Mama Mo Lily I Abilities

LIABILITIES
Problem 1-5 (IAA)

On December 31, 2021. Cordillera Company reported the following liabilities:
Note Payable – 9% 3,000,000
Note Payable – 8% 6,000,000
Note Payable – 10% 4,000,000
Note Payable – 11% 5,000,000
The 9% note payable is noncancelable and matures on July 31, 2022. Sufficient cash is expected to be
available to retire the note at maturity.
The 8% note payable matures on May 31, 2027 but the creditor has the option of calling the note or
demanding payment on June 30, 2022.
However, the call option is not expected to be exercised given the prevailing market condition.
The 10% note payable is due on March 31, 2023. A debt covenant requires Cordillera Company to
maintain current assets at least equal to 150% of current liabilities.
On December 31, 2021, Cordillera Company is in violation of this covenant.

However, Cordillera Company obtained a waiver from the creditor until June 2022 having convinced the
creditor that Cordillera Company's normal 2 to 1 ratio of current assets to current liabilities shall be
reestablished during the first half of 2022.
The 11% note payable matures on June 30, 2022. On January 31, 2022 before the issuance of the 2021
financial statements, the note payable was refinanced on a long-term basis.
Required: Explain the appropriate classification of the notes payable as current or noncurrent in the
statement of financial position on December 31, 2021.
Answer:
Current Liabilities as on 31st December 2021

Particulars Amount
1. Note Payable 9% 3,000,000
2. Note Payable 11% 5,000,000
Non current liabilities on 31st December 2021

3. Note Payable 8% 6,000,000
4. Note Payable 10% 4,000,000
Explaination :
1 & 2.As the payment need to done with in short period, it is considered as current liability.
3 & 4. Even though call option & liability is there, but probability of livability is very less. So it can be
considered as non current liability.
Problem 1-9 (AICPA Adapted)
Company had the following amounts of long-term debt outstanding on December 31, 2021:
14% term note payable, due 2022 30,000

11% term note payable, due 2024 1,070 000
8% note payable, due in 11 equal payments,
plus, interest beginning December 31,2022 1,100 000
7% guaranteed debentures, due 2023 1,000,000
Total 3,200,000
The annual sinking fund requirement on the guaranteed debentures is P40000 per year.
What total amount should be reported as current liabilities on December 31,2021?

A. 40,000 C. 100,000
B. 70,000 D. 130,000
Solution:
8% note payable, due 2023 (P1 100 000/11 equal payments) 100,000
14% term note payable, due 2022 30,000
Total current liabilities 130,000

Achilles Company reported the following liability balance on December 31, 2021:
12% note payable issued on March 1, 2020, maturing

on March 1, 2022 5,000,000
10% note payable issued on October 1, 2020, maturing
October 1, 2022 3,000,000
The 2021 financial statements were issued on March 31, 2022.
On January 31, 2022, the entire P5,000,000 balance of the 12% note payable was refinanced through
issuance of a long-term obligation payable lump sum.
On December 31, 2021, the entity has the right to defer settlement of the 10% note payable for at least
twelve months after December 31, 2021.
What amount of the note payable should be classified as current on December 31, 2021?
A. 8,000,000 C. 3,000,000
B. 5,000,000 D. 0
Solution:
Current Liability = These are the obligation which are payable within 12 Months.
Non Current Liability = These are the obligation which are payable after 12 Months.
IAS 1 - Presentation of Financial statement states that if an entity has discretion to roll over an
obligation after a period of 12 months then it should classify such liability as non current liability
even if that liability is maturing within 12 months period. But if The entity does not have
discretion to refinance then it should be classified as current liability on reporting date.
PARTICULAR CURRENT / NON CURRENT REASON

In this case the 12% note
payable is financed for long
term. But the company does not
have discretion to refinance it
after 12 Months.
12% note payable issued on
Further The the note payable
March 1, 2020, maturing on Current
becoming due on March
March 1, 2022 5,000,000
31,2022. it means notes payable
are due within 12 months from
reporting date of 31st
December 2021.
Therefore it should be classified
as Current Liability.
As discussed in Step 1 Company

has discretion to refinance the
liability for further 12 months
10% note payable issued on even if it is maturing within 12
October 1, 2020, maturing Non Current months
October 1, 2022 3,000,000 i.e. on 1 October 2022 from
reporting date.
Therefore it should be classified
as Non Current Liability
Current Liability = 5,000,000 (12% Note Payable)

Eliot Company reported the following liabilities on December 31, 2021:
Accounts payable and accrued interest 1,000,000

12% note payable issued November 1, 2020
maturing July 1, 2022 2,000,000
10% debentures payable, next annual principal
installment of P500,000 due February 1, 2022 7,000,000
On December 31, 2021, the entity consummated a noncancelable agreement with the lender to
refinance the 12% note payable on a long-term basis.
On December 31, 2021, what total amount should be reported as current liabilities?
A. 3,500,000 C. 1,500,000
B. 3,000,000 D. 2,500,000
Solution:
Current Liabilities = Accounts payable and Accrued Interest + Debentures payable
Accounts payable and accrued interest 1,000,000
Add: Debentures payable – current portion 500,000
Total current liabilities 1,500,000

On December 31, 2021, Largo Company had a P750,000 note payable outstanding due July 31,
2022. The entity planned to refinance the note by issuing long-term bonds.
Because the entity temporarily had excess cash, it prepaid P250,000 of the note on January 15, 2022.
In February 2022, the entity completed a P1,500,000 bond offering. The entity will use the bond offering
proceeds to repay the note payable at maturity.
On March 31, 2022, the 2021 financial statements were authorized for issue.
What amount of the note payable should be included in current liabilities on December 31,
2021?
A. 750,000 C. 250,000
B. 500,000 D. 0
Solution:
Short-term debt that is expected to be refinanced is classified as long-term to the extent of post-
balance sheet refinancing. Support must exist for the refinancing. .
The 250,000 was paid prior to refinancing and is classified at year-end as a current liability.
The 250,000 was pain on January 15, Year 2, after the cutoff date of December 31, Year 1.
Since it wasn’t paid before the year end, it has to be a liability, but since the refinancing would
used to pay only 500,000, the 250,000 is considered short-term liability. Therefore, only the
500,000, which would be paid from the refinancing, would be long-term.

Dean Company has a P2,000,000 note payable due June 30, 2022. On December 31, 2021 the
entity signed an agreement to borrow up to P2,000,000 to refinance the note payable on a long-
term basis
.
The financing agreement called for borrowing not to exceed 80% of the value of the collateral the entity
was providing.
On December 31,2021, the value of the collateral was P1,500,000.

On December 31, 2021, what amount of the note payable should be reported as current
liability?
A. 2,000,000 C. 800,000
B. 1,500,000 D. 500,000
Solution:
Note payable 2,000,000
Less: Refinanced on Dec. 31,2021 – non current portion
(80% x 1,500,000) 1,200,000
Note payable – not refinanced, current portion 800,000
Problem 1-14(AICPA Adapted)

Willem Company reported the following liabilities on December 31, 2021:
Accounts payable 750,000

Short-term borrowings 400,000
Mortgage payable, current portion P100,000 3,500,000
Bank loan payable, due June 30, 2022 1,000,000
The P1,000,000 bank loan was refinanced with a 5-year loan on January 15, 2022, with the first principal
payment due January 15, 2023.
The financial statements were issued February 28, 2022.
What total amount should be reported as current liabilities on December 31, 2021?
A. 1,150,000 C. 1,250,000
B. 2,250,000 D. 850,000
Solution:
Accounts payable 750,000
Short-term borrowings 400,000
Mortgage payable, current portion 100,000
Bank loan payable, due June 30, 2022 1,000,000
Total current liabilities 2,250,000

Greene company sells office equipment service contracts agreeing to service equipment for a two-year
period.
Cash receipts from contracts are credited to unearned contract revenue.
Service contract costs are charged to service contract expense as incurred. Revenue from service
contracts is recognized as earned over the term of the contracts.
Unearned contract revenue at January 1 600,000

