Quiz 1: CURRENT LIABILITIES

Part 1:
1. An analysis of Octagon Company’s liabilities disclosed the following:
a. Claims for increase in wages and allowances by 520,000
Employees of the entity, covered in a pending lawsuit
b. Accounts payable, after deducting debit balances 5,200,000
In suppliers’ accounts amounting to P130,000
c. Accrued expenses 1,950,000
d. Credit balances of customer’s accounts 650,000
e. Estimated expenses in redeeming prize coupons 780,000
Presented by customers
f. Share dividend 1,300,000
What total amount should be presented as current liabilities in the statement of financial position?

2. The trial balance of Boone Company included the following account balances on Dec. 31, 20x1:
a. Cash dividend payable 832,000
b. Account payable 1,560,000
c. Notes payable, due 20x3 2,080,000
d. Bonds payable, due 20x2 2,600,000
e. Discount on bonds payable 312,000
What total amount should be presented as current liabilities in the statement of financial position?

3. After three profitable years, Julia company decided to offer a bonus to its branch manager of 25% of income over
P1,500,000 earned by the branch during the current year. The income for the branch was P2,400,000 before tax and
before bonus for the current year. The bonus is computed on income in excess of P1,500,000 after deducting the bonus
but before deducting tax.
What is the bonus for the current year?

4. Daisy Company reported the following on December 31, 20x1:

a. Accounts payable 960.000
b. Advances to employees 43,200
c. Bonds payable 4,800,000
d. Customer advances 72,000
e. Estimated liability under warranties 240,000
f. Trademark 48,000
g. Unearned rent revenue 288,000
What total amount should be presented as total liabilities in the statement of financial position?

5. Rosa company has an incentive compensation plan under which the president is to receive a bonus equal to 10% of
income after deducting income tax and after deducting the bonus. The income before income tax and the bonus is
P6,398,600. Assume tax rate is 30%
What is the bonus for the current year?

6. On July 1, Hydie Company purchased a P95,000 of inventory items on credit with the terms 1/15 net 30, FOB
destination, freight charges were P2,000, freight prepaid. Payment for the purchase was made on July 18.
Assuming Hydie uses the perpetual inventory system and the net method of accounting for purchase discounts,
what amount is recorded as accounts payable from this purchase on July 1?

7. Jean Company has an incentive compensation plan under which the president is to receive a bonus equal to 25% of
income in excess of P1,500,000 before deducting income tax but after deducting the bonus. The income before income
tax and the bonus is 4,800,000. Assume a tax rate of 30%.
What is the bonus for the current year?
8. Multitrade Company operates a retail store and must determine the proper December 31, 20x1 year end accrual for the
following expenses:
● The store lease calls for fixed rent of 20,000 per month payable at the beginning of the month.
● Additional rent equal to 5% of net sales over 3 million per year payable on January 31 at the following year. Net
sales for 2020 amounted to P9 million.
On December 31, 20x1 what amount should be reported as accrued liabilities?

9. Keebler Company sells gift certificates redeemable only when merchandise is purchased. These gift certificates have
no expiration date. Upon redemption, Keebler Company recognizes the unearned revenue as realized. Information for the
current year is as follows:
a. Unearned revenue, Jan 1 975,000
b. Gift Certificates sold 3,375,000
c. Gift certificates redeemed 2,925,000
d. Cost of Goods Sold 40%
At the end of the current year, what amount should be reported as unearned revenue?

10. Rolly company sells equipment service contracts that cover two-year periods. The entity sold 2,000 contracts evenly
throughout 20x1 and the sales price of each contract is P1,200.
Past experience indicates that, of the total pesos spent for repairs and service contracts, 40% is incurred evenly during
the first contract year (20x1-20x2) and 60% evenly during the second contract year (20x2-20x3).
(Hint: “incurred evenly” means one-half of the contract is earned in the current year and one-half in the next year)
What amount should be reported as deferred service revenue on December 31 20x1?

11. Polly's Company had P3,000,000 note payable due on June 30, 20x2. Under the existing loan facility, the entity had
discretion to refinance the loan or roll over the notes payable for at least twelve months after the end of the reporting
period.
On December 31, 20x1, what amount of the notes payable should be reported as current liability?

12. The trial balance of Patter Company reflected the following liability account balances on December 31, 2020:
a. Notes payable, due January 31, 2021 1,200,000
b. Income tax payable 1,800,000
c. Dividends payable 1,000,000
d. Discount on bonds payable 400,000
e. Deferred tax liability 800,000
f. Bonds payable, due on December 31, 2022 6,800,000
g. Accounts payable 3,800,000
What total amount should be presented as current liabilities in the statement of financial position?

13. In November and December 20x1, Rainbow company, a newly organized magazine publisher, received the amount of
P720,000 for the 1,000 three-year subscriptions at P240 per year, starting with the January 20x2 issue.
Rainbow Company elected to include the entire P720,000 in its 20x1 income tax return. What amount should
Rainbow Company report as liability for the year 20x1?

