THIS

PRACTICE QUIZ IS COMPOSED OF 20 THEORIES AND 38 PROBLEMS.

NORMAL ALLOTED TIME IN ANSWERING IS ONE MINUTE PER THEORY QUESTION
AND THREE MINUTES PER PROBLEM.
THIS SHOULD TAKE YOU APPROXIMATELY TWO AND A HALF HOURS TO FINISH.


THEORIES
1. It is an existing liability of uncertain amount or uncertain timing.
a. Contingent liability
b. Discount on notes payable
c. Unearned income
d. Provision

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

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

4. Liabilities are present obligations that represent
a. both legal and constructive obligations.
b. neither legal nor constructive obligations.
c. legal obligations only.
d. expected value.

5. Which of the following is a current liability?
a. Preferred dividends in arrears
b. Dividend payable in the form of additional share capital
c. Cash dividend payable to preferred shareholders
d. All of these

6. When the word accrued is used in connection with a current liability, it means
a. an expense has been incurred, but is unpaid at the end of the reporting
period.
b. an expense has been incurred for which cash has been paid.
c. the liability will not come due in the subsequent accounting period.
d. the liability being contested and may not be paid.

7. Which of the following sets of conditions would give rise to the accrual of a
contingency?
a. Amount of loss is reasonably estimable and event occurs infrequently.
b. Amount of loss is reasonably estimable and occurrence of event is probable.
c. Event is unusual in nature and occurrence of event is probable.
d. Event is unusual in nature and occurs infrequently.

8. A provision or estimated liability is an obligation that is uncertain as to
Amount Existence
a. Yes Yes
b. Yes No
c. No Yes
d. No No

9. Which of the following loss contingencies is normally accrued?
a. Pending or threatened litigation
b. General or unspecified business risk
c. Obligations related to product warranties
d. Risk of property loss due to fire

10. A contingent liability
a. has a most probable value of zero but may require a payment if given future
event occurs.
b. definitely exists as a liability but its amount or due date is indeterminate.
c. is commonly associated with operating loss carry forwards.
d. is not disclosed in the financial statements.

11. Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with
generally accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions the settlement of which is
expected to result to an outflow of resources embodying economic benefits.

12. Matic Company sells appliances that include a three-year warranty. The
warranties merely provide assurance that the products will function as
intended based on agreed upon specifications and the customers do not have an
option to purchase the warranties separately. Service calls under the warranty
are performed by an independent mechanic under a contract with Matic. Based
on experience, warranty costs are estimated at P300 for each machine sold.
When should Matic Company recognize these warranty costs?
a. Evenly over the life of the warranty
b. When the service calls are performed
c. When payments are made to the mechanic
d. When the machines are sold

13. Which of the following should be recognized?

Contingent assets Contingent liabilities Provisions
a. Recognized Recognized Recognized
b. Recognized Not recognized Not recognized
c. Not recognized Not recognized Recognized
d. Not recognized Recognized Recognized


14. Which of the following circumstances would give rise to the recognition of
provision?
a. The party to whom the obligation is owed must be identifiable and the
amount can be reasonably estimated.
b. The outflow of economic benefits is probable and the amount is reliably
estimable.
c. The outflow of economic benefits is reasonably possible and the amount is
reliably estimable.
d. The event occurs infrequently and the amount of the loss is reliably
estimable.

15. A liability is recognized in the statement of financial position when, and only
when
I. an enterprise has a future obligation (legal or constructive) as a result
of past event.
II. it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
III. a reliable estimate can be made of the amount of the obligation.

a. I, II and III
b. I and II
c. II and III
d. I and III

16. What is the appropriate measurement of a provision where the effect of time
value of money is material? (Example, provision for dismantling a property
item after the asset’s estimated useful life of ten years)

a. Amount of the expenditure expected to be required to settle the
obligation.
b. Present value of the expenditure expected to be required to settle the
obligation.
c. Average of the total expenditure over the useful life of the asset.
d. Nil

17. What is the concept behind recognizing warranty expense in the same period
in which the sales are recorded, which is true when the warranty is merely
based on agreed-upon specifications.

a. Substance over form
b. Prudence
c. Associating cause and effect
d. Immediate recognition