Cash receipts from service controls sold 980,000
Service contract revenue recognized 860,000
Service contract expense 520,000
What amount should be reported as unearned contract revenue on December 31?
A. 460,000 C. 490,000
B. 480,000 D. 720,000
Solution:
Unearned service contract revenue on Dec. 31 = Unearned contract revenue at Jan. 1 + cash
receipt from service contract sold – service
contract revenue recognized.
Unearned service contract revenue on Dec. 31 600,000

Add: cash receipt from service contract sold 980,000
Less: 8 service contract revenue recognized 860,000
720,000

Ryan Company sells major household appliance service contracts for cash. The service contracts are for
a one year, two-year, or three-year period.
Cash receipts from contracts are credited to unearned contract revenue. This account had a balance of
P720,000 on December 31, 2021 before year-end adjustment.
Service contract cost are charged as incurred to service contract expense which had a balance of
P180,000.
Outstanding service contract on December 31, 2021 expire during 2022 P150,000, during 2023 P225,000
and during 2024 P100,000.
What amount should be reported as unearned contract revenue on December 31, 2021?
A. 540,000 C. 295,000
B. 475,000 D. 245,000
Solution:
Given that:
Unearned revenue as on Dec. 31,2021 = 720,000
Outstanding revenue contracts as on Dec.31,2021 = sum of To be expired in 2022,2023,2024
= 150,000 + 225,000 + 100,000
= 475,000
These contracts have entered and amount has, been received but for these services are not
provided yet. So, this will be unearned service revenue.
So, unearned service revenue as on Dec 31,2021 = Outstanding revenue contracts as on Dec
31,2021
= P475,000

Dunne Company sells equipment service contracts that cover a two-year period. The sale price of each
contract is P600.
The past experience is that, of the total pesos spent for repairs on service contracts, 40% is incurred
evenly during the first contract year and 60% evenly during the second contract year.
The entity sold 1,000 contracts evenly throughout 2021.
1. What amount should be reported as contract revenue for 2021?

A. 120,000 C. 300,000
B. 240,000 D. 150,000
Solution:
= 600 x 1000
= 600,000 x 40%
= 240,000 x ½
= 120,000
2. What amount should be reported as deferred contract revenue on December 31, 2021?
A. 540,000 C. 360,000
B. 480,000 D. 300,000
Solution:
Total contracts sold 2021 600,000
Less: contracts revenue in 2021 120,000
Total deferred service revenue 480,000

A. 180,000 C. 300,000
B. 360,000 D. 120,000
Solution:
= 600,000 x ½
= 300,000

A. 240,000 C. 180,000
B. 360,000 D. 0
Solution:
= 600,000 x 60%
= 360,000 x ½
= 180,000

Cobb company sells appliance service contracts ageeing to repair appliances for two-year period.
The past experience is that, of the total amount spent for repairs on service contracts, 40% is
incurred evenly and during the first contract year and 60% is incurred evenly during the second
contract year.
Receipts from service contract sales are P500,000 for 2021 and P600,000 for 2022.
Receipts from contracts are credited to unearned contract revenue. All sales are made evenly during the
year.

A. 100,000 C. 250,000
B. 200,000 D. 500,000
Solution:
= 500,000 x 40%
= 200,000 x ½
= 100,000
2. What amount should be reported as unearned contract revenue on December 31, 2021?
A. 300,000 C. 200,000
B. 400,000 D. 150,000
Solution:
Total contract sold in 2021 500,000
Less: contract revenue 100,000
400,000

A. 240,000 C. 370,000
B. 360,000 D. 250,000
Solution:
2022 sales = 600,000 x 40%
= 240,000 This amount is earned one-half in 2021 or P120,000 and one-half in 2022.
600,000 x 60% = P360,000 This amount is earned one-half in 2023 and ½ in 2024.
Remaining ½ of first contract year – 2021 sales(200,000 x ½) 100,000

First ½ of second contract year – 2021 sales(300,000 x ½) 150,000
First ½ of first contract year – 2022 sales(240,000 x ½) 120,000
Total contract revenue for 2022 370,000
4. What amount should be reported as unearned contract revenue on December 31,2022?

A. 360,000 C. 480,000
B. 470,000 D. 630,000
Solution:
Total contracts sold in 2021 and 2022 1,100,000

Contract revenue in 2021 100,000
Contract revenue in 2022 370,000
Unearned contract revenue – December 31, 2022 630,000
The unearned contract revenue on December 31, 2022 is P150,000 for the 2021 sales and
P480,000 for 2022 sales or a total of P630,000

Hart Company sells subscriptions to a specialized directory that is published semi-annually and shipped
to subscribers on April 15 and October 15.
Subscriptions received after the March 31 and September 30 cut-off dates are held for the next
publication.
Cash from subscribers is received evenly during the year and is credited to deferred subscriptions
revenue.
Deferred revenue from subscriptions on January 1 1,500,000
Cash receipts from subscribers during the current year 7,200,000
What amount should be reported as deferred revenue from subscription on December 31?
A. 1,800,000 C. 3,600,000
B. 3,300,000 D. 5,400,000
Solution:
Monthly subscription (7,200,000/12) = 600,000
The subscriptions after the Sept. 30 cut off are:
October: 600,000
November: 600,000
December: 600,000
Total unearned subscription revenue – Dec 31 1,800,000

Weaver Company sells magazine subscriptions for a 1-year, 2-year, or 3-year period.
Cash receipts from subscribers are credited to deferred subscription revenue and his account had a
balance of P1,700,000 on January 1, 2021.
The entity provided the following information for the year ended December 31, 2021:
Cash receipts from subscribers 2,100,000

Subscription revenue recognized on December 31, 2021 1,500,000
On December 31, 2021, what amount should be reported as deferred subscription revenue?
A. 1,900,000 C. 1,400,000
B. 2,300,000 D. 2,100,000
Solution:
January 1 balance 1,700,000
Less: Revenue earned 1,500,000
Add: Cash receipts 2,100,000
2,300,000
As receipts are collected, the liability is credited to record the additional subscriptions owed to
customers. In addition, the liability is decreased as revenue from the subscriptions is earned.
Based upon the information given, Weaver should report 2,300,000 of subscriptions collected in
advance at December 31.

Anette Video Company sells 1- and 2-year subscriptions for the video-of-the-month business.
Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity
revealed the following:
2021 2022
Sales 420,000 500,000
Less cancelations 20,000 30,000
Net sales 400,000 470,000
Subscription expiration:
2021 120,000
2022 155,000 130,000
2023 125,000 200,000
2024 140,000
400,000 470,000
1. On December 31, 2022, what amount should be reported as unearned subscription revenue?
A. 495,000 C. 465,000
B. 470,000 D. 340,000
2. What amount should be reported as subscription revenue for 2022?

A. 175,000 C. 285,000
B. 305,000 D. 250,000
Solution:
Unearned revenue is that amount which is received in advance for future period of time or for which
services or goods needs to be provided in future. Unearned revenue is a form of liability for the
business.
Unearned Subscription Revenue as on Dec 31,2022 = Subscriptions to be expired in 2023 and

2024
= 125,000 + 200,000 + 140,000
= 465,000
Subscription Revenue for 2022 = Subscriptions expired in 2022

= 155,000 + 130,000
= 285,000

Marr Company sells its 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.
Containers held by customers at January 1,2021, From deliveries in:
2019 150,000
2020 430,000 580,000
Containers delivered in 2021 780,000
Containers returned in 2021 From deliveries in:

2019 90,000
2020 250,000
2021 286,000 626,000
What amount should be reported as liability for deposits on December 31,2021?

