CHAPTER 1

PROVISIONS, CONTINGENCIES AND OTHER LIABILITIES

Problems

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

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

1-2. Case 1 – None

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

1-3. (Garfield Company)

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

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

(c) B = .08 (8,000,000 – T )

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

(d) B = .08 {8,000,000 – B – T }

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

1-4. (Arthur Corporation)

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

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

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

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

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

1-5. (Cleveland, Inc.)

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

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

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

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

 Chapter 1 – Provisions, Contingencies and Other Liabilities

1-6. (Jackson Company)

2019 2020 2021
Sale of product

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

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

Warranty Expense 60,000 150,000 210,000

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

Warranty Liability 8,000 38,000 112,500

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

1-7. (Filmore Company)

(a)
2019 2020
Warranty Liability, January 1 P 0 P187,200
Warranty expense (8% x 4,200,000)/(8% x 6,960,000) 336,000 556,800
Actual repair costs incurred (148,800) (180,000)
Warranty liability, December 31 P187,200 P564,000
(b)

On 2019 sales (4,200,000 x 5% x ½) P105,000

On 2020 sales [(1/2 of 3%) + 5%] x 6,960,000 452,400
Predicted warranty liability at December 31, 2020 P557,400

1-8. (Johnson Company)

2019 2020
(a) Cash 720,000 864,000
Unearned Revenue from Warranty Contracts 720,000 864,000

Cost of Warranty Contracts 25,000 100,000

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

Unearned Revenue from Warranty Contracts 72,000 266,400

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

20% x ½ x 720,000 = 72,000

30% x ½ x 720,000 = 108,000
20% x ½ x 864,000 = 86,400
Total for 2020 266,400

(b) Unearned Revenue from Warranty Contracts, Dec. 31, 2019

(720,000 – 72,000) 648,000
Unearned Revenue recorded during 2020 864,000
Revenue recognized during 2020 (266,400)
Unearned Revenue from Warrant Contracts, Dec. 31, 2020 1,245,600
or
From 2019 contracts 720,000 x 65% 468,000
From 2020 contracts 864,000 x 90% 777,600
Total 1,245,600

(c) 2019 2020

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

1-9. (Tyler Corporation)

(a) Premium Inventory 225,000

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

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

Sales 14,062,500

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

Unearned Revenue for Premium Claims 937,500

Basis of allocation of sales price of main product

Selling price of main product 15,000,000
Selling price of premium
(1,000,000 x 40%)/100 = 4,000 x 250 1,000,000
Total 16,000,000

Allocation of sales price

To main product 15,000,000 x (15M/16M) 14,062,500
To premium 15,000,000 x (1M/16M) 937,500
Total 15,000,000

(c) Cash 50,000

Unearned Revenue for Premium Claims 234,375
Sales 284,375
1,000 x 50 = 50,000
937,500 x (1,000/4,000) = 234,375

1-10. (Polk Company)

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

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

Allocation of sales price

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

Unearned revenue for unredeemed coupons before redemption 176,471

Reduction resulting from redemption
176,471 x (4,000/4,500) 156,863
Unearned revenue for unredeemed coupons, December 31, 2020 19,608
or 176,471 x (500/4,500)

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

1-11. (Taylor Company)

NOTE: Please provide the sales price of the main product of P500, missing in the problem.
(1) 2019
Total sales price of main product (140,000 units x P500) P70,000,000
Total sales price of premiums
(40,000 + 30,000)/5 = 14,000 units x P150 2,100,000
Total (basis of allocation) P72,100,000

Allocation:
Main (70/72.1) x 70M P67,961,165
Premium (2.1/72.1) x 70M 2,038,835
Total P70,000,000

Provision for unredeemed coupons at the end of 2019

2,038,835 x (6,000*/14,000) P 873,786
*(30,000/5)

2020
Total sales price of main product (200,000 x P500) P100,000,000
Total sales price of premiums
(90,000-30,000+80,000)/5 = 28,000 units x P150 4,200,000
Total (basis of allocation) P104,200,000