14. Rolly company sells equipment service contracts that cover two-year periods. The entity sold 2,000 contracts evenly
throughout 20x1 and the sales price of each contract is P1,200.
Past experience indicates that, of the total pesos spent for repairs and service contracts, 40% is incurred evenly during
the first contract year (20x1-20x2) and 60% evenly during the second contract year (20x2-20x3).
(Hint: “incurred evenly” means one-half of the contract is earned in the current year and one-half in the next year)
What amount should be recognized as contract revenue for 20x1?
15. Cain Company has P3,300,000 note payable due on April 30, 20x2.
On December 31, 20x1, the entity signed an agreement to borrow up to P3,300,000 to refinance the note payable on a
long term basis. The refinancing agreement called for borrowing not to exceed 80% of the value of the collateral the entity
was providing. At the time the agreement was signed, the value of the collateral was P2,500,000.
On December 31, 20x1, what amount of the note payable should be reported as current liability?

Part 2:
1. Some liabilities, such as trade payables, accruals for employees and other operating costs, are expected to be
settled in more than twelve months after the reporting period.
How will an entity classify these items in the statement of financial position?
a. First classify as noncurrent since the term is more than twelve months, then reclassify to current if the term is less
than twelve months.
b. Noncurrent
c. It will depend on the entity’s policy
d. Current
2. Which of the following is a noncurrent liability?
a. Estimated warranty liability
b. Unearned interest income related to non interest bearing long term notes receivable
c. One-year magazine subscription received in advance.
d. Income tax payable.
3. Which of the following represents a liability?
a. The obligation to pay for goods that an entity expects to order from suppliers next year
b. The obligation to distribute an entity’s own shares next year as a result of a stock dividend declared near the end
of the current year.
c. The obligation to pay interest on a five-year note payable that was issued the last day of the current year.
d. The obligation to provide goods that customers have ordered and paid for during the current year.
4. Which of the following does NOT meet the definition of a liability?
a. An obligation that is estimated in amount
b. A note payable with no specified maturity date
c. An obligation to provide goods or services in the future
d. Signing of a three-year employment contract with a fixed annual salary.
5. For a liability to exist
a. A past transaction or event must have accrued
b. The exact amount must be known
c. An obligation to pay cash in the future must exist
d. The identity of the party owed must be known
6. Which of the following shall be classified as noncurrent liability?
a. Bond payable issued with the intention to repurchase in the near term.
b. Dividend payable due in two years after reporting period
c. Trade note payable
d. Long-term loan arrangement wherein an entity breaches a provision such that the loan becomes payable on
demand. After the reporting period and before authorization of the financial statements for issue, the lender has
agreed not to demand payment.
7. Which of the following shall be classified as noncurrent liability?
a. Trade and other payables
b. Deferred tax liabilities
c. Provisions
d. Financial liabilities for trading
8. All of the following would require the classification of liability as current, except
a. The liability is due to be settled within twelve months after the reporting period
b. The entity has an unconditional right to defer settlement of the liability for at least twelve months after the
reporting period.
c. The entity expects to settle the liability within the entity’s operating cycle
 d. The entity holds the liability for the purpose of trading.

9. Which of the following is not a liability?

a. Deposit received from customer
b. Unearned revenue
c. Zero-interest bearing note payable
d. Share dividend payable
10. A long term debt which is due to be settled within twelve months after the reporting period is classified as
noncurrent when
a. An agreement to refinance or to reschedule payments on long-term basis is completed on or before the reporting
period and before the financial statements are authorized for issue
b. The entity has the discretion to refinance or roll over the obligation for at least twelve months after the reporting
period under an existing loan facility
c. Neither A nor B
d. Both A and B
11. Which of the following is not an acceptable presentation of current liabilities?
a. Listing current liabilities in the order of maturity
b. Showing current liabilities in the order of liquidation preference
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Listing current liabilities according to amount.
12. Among the short-term obligations as of the year-end are notes payable with a certain bank. These are 90 day
notes, renewable for another 90-day period. These notes should be classified as
a. Intermediate debt
b. Noncurrent liabilities
c. Current liabilities
d. Deferred credits
13. Which obligations are classified as current even if they are expected to be settled after more than twelve
months from the end of the reporting period?
a. Bank overdraft
b. Trade payables and accruals for employees and other operating cost
c. Dividends payable
d. Income tax payable
14. Which of the following circumstances may result in the classification of a liability as current?
a. Debts to be liquidated from funds that have been accumulated and are reported as noncurrent assets
b. Violation of provisions of a debt agreement
c. Obligations for advance collections that involved long-term deferment of the delivery of goods or services
d. Short-term obligations refinanced with long-term debt at the end of reporting period
15. A department store received cash and issued a gift certificate that is redeemable in merchandise. When the
gift certificate was issued
a. Revenue account should be increased
b. Revenue account should be decreased
c. Deferred revenue account should be decreased
d. Deferred revenue account should be increased
Quiz 2: PROVISIONS
Part 2:
1. What amount is recognized as provision?
a. Midpoint of the range
b. Minimum of the range
c. Best estimate of the expenditure
d. Maximum of the range
2. The cost of customers premium offer should be charged to expense
a. When the premium offer expires
b. When the premium is claimed
c. Over the life cycle of the product to which the premium relates.
d. When the related product is sold
3. Which of the following statement is correct
1) The cause for litigation must have occurred on or before the date of financial statements to report a liability in the
financial statements.
2) A provision differs from other liabilities in that there is greater uncertainty about the timing and amount of
settlement.