A. 494,000 C. 674,000
B. 584,000 D. 734,000
Solution:
.
Containers held by customer’s at Jan. 1, 2021,
from deliveries in 2019 150,000
Less: Containers returned in 2021
from deliveries in 2019 90,000
Revenue from container sales P60,000
Liability for returnable containers, Jan.1,2021 P580,000

Add: Deliveries in 2021 780,000
Total 1,360,000
Less: 2021 container returns P626,000
2021 container sales 60,000 = 686,000
Liability for deposit on Dec. 31,2021 P674,000
Liability
P580,000 12/31 /20 balance
780,000 2021 deliveries
2021 returns P626,000
2021 sales 60,000
P674,000 12/31/21 balance
Problem 1-23(IAA)
Diversified Company sells perishable electronic products that are shipped in reusable containers.
Customers pay a deposit for each container.
The deposit is equal to the container cost. Customers receive a refund when the container is returned.
During the current year, deposits collected on containers shipped amounted to P700,000. Deposits are
forfeited if containers are not returned in 18 months.
Containers held by customers at the beginning of the year totaled P330,000.
During the current year, an amount of P410,000 was refunded and deposits of P25,000 were forfeited.
What amount should be reported as liability for refundable deposit at year-end?

A. 595,000 C. 645,000
B. 620,000 D. 290,000
Solution:
Containers held by – Jan. 1 330,000
Add: Deposits collected from customer 700,000
during the year
Total 1,030,000
Less: Deposits refunded 410,000
Deposits forfeited 25,000
Liability for refundable deposit – Dec. 31 595,000

Black Company required nonrefundable advance payments with special orders for machinery
constructed to customer specification.
The entity provided the following information for the current year:
Customer Advances – January 1 1,180,000
Advances received with orders 1,840,000
Advances applied to orders shipped 1,640,000
Advances applicable to orders cancelled 500,000
What amount should be reported as current liability for advances from customers at year-end?
A. 1,480,000 C. 880,000
B. 1,380,000 D. 0
Solution:
Advances from customers – January 1 1,180,000
Add: Advances received with orders 1,840,000
Total 3,020,000
Less: Advances applied to order shipped 1,640,000
Advances applicable to orders cancelled 500,000
Advances from customer – December 31 880,000

Lovie company offers three payment plans on its twelve-month contracts.
The entity provided the following information on the three plans and the number of children enrolled in
each plan for the September 1, 2022 through August 31, 2023 contract year:
Initial payment Monthly fee Number of
per child per child children
#1 50,000 - 15
#2 20,000 3,000 12
#3 5,500 9
The entity received P990,000 of initial payments on September 1, 2022, and P324,000 of monthly fees
during the period September 1 through December 31, 2022.
On December 31, 2022, what amount should be reported as deferred revenue?
A. 330,000 C. 660,000
B. 438,000 D. 990,000
Solution:
Plan #1 (50,000 x 15) 750,000
Plan #2 (20,000 x 12) 240,000
Total initial payments 990,000
Deferred revenue – December 31, 2015 (990,000 x 8/12) 660,000
Plan #2 (3,000 x 12 x 4) 144,000

Plan #3 (5,000 x 9 x 4) 180,000
Total monthly fees – already earned 324,000

Kent Co., a division of realty entity, Inc., maintains escrow accounts and pays real estate taxes for
National's mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest income less
a 10% service fee is credited to the mortgagee's account and used to reduce future escrow payments.
The entity provided the following additional information for the current year:
Escrow accounts liability, January 1 700,000
Escrow payments received 1,580,000
Real estate taxes paid 1,720,000
Interest on escrow funds 50,000
What amount should be reported as escrow accounts liability on December 31?
A. 510,000 C. 605,000
B. 515,000 D. 610,000
Liabilities as of Jan. 1 700,000

Add Escrow Payments received 1,580,000
Add Interest 50,000
Total liability 2,330,000
Less payment made (1,720,000)
Less 10% service charge (5,000)
Liability on December 31 605,000

On the first day of each month, Bell Company received from Kaye Company an escrow deposit of
P250,000 for real estate taxes. The entity recorded the P250,000 in an escrow account.
Kaye's 2021 real estate tax is P2,800,000, payable in equal instalments on the first day of each calendar
quarter. On January 1, 2021, the balance in the escrow account was P300,000.
On September 30, 2021, what amount should be reported as an escrow liability?
A. 250,000 C. 850,000
B. 450,000 D. 150,000
In deposit 9 months are taken from 1 st January to 30th September and in payment 3 quarters from 1 st
January to 30th September
Escrow Liability on 30th September Escrow Liability on 30th September

Particulars Amount Particulars Amount
Balance on 1st January 300,000 Balance on 1st January P 300,000
Add: Escrow deposit = 250,000*9 Add: Escrow deposit P 2,250,000
Less: Tax pament =2,800,000*3/4 Less: Tax pament P 2,100,000
th th
Balance on 30 September =B+D-T Balance on 30 September P 450,000
Problem 1-28 (ACP)

Nature Company had an agreement to pay the sales manager a bonus of 5% of the entity's earnings. The
income for the year before bonus and tax is P5,250,000. The income tax rate is 25% of income after
bonus.
Required: Determine the bonus under each of the following independent assumptions:
1. Bonus is a certain percent of the income before bonus and before tax.
2. Bonus is a certain percent of income after bonus but before tax.
3. Bonus is a certain percent of income after bonus and after tax.
4. Bonus is certain percent of income after tax but before bonus.
1. Bonus (5% x 5,250,000) 262,500
2. B = .05 (5,250,000 – B)
B = 262,500 - .05B B + .05B
B +0.5B = 262,500
1.05 B = 262,500
B = 262,500/1.05
B = 250,000
Proof:
Income before bonus and before tax 5,250,000
Bonus (250,000)
Income after bonus before tax 5,000,000
Multiply by 5%
Bonus 250,000
3. B = .05(5,250,000 – B – T)
T = .25 (5,250,000 – B)
B = .05 [5,250,000 – B - .25 (5,250,000 – B)
B = .05 (5,250,000 – B – 1,312,500 + .25B)
B = 262,500 - .05B – 65,625 + .0125B
B + .05B – .0125B = 262,500 – 65,625
1.0375B = 196,875
B = 196,875 / 1.0375
B = 189,759
Proof:
Bonus (189,759)
Income after bonus before tax 5,060,241
Tax (25% x 5,060,241) (1,265,060)
Income after bonus and after tax 3,795,181
Multiply by 5%
Bonus 189,759
4. B = .05 (5,250,000 – T)
T = .25 (5,250,000 – B)
B = .05 [5,250,000 - .25 (5,250,000 – B)
B = .05 (5,250,000 – 1,312,500 + .25B)
B = 262,500 – 65,625 + .0125B
B - .0125B = 196,875
.9875B = 196,875
B = 196,875 / .9875
B = 199,367
Proof:
Tax (5,250,000 – 199,367) x 25% 1,262,658
Income after tax and before bonus 3,987,342
Multiply by 5%
Bonus 199,367

Ronald Company had an incentive compensation plan under which a branch manager received 10% of
the branch income after deduction of the bonus but before deduction of income tax.
Branch income for the current year before the bonus and income tax was P1,650,000.
The income tax rate was 25%.
What is the bonus for the currènt year?

