Chapter 22

Financial and Non-Financial Liabilities

&
Accounting for Provisions

Measure of Liabilities
Upon incurrence – PV of future cash outlay to liquidate the accounting liabilities xx
Amount liquidated thru:
a. Payment of cash
b. payment of non-cash asset
c. performance service (xx)
d. amortization (passage of time)
e. forfeiture/expiration
PV/FV/estimated value of additional liability incurred xx
Upon Balance sheet presentation — Carrying Value xx

PV of future cash outflows to settle the, obligation is the amount of cash required to liquidate the
obligation if it were paid today; which is equal to any of the following:
 Face value of the liability (for liabilities that are definite in amount)
 estimated value (provision or liabilities that are estimated)
 present value or discounted value (for long term non-interest hearing liabilities)
Current and Non-current Classification
Liabilities are classified as current when it satisfies any of the following:
a. It is expected to be settled in the entity’s normal operating cycle:
b. It is held primarily for the purpose of being traded;
c. It is due to be settled within twelve months after the balance sheet date; or
d. The entity does not have an unconditional right to defer settlement of the liability for at least twelve
months after the balance sheet date.
Example of liabilities held for trading:
a. Issued debt instrument that the entity intends to repurchase in the near term to make a gain from
short-term movements in interest rates.
b. The obligation that arises when an entity sells a security that it has borrowed and does not owned (a
so-called short sale).
Non-current liabilities — are liabilities not classified as current. These Include the following: non-
current portion of long term, capital lease liability, non-current deferred tax liability, term obligations to
company officers, long term deferred revenue.
Short term debt that is expected to be refinanced
An entity classifies its financial liabilities as current when they are due to be settled within twelve months
after the balance sheet date, even if,
a. The original term was for a period longer than twelve months; and
b. The intention is supported by an agreement to refinance, or reschedule payments, on a long-term basis
is completed after the balance sheet date and completed before the financial statements are authorized
for issue.
If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve
months after the balance sheet date under an existing loan facility, it classifies the obligation as non-
current, even if it would otherwise be due within a shorter period. However, when refinancing or rolling
over the obligation is not at the discretion of the entity, the potential to refinance is not considered and the
obligation is classified as current.
Breach of an undertaking or violation of debt covenants
When an entity breaches an undertaking under a long-term loan agreement on or before the balance sheet
date with the effect that the liability becomes payable on demand, the liability is classified as current,
even if the lender had agreed, after the balance sheet date and before the authorization of financial
statements for issue, not to demand payment as consequence of the breach. The liability is classified a
current because, at the balance sheet dates, the entity does not have an unconditional right to defer its
settlement for at least twelve months after that date.
Provision
Is an existing liabilities of uncertain timing or uncertain amount. The liability does exist on balance sheet
date but the amount is indefinite, or the date the obligation is due and in some cases the payee cannot be
determined.
It is the equivalent of estimated liability or a loss contingency that is accrued because it is both probable
and measurable.
a. Recognition of provision — the following conditions must be met:
 The enterprise has a present obligation, legal or constructive, as a result of a past event.
 It is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation.
 The amount of the obligation can be measured reliably.

b. Measurement of the provision — the amount recognized as a provision should be the best estimate
of the expenditure required to settle the present obligation at the balance sheet date. The best estimate
is the amount that an enterprise would rationally pay to settle the obligation at the balance sheet or to
transfer it to a third party at that time. Time estimates of outcome are determined by the judgment of
management of the enterprise supplemented by experience of similar transactions and reports from
independent experts.
c. Expected value method — this is the statistical method of estimation applied where the provision
being measured involves a large population of items. Under this method, the obligation is estimated
by “weighing” all possible outcomes by their associated possibilities.

Provisions for restructuring costs are treated as follows:

 The cost of terminating a contract before the end of its term should be recognized when the entity
terminates the contract. The liability for costs that will continue to be incurred under a contract for its
remaining term without economic benefit to the entity should be recognized in accordance with the
requirements of onerous contracts.
 The recognition of involuntary termination benefits requires the communication of those benefits to
the employees.
 When employees are required to render services beyond any notification period to be entitled to the
termination benefits and those benefits are not paid pursuant to any pre-existing benefit arrangement
(i.e. they are one-time benefits) those benefits should be recognized over the future service period.
 Voluntary termination benefits are recognized when employees accept the offer of voluntary
termination.
Contingencies:
a. Contingent liability — is a possible obligation that arises from past event and whose existence will
be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not
wholly within the control of the enterprise. It is a present obligation that arises from past event 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.
b. Contingent asset - is a possible asset that arises from past event and whose existence will be
confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly
within the control of the enterprise.
Accounting for contingent liabilities and contingent asset
Contingent Contingent
Liabilities Assets
Virtual certain (therefore, not contingent) Provide Recognize
Probable Provide Disclose by note
Possible Disclose by note No Disclosure
Remote No disclosure No disclosure

