Chapter 1 - Introduction to Liabilities

Chapter 1 — Introduction to Liabilities

c. aconnection with a utility provider has been established
CHAPTER 1: SELF-TEST EXERCISES d. allofthe above

True or False 4. The following are considered as financial liabilities, except

No liability shall be recognized if the counterparty is not specifically identified. a. advances from customers
DAAPWNnP

A liability may be recognized even if its amount is based on estimates, b. bonds payable
Obligation to be incurred in the future shall be recognized as a liability. c. accounts payable
Warranty liability is not considered as a financial liability. d. loans payable
Bonds payable is considered as a financial liability.
On initial recognition, financial liabilities are measured at the total amount of cash 5. Non-financial liabilities include all of the following, except
to be paid in the future. a. income tax payable
7. Atrade liability that is to be settled within the entity's normal ogenatine cycle shall b. constructive obligations
be recognized as current. c. deferred tax payable
8. All of the criteria given in the standard shall be met to be able to classify a liability d. note payable
as current.
9, Portion of deferred tax liability that is expected to be reversed within 12 months is 6. Financial liabilities are accounted for differently compared to non-financiaj
classified as current. liabilities. In relation with this, which of the following is correct?
10. A five-year loan payable maturing in four months shall be reported as a current a. financial liabilities are accounted for using different accounting standards
liability. applicable to the specific liability.
11. A loan payable with remaining term of six months is reported as a noncurrent b. non-financial liabilities are initially measured at fair value.
liability if the entity has the sole discretion to refinance the loan. c. financial liabilities may be accounted for at fair value through profit or loss.
12. Aconvertible bond payable is classified as current or noncurrent, depending on the d. non-financial liabilities are always classified as noncurrent.
expected timing of the actual conversion of the bonds.
13. Accrued interest payable is computed from the beginning of the period until the 7. To be considered as current, non-trade liabilities shall be payable
interest payment date. a. within 12 months after the reporting period
14. A loan with principal that is payable in annual installments is classified as partly b. atleast 12 months after the reporting period
current and partly noncurrent. c. beyond 12 months after the reporting period
15. If a grace period to rectify a breach in loan covenants was granted after the d. any ofthe above
reporting date, the related loan payable shall be classified as noncurrent.
8. All of the following are considered noncurrent liabilities as of December 31, 2023,
Multiple Choice - Theories except :
1. Criteria that should be met for a liability to exist include the following, except a. a five-year loan payable that will mature on July 1, 2025.
a. the entity has an obligation b. asix-year bond payable that was issued last April 1, 2018.
b. the obligation is to transfer an economic resource c. a one-year loan payable that was borrowed last July 1, 2023 but can be
c. the identity of the counterparty is known refinanced for three years based solely on the borrower's intention.
d. there is a present obligation that exists as a result of past events. d. aten-year bond payable that was issued last October 1, 2016.
2. Obligations to transfer an economic resource include the following, except
9. Which of these liabilities is considered as current as of December 31, 2023?
a. to exchange economic resources with another party on favorable terms
a. aloan with remaining term of three years that can be refinanced provided the
b. to pay cash
lender wil] agree.
c. to deliver goods or provide services
d. to transfer an economic resource if a specified uncertain future event occurs
b. aconvertible bond payable with remaining term of four years but is expected &
be converted on April 1, 2024.
3, Which of the following events will give rise to a present obligation? c. a loan with remaining term of nine years but the lender can claim payment
a. an employment contract was signed with a new employee providing for a anytime from the borrower,
monthly salary of P50,000. d. a loan with the borrower breaching some covenants, but the lender granted 2
b. purchased inventory items have been shipped FOB shipping point grace period on December 31, 2023,
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Chapter 1 — Introduction to Liabilities Chapter 1 - Introduction to Liabilities