A. 126,000 C. 165,000
B. 150,000 D. 180,000
Before the bonus and income tax was P1,650,000

Branch manager received 10% of the branch income.
Bonus = B
B = 10% * (1,650,000 – B)
B = 165,000 – 10% B
(B + 10% B) = 165,000
1.1B = 165,000
B = 165,000/1.1
B = 150,000
Christian Company has a bonus agreement which provided that the general manager shall receive an annual
bonus of 10% of the income after bonus and tax. The income tax rate is 25%.
The general manager received P300,000 for the current year as bonus.
What is the income before bonus and tax?
A. 4,300,000 C. 3,000,000
B. 4,000,000 D. 3,700,000
Particulars Amount
Income after tax and bonus =300,000/0.1 3,000,000
Income before tax (100%-25%) =3,000,000/0.75 4,000,000
Income before tax & bonus =4,000,000+300,000 4,300,000

After three profitable years, Cairo Co. decided to offer a bonus to its branch manager of 25% of income over
P1,000,000 earned by the branch during the current year.
The income for the branch was P1,600,000 before taxes and before bonus of the current year.
The bonus was computed on income in excess of P1,000,000 after deducting the bonus, but before deducting
taxes.
What amount should be reported as bonus for the current year
A. 120,000 C. 250,000
B. 150,000 D. 320,000
Bonus= 25% of ((income over 1M) after deducting Bonus)

B = .25((1,600,00 - 1,000,000) - B)
B = .25(600,000 - B)
B = .25(600,000) - .25(B)
B = 150,000 - .25B
1.25 B = 150,000
B = 120,000
Bonus = Profit before bonus * %age of bonus/(100+%age of bonus)

Total income of branch = 1,600,000
Income eligible for bonus = 1,600,000-1,000,000
= 600,000
Bonus amount = (600,000*25%/125%)
=120,000

Jackson Company had an incentive compensation plan under which the president is to receive a bonus
equal to 10% of income in excess of P1,000,000 before deducting income tax but after deducting the
bonus. The income before income tax and the bonus is P3,200,000.
What is the amount should reported as of bonus?
A. 220,000 C. 320,000
B. 200,000 D. 440,000
Solution:
Income before income tax and bonus = P3,200,000
Let x be the bonus amount.
Income after bonus but before taxes = Income before bonus and tax – Bonus amount
= P3,200,000 – x
Bonus = (income after bonus but before taxes – 1,000,000)*10%
= (3,200,000 – x – 1,000,000)*10%
= (2,200,000 – x)*10%
= 220,000 – 0.1x
Bonus = x
220,000 – 0.1x = x
X + 0.1x = 220,000
1.1x = 220,000
X = 220,000/1.1
= 200,000
PREMIUM LIABILITIES
Problem 2-1 (IAA)

Miracle Company manufacturers a product that is packaged and sold. A plate is offered to customers
sending in three wrappers accompanied by a remittance of P10.
Data with respect to the premium offer are summarized below.

2021 2022
Sales 3,600,000 4,200,000
Purchase of premium, P50 per plate 390,000 580,000
Number of plates distributed as premiums 5,000 9,000
Estimated number of plates to be
distributed in subsequent period 2,000 3,000
Distribution cost P20 per plate
Required: Prepare journal entries that would be made in 2021 and 2022 to record sales, premium
purchases and redemptions, and year-end adjustments.
Answer:
Journal entries for 2021

Particular Debit Credit
Cash 3,600,000
Sales 3,600,000
To record the sales
Premium – plates 390,000

Cash 390,000
To record the purchase of premiums
Cash (5,000 x 10) 50,000

Premium Expense (5,000 x 40) 200,000
To record the distruted premiums

Cash 100,000
To record the redemption of 5,000 plates

Estimated premium liability 120,000
To record the liability for the premiums at the end of the first year
Journal entries for 2022

Particular Debit Credit
Sales 120,000
To record the reversing of the premiums for 2021
Cash 4,200,000
Sales 4,200,000
To record the sales
Premium – plates 580,000

Cash 580,000
To record the purchase of premiums
Cash 90,000
To record the distributed premiums

Cash 180,000
To record the redemption of plates
Premium expense(3,000 x 60) 180,000

To record the liability for the premiums at the end of the second year
Problem 2-2(IAA)
Cascade Company manufactures a special laundry soap.
A towel is offered as a premium to customers who send in two

proof-of-purchase seals from the soap boxes and a remittance
of P20. Distribution cost is P5 per towel.
Data for the premium offer are.
2021 2022
Soap sales 2,500,000 3,125,000
Towel purchases, P100 per towel 175,000 200,000
Number of towels distributed as premium 1,000 1,800
Number of towels expected to be
distributed in subsequent period 600 800
Required:
1. Prepare journal entries for 2021 and 2022.
2. Statement classification of the account balances pertaining
to the premium plan.
Answer:
2021 Debit Credit

Cash 2,500,000
Sales 2,500,000
To record sales
Premium – towels 175,000

Cash 175,000
To record purchased of 1,750 towels
Cash (1,000 x 20) 20,000

Premium Expense 80,000
Premium – towels (1,000 x 100) 100,000
To record redemption of 1,000 premiums

Cash 5,000
To record distribution cost
Premium Expense (600 x 85) 51,000

To record the liability for the premiums at the end of 2021
2022 Debit Credit
To reverse entry made on December 2021
Cash 3,125,000
Sales 3,125,000
To record 2022 sales
Premium – towels 200,000

Cash 200,000
To record purchase of 2,000 towels
Cash (1,800 x 20) 36,000

Premium – towels (1,800 x 100) 180,000
To record redemtion of 1,800 premiums

Cash 9,000
To record distribution cost

To record the liability for the premium at the end of 2022
Statement Classification 2021 2022

Current Asset:
Premium – towels 75,000 95,000
Current Liability:
Estimated Premium Liability 51,000 68,000
Selling Expense
Premium Expense 136,000 170,000
Problem 2-3 (IAA)

Pop Company Sells banana juice. In order to promote the drink among teenagers and others who might
otherwise be indifferent to the product, the entity inaugurated in the current year a premium plan
called "Drink-N-Win".
For every 10 bottle caps and P5 turned in, customers receive an attractive ball-pen and become eligible
for a grand prize of P5,000 in cash which is awarded for every 100 tops turned in.
The entity estimated that only 25% of bottle caps reaching the hands of customers will be presented for
redemption.
During the current year, the entity sold P400,000 bottles of banana juice at P9 each, purchased 10,000
ball-point pens for a total cost of P900,000, and incurred nondeferrable costs of P30,000 applicable to
the premium plan.
A total of 8,000 pens have been redeemed and thirty grand prizes have been awarded.
Required: Prepare journal entries to record the transactions relating to the premium plan for the current
year.
Answer:
Debit Credit
Cash (400,000 x 9) 3,600,000
Sales 3,600,000
To record sales
Premium – ball point pen 900,000

Cash 900,000
To record purchase of 10,000 ball point pens

Cash 30,000
To record cost of premium plans (non-refundable)
Cash (8,000 x 5) 40,000
Premium – ball point pen (8,000 x 90) 720,000
To record redemption of 8,000 pens

To record premium liability
Bottle caps to be redeemed (400,000 x 25%) 100,000

Less: Bottle Caps redeemed (8,000 x 10) 80,000
Bottle caps outstanding 20,000
Premium to be distributed (20,000 / 10) 2,000
Premium Expense ( 30 x 5,000) 150,000

Cash 150,000
To record the payment of 30 grand prizes amounting to
5,000 each
Topsy Company started a new promotional program. For every 10 box returned, customers receive a
basketball. The entity estimated that only 60% of the box tops reaching the market will be redeemed.
The entity provided the following information:

Units Amount
Sales of product 100,000 30,000,000
Basketball purchased 5,500 4,125,000
Basketball distributed 4,000
Required:
Prepare journal entries to record the transactions relating to the premium plan for the current year
Answer:
Basketballs to be distributed ( 100,000 x 60% /10 ) 6,000
Basketballs distributed 4,000
Balance 2,000
Cost of basketball (4,125,000 / 5,500) 750
Premium Expense (6,000 x 750) 4,500,000
Estimated Liability (2,000 x 750) 1,500,000

