and must determine 31. Using same info from previous number. How much
the proper December 31, 2016 year-end accrual for revenue from service contracts is recognized in
the following expenses? 2015?
a. P204,750
 The store lease calls for fixed rent of b. P525,000
P12,000 per month, payable at the c. P729,750
beginning of the month, and additional rent d. P1,706,625
equal to 6% of net sales over P2,500,000
per calendar year, payable on January 31 32. Using same info from previous number (30). How
of the following year. Net sales for 2016 much revenue from service contracts sold in 2015
are P4,500,000. is realized in 2016?
 An electric bill of P8,500 covering the a. P682,500
period December 16, 2016 through January b. P862,500
15, 2017 was received January 22, 2017. c. P955,500
 A P4,000 telephone bill was received d. P1,842,750
January 7, 2017, covering:
33. Using same info from previous number (30). How
Service in advance for January 2017 much is the unearned
P1,500 revenue from service
Local and toll calls for December 2016 contracts as of December
2,500 31, 2016?
a. P4,657,125
In its December 31, 2016 SFP, K should report b. P3,468,750
accrued liabilities of: c. P2,475,000
a. P150,750 d. P1,237,500
b. P131,000
c. P128,250 34. At December 31, 2016, C Co. has 1,000 gift
d. P126,750 certificates outstanding, which had been sold to
customers during 2016 for P750. C operates on a
29. J Co. sells contracts agreeing to service equipment gross margin of 60%. How much revenue
for a three-year period. Information for the year pertaining to the 1,000 outstanding gift certificates
ended December 31, 2016 is as follows: should be deferred at December 31, 2016?
Cash receipts from service contracts sold a. P0P1,920,000
Service contract revenue recognized b. P300,000
1,560,000
Unearned service contract revenue, January 1 c. P450,000
1,080,000
d. P750,000

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35. R Co. pays all salaried employees on a biweekly premium in each ream of bond paper sold. Each
basis. Overtime pay however, is paid in the next premium costs Ocare P20 and five coupons must
biweekly period. R accrued salaries expense only be presented by a customer to receive a premium.
at its July 31 year-end. Data relating to salaries in Ocare estimated that only 70% of the coupons
July 2016 are as follows: issued would be redeemed. For four months ended
December 31, 2019, the following information is
 Last payroll was paid on July 26, 2016, for available.
the two-week period ended July 26, 2016.
 Overtime pay earned in the two-week Reams of bond paper sold Premiums purchased C
period ended July 26, 2016 was P63,000. 400,000 30,000
 Remaining work days in 2016 were July 29,
30 and 31, on which there was no overtime. How much is the estimated liability for premiums
claims outstanding at December 31, 2019?
Assuming 5-day work week and a fiscal year July a. P720,000
31, R should report a liability at July 31, 2016 for b. P1,020,000
accrued salaries of c. P1,800,000
a. P337,500 d. P3,600,000
b. P400,500
c. P675,000 39. The B Co. distributes to consumers coupons, which
d. P737,000 may be presented on or before a stated expiration
date to retail outlets on certain products of B. The
36. During 2016, B Company sold 500,000 boxes of retail outlets are reimbursed when they send the
cake mix under a new sales promotional program. coupons back to B. In B’s experience, 50% of such
Each box contains one coupon, which when coupons are redeemed. The retail outlets are given
submitted with P40.00 entitles the customer to a one month to request full reimbursement from B
baking pan. B pays P50 per pan and P5 for handling from the date it redeems the coupons from the
and shipping. B estimates that 80% of the coupons consumers. During 2016, B issued two separate
will be redeemed, even though only 300,000 series of coupons as follows:
coupons had been processed during the year.

What amount should B report as liability for

unredeemed coupons at December 31, 2016?
a. P1,000,000
b. P1,500,000
c. P3,000,000 The only journal entries to date recorded debits to
d. P5,000,000 coupon expense and credits to cash of P536,000,
representing total amount disbursed for the coupon
37. C Co launched a new sales promotional program. redemption.
For every 10 chewing gum box tops returned to C,
customers receive an attractive prize. C estimates The December 31, 2016 SFP should include a
that 40% of the chewing gum box tops reaching the Liability for Unredeemed Coupons of
consumer market will not be redeemed. Additional a. P0
information is as follows: b. P60,000
c. P124,000
d. P360,000 Units Amount
Sales of chewing gum (in boxes) 3,000,000 P3,600,000
Purchase of prizes by C 40. Z Co. sells washing machines that 40,000
80,000 carry a three-
Prizes distributed to customers year warranty against
42,000 manufacturer’s defects.
Based on company experience, warranty costs were
At the end of the year, C recognized a provision estimated at P300 per machine. During 2019, Z
equal to the estimated cost of potential prizes sold 24,000 washing machines and paid warranty
outstanding. What is the amount of this provision? costs of P1,700,000.
a. P69,000
b. P49,000 In its profit or loss statement for the year ended
c. P39,000 December 31, 2019, Z should report warranty
d. P21,000 expense of
a. P1,700,000
38. Ocare Co. inaugurated a sales promotional b. P2,400,000
campaign on August 31, 2019 in its desire to c. P5,500,000
improve sales. O placed a coupon redeemable for a d. P7,200,000

