A NI tD'2

ACC 4 FINANCIAL ACCOUNTING 2

CHAPTER TEST 2
LIABILITIES / PREMIUM LIABILITY / WARRANTY LIABILITY/
ACCRUED LIABILITIES & DEFERRED REVENUE
3RD GRADING PERIOD SECOND SEMESTER SY 2016-2017

l. Phillip Corporation has the following subsidiaries : Sweetzel Company engaged in shoes line,
Denise Company engaged in cosmetics line, Katherine Company engaged in clothes line, and
Gracel Company engaged in health supplements line. These subsidiaries provided the following
information on December 31, 2017 :

Sweetzel Company ;
Bonds payable - due December 31 , 2019 P6,000,000
/ Note payable - due April 30, 2018 2,400,000
/ Note payable - due April I, 2018 3,000,000
,,Accrued liabilities 150,000
Stock dividends payable 480,000
Accounts payable after deducting debit balances in
suppliers' accounts of P300,000 1,500,000 1 ')OJ : 1'60J

On February 28, 2018 before the 2017 FS were issued, the note payable of P3,000,000 was
replaced by an 18-month note for the same amount. Further, a similar action on the P2,400,000
note is being considered. The FS were issued on April 1, 2018.

Denise Company :
_,..Accounts payable P9,000,000
Deferred serial bonds 15,000,000
These bonds were issued at par and bears interest
at 12% p.a. payable in semiannual installment
of P 1,500,000 due March 31 and September 30
of each year, the last bond to be paid on September
30, 2012. Interest is also paid semiannually.
Stock dividend payable 6,000,000
/Income taxes withheld from employees 1,700,000
/Valued added tax payable 1,000,000
. . . cash overdraft at RCBC 3,900,000
The company has a demand-deposit at
Eastwest Bank amounting to 7,500,000 ·
/ Accounts receivable with credit balance 2,250,000
/Estimated expenses of meeting warranties on
merchandise previously sold 1,500,000
/Estimated damages as a result of unsatisfactory
performance on a contract 4,500,000

Katherine Company :
.,Accounts payable - trade Pl2,000,000
-Bank overdraft . 900,000
--Dividend payable 3,000,000
,,Withholding tax payable 300,000
x Mortgage payable 11 ,400,000 J.
--Income tax payable 2,400,000
,Estimated warranty liability 1,800,000
-Estimated damages payable by reason of breach
of contract 2,100,000
Accrued liabilities 2,700,000
.Estimated premium liability 600,000
.xClaim for increase in wages by employees covered in
 a pending lawsuit I 0,500,000 'i-
Contract entered into for the construction of
15,000,000
X 1
Building . '
,, Notes payable ~ trade . 9,000,000
,,-Notes payable - bank loan short term 6,000,000
,, Notes payable - advances from.officers 1,500,000

Grace! Company
/Unearned rent income P 300,000
Contested BIR tax assessment-possible obligation 900,000 .
.,Accrued interest on bonds payable 450,000
/Serial bonds payable in semiannual installment
of P 1,500,000 'f. 1- 15,000,000
,.,Credit balances in customers' accounts 600,000
Stock dividend payable 1,200,000
Notes payable, including note payable to bank due
on December 31, 2019 of Pl 500 000 4,500,000 - ,s-oo r
,,..Accounts payable, including d~~sit~ and advances
from customer of P750,000 3,750,000 .

a. Determine the totaJ current liabilities and total .non-current liabilities, RESPECTIVELY, of
Sweetzel Company ·
b. Determine the total current liabilities of Denise Company
c. Compute the amount of current liabilities of Katherine Company
d. Compute the amount of current liabilities of Grace! Company .

2. Alvonne Company provided the following data on December 31 , 2017:

Reserve for contingencies - P 450,000 , · ~ -

.....-Accrued utilities 180,000
.....-Bank overdraft 165,000
Bank loan payable of Esveera Company where
Alvonne Company acted signed as guarantor 600,000
/Customers' deposit 300,000
/ Accrued taxes payable 375,000
,, Trade accounts payable, including cost of sales
received on consignment of P450,000 4,050,000 - \.If'()

What total amount should be reported as current liabilities?

3. Reeshamae Company disclosed the following information about liabilities at year-end:

Estimated expensed in redeeming-prize coupons

presented by customers 1,800,000/
Claims for increase in wages and allowance by
a
employees, covered in pending lawsuit 1,200,000
Share dividend payable 3,000,000
Credit balances of customers' accounts 1,soo,000,,,..
Accrued expenses 3,000,000,,,..
Deferred rent revenue (12 months) 1,soo,ooo....-
Accounts payable, after deducting debit balances
in suppliers' accounts amounting to P300,000 12,000,000 t lJll)T" /

What total amount should be presented as current liabilities?