Victoria Company sells bed sheets for P3,000 per set. There is a promotion wherein if a customer buys 4
sets in a single transaction, the customer receives a coupon for one additional set for free. Customers
should go to the entity's website, fill out a request form, input the coupon number and submit online
before the expiration date. It is expected that 80% of the coupon will be redeemed.
During 2021, the entity sold 1,000 sets at P3,000 per set or P3,000,000. During 2022, the entity delivered
75 free additional sets.
Required:
1. Compute the stand-alone price of the coupons.
2. Allocate the transaction price to the products sold and the coupons.
3. Prepare journal entries for 2021 and 2022.
4. Compute the deferred revenue from coupons on December 31, 2022.
Answer:
The stand-alone price would be computed using the sales value of 4 bed sheets and probable
coups to be redeemed by the company. The coupon price is included in the selling price.
The stand alone price of coupon is P2,000

The transaction price of units sold and coupons are P2,500 per unit and P2,000 per coupon
respectively.
Working Note: Compute the stand-alone price of coupon and transaction price of units sold and
coupons as follows:
Computation for Stand Alone Price of Coupon and Transaction Price

Particulars Amount
Total Selling Price of 4 Bed Sheets (P3,000 x 4) 12,000
Total Units To be Considered (4 + 1 x 80%) 4.80
Transaction Price Per Bed Sheet (12,000 / 4.80 P2,500
Stand Alone Price of Coupon (P2,500 x 0.80) P2,000
Note: Coupon unit considered as 0.80 (1 x 80%) as only 80% of the total coupon are expected to
be redeemed (or used) by customers.
Record journal entries as follows:

Journal Entry
Date Particulars Debit Credit
31-Dec-21 Sales (P3,000 x 1,000) P3,000,000
Account Reveivable P3,000,000
(Being sales recorded)
31-Dec-21 Coupon Expense (P2,000 x 1,000 x ¼ ) P500,000

Deferred Revenue P500,000
(Being revenue expense and deferred revenue recorded)
31-Dec22 Deferred Revenue P150,000
Inventory P150,000
(Being revenue earned and recorded)
Problem 2-6 (IFRS)

Anton Company sells one dozen doughnuts for P500 per box. There is a promotion wherein if a
customer buys 3 boxes in a single transaction, a customer receives a coupon for one additional box for
free. Customers can redeem coupons at any time following the month of sale of the 3 boxes before the
expiration date. It is expected 60% of the customers will redeem the coupons.
During 2021, the entity sold 15,000 boxes at P500 per box or P7,500,000. During 2022, the entity
delivered 2,000 free additional boxes to the customers.
Required:
1. Compute the stand-alone selling price of the coupons
2. Allocate the transaction price to the products sold and the coupons.
3. Prepare the journal entry to record the sale of the products and issue of the free product coupons.
4. Prepare the journal entry to record the delivery of 2,000 free additional boxes.
Answer:
Problem 2-7
Sydney Company is a retailer that sells clothing. The entity has launched a promotional campaign
wherein if customers buy clothing with a single purchase of at least P12,000, the entity shall issue "30%
discount coupons" on selected items for 2 months following the campaign.
During the campaign, the entity sold clothing worth P3,240,000 and had issued 100 "30% discount
coupons".
It is expected that 80% of the coupons will be redeemed and customers using the coupons will buy
clothing at an average price of P15,000.
Required:
1. Compute the stand-alone selling price of the discount coupons.
2. Allocate the transaction price to the products sold and the discount coupons.
3. Prepare journal entries for the current year including the redemption of the coupons.
Answer:
1) Computation of Stand-alone selling price
Total Selling Price = Average Price x Discounted Rate x Expected discount Rate x Number of
coupons
= P15,000 x 30% x 80% x 100
= P 360,000
2) Allocation of Transaction Price
Particular Total stand-alone Price Weight Allocation Price

Product P3,240,000 90% P2,916,000
Coupon P360,000 10% P36,000
Total P3,600,000 100% P2,952,000
3) Prepare Journal
S.No Particular Amount (P) Amount(P)
1) Cash 3,240,000
Sales 2,916,000
Deferred Revenue- coupon 36,000
2) Cash (15,000 x 70% x 80% x 100) 840,000

Sales 876,000
Problem 2-8 (IFRS)

Nia Company is a retailer and has launched a promotional campaign wherein if customers buy clothing
with a single purchase of at least P4,000, the entity shall issue "40 discount coupons" on selected items.
The coupons may be used for 2 months following the campaign. During the campaign, the entity sold
clothing worth P1,860,000 and issued 100 "40% discount coupons."
The entity expects that 70% of the coupons will be redeemed and customers using the coupons buy
Required:
1. Compute the stand-alone price of the discount coupons.
2. Allocate the transaction price to the products sold and the discount coupons.
3. Prepare the journal entry to recognize the sale of the products and issue of discount coupons.
4. Prepare the journal entry to recognize the redemption of coupons.
Answer:
Total Selling Price = Average Price x Discounted Rate x Expected discount Rate x Number of
coupons
= 5,000 x 40% x 70% x 100

= 140,000
Particular Total stand-alone Price Weight Allocation Price
Product P1,860,000 90% P1,674,000
Coupon P140,000 10% P14,000
Total P2,000,000 100% P1,688,000
S.No Particular Amount (P) Amount(P)
1) Cash 1,860,000
Sales 1,674,000
2) Cash (5,000 x 60% x 70% x 100) 210,000
Sales 224,000
Problem 2-9 (IFRS)
Susan Company is a manufacturer of can shampoo and sells its product through local retailers. The
shampoo cost P550 to the retailer. Retailers sell the product to its customers and for each product
purchased by the customer, a coupon of P100 discount is given and may be used on future purchase of
the same product.
Retailers are reimbursed for the discount by the entity when customers redeem their coupons.
During the current year, the entity sold 8,000 products to local retailers at P550 each product or
P4,400,000. The entity expected that 75% of the coupons issued will be redeemed. At year end, the
entity paid the retailers P250,000 as reimbursement.
Required:
1. Compute the stand-alone selling price of the rebate coupons.
2. Allocate the transaction price to products sold and to the rebate coupons.
3. Prepare journal entries for the current year.
4. Compute the rebate liability at year-end.
Problem 2-10 (IFRS)

Isabel Company is a manufacturer of deodorant and sells its product through local retailers. The
deodorant costs P64 to the retailer. Retailers sell the product to its customers and for each product
purchased by the customer, a coupon of P20 discount is given and may be used on future purchases of
the same product.
Retailers are reimbursed for the discount by the manufacturer when customers redeem their coupons.
During the current year, the entity sold 10,000 deodorants to the local retailers at P64, each or P640,00.
The entity expected that 80% of the coupons issued will be redeemed. At year end, the entity paid the
retailers P50,000 as reimbursement.
Required:
1. Compute the stand-alone selling price of the rebate coupons.
2. Allocate the transaction price between the products sold and the rebate coupons.
3. Prepare journal entries for the current year.
Problem 2-11 (IFRS)

Marie Company sells gift certificates worth P2,500,000 to customers in exchange for future delivery of
its product.
The gift certificates are nonrefundable by the customer and the entity expects that 5% of the gift
certificates will not be redeemed.
During the current year, the entity redeemed gift certificates worth P1,425,000.
Required:
1. Compute the expected value of breakage.
2. Compute the expected value of gift certificate to be redeemed.
3. Compute the breakage revenue.
4. Prepare the journal entries to recognize the sale of gift certificates and the redemption of gift
certificates.
Problem 2-12(IFRS)
Shawn Company sells gift certificates worth P8,000,000 to customers in exchange for future delivery of
its product.
The gift certificates are nonrefundable by the customer and the entity expects that 15% of the gift
certificates will not be redeemed.
During the current year, the entity redeemed gift certificates worth P2,975,000.
Required:
1. Compute the expected value of breakage.
2. Compute the expected value of gift certificates to be redeemed.
3. Compute the breakage revenue.
4. Prepare the journal entries to record the sale of gift certificates and the redemption of gift
certificates.
Problem 2-13(IFRS)
Arianne Company, a grocery retailer, operates a customer loyalty program. The entity grants program
members loyalty points when they spend a specified amount on groceries. Program members can
redeem the points for groceries. The points have no expiry date.
During 2021, the sales amounted to P7,000,000 based on stand-alone selling price. During the year, the
entity granted 10,000 points. But management expects that only 80% or 8,000 points will be redeemed.
The stand-alone selling price of each loyalty point was estimated at P100.
On December 31, 2021, 4,800 points were redeemed. In 2022, management revised its expectations and
now expected that 90% or 9,000 points will be redeemed altogether. During 2022, the entity redeemed
2,400 points.
Required: Prepare journal entries for 2021 and 2022.
Answer:
Product sales 7,000,000
Point granted during the year (10,000 x 100) 1,000,000
Total 8,000,000
Product sales (7,000,000/8,000,000x7,000,000) 6,125,000