Degree of probability — PAS 37 recognizes four degrees of probability for contingencies but it gives no
guidance as to the meaning of the terms. One possible interpretation could be:
Virtually certain Probability above 95%
Probable Probability above 50% and up to 95%
Possible Probability of 5% and up to 50%
Remote Probability below 5%
Problem 22 — 1: (Current Liabilities)
On December 31, 2014, the bookkeeper of Grand Company provide the following information:
 Accounts payable, including deposit and advances
from customers of P500,000 P2,500,000
Notes payable, including note payable to bank due on
December 31, 2016 for P1,000,000 3,000,000
Share dividends payable 800,000
Credit balance in customers’ accounts 400,000
Serial bonds, payable in semiannual installments
of P1,000,000 10,000,000
Accrued interest on bonds payable 300,000
Contested BIR tax assessment 600,000
Unearned rent income 100,000
In the December 31, 2014 statement of financial position, how much current liabilities should be
reported?
a) P6,800,000
b) P7,300,000
c) P7,900,000
d) P8,700,000
Problem 22 - 2: (Current Liabilities)
An analysis of Cool Company’s liabilities disclosed the following:
Accounts payable, after deducting debit balances in
Suppliers’ accounts amounting to P22,500 (accounts
Payable included non-liabilities of 32,500) P105,000
Accrued expenses 15,000
Credit balances of customers’ account 13,500
Stock dividends payable 70,000
Claims for increase in wages and allowances by
Employees of the company, covered in a pending lawsuit 125,000
Estimated liabilities for premium 60,000

How much should be presented as total current liabilities in the statement of financial position?
a) P 6,000
b) P168,500
c) P183,500
d) P216,000
Problem 22 — 3: (Current Liabilities – Accounts Payable)
The balance in Coward Company’s accounts payable account at December 31, 2014 was P 1,170,000
before any year-end adjustments relating to the following:
 Goods were in transit from, a vendor to Coward on December 31, 2014. The invoice cost was
P65,OOO and the goods were shipped FOB shipping point on December 29, 2014. The goods
were received on January 2, 2015.
  Goods shipped FOB shipping point on December 20, 2014 from a vendor to Coward, were lost in
transit. The invoice cost was P32,500. On January 5, 2015, Coward filed a P32,5000 claim
against the common carrier.
 Goods shipped FOB destination on December 21, 2014, from a vendor to Coward, were received
on January 6, 2015. The invoice cost was 19,500.
What amount should Coward reports as accounts payable om its December 31, 2014 stat3ment of
financial position.
a) P1,202,500 c) P1,235,000
b) P1,222,000 d) P1,267,500
Problem 22 - 4: (Current Liabilities – Accounts Payable)
The balance in Stem Corporation’s accounts payable account at December 31, 2014 was P 1,350,000
before any necessary year-end adjustments relating to the following:
 Goods were in transit to Stem from a vendor on December 31, 2014. The invoice cost was P
75,000. The goods were shipped FOB shipping point on December 29, 2014 and were received
on January 2, 2015;
 Goods shipped FOB destination on December 21, .2014, from a vendor to Stem, were received on
January 6, 2015. The invoice cost was P37,500.
 On December 27, 2014, Stem wrote and recorded checks totaling P60,000 which were mailed on
January 10, 2015.
In Stem’s December 31, 2014 statement of financial position, how much should be the accounts payable?
a) P1,410,000
b) P1,425,000
c) P1,462 000
d) P1,486,000
Problem 22 - 5: (Current Liabilities – Accounts Payable)
GSM Corp.’s accounts payable at December 31, 2014, totaled P1,600,000 before any necessary year-end
adjustments relating to the following:
 On December 27, 2014, GSM wrote and recorded checks to creditors totaling P700,000 causing
an overdraft of in GSM’s bank account at December 31, 2014. The checks were mailed out on
January 10, 2015.
 On December 28, 2014, GSM purchased and received goods for P300,000, terms 2/20, n/30.
GSM records purchases and accounts payable at net amounts. The invoice was recorded and paid
January 2, 2015.
 Goods shipped FOB destination on December 20, 2014 from a vendor was received January 2,
2015. The invoice price was P 130,000.
At December 31, 2014, what amount should GSM report as total accounts payable?
a) P1,900,000
b) P2,100,000
c) P2,594,000
d) P2,724,000
Problem 22 — 6: (Current Liabilities)
Lovely Corporation’s current liabilities at December 31, 2014 totaled P 1,500,000 before any necessary
year-end adjustment relating to the following transactions:
 On December 23, 2014, a vendor authorized Lovely to return for full credit, merchandise shipped
and billed at P45,000 on December 9, 2014. Lovely shipped the returned items on December 29,
2014. A P45,000 credit memo was received and recorded by Lovely on January 2, 2012.
 During December 2014, Lovely received P75,OOO from Pretty, a customer, as an advance
payment for a handicraft that Lovely will make to Pretty’s specifications. From this transaction,
Lovely has a P 75,000 credit balance in its accounts receivable from Pretty at December 31, 2014.
What amount should Lovely report as total current liabilities in its December 31, 2014 statement of
financial position?
a) P1,455,000
b) P1,470,000
c) P1,530,000
d) P1,575,000
Problem 22 — 7: (Current Liabilities — Unearned Revenue)’
Echo Company sells office equipment 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 contract is recognized as
earned over the lives of the contracts.
Additional information for the year ended December 31, 2014 is as follows:
Unearned service contract revenue, January 1, 2014 P600,000
Cash receipts from service contracts sold 980,000
Service contract revenue recognized 860,000
Service contract expense 520,000

What amount should Echo report as unearned service contract revenue at December 31, 2014?
a) P460,000
b) P480,000
c) P490,000
d) P720,000
Problem 22 — 8: (Current Liabilities — Unearned Service Contract)
Bags Appliance Company’s accountant has been reviewing the firm’s past television sales. For the past
years, Bugs has been offering a special service warranty on all televisions sold. With the purchase of a
television, the customer has the right to purchase a 3-year service contract for an extra P600.
Information concerning past television and warranty contract sales is given below:
2012 2011
Television sales in units 550 460
Sales price per unit P 5,000 P 4,000
Number of service contracts sold 350 300
 Expenses relating to television warranties P38,520 P13,400
BUGS' accountant has estimated from past records that the pattern of repairs has been 40% in the year of
Sale, 36% first year after sale and 24% on 2 nd year of Sale. Sales of the contracts are made evenly during
the year.
Question 1: What is the adjusted balance of the unearned service contract as December 31, 2012?
a) P111,600
b) P168,600
c) P211,200
d) P243,600