 4. Kyle Company reported the following information at the end of accounting period ,:

"Trademark P 150,000
,, Discount on bonds payable (1,500,000)
,, Bonds payable 15,000,000
)(Cash surrender value of officers' life insurance 225,000
, Estimated liabilities under warranties ,, 750~000
..,P,recollected rent revenue (12 months) 900,000_·:
,. Advances to employees 135,000
/ Advances from officers 800,000
, Accounts payable 2,200,000
Appropriated retaiµed earnings for sinking fund ·4,50,0,000
Treasury shares - · 400))00

What amount should be reported in the statement of financial position as total_liabilities?

I '

5. Erika Company manufactures a whitening cream and sells it at P900 per unit. A pendant is .
offered to customers on the return of 5 packaging box plus a remittance of P30. The pendant
costs Pl 50 and it is estimated that 60% of the packaging boxes will be redeemed. During 2017,
the first year of the premium plan, 10,000 units of cream :were sold at P900 each or a total sales
of P9,000,000. 2,000 units of pendants were purchased at Pl SO each or total of P300,000. Only
4,000 packaging boxes were redeemed.

a. What is the entry to re~rd redemption 9f 4,000 p1;1Ckaging boxes? ', :

b. What is the entry to record the liability for the . premiums at the end of 20' I 7?

6. Claire Company, a grocery retai!er, 9perates a customer loy/tl~ program. It grants program
members loyalty points when they spenq.a specified amount on groceries. Program members can
redeem the points for further groceries. The points have no· expiry date.

Duripg 2017, sales amounted to P27,000,000 ba,sed on stand-ajone selling price. During this
period, ,1.0JlOO points were earned by t~e,customers~Howeyer, management expects that only
~ o f these points will be redeemed. The stand-aloQe selling pf1Ce of each loyalty point is
estimated at P300. On DecembeF 31, 2017, 4,000 points have been redeemed in exchange for
groceries. - ·

In 2018, the management revised expectations and now expects that 90% will be redeemed
altogether. During this period, the entity redeemed 4,100 points.

In 2019, ad.ditional 900 points are redeemed. Management continues to expect that only 9,000
points will ever be redeemed. No more points will be redeemed after 2019.
a. What is the entry to record redemption of 4,100 points in 2018?
b. What is the entry to record redemption of 900 points in 2019?

7. Jasette ~~any manufactures wine. A ~ ~ s s set is offered as_ ~iwn to customers

who ~nd ~ottle caps and a remittance o~Distribution cost t:_o/er set. Data for the
premmm o er are
2017 2018
Sales of wine P 7,500,000 P 9,375,000
Purchases of wine glass sets,
P300 per set p 525,000 1151) p 600,000
Nwnber of wine glass sets 'l,,f v,111'\.L
distributed as premium 1,000 1,800
Number of wine glass sets to
be distributed·in the
subsequent period 600 800
'
 _/
a. What is the Estitpated premium liability on 12/31/17?
b. What is the Premium expense in 2018?
c. What is the Estimated premium liability on 12/31/18?
d. What is the balance of.Premiums on 12/31/18? ·

8. Kristine Company manufactures Product X. A bottle of collagen is offered as a premium to

customers who send in 3 wrappers and a remittance of P30. Distribution cost is P60 per set. Data
for the premium offer are

2017 2018
Sales of product X P 10,800,000 P 28,125,000
Purchases of premium P 150
per unit P 1,170,000 p 1,740,000
· Number of premiums
distributed 5,000 9,000
Number of premiums to be
distributed in the subsequent
period 2,000 3,000

a. What is the Estimated premium liability on 12/31/17?

b. What is the Premium ~xpense in 2018?
c. What is the Estimated premium liability on 12/31/ 18?
d. What is the balance of Premiums on 12/31/18?

9. Janna Company operates a customer loyalty program. It grants loyalty points for goods
purchased. These loyalty points can be used by the customers in exchange for goods of the
company. The points have no expiry date.

In 20 I 7, the company issued 50,000 award credits and expects that 80% of these award credits
will be redeemed. The stand-alone selling price of the award credits granted is reliably measured
at P3,000,000. In 2017, the company sold goods to customers for a total consideration of
P2 Dmu:uuo based on stand-alone selling price.