Points (1,000,000/8,000,000x7,000,000) 875,000
Total transaction price 7,000,000
Product sales 6,125,000

Revenue from points redeemed in 2021
(4,800/8,000x875,000) 525,000
Total revenue in 2021 6,650,000
Cash 7,000,000
Sales 6,125,000
Unearned revenue – pts. 875,000
Sales 525,000
Pts redeem in 2021 4,800

Pts redeem in 2022 2,400
Total pts redeem 12/31/22 7,200
Cumulative revenue on 12/32/22

(7,200/9,000x875,000) =700,000
Revenue from pts recognized 2021= 525,000
Revenue from pts earn in 2022 = 175,000

Sales 175,000
Problem 2-14(IFRS)
Erika Company operates a customer loyalty program. The entity grants loyalty points for good
purchased. The loyalty points can be used by the customers in exchange for goods of the entity. The
points have no expiry date.
During 2021, the entity issued 50,000 award credits and expected that 80% of these award credits shall
be redeemed.
The stand-alone selling price of the award credits granted is reliably measured at P1,000,000. In 2021,
the entity sold goods to customers for a total consideration of P7,000,000 based on stand-alone selling
price. The award credits redeemed and the total award credits expected to be redeemed each year are:
Redeemed Expected to be redeemed

2021 15,000 80%
2022 7,950 85%
2023 2,550 85%
2024 15,000 90%
Required: Prepare journal entries for 2021, 2022, 2023 and 2024.
Answer:
2021
Product sales = 7,000,000
Points – stand – alone selling price = 1,000,000
Total = 8,000,000
Cash 7,000,000
Sales (7,000,000/8,000,000)x7,000,000 6,125,000
Unearned revenue pts(1,000,000/8,000,000)x7,000,000 875,000
Unearned revenue pts 328,125
Sales 328,125
(15,000/40,000) 875,000
Pts to be redeemed (80%x50,000) 40,000

Revenue to be recognized in 2021 (15,000/40,000)x875,000 328,125
2022
Sales 144,375

Total pts to be redeemed 12/31/22 (15,000+7950) 22,950
Cumulative revenue 12/31/22 (22,950/42,500)x875,000 472,500

Revenue recognized in 2021 328,125
Revenue to be recognized in 2022 144,375
2023
Sales 52,500

Total pts to be redeemed 12/31/23 (15,000+7,950+2,550) 25,500
Cumulative revenue 12/31/23 (22,500/42,500)x875,000 525,000

2024
Sales 262,500

Total pts to be redeemed 12/31/22 (15,000+7,950+2,550+15,000) 40,500
Cumulative revenue 12/31/24 (40,500 /45,000)x875,000 787,500


In an effort to increase sales, Mill Company inaugurated a sales promotional campaign on June 30. The
entity placed a coupon redeemable for a premium in each package of cereal sold.
Each premium cost P20 and five coupons must be presented by a customer to receive a premium.
The entity estimated that only 60% of the coupons issued will be redeemed.
For the six months ended December 31, the following information is available:
Packages of cereal sold 160,000
Premiums purchased 12,000
Coupons redeemed 40,000
1. What amount should be reported as premium expense?

a. 640,000 b. 384,000 c. 240,000 d. 160,000
2. What amount should be reported as estimated premium liability on December 31?
a. 169,000 b. 224,000 c. 288,000 d. 384,000
Answer:
1: B
2: B
Coupons to be redeemed (160,000x60%) 96,000
Less:Coupons redeemed 40,000
Coupons outstanding 56,000
Premium expense (96,500/5)x20 384,000

Estimated liability (56,500/5)x20 224,000
Problem 2-16(AICPA Adapted)
Baker Company sold consumer products that are packaged in boxes. The entity offered an unbreakable
glass in exchange for two box tops and P50 as a promotion during the current year. The cost of the glass
was P200.
The entity estimated at the end of the year that it would be probable that 50% of the box tops will be
redeemed.
The entity sold 100,000 boxes of the product during the current year and 40,000 box tops were
redeemed during the year.
What amount should be reported as estimated premium liability at year-end?

a. 3,000,000 b. 1,500,000 c. 750,000 d. 500,000
Answer: C
Cost of glass 200

Less: Remittance from customer 50
Net premium cost 150
Box tops to be redeem (50%x100,000) 50,000

Less:Box tops redeemed 40,000
Outstanding 10,000
Premium expense (50,000/2)x150 3,750,000

Estimated liability at year end (10,000/2)x150 750,000

During 2021, Day Company sold 500,000 boxes of cake mix under a new sales promotional program.
Each box contained one coupon, which entitled the customer to a baking pan upon remittance of P40.
The entity paid P50 per pan and P5 for handling and shipping.
The entity estimated that 80% of the coupons will be redeemed, even though only 300,000 coupons had
been processed during the current year.

a. 6,000,000 b. 7,500,000 c. 4,500,000 d. 2,000,000
2. What amount should be reported as liability for unredeemed coupons at year-end?

a. 1,000,000 b. 1,500,000 c. 3,000,000 d. 5,000,000
Answer:
1. A
2. B
Net premium expense (50+5-40) 15
Coupons to be redeemed(80%x500,000) 400,000

Less:Coupons redeemed 300,000
Coupon outstanding 100,000
Premium expense (400,000x15) 6,000,000

Liability for unredeem coupon(100,000x15) 1,500,000
Problem 2-18 (IAA)

Clam Company offers customers a pottery cereal bowl if they send in three boxtops from its products
and P10. The entity estimated that 60% of the boxtops will be redeemed.
During the current year, the entity sold 675,000 boxes and customers redeemed 330,000 boxtops
receiving 110,000 bowls. The cost of each bowl was P25.

a. 2,025,000 b. 6,075,000 c. 4,550,000 d. 1,650,000
2. What amount should be reported as liability for outstanding premiums at year-end?
a. 250,000 b. 375,000 c. 625,000 d. 875,000
Answer:
1. A
2. B
Boxtops to be redeem (60%x675,000) 405,000

Less:Boxtops redeemed 330,000
Boxtops outstanding 75,000
Cost of cereal bowl 25

Less:Remittance from customer 10
Net cost of premium 15
Premium expense (405,000/3)x15 2,025,000

Estimated liability (75,000/3)x15 375,000
Problem 2-19 (IAA)

Charlene Company included one coupon in each box of laundry soap sold. A towel was offered as a
premium to customers who send in 10 coupons and a remittance of P10. Distribution cost of premium is
P5. Experience indicated that only 30% of the coupons will be redeemed.
2021 2022
Boxes of soap sold 2,000,000 2,500,000
Number of towels purchased at P50 each 50,000 80,000
Coupons redeemed 400,000 700,000

a. 2,500,000 b. 2,400,000 c. 1,800,000 d. 2,700,000
2. What amount should be reported as estimated premium liability on December 31, 2021?
a. 1,000,000 b. 1,100,000 c. 800,000 d. 900,000
3. What amount should be reported as premium expense for 2022?
a. 3,000,000 b. 3,750,000 c. 3,375,000 d. 4,000,000
a. 1,000,000 b. 1,250,000 c. 1,125,000 d. 1,375,000
Answer:
1. D 3. C
2. D 4. C
Sol.1
Cost of towel 50
Remittance from customer (10)
Distribution cost 5
Net premium cost 45
Coupons to be redeemed in 2021 (2,000,000x30%) 600,000