Question 2: How much profit on service contract would be recognized in Year 2012?
a) P42,000
b) P68,400
c) P 71,880
d) P110,400
Problem 22 — 9: (Current Liabilities — Unearned Service Contract)
Brave Company sells appliance service contracts, agreeing to repair appliances for a two-year period.
Brave’s past experience is that, of the total pesos spent for repairs on service contracts, 40% is incurred
evenly during the first contract year and 60% evenly during the second contract year.
Receipts from service contract sales for the two years ended December 31, 2012, are as follows:
2011……………. P500,000 2012....................P600,000
Receipts from contracts are credited to unearned service contract revenue. Assume that all contract sales
are made evenly during the year.
What amount should Brave Company report as unearned service contract revenue at December 31, 2012?
a) P360,000
b) P470,000
c) P480,000
d) P630,000
Problem 22 — 10: (Current Liabilities – Deferred Revenue)
Day Care Company offers 3 payment plans on its 12 months contracts. Information on the 3 plans and the
number of children enrolled in each plan for the September 1, 2011 through August 31, 2012 contract
year follows:
Initial Payment Monthly Fees Number of
Plan Per Child Per Child Children
1 P5,000 15
2 2,000 P300 12
 3 500 9
Day Care received P99,000 of initial payments on September 1, 2011 and P32,400 monthly fees during
the period September 1 through December 31, 2011. In its December 31, 2011 statement of financial
position, what amount should Day Care report as deferred revenues?
a) P33,000
b) P43,800
c) P66,000
d) P99,000
Problem 22 — 11: (Current Liabilities — Unearned Subscription)
In November and December 2011, Adventure Company received P 792,000 for 1,000, 3-year
subscriptions at P264 per issue per year, starting with the January 2012 issue. Adventure elected to
include the entire P 792,000 in its 2011 Income statement for tax purposes. What amount should
Adventure report m its 2011 statement of financial position as unearned subscription revenue?
a) None
b) P44,000
c) P264,000
d) P792,000
Problem 22 — 12: (Current Liabilities – Unearned Subscription)
In November and December 2014, Sweet Company, a newly organized magazine publisher, received P
72,000 for 1,000, three-year subscriptions at P24,000 per year, starting with the November 2014 issue of
the magazine. Sweet elected to include the entire P 72,000 in its 2014 income tax return. How much
should Sweet report in its 2014 statement of financial position as unearned subscriptions?
a) None
b) P64,000
c) P68,000
d) P72,000
Problem 22 — 13: (Current Liabilities — Unearned Subscription)
Patient Company sells subscriptions to a specialized directory that is published semiannually and shipped
to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30
cut-off dates are held for the next publication. Cash from subscribers is received evenly during the year
and is credited to deferred revenues from subscriptions. Data relating to 2014 are as follows:
Deferred revenue from subscriptions, 12/31/13 P1,500,000
Cash receipts from subscribers 7,200,000
In Its December 31, 2014 statement of financial position, how much should Patient report as deferred
revenues from subscriptions?
a) P1,800,000
b) P3,300,000
c) P3,600,000
d) P5,400,000
Problem 22—14: (Current Liabilities —Unearned Subscription)
Sour Company sells magazine subscriptions for one to three-year periods. Cash receipts from subscribers
are credited to the account magazine subscriptions collected in advance, and this account had a balance of
P2,400,000 at December 31, 2011, before year-end adjustment. Outstanding subscriptions at December
31, 2011 expire as follows:
2012…. P600,000 2013……P900,000 2014…P400,000
In its December 31, 2011 statement of financial position, what amount should Sour report as the balance
for magazine subscriptions collected in advance?
a) P 500,000
b) P1,200,000
c) P1,900,000
d) P2,400,000
Problem 22—15: (Current Liabilities — Unearned Subscription)
Small Company sells magazine subscriptions for one to three-year periods. The account unearned
magazine subscriptions has a balance of P1,800,000 at December 31, 2014. Information for the year 2015
is as follows:
Cash receipts from subscribers P2,300,000
Magazine subscriptions revenue 1,600,000
In its December 31, 2015 statement of financial position, how much should Small report as the balance
for unearned magazine subscriptions?
a) P1,100,000
b) P2,100,000
c) P2,300,000
d) P2,500,000
Problem 22 — 16: (Current Liabilities — Gift Certificates)
Gallery Department Store sells gift certificates, redeemable for store merchandise that expires one year
after their issuance. Gallery has the following information pertaining to its gift certificates sales and
redemptions:
Unearned at December 31, 2014 600,000
2015 sales 2,000,000
2015 redemptions of prior-years sales 200,000
2015 redemptions of current-year sales 1,400,000

Gallery’s experience indicates that 10% of gift certificates sold will not be redeemed. In its December 31,
2015 statement of financial position, what amount should Gallery report as unearned revenue?
a) P400,000
b) P600,000
c) P 800,000
d) P1,000,000
Problem 22 — 17: (Current Liabilities — Gift Certificates)
At December 31, 2014, Female Company had 10,000 gift certificates outstanding, which had been sold to
customers during 2014 for P 100 each. Female operates on a gross margin of 60% of its sales.
What amount of revenue pertaining to the 10,000 outstanding gift certificates
should be deferred at December 31, 2014?
a) None
b) P400,000
c) P 600,000
d) P1,000,000
Problem 22 — 18: (Current Liabilities —Customers’ Deposits)
Organ Company requires refundable advance payments with special orders for machinery constructed to
customer’s specifications. Information for 2014 is as follows:

Customer advances — balance, December 31, 2013 P 885,000

Advances received with orders in 2014 1,380,000
Advances applied to orders shipped in 2014 1,230,000
Advances applicable to orders cancelled in 2014 375,000
What amount should Organ Company report as current liability for Customer’s deposits in its December
31, 2014 statement of financial position?
a) None
b) P660,000
c) P1,035,000
d) P1,110,000
Problem 22 — 19: (Current Liabilities — Employee Benefits)
All of Gold Company’s employees are entitled to two weeks of paid vacation for each full year in Gold’s
employ. Unused vacation time can be accumulated and carried forward to succeeding years and will be
compensated at the salary in effect when the vacation is taken. Silver started her employment with Gold
on January 1, 2008. As of December 31, 2014, when Silver’s salary was P5,000 per week, Silver had used
10 weeks of her accumulated vacation time. In December 2014, Silver notified Gold of Silver’s intention
to use her accumulated vacation weeks in June 2015. Gold regularly scheduled salary adjustments in July
of each year. Gold properly did not deduct compensation for unused vacations in Silver’s 2014 income
tax return. How much Gold report as a liability should at December 31, 2014 for Silver’s accumulated
vacation time?
a) None
b) P5,000
c) P10,000
d) P20,000
Problem 22 — 20: (Current Liabilities — Employee Benefits)
Apex Company’s employees earn two weeks of paid vacation for each year of employment. Unused
vacation time can be accumulated and carried forward to succeeding years and will be paid at the salary in
effect when the vacation is taken. As of December 31, 2014, when Paul’s salary was P6,000 per week.
Paul had earned 18 weeks vacation time and had used 12 weeks of accumulated vacation time. At
December 31, 2014, how much should Apex carry as a liability for Paul’s accumulated vacation time?
a) None
b) P12,000
c) P36,000
d) P72,000
Problem 22 — 21: (Current Liabilities — Employee Benefits)
On January 1, 2011, Break Company agreed to grant its employees ten vested vacation days each year,
with the provision that vacation days earned in a particular year could not be taken until the following
year. For the year ended December 31, 2011, all ten of Break’s employees earned P300 per day each and
earned ten vacation days each. These vacation days were taken during the first half of 2012. Wage rates
remained the same for 2012. In Break’s 2011 profit or loss, how much expense should be reported for
compensated absences?

a) None
b) P3,000
c) P15,000
d) P30,000
Problem 22 — 22: (Current Liabilities — Employee Benefits)
Bad Company pays all employees on a biweekly basis. Overtime pay, however, is paid in the next
biweekly period. Bad Company accrues salaries expenses only at its December 31 year-end. Data relating
to salaries earned in December 31, 2011 are as follows:
 Last payroll was paid on December 26, 2011 for the 2-week period ended December 26, 2011.
 Overtime pay earned in the 2-week period ended December 26, 2011 was P10,500.
 Remaining work days in 2011 were December 29, 30, and 31, on which days, there was no overtime.
 The recurring biweekly salaries total P187,500.
Assuming a five-day workweek, what amount should Bad Company record as accrued salaries at
December 31, 2011?
a) P56,250
b) P66,750
c) P112,500
d) P123,000
Problem 22 — 23: (Current Liabilities — Employee Benefits)
Governance, Inc. has a bonus plan covering all employees. The total bonus is equal to 10% of
Governance’s preliminary (pre-bonus, pretax) income reduced by the income tax (computed on the
preliminary income less the bonus itself). Governance’s preliminary income for 2011 is P 1,000,000 and
income tax rate is 32%.
Question 1: How much is the bonus for 2011?
a) P61,200
b) P68,000
c) P 70,248
d) P1,000,000
Question 2: What amount should Governance Company recognize as a distribution of profit related to
their bonus plan in 2011?
a) None
b) P68,000
c) P 70,248
d) P100,000
Problem 22 — 24: (Current Liabilities — Bonus Computations)
Strand, Inc. provides an incentive compensation plan under which its president receives a bonus equal to
10% of the corporation’s income in excess of P600,000 before income tax but after deduction of the
bonus. If income before income tax and bonus is P 1,920,000 and the tax rate is 32%, the amount of the
bonus would be

a) P120,000
b) P132,000
c) P174,360
d) P192,000
Problem 22 —25: (Current Liabilities — Accrued Expense)
Free Corporation pays its outside salespersons fixed monthly salaries and commissions on net sales. Sales
commissions are computed and paid on a monthly basis (in the month following the month of sale), and
the fixed salaries are treated as advances against commissions. However, if the fixed salaries for
salespersons exceed their sales commissions earned for a month, such excess is not charged back to them.
Pertinent data for the month of April 2011 tor the three salespersons in sales region 3 are as follows:
Salesperson Fixed Salary Net Sales Commission Rate
A P10,000 P 200,000 4%
B 14,000 400,000 6%
C 18,000 600,000 6%
Totals 42,000 P1,200,000