The award credits redeemed and the total award credits expected to be redeemed each year are as
follows : ·
Redeemed Expected to be redeemed
2017 15,000 80%
2018 7,950 85%
2019 2,550 85 %
2020 15,000 90 %

Determine the balance of the unearned revenue at December 31

a.2017
b.2018
c. 2019
d.2020
11 . Princess·Company offers customers a headset if they sen:ci in three boxtops from its products
and P30. The company estimated that 60% of the boxtops will be redeemed. In 2017, the
company sold 675,000 boxes and customers redeemed 330,000 boxtops. The cost of each
headset is P75.
a. What is the premium expense for the current year?
b. What is the liability for outstanc;ling premiums on December 31, 2017?

12. Elaine Company included one coupon in each box ofhigh-endmois~zer sold. An
astringent costing P 150 was offered as a premium to custom:rs who ~end ~ 10 coupons and a
remittance of P30.' Distribution cost of premium is P5 per umt. Expenence mdicated that only
30% of the coupons will be redeemed. _ .

In 2017, 2,000,000 boxes of moisturizers were sold, 50,000 bottles of astringent were purchased
and 400,000 coupons wete redeemed. -

In 2018, 2,500,000 boxes of moisturizers were sold, 80,000 bottles of astringent were purchased
and 700,000 coupons were redeemed.

a. What is the estimated premium liability on 12/31/17?

b. What is the estimated premium liability on 12/31/18?
c. What is the premium expense in 2017?
d. What is the premium expense in 2018?

·13. Grace Company included one coupon in each package of portable DVD sold. A sandwich
maker costing P120 was offered as premium to customers who send in 19 coupons. In 2017,
500,000 units of portable DVDs were sold, 30,000 units of ~dwich makers were purchased, of
which '20,000 were distributed as premiums. It is estimated that at the end of the year, 5,000 units
of sandwich maker will be distributed as premium next period. ·

In 2018, 800,000 units of portable DVDs were sold, 60,000 units of sandwich makers were ,
purchased, of which 50,000 were distributed as premiums. 3,000 units of sandwich makers are
expected to be distributed as premium next period.

a. What is the premium expense in 2017

b. What is the.premium expense in 2018?
c. What is ·the estimated premium liability on 12/3 li l 7?
d. What is the estimated premium liability on 12/31/18?.
e. What amount should be reported as contingent liability oil 12/31/18?

14. Junie Company operates a customer loyalty program. Th'e company grants program members
loyalty points when they spend a specified amount on purchases. Program members can redeem
the points for further purchases. The points_have no expiry date. '

In 2017, the customer earned 60,000 points. Management expects that 100% of these points will
be redeemed. The stand-alone sellingprice of each loyalty point is estimated at P60. 2017 sales -
amounted to P20,400,000 based on stand-alone selling price. On December 3 l,'2017, 28,800 ·
points have been redeemed in exchange for purchases. ·. ·

In 2018, the m~ge1;11ent revised its expectations and now expects 90% of the points to be
redeemed. Dunng this year, the company redeemed 9,000 points. .

a. What ~ount of transaction.price should be allocated to the points?

b. What 1s the revenue earn~d from loyalty points for 2017?
c. What is the revenue earned from loyalty points for 2018?
 15. Gwyneth .Company sells LED TV with a 2-year r~pair warranty. The sales price for each set
is P45,000. The average repair cost per set is P2,400. It is estimated that 20% of all sets sold are
repaired in the first year and 40% in the second year.

In 2017, 300 sets were sold, and the company paid P120,000 for warranty repairs. In 2018, the
company sold 500 units and paid·P450,000 for warranty repairs.

The company uses the accrual approach. Sales and warranty repairs are made evenly throughout
the year.

a. What is the estimated warranty tiability on December 31, 2017?

b. What is the warranty expense in 2018 before adjustment?
c. What is the estimated warranty~ in 2018 before adjustment?
(7 (t>ili ~
After analyzing the estim~ted warranty liability account to ascertain whether actual warranty
costs approximate the estimate

d. What is the adjusted-warranty expense in 2018?

e. What is the estimated warranty liability on December 31, 2018?

16. In 2017, Kim Company began selling POS machines that carried a 2-year warranty against
a
defects. The entity projected the estimated warranty cost as percent of sales : 1st year of
warranty 4%; 2nd year of warranty 10%. In 2017, Sales amounted to PlS,000,000 while actual
. warranty repairs cost P600,000. In 2018, Sales reached P27,000,000 and the company spent
Pl,680,000 on warranty repairs.

The company uses the accrual approach. Sales and warranty repairs are made evenly throughout
the year.