10. The amount of accrued interest payable shall be determined 4. In preparing its statement of financial position, DARLING Company accumulated the
a. from the beginning of the period until the latest interest payment date. following information:
b. from the latest interest payment date until the reporting date.
c. from the beginning of the period until the reporting date. Withholding tax payable P350,000
d. from the latest interest payment date until the next interest payment date. Accounts payable, net of P50,000 debit balances in
supplier’s accounts 2,500,000
Straight Problems Unearned income 600,000
1. As of December 31, 2023, PUPA Company had the following liabilities: Accounts receivable, net of P100,000 credit balance in
customer’s accounts 3,000,000
Accounts payable P1,800,000 Mortgage payable 5,000,000
Unearned income 200,000
Bonds payable 7,000,000
Warranty payable 500,000
Advances from customers 200,000
Notes payable 800,000
Income tax payable 900,000
Bonds payable 3,000,000
Valued-added tax payable 450,000
Lease liability 2,000,000
Overdraft in Bank A 150,000
Pension liability 1,500,000
Cash in bank balance in Bank B 1,000,000
Income tax payable 900,000
Share dividends payable 800,000
Required: From the given information, determine the amounts of (a) financial Salaries payable 300,000
liabilities and (b) non-financial liabilities. Accrued utilities payable 240,000
Purchase price of machinery ordered but not yet received 2,000,000
2. Atthe end of the year 2023, SANSKRIT Company had the following interest-bearing Warranty liability 850,000
liabilities: Accrued interest payable 500,000
a. Loan payable with face amount of P5,000,000 that was borrowed last April 1, Deferred tax liability 1,200,000
2021. Interest is payable every March 31 of each year. Dividends payable 750,000
b. Bond payable with face amount of P7,000,000 that was issued last February 1,
2021. Interest is payable very January 31 and July 31 of each year. Required: From the given information, determine the total amounts of (a) current
liabilities and (b) non-current liabilities.
Required: From the given information, determine the total amount of accrued
interest payable as of December 31, 2023. 5. As of December 31, 2023, MYSTERIOUS Company had the following liabilities:

Accounts payable P1,200,000

3. On December 31, 2023, DONBURI Company had the following outstanding Notes payable - trade 900,000
borrowings: : 600,000
Share dividends payable
a. Bond payable with face amount of P4,000,000. Interest is payable every 700,000
Income tax payable
September 30 of each year. 6-year loan payable with maturity date of July 31, 2024. Interest of
b. Loan payable with original face amount of P10,000,000 and was issued last July 12% is payable every July 31 of each year 5,000,000
1, 2021. Interest and P2,000,000 principal are payable every June 30 of each 7-year loan payable that was issued last April 1, 2020. Interest of
year. 9% is payable every March 31 of each year 7,000,000
c. Bond payable with face amount of P8,000,000. Interest is payable every March 4-year loan payable that was issued last October 1, 2022. Interest
1 and September 1 of each year, of 10% and principal amount of P3,000,000 are payable every
September 30 of each year 6,000,000
Required: From the given information, determine the total amount of accrued
8-year bond payable that was issued last July 1, 2016, Interest of
interest payable as of December 31, 2023, 4,000,000
8% is payable every June 30 each year
5-year bond payable that was issued last January 1, 2021. Interest
of 12% and P600,000 principal amounts are payable every June
30 and December 31 of each year 3,000,000
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 Chapter 1 — Introduction to Liabilities Chapter 1 - Introduction to Liabilities

