CHAPTER 1

PROVISIONS, CONTINGENCIES AND OTHER LIABILITIES

Problems

1-1. The following shall result in the recognition of liabilities

a, c, e, g, h, i, m, n, o, p

1-2. Case 1 – None

Case 2 – P800,000
Case 3 – P400,000
Case 4 – P350,000
Case 5 - P100,000 = (1M x 10%) + (200,000 x 30%) – 60,000
Case 6 - None

1-3. (Garfield Company)

(a) B = 8,000,000 x 8% = P640,000

(b) B = 8% (8000,000 – B )
B = 640,000 - .08B
B = 640,000/1.08 = P592,593

(c) B = .08 (8,000,000 – T )

T = .30 (8,000,000 – B )
B = .08 {8,000,000 - .30 (8,000,000 – B ) }
B = .08 {8,000,000 – 2,400,000 + .30B}
B = 448,000 + .024B
B = 448,000/0.976 = P459,016

(d) B = .08 {8,000,000 – B – T }

T = .30 (8,000,000 – B)
B = .08{8,000,000 – B - .30 (8,000,000 – B)}
B = .08 {8,000,000 – B – 2,400,000 + .30B}
B = 448,000 - .056B
B = 448,000/1.056 = P424,242

1-4. (Arthur Corporation)

a. Bonus to sales manager = .08 x 3,000,000 = P240,000

Bonus to each sales agent = .06 x 3,000,000 = P180,000

b. Total Bonus = .36 {3,000,000 – B – T )

T = .30 {3,000,000 – B }
B = .36 {3,000,000 – B - .30 (3,000,000 – B)}
B = .36 {3,000,000 – B – 900,000 + .30B}
B = 756,000 - .252B
B = 756,000/1.252 = 603,834 (total)
B (Each): 603,834 / 3 = P201,278

c. B = .32 {3,000,000 – B }
B = 960,000 - .32B
B = 960,000/1.32 = 727,273 (total)
B (Sales Manager): 727,273 x 12/32 = P272,727
B (Each Sales Agent): 727,273 x 10/32 = P227,273

1-5. (Cleveland, Inc.)

B = .06 {9,000,000 – B – T }
T = .30 (9,000,000 – B)

B = .06 (9,000,000 – B - .30 (9,000,000 – B ) }

B = .06 { 9,000,000 – B – 2,700,000 + .30B }
B = 378,000 - .042B
B = 378,000 / 1.042 = 362,764

T = .30 (9,000,000 – 362,764) = P2,591,171

 Chapter 1 – Provisions, Contingencies and Other Liabilities

1-6. (Jackson Company)

2022 2023 2024
Sale of product

Accts. Receivable/Cash 1,000,000 2,500,000 3,500,000

Sales 1,000,000 2,500,000 3,500,000
Accrual of repairs

Warranty Expense 60,000 150,000 210,000

Warranty Liability 60,000 150,000 210,000
Actual repairs

Warranty Liability 8,000 38,000 112,500

Cash/ AP, etc. 8,000 38,000 112,500

1-7. (Filmore Company)

(a)
111 2023 2024
Warranty Liability, January 1 P 0 187,200
Warranty expense (8% x 4,200,000)/(8% x 6,960,000) 336,000 556,800
Actual repair costs incurred (148,800) (180,000)
Warranty liability, December 31 P187,200 P564,000

(b)

On 2023 sales (4,200,000 x 5% x ½) P105,000

On 2024 sales [(1/2 of 3%) + 5%] x 6,960,000 452,400
Predicted warranty liability at December 31, 2024 P557,400

1-8. (Johnson Company)

2023 2024
(a) Cash
720,000 864,000
Unearned Revenue from Warranty Contracts 720,000 864,000