Allocation:
Main (100/104.2) x 100M P 95,969,290
Premium (4.2/104.2) x 100M 4,030,710
Total P100,000,000

Provision for unredeemed coupons at the end of 2020

4,030,710 x (16,000*/28,000) P 2,303,263
*(80,000/5)

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

(2) 2019 2020

Sales of main product P67,961,165 P95,969,290
Redemption of premiums
Cash received
8,000 x 50 400,000
18,000 x 50 900,000
2,038,835 x (8,000*/14,000) 1,165,049
2,038,835 x (6,000/14,000) 873,786
4,030,710 x (12,000**/28,000) ____________ 1,727,447
Total revenue P69,526,214 P99,470,523
*40,000/5 = 8,000 premiums
**(90,000-30,000)/5 = 12,000 premiums

1-12. (Van Department Store)

(a)
Allocation of original consideration received:
Sales revenue (98% x P5,000,000) P4,900,000
Liability for Customer Loyalty Awards (2% x P5,000,000) P 100,000
Revenue in 2019 as a result of redemption
100,000 x 25/90 P 27,778

Revenue in 2020 as a result of redemption

Total accumulated revenue from redemption as of 12/31/20
(100,000 x 60/95) P 63,158
Less revenue earned in 2019 27,778
Revenue in 2020 as a result of redemption P 35,380

(b)
Liability as of 12/31/19 (100,000 – 27,778) P 72,222
Liability as of 12/31/20 (100,000 – 63,158) P 36,842

1-13. (Pierce Corporation)

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

Unearned Revenue from Gift Certificates Outstanding 1,280,000

Sales 1,280,000

Note: The gift certificates estimated to expire is recognized as revenue at the date of actual
expiration.

1-14. (Buchanan Company)

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

Unearned Revenue from Gift Certificates Outstanding 2,750,000

Sales 2,750,000

Unearned Revenue from Gift Certificates Outstanding 150,000

Revenue from Forfeited Gift Certificates 150,000

1-15. (Lincoln Company)

Refundable Deposits, January 1, 2020 P250,000

Deposits received during the year 200,000
Deposits refunded during the year (267,000)
Deposits forfeited during the year (100,000 – 82,000) (18,000)
Refundable Deposits, December 31, 2020 P165,000

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

1-16. (Grant Publication)

(a)
Subscriptions sold in 2017 and 2018
(5,000,000 + 4,500,000) P9,500,000
Expired subscriptions in
2017 P1,000,000
2018 (2,800,000 + 1,200,000) 4,000,000 5,000,000
Unearned subscriptions, January 1, 2019 P4,500,000

(b) 2019
Cash 5,500,000
Unearned Subscription Revenue 5,500,000

Unearned Subscription Revenue 5,000,000

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

2020
Cash 7,000,000
Unearned Subscription Revenue 7,000,000

Unearned Subscription Revenue 5,700,000

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

(c) 2019 2020

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

1-17. (Coolidge Company)

Accounts Payable P 270,000

Mortgage Notes Payable 1,300,000
Current portion of Bank Notes Payable 100,000
Interest Payable 7,500
Liability for Damages 750,000
Value Added Tax Payable 288,000
Income Tax Payable 315,000
SSS Premiums Payable (45,000 + 50,000) 95,000
Philhealth Contributions Payable (22,000 + 28,000) 50,000
Pag-ibig Contributions Payable (18,000 + 20,000) 38,000
Withholding Tax Payable 120,000
Total current liabilities, December 31, 2020 P3,333,500

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

MULTIPLE CHOICE QUESTIONS

Theory

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

Problems

MC15 B Midpoint (5M + 6.5M)/2 P5,750,000

MC16 C P5,500,000

MC17 A Accrued salaries payable, 12/31/19 P 130,000

Salaries expense during the year 1,630,000
Salaries paid during the year (1,560,000)
Accrued salaries payable, 12/31/20 P 200,000