Required: From the given information, determine the total amounts of (a) current 8. VOLT Company had the following liability balances as of December 31, 2023;
liabilities and (b) non-current liabilities as of December 31, 2023.
Accounts payable P 1,900,000
6. Last March 1, 2020, VERONICA Company borrowed funds from a bank in a form of Overdraft in Bank A 260,000
loan payable. The face amount is P5,000,000 and maturity date is set on February Overdraft in Bank B 160,000
28, 2024. Utilities payable 400,000 °
independent scenarios, determine the Loans payable:
Required: Under each of the following
Loan 1 - 5-year loan issued last October 1, 2022 5,000,000
classification of the loan payable, whether current or noncurrent, as of December 31,
Loan 2 - 10-year loan issued last January 1,2017 6,000,000
2023:
a. The loan is payable on demand of the bank. Loan 3 - 7-year loan issued last June 30, 2017 8,000,000
b. The Company has the sole discretion to refinance or roll over the loan for at least Loan 4 - 20-year loan issued last April 1, 2015 4,000,000
18 months. Additional data regarding these amounts are the following:
c. The Company can refinance or roll over the loan for at least 24 months, provided a. Accounts payable is net of P70,000 debit balances in suppliers’ accounts.
the bank will agree. Similarly, there were also a total of P150,000 credit balances in the customers’
d. The Company has the sole discretion to refinance or roll over the loan for at most account that were deducted from the accounts receivable.
3 months after the maturity date. The Company maintains another bank account with Bank A that had a positive
e. The Company has the sole discretion to refinance or roll over the loan for 3 balance of P800,000. No other bank accounts were maintained with Bank B.
months at a time after the maturity date for such number of times as the Loan 1 bears 9% interest, payable every April 1 and October 1 of each year.
Company sees fit. As part of the Loan 2’s covenants, the Company shall timely pay monthly interest
f, There were no preexisting refinancing provisions, buton December 15, 2023, the based on annual rate of 12%. However, the Company’s last interest payment
parties agreed to extend the maturity date to February 28, 2025. was on June 30, 2023. On January 12, 2024, the lender agreed to give a grace
g. There were no preexisting refinancing provisions, but on December 15, 2023, the period for the Company to rectify the breach.
parties agreed to extend the maturity date to August 31, 2024. The Company has the sole discretion to extend Loan 3’s maturity date for at least
h. There were no preexisting refinancing provisions, but on January 31, 2024, the two years after the original date. Interest of 10% is payable every June 30 of
parties agreed to extend the maturity date to February 28, 2025. each year.
The lender of Loan 4 can claim payment from the Company, regardless of the
7. Last January 1, 2020, MECHANICAL Company borrowed a 10-year, 7% interest- loan’s remaining term. Interest of 8% is payable every March 31 of each year.
bearing loan of P8,000,000. One of the covenants included in the loan agreement is
that the current ratio shall be at least 4.0. Failure to comply with this covenant or Required: From the given information, determine the total amounts of (a) current
any of all other covenants will make the loan immediately due, regardless of the liabilities and (b) non-current liabilities as of December 31, 2023.
number of years remaining before the maturity date. Unfortunately, during October
2023, the current ratio decreased to 3.50 for the first time, making the loan 9. On December 31, 2023, APPLAUSE Company reported the following information:
immediately due and demandable.
Share dividends payable P1,300,000
Required: Under each of the following independent scenarios, determine the Accounts payable 2,500,000
classification of the loan payable, whether current or noncurrent, as of December 31, Income tax payable 900,000
2023: Bonds payable:
a. There was no grace period agreed after the breach of the debt ratio covenant. Bond 1 - bears 8% interest 5,000,000
Bond 2 - bears 12% interest 7,000,000
b. There was a grace period agreed on January 15, 2024 to rectify the breach.
Bond 3 - bears 9% interest 4,000,000
c. There was a grace period agreed on December 27, 2023 to rectify the breach.
Bond 4 - bears 10% interest 6,000,000
d. There was a grace period agreed on December 26, 2023 to rectify the breach.
However, due to the increasing credit risk of the Company, the lender, as a Relevant additional data are the following:
condition to the given grace period, required that the new maturity date of the
loan is on December 31, 2024.