Cost of Warranty Contracts 25,000 100,000

Cash, Materials, etc. 25,000 100,000

Unearned Revenue from Warranty Contracts 72,000 266,400

Revenue from Warranty Contracts 72,000 266,400
20% x ½ x 720,000 = 72,000

20% x ½ x 720,000 = 72,000

30% x ½ x 720,000 =
108,000 20% x ½ x
864,000 = 86,400
Total for 2023 266,400

Unearned Revenue from Warranty Contracts, Dec. 31, 2023

(720,000 – 72,000) 648,000
Unearned Revenue recorded during 2024 864,000
Revenue recognized during 2023 (266,400)
Unearned Revenue from Warranty Contracts, Dec. 31, 2024 1,245,600
or
From 2023 contracts 720,000 x 65% (50%+1/2 of 30%) 468,000
From 2024 contracts 864,000 x 90% (50%+30%+1/2 of 20%) 777,600
Total 1,245,600

(b) 2023 2024

Revenue from warranty contracts - see (a) 72,000 266,400
Cost of warranty contracts 25,000 100,000
Profit from warranty contracts 47,000 166,400

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

1-9. (Tyler Corporation)

(a) Premium Inventory 225,000

Cash/Accounts Payable 225,000
1,500 x 150

(b) Cash/Accounts Receivable 15,000,000

Sales 14,240,506
Unearned Revenue for Premium Claims 759,494

Basis of allocation of sales price of main product

Selling price of main product 15,000,000

Selling price of premium
(1,000,000 x 40%)/100 = 4,000 x (250-50) 800,000
Total 15,800,000

Allocation of sales price

To main product 15,000,000 x (15M/15.8M) 14,240,506
To premium 15,000,000 x (0.8M/15.8M) 759,494
Total 15,000,000

(c) Cash 50,000

Unearned Revenue for Premium Claims 189,874
Sales 239,874
1,000 x 50 = 50,000
759,494 x (1,000/4,000) = 189,874

1-10. (Polk Company)

(a) Basis of allocation of sales price of main product

Selling price of main product 300,000 x 30 9,000,000
Selling price of premium
(300,000 x 30%)/20 = 4,500 x 40 180,000
Total 9,180,000

Allocation of sales price

To main product 9,000,000 x (9M/9.180M 8,823,529
To premium 9,000,000 x (180,000/9,180,000) 176,471
Total 9,000,000

Unearned revenue for unredeemed coupons before redemption 176,471

Reduction resulting from redemption
176,471 x (4,000/4,500) 156,863
Unearned revenue for unredeemed coupons, December 31, 2024
or 176,471 x (500/4,500) 19,608

(b) Additional sales upon redemption (see above) 156,863

1-11. (Taylor Company)

(1) 2023

Total sales price of main product (140,000 units x P500) P70,000,000

Total sales price of premiums

(40,000 + 30,000)/5 = 14,000 units x (150-50) 1,400,000

Total (basis of allocation) P71,400,000

Allocation:

Main (70/71.4) x 70M P68,627,451

Premium (1.4/71.4) x 70M 1,372,549

Total P70,000,000

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

Provision for unredeemed coupons at the end of 2023

1,372,549 x (6,000*/14,000) P 588,235

*(30,000/5)

2024

Total sales price of main product (200,000 x P500) P100,000,000

Total sales price of premiums

(90,000-30,000+80,000)/5 = 28,000 units x (150-50) 2,800,000

Total (basis of allocation) P102,800,000

Allocation:

Main (100/102.8) x 100M P 97,276,265

Premium (2.8/102.8) x 100M 2,723,735

Total P100,000,000

Provision for unredeemed coupons at the end of 2024

2,723,735 x (16,000*/28,000) P 1,556,420

*(80,000/5)

(2) 2023 2024

Sales of main product P68,627,451 P97,276,265
Redemption of premiums
Cash received
8,000 x 50 400,000
12,000 x 50 600,000
1,372,549 x (8,000*/14,000) 784,314
1,372,549 x (6,000/14,000) 588,235
2,723,735 x (12,000**/28,000) ____________ 1,167,315
Total revenue P69,811,765 P99,631,815
*40,000/5 = 8,000 premiums
**(90,000-30,000)/5 = 12,000 premiums

1-12. (Van Department Store)

(a)
Allocation of original consideration received:
Sales revenue (98% x P5,000,000) P4,900,000
Liability for Customer Loyalty Awards (2% x P5,000,000) P 100,000

Revenue in 2022 as a result of redemption

100,000 x 25/90 P 27,778
Revenue in 2023 as a result of redemption
Total accumulated revenue from redemption as of 12/31/22
(100,000 x 60/95) P 63,158
Less revenue earned in 2022 27,778
Revenue in 2023 as a result of redemption P 35,380