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

b. What is the warranty expense in 2018 before adjustment?
c. What is the estimated warranty expense in 2018 before adjustment?

After analyzing the estimated warranty liability account to ascertain whether actual warranty
costs approximate the estimate

d. ~tis the adjusted warranty expense in 2018?

e. What is the estimated warranty liability on December 31, 2018?

17. In 2017, Mykee Company started selling freezers that carried a 2-year warranty against
defects. The entity projected the estimated warranty cost as a percent of sales : 1st year of
warranty 3%; 2nd year of warranty 9%. In 2017, Sales amounted to P15,000,000 while actual
warranty repairs cost Pl00,000. In 2018, Sales reached P21,000,000 and the company spent
P750,000 on warranty repairs,

The company uses the accrual approach. Sales and warranty repairs are made evenly throughout
the year. After analyzing the estimated warranty liability account to ascertain whether actual
warranty costs approximate the estimate,

a. Give the adjusting journal entry on 12/31/18 (2 points)

b. What is the adjusted balance of the estimated warranty liability on 12/31/18?

18. In March 2017, Mikaela Cpmpany reported the following payroll of the employees : Gross
payroll Pl,500,000; withheld from employees gross pay : income tax P60,000; SSS
contribution Pl2,000 ; Pag-ibig contribution P6,000. Phi I n1 Qlth ·. j ':>,-' 0 ;i
 •

In tbe same month, the employer' s share is the contributions are: SSS Pl8 000 · Philhealth .
P9,000 and Pag-ibig P6,000. ' '

Gi~e the jo~al entry to record remittance of vari~us items ~thheld and employer's share to
vanous agencies the following month (2 points)

19
· During M~h 2_017, Ella Company, a VAT~registered company purchased goods on account
from VAT-registered suppliers for P6,720,000 inclusive of VAT. In the same month, it sold
goods on account for P 16,800,000 inclusive of VAT. / ~ r ·- rzo r

What is the VAT payable on March 31 , 2017?

20. During March 2017, Clairer Company, a VAT-re~tered company purchased goods on
account from VAT-registered suppliers for P8,000~~chlsive of VAT. In the same month, it sold
goods on account for P20,000 000 exclusive of VAT ·
' . i yOo f

What is the VAT payable on March 31, 2017?

21 . Compute the VAT payable under the following

;~oor . ...,~·or
a. During the month, total Sales credited Pl0,000,000; total Purchases debited P4,000,000
b. During the month, total: invoice amount of sales P896,000 ; total invoice amount of purchases
P560,000 CLOT 91# ·

22. The company provided the following information on December 31, 2017
Income before bonus and before tax Pl3,200,000
~us 1~
Income tax rate . 30%

Determine the amount of bonus as a percent of

a. income after tax but before bonus
b. income after bonus and after tax
c. income after bonus but before tax
d. income before bonus and before tax

23. Aura Department Store sells gift certificates redeemable only when merchandise is
purchased. Upon redemption, the entity recognizes the unearned revenue as realized. On January
1, 2017, Gift certificates payable amounted to P780,000. In 2017, gift certificates sold and
redeemed amounted to.P2,700,000 and P2,340,000 respectively. Pl20,000 worth ofGCs are
expected not. to be redeemed. Gross profit rate based on sales is 40%.

What is the unearned revenue on December 31, 2017?

24. Cris Company sells office equipment service contracts agreeing to service equipment for a
two-year period. Cash receipts from contracts are credited to unearned service contract revenue
and service contract costs are charged to service contract expense as incurred. Revenue from
service contracts is recognized as earned over the tenn of the contracts.

On January 1, 2017, unearned service contract revenue has a balance of Pl,800,000. In 2017,
cash receipts from service contracts sold amounted to P2,940,000. Service contract expense
incurred was Pl,560,000 while the company recognized service contract revenue amounting to
P2,580,000.

What is the unearned service c~ntract revenue on December 31 , 201 7?

25. Fort Company sells products with reusable and expensive containers. The customer is,
charged a deposit for each container delivered and receives a refund for each container returned
within two years after the.year of delivery.

On January I, 20 I 7 '. Co~taine~ held by customers amounted t o Q , of which P75,000 .

were from 2015 dehve sP215,000 were from 2016 deli~20~ 7, tamers
delivered amounted to P3 90, 00 Containers returned in 2017 amounted to 13, 0 , of this
amount, P45,000 perta 015 deliveries, P125,000 to 2016 deliveries 43,000 to 2017
deliveries.

What is the liability for deposits on December 3 I, 2017?