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Chapter 1 — Introduction to Liabilities

Chapter 1 — Introduction to Liabilities

Salaries payable 320,000

Bond 1 has an original maturity date of June 30, 2024. However, the Company
has the sole discretion to extend the payment of the 70% of the bond's principal Utilities payable 650,000
amount. The bond’s interest is payable every June 30 of each year. 10-year loan payable with maturity date of May 1, 2024 2,500,000
Bond 2 has an original maturity date of April 1, 2024, Nevertheless, the 7-year loan payable with principal payments of P800,000
Company may refinance the bond and extend its maturity date on March 31, every July 1 of each year 5,600,000
2027, provided the lender will agree. Interest is payable every March 31 and
From this information, the total amount of current liabilities shall be
September 30 of each year.
Bond 3 has a maturity date of December 31, 2029. However, the bond is payable a. P4,470,000 c. P7,970,000
b. P6,970,000 d. P9,970,000
on the demand of the investors.
Bond 4 has an original maturity date of September 30, 2030 and contains
From this information, the total amount of non-current liabilities shall be
covenant that the Company shall maintain 40% debt ratio. However, on
a. P14,800,000 c. P18,300,000
December 1, 2023, the Company’s debt ratio increased to 45%, making the bond
b. P12,800,000 d. P15,800,000
due and demandable. The lender granted a grace period on December 15, 2023.
Interest is payable every August 1 of each year. 3. CALM Company had the following information as of December 31, 2023:
Required: From the given information, determine the total amounts of (a) current Withholding tax payable P250,000
liabilities and (b) non-current liabilities as of December 31, 2023.
Warranty liability 800,000
Mortgage payable 4,500,000
Multiple Choice - Problems
Accrued expenses, including accrued interest payable 900,000
1. JULIANA Company had the following information related to its liabilities:
Accounts payable 1,700,000
Deferred tax liability P2,000,000 4-year loan payable that was issued last May 1, 2020; interest of 9%
Accounts payable 1,600,000 is payable every April 30 of each year 3,000,000
Notes payable 900,000 10-year loan payable that was issued last July 1, 2021; interest of
Income tax payable 600,000 12% is payable every June 30 of each year 5,000,000
Unearned income 850,000 5-year loan that is payable P500,000 every April 1 and October 1 of
Warranty liability 750,000 each year; interest of 10% is payable on the same dates as the
Bonds payable 4,000,000 principal installment payments 6,000,000
Utilities payable 300,000
Accrued interest payable 450,000 From the given information, the total amount of current liabilities shall be
a. P7,650,000 c. P6,350,000
From this information, the total amount of financial liabilities shall be b. P4,950,000 d. P5,750,000
a. P5,650,000 c. P7,250,000
From the given information, the total amount of non-current liabilities shall be
b. P7,100,000 d. P8,100,000
a. P17,200,000 c. P14,500,000
From this information, the total amount of non-financial liabilities shall be b. P16,400,000 d. P15,800,000
a. P4,200,000 c. P4,350,000
b. P5,800,000 d, P3,350,000 4. GENTLE Company had a tough time during the year 2023 because of the decrease in
economic activities in the country in which it operates. As a result, covenants
2. As of December 31, 2023, KIMBERLY Company had the following liabilities: relating to financial ratios have been breached due to deterioration in the Company's
financials. The Company had the following loans as of December 31, 2023, all of
Purchase price of equipment ordered but not yet received P3,000,000 which have maturity dates beyond the year 2025;
Accounts payable 2,200,000 e Loan payable with principal amount of P5,000,000 and interest of 8% payable
Mortgage payable 5,000,000 every October 1 of each year. The breach relates to non-payment of interest on
Bonds payable 6,000,000 October 1, 2023. The lender granted grace period on December 20, 2023. ‘The
Accrued interest payable 500,000 interest due October 1, 2023 was actually paid on January 31, 2024,