(b)
Liability as of 12/31/22 (100,000 – 27,778) P 72,222
Liability as of 12/31/23 (100,000 – 63,158) P 36,842

1-13. (Pierce Corporation)

Cash 2,000,000
Unearned Revenue from Gift Certificates Outstanding 2,000,000

Cash 650,000

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

Sales 570,000
Unearned Revenue from Gift Certificates Outstanding 80,000

Unearned Revenue from Gift Certificates Outstanding 1,280,000

Sales 1,280,000

Unearned Revenue from Gift Certificates Outstanding 18,000

Gain from Forfeited Gift Certificates 18,000

1-14. (Buchanan Company)

Cash 3,000,000
Unearned Revenue from Gift Certificates Outstanding 3,000,000

Unearned Revenue from Gift Certificates Outstanding 2,750,000

Sales 2,750,000

Unearned Revenue from Gift Certificates Outstanding 150,000

Gain from Forfeited Gift Certificates 150,000

1-15. (Lincoln Company)

Refundable Deposits, January 1, 2024 P250,000

Deposits received during the year 200,000
Deposits refunded during the year (267,000)
Deposits forfeited during the year (100,000 – 82,000) (18,000)
Refundable Deposits, December 31, 2024 P165,000

1-16. (Grant Publication)

(a) Subscriptions sold in 2021 and 2022

(5,000,000 + 4,500,000) P9,500,000
Expired subscriptions in
2021 P1,000,000
2020 (2,800,000 + 1,200,000) 4,000,000 5,000,000
Unearned subscriptions, January 1, 2023 P4,500,000
(Or 1.2M + 2.0M + 1.3M) see table

(b) 2023
Cash 5,500,000
Unearned Subscription Revenue 5,500,000

Unearned Subscription Revenue 5,000,000

Subscription Revenue 5,000,000
1,200,000 + 2,000,000 + 1,800,000

2024
Cash 7,000,000
Unearned Subscription Revenue 7,000,000

Unearned Subscription Revenue 5,700,000

Subscription Revenue 5,700,000
1,300,000 + 2,400,000 + 2,000,000

(c) 2023 2024

Unearned Subscription Revenue, January 1 P4,500,000 P5,000,000
Subscription received during the year 5,500,000 7,000,000
Subscription revenue for the year (5,000,000) (5,700,000)
Unearned Subscription Revenue, December 31 P5,000,000 P6,300,000

1-17. (Coolidge Company)

Accounts Payable P 270,000

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

Mortgage Notes Payable 1,300,000

Current portion of Bank Notes Payable 100,000
Interest Payable 7,500
Liability for Damages 750,000
Value Added Tax Payable (2,688,000/1.12=2.4M; 2.4M x 12%) 288,000
Income Tax Payable (865,000 – 550,000) 315,000
SSS Premiums Payable (45,000 + 50,000) 95,000
Philhealth Contributions Payable (22,000 + 28,000) 50,000
Pag-ibig Contributions Payable (18,000 + 20,000) 38,000
Withholding Tax Payable 120,000
Total current liabilities, December 31, 2024 P3,333,500

MULTIPLE CHOICE QUESTIONS

Theory

MC1 B MC8 D
MC2 A MC9 B
MC3 D MC10 A
MC4 C MC11 A
MC5 B MC12 B
MC6 D MC13 D
MC7 B MC14 D

Problems

MC15 B Midpoint (5M + 6.5M)/2 P5,750,00

0
MC16 C P5,500,00
0
MC17 A Accrued salaries payable, 12/31/21 P 130,000
Salaries expense during the year 1,630,000
Salaries paid during the year (1,560,000)
Accrued salaries payable, 12/31/22 P 200,000

MC18 B Accrued electricity expense (1/2 x 8,500) 4,250

Accrued telephone bill 2,500
Total accrued liabilities P6,750

MC19 D Unearned service contract revenue, January 1 P1,080,000

Cash receipts from service contracts sold 1,920,000
Service contract revenue recognized during the year (1,560,000)
Unearned service contract revenue, December 31, 2022 P1,440,00
0