4. The accounting concept that requires recognition of a liability for customer premium offer is _________

5. Which of the following statements is true in relation to recognition of provision?

I. No provision is recognized for costs that need to be incurred to operate in the future.
II. A provision for the decommissioning of an oil installation or a nuclear plant station shall be recognized to the
extent that an entity is obliged to rectify damage already caused.
6. An item that is not contingent liability is
a. Accommodation endorsement on customer note
b. Premium offer to customers for labels or box tops
c. Additional compensation that may be payable on dispute now being arbitrated
d. Pending Lawsuit

7. What cognition is necessary to recognize an environmental liability?

8. Which of the following best describes the accrual approach of accounting for warranty cost?
a. Expensed when paid
b. Expensed when warranty claims are certain
c. Expensed based on estimate in the year of sale
d. Expensed when incurred
9. Which of the following best describes the expense as an incurred approach of accounting for warranty cost.
a. Expense when warranty claims are certain
b. Expense when liability is incurred
c. Expensed based on estimate in the year of sale
d. Expensed when incurred
10. A provision for restructuring is required when
I. The entity has a detailed formal plan for the restructuring.
II. The entity has raised valid expectation in the minds of those affected that the entity will carry out the restructuring
by announcing its main features to those affected by it
11. An entity sells appliances that include a two year warranty. Service calls under the warranty are performed by
an independent mechanic under contract with the entity. Based on experience , warranty costs are estimated at a
certain amount for each appliance sold. When should the entity recognize these warranty costs?
a. When payments are made to mechanics
b. Evenly over the life of the warranty
c. When the service calls are performed
d. When the appliances are sold
12. Information available prior to the issuance of the financial statements indicates that it is probable that, at the
date of the financial statements, a company has a present obligation related to product warranties. The amount of
the expense involved can be reasonably estimated. Based on the above facts, the estimated warranty expense
should be ________

13. Which of the following should be disclosed in the financial statements as contingent liability?
a. The entity has not yet paid certain claims under sales warranties
b. The entity has accepted liability prior to the year-end for unfair dismissal of an employee and is to pay damages.
c. The entity has received a letter from a supplier complaining about an old unpaid invoice
d. The entity is involved in a legal case which it may possibly lose, although this is not probable.
14. When the provision arises from a single obligation, the estimate of the amount
a. Reflects the weighting of all possible outcomes by their associated probabilities.
b. May be the individual most likely outcome adjusted for the effect of other possible outcomes
c. Midpoint of the possible outcomes
d. Is determined as the individual most likely outcomes
15. It is a contract in which the unavoidable costs of meeting the obligation under the contract exceed the
economic benefits to be received under the contract.
a. Onerous contract
b. Sale contract
c. Executed contract
d. Executory contract
16. The award credits granted to customers under customers loyalty program is often described as
a. Points
b. Awards
c. Credits
d. Royalty
17. Disclosure usually is not required for
a. Contingent losses that are reasonably possible and cannot be reasonably estimated.
b. Contingent losses that are probable and cannot be reasonably estimated.
c. Contingent gains that are probable and can be reasonably estimated.
d. Contingent losses that are remote and can be reasonably estimated.
18. A contingent liability
a. Definitely exists as a liability but its amount or due date is indeterminate.
b. Is the result of a loss contingent
c. Is not recognized in the financial statements.
d. Is accrued even though not reasonably estimated
19. It is a marketing scheme whereby an entity grants award credits to customers and the entity can redeem the
award credits in exchange for free or discounted goods and services.
a. Premium plan
b. Loyalty award
c. Marketing program
d. Customers loyalty program
20. Which statement is correct regarding decommissioning liability?
I. Decommissioning liability is an obligation to dismantle remove and restore an item of property plant and
equipment as required by law and contract
II. The decommissioning liability is initially recognized at face value
Part 2:
1. Charlie Company sells a product under a two year warranty. The estimated cost of warranty repairs is 3% of net sales.
During the first two years in business, the entity made the following sales and incurred the following warranty repair costs:
20x1 20x2

Sales 2,000,000 2,000,000

Repair cost incurred 40,000 36,000

What amount should be reported as warranty expense for 20x2?

2. During 20x2, Lukas Company introduced a new product carrying a two-year warranty against defects. The estimated
warranty costs related to peso sales are 2% within 12 months following sale and 4% in the second months following sale.
Sales are P4,000,000 for 20x2 and P6,000,000 for 20x3
Actual warranty expenditures are P60,000 for 20x2 and 200,000 for 20x3
On December 31, 20x3, what is the estimated warranty liability assuming the entity is using the expense as
incurred approach?