For sales region 3, what total amount should Free Company accrue for sales commission payable at April
30, 2011?
a) P26,000
b) P28,000
c) P68,000
d) P70,000
Problem 22 26: (Current Liabilities — Returnable Containers)
Inter Company sells its products in reusable, expensive containers. The customer charged a deposit for
each container delivered and receives a refund for each container returned within two years after the year
of delivery. Inter accounts for the containers not returned within the time limit as being retired by sale at
the deposit amount. Information for 2012 is as follows:
Deposits for containers at December 31, 2011 from deliveries
in: 2010.......................P 150,000
2011…………………. 430,000 P580,000
Deposits for containers delivered in 2012 780,000
Deposits for containers returned in 2012 from deliveries in:
2010……………………..90,000
2011………………. ….250,000
2012……………………286,000 626,000
What amount should Inter Company report as a liability for deposits on returnable containers at
December 31, 2012?
a) 494,000
b) P644,000
c) P674,000
d) P734,000
Problem 22 — 47: (Interest Payable)
On September 1, 2010, Crackers Company issued a note payable to PNB in the amount of P2,400,000,
with the stated rate of 12% and payable in 3 equal annual installments. On this date, the bank’s prime rate
is 11%. The first interest and principal payment was made on September 1, 2011. How much should
Crackers record as accrued interest payable at December 31, 20117
a) P58,667
b) P64,000
c) P88,000
d) P96,000
Problem 22 — 48: (Interest Payable)
Urn Corporation’s liability account balances at June 30, 2011 included a 10% note payable the amount of
P1,800,000. The note is dated October 1, 2007 and is payable in three equal annual payments of P600,000
plus interest. In Urn’s June 30, 2011 statement of financial position, what amount should be reported as
accrued interest payable for this note?
a) P30,000
b) P45,000
c) P90,000
d) P135,000
Problem 22 — 49: (Interest on Borrowings)
Ball Corporation frequently borrows from the bank in order to maintain sufficient operating cash. The
following loans were at a 12% interest rate, with interest payable at maturity. Ball repaid each loan on its
scheduled maturity date.
Date of Loan Amount Maturity Date Term of Loan
11/01/11 P 500,000 10/30/12 1 year
02/01/12 1,500,000 07/31/12 6 months
05/01/12 800,000 01/31/12 9 months

Ball records interest expenses when the loans are repaid. As a result, interest expense of P 150,000 was
recorded in 2012.
If no Correction is made, by what amount would 2012 interest expense be understated?
a) P54,000
b) P62,000
c) P64,000
d) P72,000
Problem 22 — 50: (Interest Rate on Borrowings)
On July 1, 2011, Clear Company obtained a P3,000,000, 180-day bank loan at an annual rate of 12%. The
loan agreement requires Clear to maintain a P600,OOO compensating balance in its checking account at
the lending bank. Clear would otherwise maintain a balance of only P300,000 in this account. The
checking account earns interest at an annual rate of 6%. Based on a 360-day year, the effective interest
rate on the borrowing is
a) 12.00%
b) 12.67%
c) 13.33%
d) 13.50%
Problem 22 - 51: (Accrued Expenses)
Brown Eyes Company operates a retail store and must determine the proper December 31, 2011, year-end
accrual for the following expenses:
 The store lease calls for fixed rent of P6,000 per month, payable at the beginning of the month, and an
additional rent equal to 6% of net sales over P 1,250,000 per calendar year, payable on January 31 of
the following year. Net sales for 2011 were P2,250,000.
 An electric bill of P4,250 covering the period December 17, 2011 through January 16, 2012 was
received January 23, 2012.
 A P 2,000 telephone bill was received on January 2, 2012, covering:
Service in advance for January 2012 P 750
Local and toll calls for December 2011 1,250
In its December 31, 2011 statement of financial position, what amount of accrued liabilities should Brown
Eyes report?
a) P63,375
 b) P64,125
c) P65,500
d) P75,375
Problem 22 — 52: (Accrued Expenses)
Johnson Apparel, Inc. operates a retail store and must determine the proper December 31, 2011 year-end
accrual for the following expenses:
The store lease calls for fixed rent of P10,000 per month, payable at the beginning of the month, and
additional rent equal to 6% of net sales over P2,000,000 per calendar year, payable on January 31 of the
following year. Net sales for 2011 are P8,000,000
Johnson has property subject to a city property tax. The city’s fiscal year runs from July 1 to June 30 and
the tax, assessed at 3% of property on hand at April 30, is payable on June 30. Johnson estimates that its
property tax will amount to P60,000 for the fiscal year ending June 30, 2012. In its December 31, 2012
statement of financial position, how much should Johnson report as accrued expenses?
a) P390,000
b) P396,000
c) P510,000
d) P516,000
Problem 22 — 53: (Accrued Expenses)
Brain Company salaried employees are paid biweekly. Occasionally, advances made to employees are
paid back by payroll deductions. Information relating to salaries for the calendar year 2011 is as follows:

December 31, 2010 December 31, 2011

Employee advances P12,000 P 18,000
Accrued salaries payable 65,000 ?
Salaries expense during the year 815,000
Salaries paid during the year (gross) 780,000
At December 31, 2011, what amount should Brain report as accrued salaries payable?
a) P35,000
b) P82,000
c) P94,000
d) P100,000
Problem 22 — 27: (Provision — Product Premiums)
Lancer Company inaugurated a promotional campaign on January 2, 2011 to promote the salability of
their product. Lancer Company placed a coupon redeemable for a premium in each package of cereal sold
at P200. Each premium costs P25 and 10 coupons must be presented by a customer to receive a premium.
Lancer estimated that only 70% of the coupons issued would be redeemed. For the 6 months ended July
31, 2011, the following transactions occurred:
 Packages of cereal sold 120,000
Premium purchased 30,000
Coupons redeemed 54,000

