Mama Mo Lily I Abilities
Mama Mo Lily I Abilities
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.
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:
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.
Company had the following amounts of long-term debt outstanding on December 31, 2021:
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
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.
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
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.
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
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
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.
Solution:
Unearned service contract revenue on Dec. 31 = Unearned contract revenue at Jan. 1 + cash
receipt from service contract sold – service
contract revenue recognized.
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
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
Solution:
= 600,000 x ½
= 300,000
Solution:
= 600,000 x 60%
= 360,000 x ½
= 180,000
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.
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
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.
Solution:
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
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:
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.
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
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.
2019 150,000
2020 430,000 580,000
Containers delivered in 2021 780,000
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
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.
During the current year, an amount of P410,000 was refunded and deposits of P25,000 were forfeited.
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
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
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
A. 510,000 C. 605,000
B. 515,000 D. 610,000
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.
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
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:
Income before bonus and before tax 5,250,000
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:
Income before bonus and before tax 5,250,000
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
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
A. 120,000 C. 250,000
B. 150,000 D. 320,000
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
Required: Prepare journal entries that would be made in 2021 and 2022 to record sales, premium
purchases and redemptions, and year-end adjustments.
Answer:
Cash 4,200,000
Sales 4,200,000
To record the sales
Cash 90,000
Premium Expense (9,000 x 40) 360,000
Premium Expense (9,000 x 50) 450,000
To record the distributed premiums
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:
Cash 3,125,000
Sales 3,125,000
To record 2022 sales
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
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
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.
Working Note: Compute the stand-alone price of coupon and transaction price of units sold and
coupons as follows:
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.
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
3) Prepare Journal
1) Cash 3,240,000
Sales 2,916,000
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
clothing at an average price of P5,000.
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
1) Cash 1,860,000
Sales 1,674,000
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.
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.
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.
Answer:
Product sales 7,000,000
Point granted during the year (10,000 x 100) 1,000,000
Total 8,000,000
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:
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
2022
Unearned revenue pts 144,375
Sales 144,375
2023
Unearned revenue pts 52,500
Sales 52,500
2024
Unearned revenue pts 262,500
Sales 262,500
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
Answer:
1: B
2: B
Coupons to be redeemed (160,000x60%) 96,000
Less:Coupons redeemed 40,000
Coupons outstanding 56,000
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.
Answer: C
The entity estimated that 80% of the coupons will be redeemed, even though only 300,000 coupons had
been processed during the current year.
Answer:
1. A
2. B
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.
Answer:
1. A
2. B
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
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
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
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
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
Sol. 4
Estimated liability – 12/31/22 (3,000x40) 120,000
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
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
clothing at an average price of P5,000.
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
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
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.
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
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%
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
2022
Unearned revenue pts 200,000
Sales 200,000
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.
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
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
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