3. Karen Company frequently distributes coupons to promote new products. On October 1, 20x2, the entity mailed
100,000 coupons for P25 off each box of cereal purchased and expected 12% of these coupons to be redeemed before
the December 31,20x2 expiration date. It takes 30 days from the redemption date for the entity to receive the coupon from
the retailers.
The entity reimburses the retailers an additional P5 for each coupon redeemed. On December 31, 20x2, the entity had
paid retailers P250,000 related to these coupons and had 5,000 coupons on hand that had not been processed for
payment.
What amount should be reported as liability for coupons on December 31, 20x2?

4. In 2020 Fairly Company started selling new computers that carried a 2-year warranty against defects. Based on the
manufacturer recommendations, Fairly Company projects estimated warranty costs as 3% during the first year of warranty
and 9% during the second year of warranty.
20x1 20x2

Sales 5,000,000 7,000,000

Repair cost incurred 100,000 250,000

To ascertain if actual repairs approximate the estimate, an analysis of the estimated warranty liability accounts was
conducted on December 31, 20x2 and it was determined that the estimated warranty liability should have a balance of
P800,000.
What amount should be reported as estimated warranty liability as of December 31,20x2?

5. On January 1, 20x1, Perry Company purchased a gas detoxification facility for P4,000,000. The cost of cleaning up the
routine contamination caused by the initial location of gas on the property is estimated to be P600,000. The cost will be
incurred in 5 years when all of the existing stockpile of gas is detoxified and the facility is decommissioned.
The appropriate discount rate is 4%. The present value of ordinary annuity of 1 at 4% for 5 periods is 4.45 and the present
value of 1 at 4% for 5 periods is 0.82.
How much is the reported decommissioning liability as of December 31, 20x1?
6. During 20x1, Carol Company sold 600,000 boxes of cake mix under a sales promotional program. Each box contains
one coupon, which entitles the customer to a baking pan upon remittance of P15. Carol Company pays P20 per pan and
P5 for handling and shipping.
Carol Company estimates that 70% of the coupons will be redeemed, even though only 150,000 coupons had been
processed during 20x1.
What amount should Carol Company report as liability for unredeemed coupons on December 31, 20x1?

7. On December 31, 20x1, Micah Company was a defendant in a pending lawsuit, In the opinion of the entity’s attorney, it
is probable that Micah Company will have to pay P600,000 ad it is reasonably possible that Micah Company will have to
pay P800,000 as a result of this lawsuit. What should be reported in the 20x1 financial statements?
a. An accrued liability of P800,000 only
b. No information about this lawsuit
c. An accrued liability of P600,000 and disclosure of a contingent liability of a P200,000
d. An accrued liability of P600,000 only

8. James Company acquired a tract of land containing an extractable natural resource million. During the year, the entity
incurred exploration and development costs amounting to P1,000,000. Geological survey indicated that the recoverable
reserves will be 1,500,000 tons and that the extraction will be completed in five years. The entity is required by the
purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource.
The expected cash flow for restoration cost was P800,000. Based on 12% implied Market rate, the present value of
ordinary annuity of 1 of 5 periods at 10% 0.57.
How much is the initial recognition of decommissioning liability upon acquisition of property?

9. On November 1 20x2, Austen Company was awarded a judgment of P2,000,000 in connection with the lawsuit. The
decision is being appealed by the defendant and it is expected that the appeal process will be completed by the end of
20x3. The attorney believed that it is highly probable that an award will be upheld on appeal but that the judgment may be
reduced by an estimated 20%.
What amount should be reported as a receivable on December 31, 20x2?
a. 0
b. 1,600,000
c. 2,000,000
d. 400,000

10. During 20x1, Carol Company sold 6,000,000 boxes of cake mix under a new sales promotional program. Each box
contains one coupon, which entitles the customer to a baking pan upon remittance of P15. Carol Company pays P20 per
pan and P5 for handling and shipping.
Carol Company estimates that 70% of the coupons will be redeemed, even though only 150,000 coupons had been
processed during 20x1.
What amount should Carol Company report as premium expense on December 31, 20x1?

11. Chan Company sells electrical goods covered by a one-year warranty for any defects of any sales of P90,000,000 for
the year, the entity estimates that 3% will have major defects, 6% will have minor defects and 91% will have no defects.
The cost of repairs would be P6,000,000 if all the products sold had major defects and P4,000,000 if all had minor
defects.
What amount should Chan Company recognize as a warranty provision?