How much should be reported as premium expense and estimated liability for coupons on the fiscal year
ended July 31, 2011, respectively?
a) P 75,000 and P 75,000
b) P135,000 and P135,000
c) P135,000 and P210,000
d) P210,000 and P 75,000
Problem 22 – 28: (Provision – Product Premiums)
Bangkok Company inaugurated a sales promotion campaign on May 31, 2011, whereby Bangkok placed
a coupon in each package of chocolate sold, the coupons being redeemable for a premium. Each premium
costs Bangkok P50 and a customer to receive a coupon must present five coupons. Bangkok estimated
that only 60% of the coupon issued would be redeemed. For the seven months ended December 31,2011,
the following information is available
Packages of chocolates sold 400,000
Premiums purchased 30,000
Coupons redeemed 100,000

How much is the estimated liability for premium claims outstanding at December 31, 2011?
a) P100,000
b) P140,000
c) P180,000
d) P240,000

Problem 22— 29: (Provision Product Premiums)

Broad Company includes in packages of its products, coupons that may be presented to retail stocks to
obtain discounts on other Broad Company products Retailers are reimbursed for the face amount of
coupons redeemed plus 10% of that amount for handling costs. The company honors requests for coupon
redemption by retailers up to three months after the coupon expiration date. The company estimates that
70% of all coupons issued will ultimately be redeemed. Information relating to coupons issued by the
company during 2011 is as follows:
Consumer expiration date Dec. 31, 2011
Total face amount of coupons issued P600,000
Total payments to retailers as of Dec 32, 2011 P220,000
What amount should Broad Company report as liability for redeemed coupons at December 31, 2011?
a) None
b) P200,000
c) P242,000
d) P308,000
Problem 22— 30: (Provision — Product Premiums)
During 2011, Mallow Company sold 500,000 boxes of hotcakes under a sales promotional program,.
Each box contains one coupon, which when submitted with P16, entitles the customer to a baking pan.
Mallow pays P20 per pan and P2 for handling and shipping. Mallow estimates that 80% of the coupons
will be redeemed, even though only 300,000 coupons had been processed during 2011. What amount
should Mallows report as a liability for unredeemed coupons at December 31, 2011?
a) P300,000
b) P400,000
c) P600,000
d) P1,000,000
Problem 22 - 31: (Provision - Product Premiums)
On July 1, 2011, Sydney Company started a sales promotional campaign. In each box of cereal sold,
Sydney inserted a coupon redeemable for a premium. To receive a premium, each customer must submit
five coupons. Sydney’s cost for each premium is P6. Sydney estimated that 60% of the coupons issued
would be redeemed. For the six months ended December 31, 2011. The following information is
available:
Boxes of cereal sold 800,000
Coupons redeemed 200,000
How much should be the estimated liability for premium claims outstanding at December 31, 2011?
a) P240,000
b) P336,000
c) P432,000
d) P576,000

Problem 22 —32: (Provision — Product Premiums)

The Puncher Corporation launched a sales promotional campaign on June 30, 2011. For every ten empty
packs returned to Puncher, customers will receive an attractive food container. The company estimates
that only 30% of the packs reaching the market will be redeemed. Additional data are as follows:
Units Amount
Sales of food packs 3,000,000 P9,000,000
Food containers purchased 60,000 180,000
Prizes distributed to customers 37,000

At the end of the year, Puncher recognized a liability equal to the estimated cost of potential prizes
outstanding. What is the amount of this estimated liability?
a) P69,000
b) P90,000
c) P159,000
d) P180,000
Problem 22— 33: (Provision — Product Premiums)
The Top Bottling Corporation embarked on a promotional program whereby a key chain costing P 15
each is given away for every 10 bottle crowns returned plus 95. Top Bottling Corporation estimates that
only 40% of the bottle crowns in the hands of consumers will be presented for redemption. The following
information is available:
Quantity Amount
Bottles sold 1,000,0000 P5,000,000
Key chains bought for giveaways 15,000 225,000
Key chains distributed to customers

At the close of the first year, how much should Top Bottling Corporation recognize as estimated liability
for promotional items outstanding?
a) P250,000
b) P300,000
c) P375,000
d) P450,000
Problem 22 — 34: (Provision — Product Warranty)
The selling price of Appliances Company’s units is P80,000 each. The buyers are provided with a 2-year
warranty that is expected to cost the company P2,000 per unit in the year of sale and P6,000 per unit in
the year following the sale. The company sold 80 units in 2011 and 100 units in the 2012. Actual
payments for warranty claims were P80,000 and P520,000 in 2021 and 2012, respectively. How much
would be the warranty expense for 2011 and 2012, respectively?
a) P200,000 and P600,000
b) P640,000 and P800,000
c) P680,000 and P280,000
d) P800,000 and P840,000

Problem 22 — 35: (Provision - Product Warranty)

Male Company sells calculators that carry a one-year warranty against
manufacturer’s defects. Based company experience, warranty costs are
estimated at P300 per calculator. During 2011, Male sold 24,000 calculators
and paid warranty costs of P170,000. In its income statement for the year
ended December 31, 2011, how much should Male report as warranty expense?
a) P1,700,000
b) P2,400,000
c) P5,500,000
d) P7,200,000
Problem 21 - 36: (Provision — Product Warranty)
A new product introduced by Beauty Promotions carries a two-year warranty against defects. The
estimated warranty costs related to sales are as follow:
Year of sale 3%
Year after sale 5%
Sales and actual warranty expenditures for the years ended December 31, 2011 and 2012 are as follows:
Sales Actual Warranty Expenditures
2011 P 800,000 P20,000
2012 1,000,000 70,000