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

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

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

Cash receipts from service contracts sold 1,920,000
Service contract revenue recognized during the year (1,560,000)
Unearned service contract revenue, December 31, 2020 P1,440,000

MC20 C Unearned revenue from 2018 sales (67.5% x 2,100,000) P1,417,500

Unearned revenue from 2019 sales (92.5% x 2,730,000) 2,525,250
Unearned revenue, December 31, 2019 P3,942,750

MC21 D From 2018 contracts 2,100,000 x ½ x (35% + 50%) P892,500

From 2019 contracts 2,730,000 x ½ x (15% + 35%) 682,500
From 2020 contracts 2,475,000 x ½ x 15% 185,625
Revenue from service contracts recognized in 2020 P1,760,625

MC22 B Revenue from service contracts sold in 2020 realized in

2021 2,475,000 x ½ x (15% + 35%) P618,750

MC23 A From 2018 contracts (2,100,000 x ½ x 50%) P 525,000

From 2019 contracts (2,730,000 x ½ x 67.5%) 1,842,750
From 2020 contracts (2,475,000 x 92.5%) 2,289,375
Unearned revenue from service contracts, December 31, 2020 P4,657,125

MC24 D Warranty contracts (500 x 2,250) P1,125,000

Earned during 2020 (1,125,000 x ½ x 30%) 168,750
Unearned revenue from service contracts at Dec. 31, 2020 P 956,250

Revenue earned from service contracts P168,750

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

MC25 (20,000 X 75%)/20 = 750 premiums x 300 = 225,000

225,000/12,225,000 P220,859

MC26 (500/750) x 220,859 P147,239

MC27 D Deferred revenue from gift certificates outstanding

1,000 x 750 P750,000

MC28 B Accrued biweekly salaries (3/10 x 1,125,000) P337,500

Accrued overtime pay 63,000
Accrued salaries, July 31, 2020 P400,500

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MC29 B Est. number of coupons to be redeemed (80% x 500,000) 400,000

Number of coupons already processed 300,000
Estimated unredeemed coupons 100,000
Cost per premium (50 + 5 – 40) P 15.00
Estimated liability for unredeemed coupons P1,500,000
MC30 A Estimated total number of premiums
60% x 3,000,000 = 1,800,000; 1,800,000/10 180,000
Number of premiums already distributed 42,000
Estimated outstanding premiums 138,000
Cost per premium (40,000/80,000) P0.50
Estimated cost of potential prizes outstanding P69,000

MC31 A Estimated total coupons (400,000 x 70%) 280,000

Coupons redeemed 100,000
Outstanding coupons 180,000
Estimated outstanding premiums (180,000/5) 36,000
Cost per premium P20.00
Estimated liability for premiums outstanding P720,000

MC32 B Estimated value of redemptions (720,000 x 50%) P360,000

Amount already disbursed for redemptions 300,000
Liability for unredeemed coupons, December 31, 2020 P 60,000

MC33 D Warranty expense for 2020 (24,000 units x P300) P7,200,000

MC34 C Total warranty expense P7,200,000

Less warranty costs paid 1,700,000
Estimated liability for warranty P5,500,000

MC35 D 1,500 x 4% P60,000

MC36 C B = .45 {2,000,000 – B - .30 (2,000,000 – B)} P479,087

MC37 C Total Bonus = .35 {2,000,000 – B) = 518,519

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

MC38 B Bonus
B = .10 {2,500,000 - .30 x (2,500,000 – B)} P180,412

MC39 C Outstanding subscriptions expiring in 2021, 2022 and

2023: (600,000 + 900,000 + 400,000) P1,900,000

MC40 A Magazine subscriptions received in advance before adjustments P2,400,000

Unearned subscriptions as of December 31, 2020 1,900,000
Magazine subscriptions revenue for year 2020 P 500,000

MC41 D Cash payment P3,800,000

Carrying amount of patent transferred 2,000,000
Total payment P5,800,000
Accrued loss reported on December 31, 2019 5,000,000
Decrease in profit at December 31, 2020 P 800,000