12. At the beginning of the current year, Norah Company began marketing a new product. To help promote the product,
the management is offering a special mug to each customer for every 20 specially marked bottle caps. The entity
estimated that out of the 800,000 bottles sold during the year, only 50% of the marked bottle caps would be redeemed.
During the year, the entity purchased 18,000 mugs for customers.
What is the estimated premium liability at year end?
13. In packages of its products, Katy Company includes coupons that may be presented to stores to obtain discounts.
Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling cost.
Katy Company honors requests for coupon redemption by retailers, up to three months after the consumer expiration
date, on December 31,20x3. Katy Company estimates that 40% of all coupons issued will ultimately be redeemed.
During the year, Katy issued a total of 125,000, P10.00 coupons and made a total payments to the retailers amounting to
P260,000
What amount should Katy Company report as liability for unredeemed coupons on December 31, 20x3?

14. Noelle Company purchased an oil rig for P7,000,000 on January 1,20x1. The life of the rig is 10 years and the
expected cost to dismantle the rig at the end of 10 years is P1,400,000. The appropriate discount rate for the entity is
10%. The discounted value of the dismantling cost at 10% is P539,000. What should be recorded in the current year
as a result of these events.
a. Depreciation expense of P700,000 and interest expense of P140,000
b. Depreciation expense of P840,000
c. Depreciation expense of P700,000 and interest expense of P53,900
d. Depreciation expense of P753,900 and interest expense of P53,900

15. Zoe Company is preparing the annual financial statements on December 3, 20x1. Because of a recently proven health
hazard in one of the products, the Philippine government has clearly indicated its intention of requiring the entity to recall
all cans of these products sold in the last three months. The management of the entity estimated that this recall would
cost P580,000. What accounting recognition should be accorded this situation?
a. no recognition
b. expense of P580,000 and liability of 580,000
c. note disclosure only
d. not be accrued and not be disclosed expense of 580,000 and retained earnings restriction of 580,000

16. During 20x2 Albay Company is the defendant in a breach of patent lawsuit. The lawyers believe there is a 20%
chance that the court will dismiss the case and the entity will incur no outflow benefits. However, if the court rules in favor
of the claimant, the lawyers believe that there is a 60% chance that the entity will be required to pay damages of
P3,000,000 and a 40% chance that the entity will be required to pay damages of P1,500,000. Other amounts of damages
are unlikely. The court expected to rule within three months. There is no indication that the claimant will settle out of court.
An 8% risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow
estimates. The appropriate discount rate is 12%. The present value of one at 12% for one period is 0.89.
What is the amount of undiscounted cash flows for provision?

17. In 20x1, Fragile Company purchased property with natural resources for P25,000,000. The property had a residual
value of P4,400,000 and a useful life of five years. At the end of five years, the entity is required to restore the property to
its original condition at an estimated amount of P2,600,000, discounted at P1,700,000
How much is the initial recognition of decommissioning liability upon acquisition of property?

18. Peter Company offers its customers a pottery cereal bowl if they send three box-tops from its products and P5. The
cost of each bowl is P20. The entity estimated that 60% of the box-tops will be redeemed. In 20x1, the entity sold 500,000
boxes and customers redeemed 240,000 box-tops.
What is the entry to record the redemption of premium?
19. In 20x2, Joshua Company started selling a new calculator that carried a 2-years warranty against defects. Joshua
Company projected estimated warranty cost related to —--- sales are 4% within 12 months following sale and 10% in the
second 12 months following scale..
Sales are P6,000,000 for 20x2 and P10,000,000 for 20x3
Actual warranty expenditures are P300,000 for 20x2 and P600,000 for 20x3
To ascertain if actual repairs approximate the estimate, an analysis of the estimated warranty liability account was
conducted on December 31,20x3 and it was determined that the estimated warranty liability should have a balance of
P1,200,000.
What amount should be reported as warranty expense as of December 31, 20x3?

20. During 20x2 Albay Company is the defendant in a breach of patent lawsuit. The lawyers believe there is a 20%
chance that the court will dismiss the case and the entity will incur no outflow benefits. However, if the court rules in favor
of the claimant, the lawyers believe that there is a 60% chance that the entity will be required to pay damages of
P3,000,000 and a 40% chance that the entity will be required to pay damages of P1,500,000. Other amounts of damages
are unlikely. The court expected to rule within three months. There is no indication that the claimant will settle out of court.
An 8% risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow
estimates. The appropriate discount rate is 12%. The present value of one at 12% for one period is 0.89.
What is the amount of measurement off the provision on December 31, 20x2?

21. During 20x1, Rea Company became involved in a tax dispute with the BIR. On December 31, 20x1, the tax advisor
believed that an unfavorable outcome was probable and a reasonable estimate of additional taxes was P800,000. After
the 20x1 financial statements were issued , the entity received and accepted a BIR settlement offer of P850,000. What
amount of accrued liability should have been reported on December 31, 20x1?

22. On January 1, 20x1, Perry Company purchased a gas detoxification facility for P4,000,000. The cost of cleaning up
the routine contamination caused by the initial location of gas on the property is estimated to be P600,000. The cost will
be incurred in 5 years when all of the existing stockpile of gas is detoxified and the facility is decommissioned.
The appropriate discount rate is 4%. The present value of ordinary annuity of 1 at 4% for 5 periods is 4.45 and the present
value of 1 at 4% for 5 periods is 0.82.
On December 31, 20x5, the entity paid a contractor an amount of P800,000 for the decommissioning of the detoxification
facility.
How much is the gain or loss from settlement of decommissioning liability on December 31, 20x5?