Less:Coupons redeemed in 2021 400,000
Coupon outstanding – Dec. 31, 2021 200,000
Premium expense for 2021 (600,000/20)x45 2,700,000
Sol.2
Estimated liability – 12/32/2021 (200,000/10)45 900,000
Sol.3
Coupon to be redeem in 2022 (2,500,000x30%) 750,000
Premium expense for 2022 (750,000/10)x45 3,375,000
Sol.4
Coupon outstanding – 12/31/2021 200,000
Add:Coupon to be redeemed in 2022 750,000
Total coupon to be redeemed 950,000
Less:Coupon redeemed in 2022 (700,000)
Coupon outstanding – 12/31/22 250,000
Estimated liability – 12/31/22 (250,000/10)x45 1,125,000
Problem 2-20 (IAA)

Love Company included one coupon in each package of cereal sold. A towel was offered as a premium to
customers who sent in 10 coupons.
2021 2022
Packages of cereal sold 500,000 800,000
Number of towels purchased at P40 per towel 30,000 60,000
Number of towels distributed as premium 20,000 50,000
Number of towels to be distributed
As premium next period 5,000 3,000

a. 1,000,000 b. 1,200,000 c. 600,000 d. 500,000
a. 400,000 b. 200,000 c. 600,000 d. 300,000
a. 2,400,000 b. 2,000,000 c. 2,120,000 d. 1,920,000
a. 320,000 b. 400,000 c. 120,000 d. 520,000
Answer:
1. A 3. D
2. B 4. C
Sol. 1
Number of premiums distributed in 2021 20,000
Add:Number of premiums to be distributed in 2022 5,000
Total premiums in 2021 25,000
Premium expense for 2021 (25,000x40) 1,000,000
Sol.2
Estimated liability – 12/31/21 (5,000x40) 200,000
Sol.3
Premiums distributed in 2022 50,000
Add:Premiums to be distributed in 2023 3,000
Total 53,000
Less:Premium arising from 2021 sales distributed in 2022 (5,000)
Premium applicable to 2022 48,000
Premium expense for 2022 (48,000x40) 1,920,000
Sol. 4
Estimated liability – 12/31/22 (3,000x40) 120,000
Problem 2-21 (IAA)

Choco Company, a high street chain, is offering a promotion whereby a customer who purchases three
boxes of chocolates as P200 per box in a single transaction receives a coupon for one free box of
chocolates if the customer fills out a request form and mails it before a set expiration date. It is expected
that 75% of the coupons will be redeemed.
During 2021, the entity sold 30,000 boxes of chocolates at P200 per box or P6,000,000. During 2022, the
entity delivered 6,000 additional free boxes of chocolates to the customers.
1. What amount should be reported as stand-alone selling price of the free product coupons?
a. 1,500,000 b. 2,000,000 c. 750,000 d. 500,000
2. What amount of the transaction price should be allocated to the free product coupons?
a. 1,000,000 b. 1,200,000 c. 500,000 d. 600,000
3. What amount should be reported as sales revenue in 2021?
a. 6,000,000 b. 3,000,000 c. 4,800,000 d. 2,400,000
4. What amount should be reported as sales revenue from the delivery of free products in 2022?
a. 900,000 b. 600,000 c. 480,000 d. 720,000
Problem 2-22 (IFRS)

Dress Company is a retailer that sells clothing. The entity has launched a promotional campaign whereby
if customers buy clothing with a single purchase of at least P4,000, the entity shall issue "30% discount
coupons" on selected items. The coupons may be used for 3 months following the campaign.
During the campaign, the entity sold clothing worth P5,400,000 and issued 500 "30% discount coupons".
The entity expected that 80% of the coupons will be redeemed and customers using the coupons buy
1. What amount should be reported as stand-alone selling price of the discount coupons?
a. 750,000 b. 600,000 c. 400,000 d. 300,000
2. What amount of transaction cost should be allocated to the discount coupons?
a. 600,000 b. 500,000 c. 540,000 d. 270,000
3. What amount should be recorded initially as sales revenue?
a. 4,860,000 b. 5,400,000 c. 2,560,000 d. 1,960,000
4. What amount should be recorded as sales revenue from the redemption of coupons?
a. 2,500,000 b. 1,940,000 c. 1,750,000 d. 1,400,000

Cereal Company is a manufacturer and sells its product to retailers. Retailers sell the products to its
customers and for each product purchased by the customers, a rebate coupon of P50 discount is given
and may be used on future purchase of the same product. Retailers are reimbursed for the discount by
the manufacturer upon redemption of the coupons.
During the current year, Cereal Company sold 40,000 products to the retailers at P187.50 each or
P7,500,000.
It is expected that 75% of the coupons will be redeemed. At year-end, Cereal Company paid the retailers
P500,000 as reimbursement.
1. What amount should be reported as stand-alone selling price of the rebate coupons?
a. 1,500,000 b. 2,000,000 c. 3,200,000 d. 4,000,000
2. What amount of the transaction price should be allocated to the rebate coupons?
a. 1,250,000 b. 1,500,000 c. 750,000 d. 500,000
3. What amount should be reported as sales revenue?
a. 7,500,000 b. 6,250,000 c. 7,000,000 d. 9,000,000
4. What amount should be reported as rebate liability at year-end?
a. 1,500,000 b. 1,250,000 c. 750,000 d. 500,000
Problem 2-24 (IFRS)

Alyanna Company operates a customer loyalty program. The entity 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.
During 2021, the customer earned 60,000 points. Management expects that 100% of these pints will be
redeemed. The stand-alone selling price of each loyalty point is estimated at P20.
The sales during 2021 amounted to P6,800,000 based on stand-alone selling price.
On December 31, 2021, 28,800 points were redeemed in exchange for purchases.
In 2022, the management revised expectations and now expects 90% of the points to be redeemed.
In 2022, the entity redeemed 9,000 points.

1. What amount of the transaction price should be allocated to the points?
a. 1,800,000 b. 1,200,000 c. 1,020,000 d. 0
2. What amount should be reported as revenue earned from loyalty points for 2021?
a. 576,000 b. 489,600 c. 510,000 d. 0
3. What amount should be reported as revenue earned from loyalty points for 2022?
a. 224,400 b. 714,000 c. 170,000 d. 0
Answer:
1. C
2. B
3. A
Sol.1
Points granyed during the year (60,000x20) 1,200,000
Add:Product sales 6,800,000
Total 8,000,000
Allocated price of points (1,200/8,000)x6,800,000nnnn 1,020,000
Sol.2
Points to be redeemed in 2021 (100%x60,000) 60,000
Revenue to be recognized in 2021 (28,800/60,000)x1,020,000 489,000
Sol.3
Points to be redeemed in 2022 (90%x60,000) 54,000
Pts to be redeemed in 2021 28,800

Pts to be redeemed in 2022 9,000
Total pts redeemed to 12/31/2022 37,800
Cumulative revenue 12/31/22 (37,800/54,000)x1,020,000 714,000

Revenue recognized in 2021 (489,600)
Problem 2-25 (IFRS)

William Company operates a customer loyalty program. The entity grants loyalty points for goods
purchased.
The loyalty program can be used by the customers in exchange for goods of the entity. The points have
no expiry date.
During 2021, the entity issued 100,000 award credits and expects that 80% of these award credits shall
be redeemed.
The total stand-alone selling price of the award credits granted is reliably measured at P2,000,000.
In 2021, the entity sold goods to customers for a total considerations of P8,000,000 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
2021 30,000 80%
2022 15,000 90%
1. What amount should be reported as revenue from points for 2021?