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manager is entitled to a year-end bonus of 10% of
41. Use information from the previous number.
the profit before deducting the bonus but after
Assuming that the company’s operations started in
deducting the income tax. Income tax rate is 30%.
2019, what is the liability for warranty reported by
Z at December 31, 2019?
The manager’s bonus for 2019 was
a. P1,700,000
a. P175,000
b. P2,400,000
b. P180,412
c. P5,500,000
c. P227,273
d. P7,200,000
d. P250,000
42. R Co. estimates its annual warranty expense at 4%
of annual net sales. The following data relate to the 46. F Co. sells magazine subscriptions for one to three
calendar year 2019: year periods. Cash receipts from subscribers are
Net sales P1,500,000 credited to Magazine Subscriptions collected in
Warranty liability account Advance, and this account had a balance of
Balance,12/31/2019(debit,before adjustment) 10,000 P2,400,000 at December 31, 2019, before year-end
Balance, 12/31/2019 (credit, after adjustment) 50,000 adjustments. Outstanding subscriptions at
December 31, 2019 expire as follows:
Which of the following entries was made to record During 2020 – P600,000
the 2019 estimated warranty expense? 2021 – P900,000
2022 – P400,000
a. Warranty expense 60,000
Retained earnings 10,000 In its December 31, 2019, SFP, what amount should
Warranty liability 50,000 F report as the balance of magazine subscriptions
collected in advance?
b. Warranty expense 50,000 a. P500,000
Retained earnings 10,000 b. P1,200,000
Warranty liability 60,000 c. P1,900,000
d. P2,400,000
c. Warranty expense 40,000
Warranty liability 40,000 47. Using the same info from #46. What amount should
F report as magazine subscriptions revenue for the
year ended December 31, 2019?
d. Warranty expense 60,000
a. P500,000
Warranty liability 60,000 b. P1,200,000
43. G Inc. distributes annual bonuses to its sales c. P1,900,000
manager and two sales agents. The company d. P2,400,000
reported P2,000,000 profit for 2019 before bonuses
and income taxes. Income taxes of G Inc. average 48. V Co. is the defendant in a patent infringement suit
30%. filed by P Co. in 2015. At December 31, 2015, V
determined that P would probably be successful
How much is the total amount of bonus if bonus of against V for an estimated amount of P5,000,000.
each is computed at 15% after taxes and bonuses? V appropriately accrued the loss for the year ended
a. P190,045 December 31, 2015. On October 31, 2016, V Co.
b. P397,476 and P Co. agreed to a settlement for a cash
c. P479,087 payment of P3,800,000 and transfer of V’s patent
d. P570,135 to P Co. On such date, the patent has a carrying
value of P2,000,000.
44. Using same information in No. 43. How much
should the sales manager and each sales agent What would be the effect of this settlement on V’s
received, respectively, if the sales manager gets profit for the year-ended December 31, 2016?
15% and each sales agent gets 10% of profit after a. No effect
bonuses but before income taxes? b. Increase of P1,800,000
a. P857,143 and P571,428 c. Decrease of P2,000,000
b. P518,519 and P518,519 d. Decrease of P800,000
c. P222,222 and P148,148
d. P195,000 and P130,000 49. On December 31, 2016, the bookkeeper of L Co.
45. The profit for 2019 of D Co. before any deduction gave the following information:
for bonus and income tax amounted to P2,500,000.
Under an incentive compensation plan, the general

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 Notes payable arising from purchases of  Cash overdraft with ABC Commercial Bank,
goods, P472,000; arising from loans from P50,000.
banks, P200,000 on which trading  Estimated damages to be paid as a result
securities valued at P280,000 have been of unsatisfactory performance on a
pledged as security; arising from long-term contract, P24,000.
advances by officers, P250,000.  Estimated expenses of meeting guarantee
 Employee’s income taxes payable, P9,600. for service requirement on merchandise
 Advances received from customers on sold, P48,000.
purchase orders, P64,000.  Accrued interest on bonds payable,
 Accounts payable arising from purchases of P57,500.
goods, P380,000.
 Customer accounts with credit balances What total amount of current liabilities shall be
arising from sales returns, P26,000. presented in the SFP as of December 31, 2016?
 Share dividends distributable, P240,000. a. P1,431,100
 First mortgage serial bonds, P1,500,000 b. P1,609,100
payable in semi-annual installments of c. P1,921,100
P50,000 due on April 1 and October 1 of d. P3,321,100
each year.