23. Alicia Company sells washing machines that carry a three- year warranty against manufacturer’s defects. Based on
entity experience, warranty costs are estimated at P400 per machine.
During 20x2, the entity sold 5,000 washing machines and pain warranty costs of P800,000
What amount should be reported as estimated warranty liability as of December 31, 20x2?

24. A new product introduced by David Company carries a 2- year warranty against defects. The estimated warranty cost
related to sales is 4% in the year and 8% in the year after sale.
Sales are P6,000,000 for 20x1 and P7,500,000 for 20x2. Actual warranty expenditures are P200,000 for 20x1 and
P550,000 for 20x2.
What amount should be reported as estimated warranty liability on December 3, 20x2?

25. Daniel Company manufactures stereo systems that carry two-year warranty against defects. Based on past
experience, warranty costs are estimated at 3% of sales for the warranty period.
During 20x1, stereo system sales amounted to P8,000,000 and warranty costs of P160,000 were incurred.
What amount should be reported as warranty expense for 20x1?
26. Peter Company offers its customers a pottery cereal bowl if they send three box-tops from its products and P5. The
cost of each bowl is P20.
The entity estimated that 60% of the box-tops will be redeemed.
In 20x1, the entity sold 500,000 boxes and customers redeemed 240,000 box-tops
What is the entry to record the accrual of expense and initial recognition of estimated premium liability?

27. Jack Company estimated its annual warranty expense at 2% of annual net sales. The net sales For 20x2 amounted to
P4,000,000 and the warranty payments totaled P100,000.
On December 31, 20x2, what should be reported as warranty expense assuming the entity is using the expense
as incurred approach?

28. Swan Company owns a car dealership —------ for servicing cars under warranty. In preparing its financial statements,
the entity needs to ascertain the provision for warranty that it would be required to provide at the end of the year.
The entity’s experience with warranty claims is as follow:
60% of all cars sold in a year have zero defects
30% of all cars sold in a year have normal defect, with a repair cost P20,000 per car
10% of all cars sold in a year have significant defects, with a repair cost of P40,000 per car
The entity sold 1,000 cars during the year.
What is the amount of measurement of the warranty provision for the current year?
Quiz 3:NOTES PAYABLE
1. On July 1, 20x1 Magnolia Company issued for P1,241,800, a P1,400,000 face amount note to a wealthy shareholder.
The note was dated July 1, 20x1 and mature on July 1, 20x2.
No explicit interest rate is stated in the note and in the entire face amount of the note is payable at maturity date.
What is the carrying amount of the note that should be reported as of December 31, 20x1?

2. On September 1, 20x0 an entity borrowed cash and signed a one-year interest-bearing note on which both the principal
and interest are payable on September 1,20x1. How will the note payable and accrued interest be classified in the
December 31, 20x0 statement of financial position?
a. Both note payable and accrued interest are current liability
b. Note payable is non-current liability and accrued interest is current liability
c. Note payable is current liability and accrued interest is non current liability
d. Both note payable and accrued interest are non-current liability

3. On January 1, 20x1, Churros Company lent P2,136,000 cash to Burritos Company.

The promissory note made by Burritos for P2,400,000 did not bear explicit interest and was duo on December 31, 20x2.
The prevailing interest rate for a loan of this type was 6%.
What is the amount of discount on note payable to be reported as of December 31, 20x1? ______

4. Which statement is correct?

a. The discount on note payable is a contra liability account which is shown as a deduction from note payable.
b. The discount on note payable represents interest charges applicable to future periods.
c. Both statement are correct
d. Both statement are incorrect

5. After initial recognition, An entity shall measure a note payable at ________

6. On October 1, 20x0, Lyra Company borrowed P4,000,000 on a 12% five-year interest-bearing note.
On December 31, 20x0, the fair value of the note is determined to be P3,900,000 Lyra elects the fair value option
What amount of the interest should be reported at year-ended 20x0?

7. On September 1, 20x0, Alberts Company issued a note payable in the amount of P2,340,000, bearing interest at 12% ,
and payable in three equal annual principal payments of P780,000. On this date, the prime rate was 11%. The first
interest and principal payment was made on September 1, 20x1.
On December 31, 2021, what amount should be reported as interest expense?

8. On October 1, 20x0, Orales Company borrowed P1,200,000 on a 8% note payable. The entity paid the first of four
quarterly payments of P315,000 when due on January 1, 20x1
On December 31, 20x0 what amount should be reported as the carrying amount of the note payable?