What amount should Beauty report as its estimated liability as of December 31, 2012?
a) P4,000
b) P24,000
c) P54,000
d) P74,000
Problem 22 — 37: (Provision — Product Warranty)
On January 1, 2011, Pretty Company offered a three-year warranty from date of sale on any of its
products sold after that date. The offer was part of a program to increase sales. Meeting terms of the
warranty was expected to cost 2% of sales. Sales made under warranty in 2011 amounted to P9,000,000.
One-fifth of the units sold in 2011 were returned. These units were repaired or replaced at a cost of
P32,500. What amount of warranty expense should be shown on Pretty’s 2011 profit or loss?
a) P32,500
b) P35,500
c) P68,500
d) P180,000
Problem 22 — 38: (Provision — Product Warranty)
Charming Company estimates its annual warranty expense as 2% of annual net sales. The following data
relate to calendar year 2011:
Net sales P3,200,000
Warranty liability account:
Balance, January 1, 2011 10,000 debit before adjustment
Balance, December 31, 2011 54,000 credit after adjustment
Which of the following entries was made to record the 2011 estimated warranty expense?
a) Warranty expense 64,000
Accumulated profits/losses (prior period adjustment) 10,000
Estimated liability under Warranties 54,000
b) Warranty expense 54,000
Accumulated profits/losses (prior period adjustment) 10,000
Estimated liability under warranties 64,000
 c) Warranty expense 44,000
Estimated liability under warranties 44,000
d) Warranty expense 64,000
Estimated liability under warranties 64,000
Problem 22 — 39: (Provision — Product Warranty)
Karma Company sells televisions at an average price of P 7,500 and also offers to each customer a
separate 3-year warranty contract for P 750 that requires the company to perform periodic services and to
replace defective parts. During 2011, the company sold 300 televisions and 270 warranty contracts for
cash. It estimates the 3-year warranty costs as P200 for parts and P400 for labor and accounts for
warranties separately. Assume sales occurred on December 31, 2011, income is recognized on the
warranties, and straight line recognition of warranty revenues occurs. What amount of current and non-
current liability relative to warranty revenue would appear on the December 31, 2011 statement of
financial position, respectively?
a) P 0 and P202,500
b) P67,500 and P135,000
c) P135,000 and P 67,500
d) P202,500 and P 0
Problem 22—40: (Provision—Premium & Product Warranty)
Jackson Music Emporium carries a wide variety of musical instruments, sound reproduction equipment,
recorded music, and sheet music. Jackson uses two sales promotion techniques namely (a) warranties and
(b) premiums, to attract customers.
Musical instruments and sound equipment are sold with a one-year warranty for replacement of parts and
labor. The estimated warranty cost, based on past experience, is 2% of sales.
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 a cassette player.
Jackson pays P34 for each cassette player and estimates that 60% of the coupons given to the customers
will be redeemed.
Jackson's total sales for 2011 were P7,200,000; P5,400,000 from musical instruments and sound
reproduction equipment and P 1,800,000 from recorded music and sheet music. Replacement parts and
labor for warranty work totaled P164,000 during 2011. A total of 6,500 cassette players used in the
premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2011
The accrual method is used by Jackson 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, 2011
are shown below
Inventory of Premium Cassette Players P39,950
Estimated Premium Claims Outstanding 44,800
Estimated Liability from Warranties 136,000
Question 1: At what amount should the Warranty Expense and Premium Expense be shown in the
December 31, 2011 profit or loss of Jackson Music Emporium?
 Warranty Expense Premium Expense
a) P108,000 P 56,950
b) P108,000 P 75,600
c) P136,000 P204,000
d) P164,000 P120,400
Question 2: At what amount should the Estimated Liability from Warranties be shown in the December
31, 2011 statement of financial position or Jackson Music Emporium?
a) P 80,000
b) P108,000
c) P136,000
d) P164,000
Question 3: At what amount should the Inventory of Premium Cassette Players be shown in the
December 31, 2011 financial statements of Jackson Music Emporium?
a) P39,950
b) P56,950
c) P204,000
d) P221,000
Question 4: At what amount should the Estimated Premium Claims Outstanding be shown in the
December 31, 2011 financial statements of Jackson Music Emporium?
a) P36,400
b) P44,000
c) P75,660
d) P84,000
Problem 22 — 41: (Provision-Lawsuit)
On December 2, 2011, an employee filed a P3,000,000 lawsuit against Cruiser Company for damages
suffered when one of Cruiser’s plants exploded on July 20, 2011. Cruiser’s legal counsel expects the
company will lose the lawsuit and estimates the loss to be between P500,000 and P 1,000,000. The
employees has offered to settle the lawsuit out of court for P900,000, but Cruiser will not agree to the
settlement.
Its December 31, 2011 statement of financial position, what amount should Cruiser Company report as
provision from lawsuit?
a) P500,000
b) P750,000
c) P1,000,000
d) P3,000,000
Problem 22 —42: (Provision-lawsuit)
A truck owned and operated by Ward Company was involved in an accident. when an auto driven by
Stallman on January 12, 2011. Ward Company received notice on April 24, 2011 of a lawsuit for
P800,000 damages for a personal injury suffered by Stallman. Wards counsel believes it is reasonably
possible that Stallman will be successful against the company for a estimated amount in the range
between P 100,000 and P400,000. No amount within this range is a better estimate of potential damages
than any other amount. It is expected that the lawsuit will be adjudicated in the latter part Of 2012. What
amount of loss should Ward accrue at December 31,
a) None
b) P100,000
c) P250,000
d) P400,000
Problem 22 — 43: (Provision- lawsuit)
In May 2011, West Company filed suit against Brown, Inc. seeking P850,000 damages for patent
infringement. A court verdict in November 2011 awarded West P600,000 in damages; but Brown’s
appeal is not expected to be decided before 2011. West’s counsel believes it is probable but not virtually
certain that West will be successful against Brown for an estimated amount in the range between
P300,000 and P450,000, with P400,000 considered the most likely amount. What amount should West
record as a contingent asset from lawsuit in the year ended December 31, 2011?
a) None
b) P300,000
c) P400,000
d) P600,000
Problem 22 - 57: (Provision-legal)
On December 17, 2011, an explosion occurred at Cord Company plant causing extensive property
damage to area buildings. Although no claims had yet been asserted against Cord Company by March 10,
2012, Cord’s management and counsel concluded that it is reasonably possible. Cord will be responsible
for damages, and that P2,500,000 would be reasonable estimate of its liability. Cord’s P 10,000,000
comprehensive public liability policy has a P500,000 deductible clause. In Cord’s December 31, 2011
financial statements, which were issued on March 25, 2012, how should this item be reported
a) No footnote disclosure or accrual is necessary.
b) As a footnote disclosure indicating the possible loss of P500,000.
c) As an accrued liability of P500,000.
d) As a footnote disclosure indicating the possible loss of