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 Chapter 1 — Introduction to Liabilities
Chapter 1 - Introduction to Liabilities

e Loan payable with principal amount of P4,000,000 and interest of 9% payable

every June 30 of each year. The breach relates to decrease in the current ratio 6. EGYPT Company had the following information as of December 31, 2023:
below 2.50 on November 1, 2023. The lender granted grace period on January 5, Accounts payable, net of P220,000 debit balances P3,500,000
2024. Notes payable - trade 1,600,000
e Bond payable with principal amount of P6,000,000 and interest of 12% payable Withholding tax payable - from employee compensation 450,000
every March 1 and September 1 of each year. The breach relates to debt ratio Expanded withholding tax payable 300,000
being higher than 70%. The lender granted grace period on December 26, 2023. Overdraft - Bank Z 240,000
From the given information, the total amount of current liabilities shall be Overdraft - Bank X 320,000
a. P520,000 c. P5,750,000 Share dividends payable 1,200,000
b. P4,920,000 d. P7,820,000 Credit balances in the customers’ accounts that were deducted
from accounts receivable balance 150,000
From the given information, the total amount of non-current liabilities shall be Dividends payable 1,000,000
a. P6,000,000 c. P10,000,000 Pension liability 2,500,000
b. P9,000,000 d. P11,000,000 Loans payable:
Loan 1 - has original term of five years and 9% interest 4,000,000
5. As of December 31, 2023, TEMPERATURE Company had the following borrowings,
Loan 2 - has original term of ten years and 12% interest 5,000,000
all of which have maturity dates of within the year 2024: Loan 3 - has original term of six years and 10% interest 9,000,000
Loan 1 - bears 10% annual interest payable every April 1 P8,000,000 Loan 4 - has original term of eight years and 7% interest 6,000,000
Loan 2 - bears 8% annual interest payable every July 1 4,000,000 Additional data related to these liabilities are the following:
Bond 1 - bears 12% annual interest payable every October 1 6,000,000 The Company maintain other bank accounts with positive balance in Bank X. On
a.
Bond 2 - bears 9% annual interest payable every December 31 5,000,000
the other hand, no other bank accounts are maintained in Bank Z.
Additional data that may relevant are the following: b. Loan 1 was originally issued last May 1, 2019. Interest is payable every April 30
a. Loan 1’s original maturity date was March 31, 2024. Maturity date of the half of of each year. The Company has the sole discretion to extend the maturity date
the loan is extendible until March 31, 2026, based solely in the Company’s up until May 1, 2027.
Loan 2 was originally issued last October 1, 2016. Interest is payable every
discretion.
September 30 of each year. Maturity date may be extended by two years,
b. Loan 2’s original maturity date is on July 1, 2024. Maturity date of the whole loan
provided the lender agrees.
can be extended for additional three months at the Company’s discretion.
Loan 3 was originally issued last July 1, 2019. Interest is payable every June 30
c. Bond 1’s original maturity date is on September 30, 2024. This maturity date is
of each year. The Company has the sole discretion to extend the maturity date
extendible until September 30, 2030, provided the lender will agree.
by three months after the original maturity date.
d. Bond 2’s original maturity date is on December 31, 2025; however, the parties
Loan 4 was originally issued last April 1, 2022, with the interest payable every
agreed on December 20, 2023 to extend the loan’s maturity to December 31,
March 31 of each year. During November 2023, the Company breached some of
2026. the covenants related to debt ratio and current ratio. On January 20, 2024, the
From the given information, the total amount of current liabilities shall be lender granted a grace period not to immediately demand the loan’s payment.
a. P14,940,000 c. P19,940,000 From the given information, the total amount of current liabilities shall be
b. P15,240,000 d. P20,140,000 a. P18,725,000 c. P19,815,000
b. P16,655,000 d. P14,615,000
From the given information, the total amount of non-current liabilities shall be
a. P12,000,000 c. P7,000,000 From the given information, the total amount of non-current liabilities shall be
b. P9,000,000 d. P6,000,000 a. P14,000,000 c. P20,500,000
b. P18,000,000 d. P21,300,000