18. If the warranties provide service other than agreed-upon specifications and the
customer has the option to buy the warranty separately,
I. the warranty is accounted for as a distinct service and is considered a
separate performance obligation.
II. the transaction price for the sale of the product is allocated between the
sales price of the product without warranty and the performance
obligation for the warranty.

a. Both I and II are true
b. Both I and II are not true
c. I is true and II is not true
d. I is not true and II is true

19. Which of the following statements is/are true regarding premium claims

I. Under IFRS 15, when entities offer gifts (premiums) in the sale of their
products, the transaction price at the date of sale is recorded partly as
sales of the goods that are sold outright to the customer and partly as
liability for performance obligation that will be settled by the transfer
of premium.
II. The allocation of the transaction price is based on stand-alone selling
prices of the products sold and the premiums expected to be
distributed as a result of such sales.
III. Under IFRS 15, the cost of premiums expected for redemption is
reported as an expense.

a. I, II and III
b. I and II
c. I and II
d. I only

20. Which of the following accounts would NOT go together?
a. Unearned Revenue for Premium Claims and Sales
b. Unearned Revenue from Warranty Contracts and Revenue from
Warranty Contracts
c. Premium Expense and Unearned Revenue for Premium Claims
d. Warranty Expense and Warranty Liability

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

• Last payroll was paid on June 24, 2021 for the two-week period June 24,
2021.
• Overtime pay earned in the two-week period ended June 24, 2021 was
P63,000.
• The recurring biweekly salaries total P720,000.
• In the remaining work days of June, overtime pay earned amounted to
P18,000.

How much should Burgundy Company report as accrued salaries at June 30,
2021?
a. P288,000
b. P297,000
c. P351,000
d. P369,000

2. Apachi Company must determine the December 31, 2021 year-end accruals for
advertising rent expenses. On January 3, 2022, Apachi Company received a
P100,000 advertising bill, comprising of P37,500 for newspaper advertisements
in December 2021 and P62,500 for magazine advertisements that will be
published monthly in the year 2022.

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

In its December 31, 2021 statement of financial income, Apachi Company should
report accrued liabilities of
a. P105,000
b. P142,500
c. P167,500
d. P262,500

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

At December 31, 2021, what amount should Tom Company report as accrued
interest payable?
a. P66,000
b. P60,500
c. P44,000
d. P40,333

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

What amount should Toronto Company report as accrued interest payable in its
December 31, 2021 statement of financial position?
a. P32,000
b. P17,000
c. P15,000
d. P 2,000

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

Customer advances, January 1 P 5,800,000
Advances received with orders 12,000,000
Advances applied to orders shipped 10,700,000
Advances applicable to orders cancelled 2,500,000

How much is the liability for customer advances at the end of the year?
a. P2,000,000
b. P2,500,000
c. P4,600,000
d. P7,100,000

6. During 2021, Mega Publishing, a newly organized magazine publisher, received
payment of P444,000 for the subscriptions of their two high-end magazines that
were being issued monthly (twelve times a year).

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

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

What amount should Mega Publishing report in its December 31, 2021 statement
of financial position as unearned subscriptions revenue?
a. P197,250
b. P129,750
c. P 89,250
d. P 81,750

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

What is the liability for outstanding gift certificates at December 31, 2021?
a. P760,000
b. P720,000
c. P680,000
d. P520,000

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

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

What amount should Dan Company report as unearned service contract revenue
in its December 31, 2021 statement of financial position?
a. P120,000
b. P195,000
c. P275,000
d. P360,000

9. Rye Company sells equipment service contracts that cover a two-year period. The
sales price of each contract is P5,000. Rye Company’s past experience shows that
of the total pesos spent for repairs in service contracts, 40% in incurred evenly
during the first contract year and 60% evenly during the second contract year.
Rye Company sold 1,000 contracts evenly throughout 2020 and 800 contracts
evenly throughout 2021.