Problem 22 - 58: (Provision-lawsuit)

On December 31, 2011, Home Company was a defendant in a pending lawsuit. The suit arose from the
alleged defect of a product that Home sold in 2010. In the opinion of Home’s attorney, it is probable that
Home will have to pay P500,000 and it is reasonably possible that Home will have to pay P600,000 as a
result of this lawsuit. In its 2011 financial statements, Home should report
a) An accrued liability of only.
b) An accrued liability of P500,000 and would disclose a contingent liability of an additional P
100,000.
 c) An accrued liability of P600,000 only.
d) No information about this lawsuit.
Problem 22 - 59: (Provision)
In November 2011, attorneys for current and former employees of Mecum, Inc. filed a P3,000,000 class
action lawsuit; alleging that exposure to radiation has caused significant medical problems. Attorneys for
Mecum are uncertain as to the outcome of the case. However, similar lawsuits against other firms in the
same industry have resulted in significant payments by the employer but there was no reliable estimate as
to the amount. In Mecum’s December 31, 2012 financial statements, which were issued on April 30,
2013, how should this item be reported?
a) No footnote disclosure or accrual is necessary.
b) As a footnote disclosure indicating the possible loss of P3,000,000
c) As an accrued liability of P3,000,000.
d) If the amount of payment can be estimated, a liability should be recognized, if the amount of
expected payment cannot be estimated, only a note disclosure would be required.
Problem 22 — 60: (Provision)
On January 12, 2012, a fire at a production facility damaged a number of adjacent buildings (owned by
other businesses). Coral Company’s’ insurance policy does not cover damage to the property of others.
Insurance companies for those other businesses have billed Coral Company for the estimated cost of P2.4
million required to restore the damaged buildings. In Its 2011 financial statements, Coral Company
should report
a) An accrued liability of P2,400,000 only.
b) An accrued liability of P2,400,000 and necessary disclosure in the notes to financial statements.
c) Only a note disclosure is required.
d) No information about the damage buildings.
Problem 22 — 61: (Provision)
One of Clarion production plants is located on the chores of Lake Taal. The lake has been rising for a
number of years, and the company has installed dikes to prevent flooding. The dikes are currently
operating at or near capacity. Weather forecasters have predicted that the lake will rise another 8 inches
this coming summer. If this occurs, significant damage will likely result form stressing the dikes beyond
capacity. Clarion Company estimated a P4,000,000 to P6,000,000 amount of loss should the flooding will
not be prevented. In its 2012 financial statements, Clarion Company should report.
a) An accrued liability of P4,000,000 only.
b) An accrued liability of P5,000,000 only.
c) An accrued liability of P6,000,000 only
d) Only a note disclosure is required.
Problem 22 — 62: (Guarantee of Indebtedness)
Hope guarantee a loan of P200,000 granted to Faith. At the time when the financial statements of Hope
are being finished, it is clear that Faith is in financial difficulties and it is probable that Hope will meet the
guarantee. In the financial statements, Hope should
a) Only disclose in the notes the amount of the guarantee
b) Recognize a provision for liability of P200,000.
 c) Not recognize and need not disclose the guarantee
d) Recognize a provision for liability of and also disclose in the notes to financial statements
Problem 22 — 63: (Guarantee of Indebtedness)
Gladness Co. guaranteed a loan of P400,000 grantee to Timothy C. At the date when the directors
approved the financial statements of Timothy, there is no reason to believe that the guarantee will be
invoked. Assuming that the amount of the guarantee is a material amount for Gladness Co., what proper
accounting this guarantee is in the books of Gladness Co.?
a) The amount of the guarantee is not accounted for in Gladness’ books.
b) The amount of P400,000 should be recognized as a provision.
c) The P400,000 be recognized as a liability with necessary disclosure in the notes to financial
statements.
d) The contingent liability should be disclosed by way of note to the financial statements.
Problem 22 — 64: (Guarantee of Indebtedness & Subsequent Events)
Milder Company has guaranteed a loan of P300,000 granted to Miller Company. After the balance sheet
date of Milder Company but before the directors approved the financial statements, Milder Company
receives notice that Miller Company is in liquidation and the creditor of Miller will invoke the guarantee.
What proper accounting should Milder Company account for the guarantee?
a) The amount of the guarantee is not accounted for in Milder’s books.
b) The amount of P300,000 should be recognized as a provision.
c) The P300,000 be recognized as a liability with necessary disclosure in the notes to financial
statements.
e) The contingent liability should be disclosed by way of note to the financial statements.