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

MC20 C Unearned revenue from 2020 sales (67.5% x 2,100,000) P1,417,500

Unearned revenue from 2021 sales (92.5% x 2,730,000) 2,525,250
Unearned revenue, December 31, 2021 P3,942,75
0
Unearned revenue from 2020 contracts (2,100,000 x ½ x 50%) P 525,000
Unearned revenue from 2021 contracts (2,730,000 x ½ x 67.5%) 1,842,750
Unearned revenue from 2022 contracts (2,475,000 x 92.5%) 2,289,375
Unearned revenue from service contracts, December 31, P4,657,12
2022 5
MC21 D From 2020 contracts 2,100,000 x ½ x (35% + 50%) P892,500
From 2021 contracts 2,730,000 x ½ x (15% + 35%) 682,500
From 2022 contracts 2,475,000 x ½ x 15% 185,625
Revenue from service contracts recognized in 2022 P1,760,62
5

MC22 B Revenue from service contracts sold in 2022 realized in

2023 2,475,000 x ½ x (15% + 35%) P618,750

MC23 D Warranty contracts (500 x 2,250) P1,125,000

Earned during 2022 (1,125,000 x ½ x 30%) 168,750
Unearned revenue from service contracts at Dec. 31, 2022 P 956,250

Revenue earned from service contracts P168,750

Cost of servicing contracts 95,000
Profit from service contracts P 73,750

MC24 D (20,000 x 75%)/20 = 750 premiums x 300 = 225,000

12M x (225,000/12,225,000) P220,859

MC25 D (500/750) x 220,859 P147,239

MC26 D Deferred revenue from gift certificates outstanding

1,000 x 750 P750,000

MC27 B Accrued biweekly salaries (3/10 x 1,125,000) P337,500

Accrued overtime pay 63,000
Accrued salaries, July 31, 2022 P400,500

MC28 B Est. number of coupons to be redeemed (80% x 500,000) 400,000

Number of coupons already processed 300,000
Estimated unredeemed coupons 100,000
Cost per premium (50 + 5 – 40) P 15.00
Estimated liability for unredeemed coupons P1,500,00
0
MC29 A Estimated total number of premiums
60% x 3,000,000 = 1,800,000; 1,800,000/10 180,000
Number of premiums already distributed 42,000
Estimated outstanding premiums 138,000
Cost per premium (40,000/80,000) P0.50
Estimated cost of potential prizes outstanding P69,000

MC30 A Estimated total coupons (400,000 x 70%) 280,000

Coupons redeemed 100,000
Outstanding coupons 180,000
Estimated outstanding premiums (180,000/5) 36,000
Cost per premium P20.00 Estimated liability for premiums outstanding P720,000
MC31 B Estimated value of redemptions (720,000 x 50%)
P360,000
Amount already disbursed for redemptions 300,000
Liability for unredeemed coupons, December 31, 2022 P 60,000

MC32 D Warranty expense for 2022 (24,000 units x P300) P7,200,000

MC33 C Total warranty expense P7,200,000
Less warranty costs paid 1,700,000
Estimated liability for warranty P5,500,000

MC34 D 1,500,000 x 4% P60,000

MC35 C B = .45 {2,000,000 – B - .30 (2,000,000 – B)} P479,087

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

MC36 C Total Bonus = .35 {2,000,000 – B) = 518,519

Bonus to Sales Manager (518,519 x 15/35) P222,222
Bonus to Each Sales Agent (518,519 x 1/35) P148,148

MC37 B Bonus
B = .10 {2,500,000 - .30 x (2,500,000 – B)} P180,412

MC38 C Outstanding subscriptions expiring in 2023, 2024 and

2025: (600,000 + 900,000 + 400,000) P1,900,000

MC39 A Magazine subscriptions received in advance before adjustments P2,400,000

Unearned subscriptions as of December 31, 2022 1,900,000
Magazine subscriptions revenue for year 2022 P 500,000

MC40 D Cash payment P3,800,000

Carrying amount of patent transferred 2,000,000
Total payment P5,800,000 Accrued loss reported on December 31, 2021 5,000,000
Decrease in profit at December 31, 2022 P 800,000