9. Which statement is correct?

a. After initial recognition, a note payable shall be measured at amortized using simple interest method
b. Under fair value option of measurement, the transaction cost is recognized as outright expense
c. Both statement are correct
d. Both statement are incorrect

10. On October 1, 20x0, Lyra Company borrowed P4,000,000 on a 12% five-year interest-bearing note.
On December 31, 20x0, the fair value of the note was determined to be P3,900,000. Lyra elects the fair value option.
What is the carrying amount of the note payable on December 31, 20x0?
11. At the beginning of current year, Buzz Company borrowed P5,000,000 from a major customer evidenced by a non
interest bearing note due in three years
The entity agreed to supply the customer’s inventory needs for the loan period at an amount lower than market price. At
the 12% imputed interest rate for this type of loan, the present value of the note is P3,550,000 at the date of issuance.
What carrying amount of the note should be reported for the current year?

12. The discount resulting from the determination of the present value of a note payable should reported in the
statement of financial position as
a. Deferred credit separate from the note.
b. Direct deduction from the face amount of the note.
c. Addition to the face amount of the note.
d. Deferred charge separate from the note.

13. Bobby Company has a note payable to the bank in the amount of P3,360,000 and bears a 8% interest. The note is
dated May 1,20x0 and is payable in four equal annual installments beginning May 1, 20x1. The first principal and interest
payment was made on May 1, 20x1.
What are the total current liabilities that should be reported as of December 31, 20x1?

14. On January 1, 20x1, Frankie Company purchased equipment. There was no established market price for the
equipment which has an 8 year life and no residual value.
The entity gave a P4,200,000 non-interest bearing note payable in three equal annual installments of P1,400,000 with the
first payment due to December 31, 20x1. The prevailing rate of interest for this type is 8%.
The present value of 1 at 8% for eight periods is 0.54. The present value of ordinary annuity of 1 at 8% for eight periods is
5.75.
The present value of 1 at 8% for three periods is 0.79. The present value of ordinary annuity of 1 at 8% for three periods is
2.58.
What amount should be reported as interest expense for 20x1?

15. Penguin 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. Penguin Company repaid each loan on its scheduled
maturity date:
Date Amount Maturity Date Term

11/1/x0 800,000 10/31/x1 1 year

2/1/x1 2,400,000 7/31/x1 6 months

5/1/x1 1,280,000 1/31/x2 9 months

The entity recorded interest expense when the loans are repaid. As a result, interest expense of P240,000 was recorded
in 20x1
If no correction is made, by what amount would interest expense for 20x1 be understated?

16. On January 1, 20x1, Churros Company lent P2,136,000 cash to Burritos Company.
The promissory note made by Burritos for P2,400,000 did not bear explicit interest and was due on December 31, 20x2.
The prevailing interest rate for a loan of this type was 6%.
What is the carrying amount of the note payable that should be by Burritos as of December 31, 20x1?

17. On October 1, 20x0, Lyra Company borrowed P4,000,000 on a 12% five-year interest-bearing note.
On December 31, 20x0, the fair value of the note is determined to be P3,900,000 Lyra elects the fair value option
What amount should be reported as gain or less from change in fair value of the note payable for 20x0?
18. On February 28, 20x0, Lyn Company borrowed P1,400,000 and signed a 2-year note bearing interest at 12% per
annum compounded annually. Interest is payable in full at maturity on March 1, 20x2.
What amount should Belle Company report as interest expense on December 31, 20x1?

19. On September 1, 20x0, an entity borrowed cash and signed a two-year interest-bearing note on which both the
principal and interest are payable on September 1, 20x1. How many months of accrued interest would be included in
the liability for accrued interest on December 31, 20x0 and December 31, 20x1?

20. On January 1, 20x1, Danny Company sold land to Marcel Company. There was no established market price for land.
Marcel gave Danny a P3,600,000 non-interest-bearing note payable in three equal annual installments of 1,200,000 with
the first payment due December 31, 20x1. The note has no ready market. The prevailing rate of interest for the note of
this type is 10%.
The present value of 1 at 10% for three periods is 0.751.
The present value of ordinary annuity of 1 at 10% for three periods is 2.487.
What is the carrying amount of the note payable that should be reported by Marcel as of December 31, 20x1?

21. If the present value of note issued in exchange for property is less than its face amount, the difference should
be?
a. Included in interest expense in the year of issuance
b. Amortized as interest expense over the life of the asset
c. Included in the cost of the asset
d. Amortized as interest expense over the life of the note

22. Included in Shirelles Corporation’s liability account balances on December 31, 20x0 was a note payable in the amount
of P2,400,000. The note is dated October 1, 20x0, bears interest at 12% and is payable in four equal annual payments.
The first interest and principal payment was made on October 1, 20x1
On December 31, 20x1, What amount should be reported accrued interest payable?