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Chapter 1 — Introduction to Liabilities Chapter 2 - Accounts Payable and Notes Payable

7, As of December 31, 2023, LIBYA Company generated the following information: CHAPTER 2: SELF-TEST EXERCISES
we
Unearned income P600,000
Purchase price of inventories, the title of which is
True or False
1. The balance of the accounts payable is affected by the amount of cash refunds
yet to be transferred to the Company 1,000,000
received from the suppliers.
Estimated warranty liability 800,000
2. Cash purchases do not affect the ending balance of accounts payable.
Accounts payable 2,400,000
Loans payable: 3. Outstanding checks possessed by the payee shall be added to the accounts payable
9-year loan payable - 12% 4,000,000 balance. ,
10-year loan payable - 9% 7,000,000 4, Unreleased checks shall be added to the accounts payable balance.
7-year loan payable - 10% 3,000,000 5. Notes payable are evidenced by a formal document called promissory note.
5-year loan payable - 8% 6,000,000 6. All notes payable are initially measured at their face amounts.
7. Ifthere is one-time payment of noninterest-bearing note on its maturity date, then
The 12% loan payable has a maturity date of December 31, 2024 but can be extended the present value factor of ordinary annuity shall be used in determining its initia]
to December 31, 2028 if the Company chooses to do so. fair value.
8. Interest expense from a note payable bearing interest with stated rate that is
The Company has breached some of the covenants in 9% loan payable and 10% loan substantially equal to market rates is based on the remaining face amount times the
payable. On December 20, 2023 and January 5, 2024, the relevant lenders granted stated rate.
waivers not to immediately collect the loan amounts for 9% loan payable and 10% 9, The carrying amount of noninterest-bearing note payable is also equal to the
loan payable, respectively. Both of these loans had interest payment date of every present value of the remaining cash flows discounted using the prevailing market
December 31 of each year. rate on the reporting date.
The 8% loan payable has an original maturity date of June 30, 2024. On January 31, 10. Changes in the fair value of financial liability accounted at FVTPL arising from the
2024, half of this loan was refinanced and will now mature on June 30, 2029. Interest changes in the entity's own credit risk shall be recognized in OCI.
is payable every June 30 of each year.
Multiple Choice - Theories
From the given information, the total amount of current liabilities shall be 1, The following transactions affect the balance of accounts payable, except
a. P12,340,000 c, P14,040,000 credit purchases
o>

b. P13,040,000 d. P16,040,000 receipt of credit memo from purchase returns

c, receipt of cash refunds from purchase allowance
From the given information, the total amount of non-current liabilities shall be d. none of the above
a. P7,000,000 c. P17,000,000
b. P11,000,000 d. P19,000,000 2. Apayment of accounts payable within the discount period shall decrease the balance
of accounts payable equal to
a. cash payment only
b. cash payment plus purchase discount
c. purchase discount only
d. none of the above since payment of accounts payable shall increase the balance
of the accounts payable
3, Allofthe following checks shall result to adjustments to the ending accounts payable
balance, except
a. outstanding checks
b. unreleased checks
c. stale checks
d. post-dated checks

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 Chapter 2 —- Accounts Payable and Notes Payable Chapter 2- Accounts Payable and Notes Payable