DRIL PROBLEMS

CONTINGENCIES

1. Presented below are three independent situations. is not certain who will compensate Shinobi for
Answer the question at the end of each situation. this destruction, but Shinobi has been assured
by governmental officials that it will receive a
a. During 2019, Maverick Inc. became involved in definite amount for this plant. The amount of
a tax dispute with the BIR. Maverick’s attorneys the compensation will be less than the fair value
have indicated that they believe it is probable of the plant, but more than its book value. How
that Maverick will lose this dispute. They also should the contingency be reported in the
believe that Maverick will have to pay the BIR financial statements of Shinobi Inc.?
between P800,000 and P1,400,000. After the a. It is not reported but disclosed.
2019 financial statements were issued, the case b. It is accrued as part of amounts to be
was settled with the BIR for P1,200,000. What received by Shinobi.
amount, if any, should be reported as a liability c. It is accrued but only to the excess of
for this contingency as of December 31, 2019? compensation as against the book value of
a. P1,200,000 the plant.
b. P1,100,000 d. None of these
c. P2,200,000
d. P1,400,000 2. Polska Corporation, in preparation of its December
31, 2019, financial statements, is attempting to
b. On October 1, 2019, Holmgren Chemical was determine the proper accounting treatment for
identified as a potentially responsible party by each of the following situations.
the Environmental Protection Agency.
Holmgren’s management along with its counsel As a result of uninsured accidents during the year,
have concluded that it is probable that personal injury suits for P350,000 and P60,000 have
Holmgren will be responsible for damages, and been filed against the company. It is the judgment
a reasonable estimate of these damages is of Polska’s legal counsel that an unfavorable
P6,000,000. Holmgren’s insurance policy of outcome is unlikely in the P60,000 case but that an
P9,000,000 has a deductible clause of unfavorable verdict approximating P250,000 will
P500,000. How should Holmgren Chemical probably result in the P350,000 case.
report this information in its financial
statements at December 31, 2019? Polska Corporation owns a subsidiary in a foreign
a. P3,000,000 country that has a book value of P5,725,000 and an
b. P9,000,000 estimated fair value of P9,500,000. The foreign
c. P2,500,000 government has communicated to Polska its
d. P6,000,000 intention to expropriate the assets and business of
all foreign investors. On the basis of settlements
c. Shinobi Inc. had a manufacturing plant in other firms have received from this same country,
Darfur, which was destroyed in the civil war. It

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Polska expects to receive 40% of the fair value of term basis on March 1, how much of the P500,000
its properties as final settlement. should be reported as a current liability at
December 31, 2019, the end of the fiscal year?
Polska’s chemical product division consisting of five a. P500,000
plants is uninsurable because of the special risk of b. P0
injury to employees and losses due to fire and c. P250,000
explosion. The year 2019 is considered one of the d. Cannot be determined
safest (luckiest) in the division’s history because no
loss due to injury or casualty was suffered. Having
suffered an average of three casualties a year 4. Buchanan Company recently was sued by a
during the rest of the past decade (ranging from competitor for patent infringement. Attorneys have
P60,000 to P700,000), management is certain that determined that it is probable that Buchanan will
next year the company will probably not be so lose the case and that a reasonable estimate of
fortunate. damages to be paid by Buchanan is P300,000. In
light of this case, Buchanan is considering
What will be the total amount of provision to be establishing a P100,000 self-insurance allowance.
provided by Polska as of December 31, 2019? What amount, if any, should Buchanan record to
a. P2,175,000 recognize this loss contingency?
b. P2,275,000 a. P300,000
c. P2,655,000 b. P200,000
d. P2,555,000 c. P100,000
3. For the next two (2) items. d. P0

At December 31, 2019, Burr Corporation owes 5. Calaf’s Drillers erects and places into service an off-
P500,000 on a note payable due February 15, 2020. shore oil platform on January 1, 2011, at a cost of
P10,000,000. Calaf is legally required to dismantle
Question 1: If Burr refinances the obligation by and remove the platform at the end of its useful life
issuing a long-term note on February 14 and using in 10 years. Calaf estimates it will cost P1,000,000
the proceeds to pay off the note due February 15, to dismantle and remove the platform at the end of
how much of the P500,000 should be reported as a its useful life in 10 years. (The fair value at January
current liability at December 31, 2019? 1, 2011, of the dismantle and removal costs is
a. P500,000 P450,000.) What amount, if any, should be
b. P0 recorded by Calaf regarding the transaction above?
c. Cannot be determined from the problem a. P1,000,000
d. P250,0000 b. P450,000
c. P550,000
Question 2: If Burr pays off the note on February d. P0
15, 2020, and then borrows P1,000,000 on a long-

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End -

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