23. Which statement is correct under the fair value option?

a. Both statement is incorrect
b. The change in fair attributable to credit risk is recognized in other comprehensive income
c. The decrease in fair value of the liability is recognized in profit or loss as loss from the change in fair value
d. Both statements are correct

24. Which of the following statements concerning discount on note payable is incorrect?

25. An entity issued a note solely in exchange for cash, Assuming that the items listed below differ in amount the
present value of the note a issuance is equal to
A. Proceeds received
B. Proceeds received discounted at the prevailing interest rate
a. A only
b. B only
c. Both A and B
d. Neither A or B

26. Which statement is correct when an entity issued a note payable with no stated interest rate in exchange for a
depreciable asset?
a. Both the note and the asset are recorded at the face amount of the note payable
b. If fair value is unavailable, the note payable should be recorded at present value discounted at the market rate of
interest.
c. Both statements are correct
d. Both statements are incorrect
27. On January 1, 20x1, Frankie Company purchased equipment. There was no established market price for the
equipment which has an 8 year life and no residual value.
The entity gave a P4,200,000 non-interest bearing note payable in three equal annual installments of P1,400,000 with the
first payment due to December 31, 20x1. The prevailing rate of interest for this type is 8%.
The present value of 1 at 8% for eight periods is 0.54. The present value of ordinary annuity of 1 at 8% for eight periods is
5.75.
The present value of 1 at 8% for three periods is 0.79. The present value of ordinary annuity of 1 at 8% for three periods is
2.58.
What is the carrying amount of the note payable as December 31, 20x1?

28. Which statement is correct?

a. note payable is initially measured at fair value minus transaction costs that are directly attributable to the issue of
note payable
b. A note payable that is irrevocably designated at fair value through profit or loss is measured at fair value minus
transaction costs that are directly attributable to the issue of the note payable
c. Both statements are correct
d. Both statements are incorrect

29. On January 1, 20x1, Flamingo Company bought a new machine and agreed to pay in five equal annual installments of
P600,000 at the end of each year starting December 31, 20x1. The prevailing interest rate for this type of transaction is
12%.
The present value of an ordinary annuity of 1 at 12% for five periods is 3.60. The future amount of an ordinary annuity of 1
of 12% for five years is 3.61. The present value of 1 at 12% for five periods is 0.56.
What is the carrying amount of the note that should be reported as of December 31, 20x2?

30. On October 1, 20x0, Orioles Company borrowed P1,200,000 on a 8% note payable. The entity pays the first of four
quarterly payments of P315,000 when due on January 1, 20x1.
On December 31, 20x0 what amount should be reported as interest expense?

31. On September 1, 20x0, Alberts Company issued a note payable in the amount of P2,340,000, bearing interest at
12% , and payable in three equal annual principal payments of P780,000. On this date, the prime rate was 11%. The first
interest and principal payment was made on September 1, 20x1.
On December 31, 2021, what amount should be reported as accrued interest payable?

32. On January 1, 20x1, Castle Company borrowed P600,000 8% interest-bearing note due in four years. The present
value of the note on January 1, 20x1 was P441,000. Castle Company elects a fair value option.
On December 31, 20x1, The fair value of the note is P637,500
What is gain or loss from the change in fair value to be reported at the end of 20x1?

33. On January 1, 20x1, Lauren Company borrowed from a bank P1,900,000 on 8% 5-year interest-bearing note.
Transaction cost of P12,000 was paid by the entity. Lauren Company elects the fair value option
On December 31, 20x1 the fair value of the note was P1,662,500.
What amount of interest expense should be reported at year-ended 20x1?

34. What is the amortized cost of note payable?

35. On January 1, 20x1, Danny Company sold land to Marcel Company. There was no established market price for land.
Marcel gave Danny a P3,600,000 non-interest-bearing note payable in three equal annual installments of 1,200,000 with
the first payment due December 31, 20x1. The note has no ready market. The prevailing rate of interest for the note of
this type is 10%.
The present value of 1 at 10% for three periods is 0.751.
The present value of ordinary annuity of 1 at 10% for three periods is 2.487.
What is the amount of discount on note payable to be reported as December 31, 20x1?
36. Penguin 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. Penguin Company repaid each loan on its scheduled
maturity date:
Date Amount Maturity Date Term

11/1/x0 800,000 10/31/x1 1 year

2/1/x1 2,400,000 7/31/x1 6 months

5/1/x1 1,280,000 1/31/x2 9 months

The entity recorded interest expenses when the loans are repaid. As a result, interest expense of P240,000 was recorded
in 20x1
What amount should be reported interest expense for the year 20x1?

37. On January 1,20x0, Bush Company borrowed P1,800,000 and signed a 3-year note bearing interest at 12% per
annum compounded annually. Interest i payable in full at maturity on December 31, 20x2
What amount should Bush Company report as interest payable as of December 31, 20x1?

38. On October 1,20x0, an entity borrowed cash and signed a three-year interest bearing note on which both the
principal and interest are payable on October 1, 20x3. On October 31, 20x2, accrued payable shall?

39. An entity shall measure initially a note payable not designated at fair value through profit or loss at ___

40. On December 31, 20x1, Flamingo Company issued a P600,000 face value note payable in exchange for services
rendered. The note made at usual trade terms, is due in nine months and bears interest, payable at maturity, at the
annual rate of 3%.
The Market interest rate is 8%. The compound interest factor of 1 due in nine months at 8% is .944.
At what amount should the note payable be reported on December 31, 20x1?