4, Which of the following scenarios will result to adjustments to the ending accounts a. No interest expense shall be recognized for noninterest-bearing note payable
payable balance as of December 31, 2023? since there is no related stated rate.
a. An invoice was received and recorded on December 30, 2023 for goods that b. Interest expense from interest-bearing note payable, with stated rate
were purchased FOB shipping point and were shipped on December 25, 2023. substantially equal to market rate, is equal to beginning face amount multiplied
The goods were actually received on January 2, 2024. with stated rate.
An invoice was received and recorded on January 5, 2024 for goods that were c. Bothaandb.
purchased FOB destination and were shipped on December 29, 2023. The goods d. Neitheranorb.
were actually received on January 3, 2024.
An invoice was received and recorded on December 29, 2023 for goods that 8. The following correctly indicates the carrying amount of each type of note payable,
were purchased FOB shipping point and were shipped on January 2, 2024. The except
goods were actually received on January 5, 2024. a. Interest-bearing note payable with stated rate substantially equal to market rate
An invoice was received and recorded on January 10, 2024 for goods that were - carrying amount is equal to remaining face amount.
purchased FOB destination and were shipped on December 31, 2023. The goods b. Interest-bearing note payable with stated rate not substantially equal to market
were actually received on January 4, 2024. rate - carrying amount is equal to remaining face amount.
c. Noninterest-bearing note payable that is payable lump-sum on maturity date -
5. All of the following scenarios will result to adjustments to the ending balance of carrying amount is equal to present value of remaining cash flows discounted
accounts payable as of December 31, 2023, except using the effective interest rate.
a. A check dated January 10, 2024 was recorded and given to the payee on d. Noninterest-bearing note payable that is payable in equal annual installments -
December 20, 2023.
carrying amount is equal to present value of remaining cash flows discounted
b. An invoice was received and recorded on December 28, 2023 for goods that
using the effective interest rate.
were purchased FOB destination and were actually received on January 5, 2024.
An invoice was received and recorded on January 6, 2024 for goods that were 9. Ifa financial liability is accounted for at FVTPL, which of the following accounting
purchased FOB shipping point and were shipped on December 29, 2023. Goods procedures is not correct?
were actually received on January 7, 2024. a. The carrying amount of the financial liability is equal to its fair value as of the
A check dated December 29, 2023 was recorded and given to the payee on
reporting date.
December 22, 2023.
b. Increase in the fair value of the financial liability is generally recognized as
6. On initial recognition, notes payable are measured at their fair values. Which of the unrealized loss in profit or loss.
following does not properly describe the fair value of the corresponding note c. Interest expense is equal to the beginning-of-the-period market rate multiplied
payable? to the liability’s beginning carrying amount.
a. The fair value of an interest-bearing note payable, in general, is equal to the total d. None of the above.
amount of cash to be paid during the note’s term.
b. The fair value of an interest-bearing note payable, with stated rate that is not [Link] of the following components of the changes in the fair value of the financial
substantially equal to market rates, is equal to the present value of cash flows liability shall be recognized in profit or loss, except
discounted using the market rate on initial recognition. a. entity's own credit risk
c. The fair value of a noninterest-bearing note payable, with one-time payment on b. changes in the benchmark rate
maturity date, is equal to the present value of cash flows discounted using the c. changes from market conditions
market rate on initial recognition. d. none of the above
d. The fair value of a noninterest-bearing note payable, with equal periodic
payment of principal, is equal to the present value of cash flows discounted Straight Problems ;
using the market rate on initial recognition. 1. On January 1, 2023, CHERRY Company had a beginning accounts payable balance 0!
P900,000. During the year, the Company had credit purchases of P4,500,000, which
7. Which of the following correctly describe /s the amount of interest expense that shall represented 75% of the Company’s total purchases. All of the Company’s purchases
be recognized from note payable? have 2/10, n/30 credit terms. Cash payments of P2,450,000 were made within the
discount period while P1,600,000 were paid beyond the discount period. In addition
the Company received total credit memos amounting to P220,000 while cash
49 refunds from suppliers totaled P90,000,
50

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Chapter 2 - Accounts Payable and Notes Payable