In its December 31, 2020 statement of financial position, what amount should Rye
Company report as unearned revenue?
a. P4,000,000
b. P3,000,000
c. P1,500,000
d. P0

10. How much should Rye Company report as contract service revenue for the year
ended December 31, 2021?
a. P4,500,000
b. P3,300,000
c. P2,500,000
d. P 800,000

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

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

2019 2020 2021
Number of service contracts sold 800 1,000 1,200
Service contract expense incurred P50,000 P200,000 P350,000

How much is the unearned service contract revenue at December 31, 2021?
a. P2,130,000
b. P1,930,000
c. P1,200,000
d. P 300,000

12. How much is the service contract revenue for the year ended December 31, 2020?
a. P 210,000
b. P 600,000
c. P 620,000
d. P1,000,000

13. How much is the net revenue from service contracts for the year ended December
31, 2021?
a. P270,000
b. P520,000
c. P620,000
d. P850,000

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

The provision for repairs required on December 31, 2021 is

a. P 40,000
b. P100,000
c. P300,000
d. P500,000

15. Des Moines Company introduced during 2020, a new television model with a two-
year warranty against defects and provides assurance that the product will
function as intended based on agreed upon specifications. Des Moines Company
estimates the warranty costs at 2% of peso sales within 12 months following the
sale and at 4% in the second 12 months following the sale.

Data for 2020 and 2021 follow:

Sales: 2020-P3,000,000; 2021-P5,000,000
Actual warranty expenditures: 2020-P45,000; 2021-P150,000

Des Moines Company should report an estimated warranty liability in its
December 31, 2021 statement of financial position of
a. P285,000
b. P225,000
c. P 85,000
d. P 50,000

16. During 2020, Des Moines Company introduced a new television model. The sales
price per unit of the 40” television, that comes with warranty, is P25,000. The
company offers a two-year warranty against defects and provides service other
than the agreed upon specifications. In addition, the customers are given the
option to purchase the warranty separately. If the customer opted not to buy the
warranty, the television unit is sold for P24,000.

The following sales data are compiled for 2020 and 2021.
2020 2021
Television sold 2,000 1,600
Contracts sold 1,800 1,500

Des Moines Company estimates that of the total pesos spent for repairs in the
warranty contracts, 40% is incurred evenly during the first warranty year and
60% evenly during the second warranty year.

Cost of servicing the units during 2020 and 2021 were P250,000 and P910,000.

How much is the unearned revenue from warranty contracts at December 31,
2020 and December 31, 2021?
a. P1,440,000 and P1,740,000
b. P1,800,000 and P1,500,000
c. P1,080,000 and P1,200,000
d. P360,000 and P1,200,000

17. How much is the company’s revenue from warranty contracts for years 2020 and
2021?
a. P360,000 and P1,200,000
b. P720,000 and P600,000
c. P900,000 and P840,000
d. P540,000 and P450,000

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

In 2020 and 2021, the company was able to sell 7,500 units and 8,400 units,
respectively at a selling price of P5,000 per unit. The company also incurred
actual repair costs of P53,000 and P1,176,000 in 2021 and 2021, respectively.

What amount should Sam Company report as warranty expense in 2020?
a. P7,834,000
b. P5,040,000
c. P4,500,000
d. P3,970,000

19. What is the amount of liability for warranty reported in Sam Company’s
December 31, 2021 statement of financial position?
a. P7,834,000
b. P5,040,000
c. P4,500,000
d. P3,024,000

20. Assuming that sales and repair occur evenly throughout the period, how much
would be the predicted warranty expense covering 2020 and 2021 sales still
under warranty at December 31, 2021?
a. P8,790,000
b. P7,834,000
c. P7,620,000
d. P6,450,000

21. In January 2020, the Super Marketing started a promotional campaign for the sale
of its 25-kilo bag of Harvester Dinorado rice with a sales price of P1,200 per bag.
A coupon is attached to each bag and customers can avail of a kilo of washed sugar
upon presentation of 2 coupons. Each kilo of washed sugar costs P80 and sells
for P100. During the year 2020, 5,000 bags of rice were sold and Super Marketing
estimates at only 60% of the coupons in the hands of consumers will be presented
for redemption. As of the end of the year, 500 kilos of washed sugar were
redeemed.