a. 1,600,000 b. 1,500,000 c. 600,000 d. 480,000
2. What amount should be reported as revenue from points for 2022?
a. 240,000 b. 200,000 c. 120,000 d. 0
Answer:
1. C
2. B
Solution:
2021
Product sales = 8,000,000
Points – stand – alone selling price = 2,000,000
Total = 10,000,000
Cash 8,000,000
Sales (8,000,000/10,000,000)x8,000,000 6,400,000
Unearned revenue pts(2,000,000/10,000,000)x8,000,000 1,600,000

Sales 600,000
(30,000/80,000) 1,600,000

Revenue to be recognized in 2021 (30,000/80,000)x1,600,000 600,000
2022
Sales 200,000

Total pts to be redeemed 12/31/22 (30,000+15,000) 45,000
Cumulative revenue 12/31/22 (45,000 /90,000)x1,600,000 800,000

Problem 2-26 (IFRS)

Jamaica Company, a retailer of electrical goods, participates in a customer loyalty program operated by
an airline.
The entity grants program members one air travel point for every P1,000 spent on electrical goods.
Program members can redeem the points for travel with the airline subject to availability. The entity
pays the airline P60 for each point.
During the current year, the entity sold electrical goods for consideration totaling P4,500,000 based on
stand-alone selling price and granted 5,000 points with standing-alone selling price of P100 per point.
1. What amount should be recognized as product sales revenue?

a. 4,500,000 b. 4,050,000 c. 5,000,000 d. 2,500,000
2. What amount should be reported as net revenue from points?
a. 450,000 b. 150,000 c. 200,000 d. 300,000
Answer:
1. B
2. B
Sol.1
Selling price Fraction Allocated
Product sales 4,500,000 45/50 4,050,000
Points (5,000x100) 500,000 5/50 450,000
5,000,000 4,500,000
Revenue from points 450,000

Payment to airline (5,000x60) 300,000
Net revenue from pts 150,000
Problem 2-27(IFRS)
During the current year, Isabel Company sold gift certificates to customers worth P6,000,000. The gift
certificates are nonrefundable and it is reliably determined that the breakage estimate is P600,000.
Before the end of the year, the entity redeemed gift certificates worth P3,600,000.
1. What amount should be reported as breakage revenue for the current year?
a. 400,000 b. 600,000 c. 500,000 d. 0
2. What amount should be reported as deferred revenue gift certificates at year-end?
a. 2,400,000 b. 2,000,000 c. 6,000,000 d. 0
Answer:
1. A
2. B
Sol.1
Breakage revenue reported for the current year
= Estimated breakage revenue x (redeemed gift certificate/(gift certificate sold – Estimated
breakage revenue))
= 600,000 x (3,600,000/(6,000,000-600,000))
= 600,000 x (3,600,000/5,400,000)
= 400,000
Sol.2
Deferred revenue = Gift certificate sold – redeemed gift cert for the current yr – breakage
revenue reported for the current year
= 6,000,000 – 3,600,000 – 400,000
= 2,000,000

Cobb Company sells gift certificates redeemable only when merchandise is purchased. Upon
redemption, Cobb Company recognizes the deferred revenue as realized. The entity provided the
following information for the current year:
Deferred revenue, January 1 800,000

Gift certificates sold 5,000,000
Gift certificates redeemed 4,500,000
Breakage revenue 600,000
What amount should be reported as deferred revenue from gift certificates on December 31?
a. 700,000 b. 500,000 c. 200,000 d. 600,000
Answer: A
Solution:
Deferred revenue – Jan. 1 800,000
Add: Gift certificate sold 5,000,000
Total 5,800,000
Less: Gift Certificate redeemed 4,500,000
Breakage revenue 600,000 5,100,000
Deferred revenue – Dec. 31 700,000
WARRANTY LIABILITIES
Problem 3-1 (IAA)
Socorro Company sells color television sets with a two-year repair warranty. The sale price for each set
is P15,000. the average repair cost per set is P800.
Research has shown that 20% of all sets sold are repaired in the first year and 40% in the second year.
2020 2021
Number of sets sold 300 500
Total payments for warranty repairs 40,000 150,000
Required:
1. Prepare journal entries in connection with the warranty using the "expense as incurred" approach.
2. Prepare journal entries in connection with the warranty using the "accrual" approach.
3. Determine the estimated warranty liability on December 31, 2021.
4. Analyze the estimated warranty account to ascertain whether actual warranty costs approximate the
estimate. The sales and warranty repairs are made evenly during the year.
5. Prepare journal entry to correct the estimated warranty liability on December 31, 2022
Answer:
2020 DR CR
Cash 4,500,000
Sales 4,500,000
Warranty expense 40,000
Cash 40,000
2021
Cash 7,500,000
Sales 7,500,000
Warranty expense 150,000
Cash 150,000

Mama Mo Lily I Abilities

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Mama Mo Lily I Abilities

Uploaded by

Copyright:

Available Formats

LIABILITIES

Problem 1-5 (IAA)

On December 31, 2021, Cordillera Company is in violation of this covenant.

Current Liabilities as on 31st December 2021

Non current liabilities on 31st December 2021

Problem 1-9 (AICPA Adapted)

14% term note payable, due 2022 30,000

What total amount should be reported as current liabilities on December 31,2021?

Problem 1-10 (AICPA Adapted)

12% note payable issued on March 1, 2020, maturing

PARTICULAR CURRENT / NON CURRENT REASON

As discussed in Step 1 Company

Current Liability = 5,000,000 (12% Note Payable)

Problem 1-11 (AICPA Adapted)

Accounts payable and accrued interest 1,000,000

Problem 1-12 (AICPA Adapted)

Problem 1-13 (AICPA Adapted)

On December 31,2021, the value of the collateral was P1,500,000.

Problem 1-14(AICPA Adapted)

Accounts payable 750,000

Problem 1-15 (AICPA Adapted)

Cash receipts from contracts are credited to unearned contract revenue.

Unearned contract revenue at January 1 600,000

Unearned service contract revenue on Dec. 31 600,000

Problem 1-16 (AICPA Adapted)

Problem 1-17 (AICPA Adapted)

The entity sold 1,000 contracts evenly throughout 2021.

1. What amount should be reported as contract revenue for 2021?

3. What amount should be reported as contract revenue for 2022?

4. What amount should be reported as contract revenue for 2023?

Problem 1-18 (AICPA Adapted)

1. What amount should be reported as contract revenue for 2021?

3. What amount should be reported as contract revenue for 2022?

Remaining ½ of first contract year – 2021 sales(200,000 x ½) 100,000

4. What amount should be reported as unearned contract revenue on December 31,2022?

Total contracts sold in 2021 and 2022 1,100,000

Problem 1-19 (AICPA Adapted)

Problem 1-20 (AICPA Adapted)

Cash receipts from subscribers 2,100,000

Problem 1-21 (AICPA Adapted)

2. What amount should be reported as subscription revenue for 2022?

Unearned Subscription Revenue as on Dec 31,2022 = Subscriptions to be expired in 2023 and

Subscription Revenue for 2022 = Subscriptions expired in 2022

Problem 1-22 (AICPA Adapted)

Containers held by customers at January 1,2021, From deliveries in:

Containers returned in 2021 From deliveries in:

What amount should be reported as liability for deposits on December 31,2021?

Liability for returnable containers, Jan.1,2021 P580,000

Containers held by customers at the beginning of the year totaled P330,000.

What amount should be reported as liability for refundable deposit at year-end?

Problem 1-24 (AICPA Adapted)

Problem 1-25 (AICPA Adapted)

Deferred revenue – December 31, 2015 (990,000 x 8/12) 660,000

Plan #2 (3,000 x 12 x 4) 144,000

Problem 1-26 (AICPA Adapted)

What amount should be reported as escrow accounts liability on December 31?

Liabilities as of Jan. 1 700,000

Problem 1-27 (AICPA Adapted)

On September 30, 2021, what amount should be reported as an escrow liability?

Escrow Liability on 30th September Escrow Liability on 30th September

Problem 1-28 (ACP)

1. Bonus (5% x 5,250,000) 262,500