How much is the unearned revenue from unredeemed premiums at December 31,
2020?
a. P48,780
b. P97,561
c. P146,341
d. P150,000

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

How much is the remaining liability?
a. P160,000
b. P152,000
c. P112,000
d. P 48,000

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

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

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

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

Inventory of “hot and cold” water dispensers 30 units
Estimated premium claims outstanding P17,500
Estimated liability for warranty P80,000

How much is the warranty expense for the year ended December 31, 2021?
a. P290,000
b. P216,000
c. P184,000
d. P112,000

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24. How much is the estimated liability for warranty at December 31, 2021?
a. P290,000
b. P216,000
c. P112,000
d. P 32,000

25. How much is the premium expense for the year ended December 31, 2021?
a. P72,800
b. P60,000
c. P43,300
d. P34,300

26. How much is the estimated premium claims outstanding at December 31, 2021?
a. P72,800
b. P60,000
c. P34,300
d. P27,800

27. How much is the premium inventory (prepaid expense) reported at December 31,
2021?
a. P 35,000
b. P 60,000
c. P120,000
d. P124,800

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

Information relating to coupons issued by Candy Company during 2021 is as
follows:

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

What amount should Candy Company report as a liability for unredeemed
coupons at December 31, 2021?
a. P0
b. P100,000
c. P121,000
d. P154,000

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

Alternative 1: 8% bonus based on profit before bonus and income tax in
excess of P5,000,000.
Alternative 2: 5% bonus based on profit after both bonus and income tax.
Alternative 3: 3% bonus based on profit after bonus but before income tax.
Jones Company’s profit before bonus and income tax for the year ended December
31, 2021 is P8,000,000. Assume an income tax rate of 30%.

How much is the general manager’s bonus for 2021 under Alternative 1?
a. P240,000
b. P320,000
c. P400,000
d. P640,000

30. How much is the general manager’s bonus for 2021 under Alternative 2?
a. P215,835
b. P262,911
c. P270,531
d. P290,155

31. How much is the general manager’s bonus for 2021 under Alternative 3?
a. P247,423
b. P240,000
c. P233,010
d. P184,615

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

How much is the president’s bonus?
a. P129,888
b. P200,000
c. P210,000
d. P220,000

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

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On September 30, 2021, what amount should Jake Realty show as an escrow
liability to Carlo Company?
a. P 15,000
b. P 45,000
c. P 85,000
d. P115,000

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

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

What amount should be reported by Snoopy Company as liability from the legal
case at December 31, 2021?
a. P3,000,000
b. P2,500,000
c. P2,000,000
d. P0

35. On December 17, 2021, an explosion occurred at Action Fireworks plant in
Bulacan causing extensive property damage to area buildings. Although no
claims had yet been asserted against Action Fireworks by March 10, 2022, the
management and counsel concluded that it is reasonably possible that Action
Fireworks will be responsible for damages and that P2,500,000 would be a
reasonable estimate of its liability. Action Fireworks’ P10 million comprehensive
public liability policy has a P500,000 deductible clause.

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

36. Mother, Inc. is being sued for illness caused to local residents as a result of
negligence on the company’s part in permitting the local residents to be exposed
to highly toxic chemicals from its plant. Mother, Inc.’s lawyer states that it is
probable that Mother, Inc. will lose the suit and be found liable for a judgment

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costing Mother, Inc. anywhere from P400,000 to P2,000,000. However, the

lawyer states that the most probable cost is P1,200,000.

As a result of the given facts, Mother, Inc. should accrue
a. a loss contingency of P400,000 and disclose an additional contingency of up
to P1,600,000.
b. a loss contingency of P1,200,000 and disclose an additional contingency of
up to P800,000.
c. a loss contingency of P1,200,000 but not disclose any additional
contingency.
d. no loss contingency but disclose a contingency of P400,000 to P2,000,000.

37. On November 1, 2021, Corn Company was awarded judgment of P3 million in
connection with a lawsuit. The decision is being appealed by the defendant, and
it is expected that the appeal process will be completed by the end of 2022. Corn
Company’s attorneys feel that it is highly probable than an award will be upheld
on appeal, but the judgment may be reduced by an estimated 40%.


In addition to a footnote, what amount should be reported as a receivable in Corn
Company’s statement of financial position?
a. P3,000,000
b. P1,800,000
c. P1,200,000
d. P0

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

How much should Hay Company report as pretax gain in its 2021 financial
statements?
a. P 45,000
b. P135,000
c. P150,000
d. P285,000

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