Chapter 2 - Accounts Payable and Notes Payable

7. At the beginning of 2023, ROWENA issued a five-year, noninterest-bearing

Required: Determine the balance of the Company’s accounts payable as of December —
promissory note with face amount of P5,000,000 for the purchase of an equipment.
31, 2023. The note is payable in equal annual installments of P1,000,000 starting on Decem ber |
2. During the year 2023, MADONNA Company had the following information involving 31, 2023. Market rates as of January 1, 2023 and December 31, 2023 averaged 10% —
its purchases of inventory items: and 11%, respectively.
a. Cash purchases, which are 10% of all purchases, amounted to P600,000. Required: Determine the journal entries for the years 2023 and 2024.
b. Total cash payments within the discount period amounted P2,328,000 for credit
purchases made under 3/15, n/45 terms. 8. On October 1, 2023, LESLIE Company acquired a land by issuing a seven-year
c. Total cash payments within the discount period amounted P1,980,000 for credit noninterest-bearing promissory note with face amount of P8,400,000. The note is
purchases made under 1/20, n/60 terms. payable in seven equal annual installments every September 30 of each year,
d. Total cash payments beyond the discount period amounted to P1,400,000. starting in the year 2024. Market rates on the issuance date averaged 8%.
e. Credit memos received from the supplier amounted to P340,000, while cash
refunds amounted to P110,000. Required: Determine the journal entries for the years 2023 and 2024.
f. Beginning accounts payable balance amounted to P 1,400,000.
9. On January 1, 2023, JERICHO Company acquired a building by issuing a six-year, 3%
Required: Determine the balance of the Company’s accounts payable as of December interest-bearing promissory note with face amount of P7,000,000. Market rates as
31, 2023. of that date averaged 9%. Interest is payable every December 31 of each year.
3. On January 1, 2023, GRAY Company issued a three-year, 12% interest-bearing Required: Determine the journal entries for the years 2023 and 2024.
promissory note with face amount of P5,000,000 to acquire a building. Market rates
as of that date averaged 12%. Interest is payable every December 31 of each year. 10.0n April 1, 2023, JAMES Company had a financial liability issued for the acquisition
of investments in equity securities. The P6,000,000 face amount financial liability
Required; Determine the journal entries for the years 2023 and 2024 has a maturity date of March 31, 2028 and interest per annum of 12%. On initial
recognition, this financial liability was irrevocably designated at FVTPL. As of |
4, At the beginning of the year 2023, CROCODILE Company acquired a land by paying
December 31, 2023 and 2024, the financial liability had fair values of P5,600,000
P1,000,000 down payment and issuing a four-year, 10% interest-bearing
and P5,750,000, respectively. There were no changes in the Company’s own credit
promissory note with face amount of P6,000,000. The principal is payable in four
risk.
equal annual installments every December 31 ofeach year. Interest is payable on the
same dates as the principal installment payments. Required: Determine the journal entries for the years 2023 and 2024.
Required: Determine the journal entries for the years 2023 and 2024
Multiple Choice
5, SAMANTHA Company acquired a transportation equipment on January 1, 2023 by 1. On December 31, 2023, THOMAS Company reported an unadjusted balance of
issuing a noninterest-bearing promissory note with face amount of P4,000,000 and P2,500,000. In connection with the review of the accounting manager, the following
maturity date of December 31, 2027. Market rates as of January 1, 2023 and data were gathered:
December 31, 2023 averaged 9% and 10%, respectively. e Acheck dated January 10, 2024 and amounting to P160,000 was given to the
payee on December 20, 2023,
Required: Determine the journal entries for the years 2023 and 2024. e Acheck dated December 30, 2023 and amounting to P200,000 was given to the
6. On May 1, 2023, ANDREA Company acquired a land for a total price of P8,000,000. payee only on January 5, 2024.
The Company paid a P2,000,000 down payment and issuing a six-year noninterest- e Acheck dated December 15, 2023 and amounting to P120,000 was given to the
bearing promissory note for the balance. Market rates on January 1, 2023 and payee on December 1, 2023. The check is yet to be encashed by the payee.
December 31, 2023 averaged 8% and 7%, respectively. e An invoice amounting to P170,000 was received and recorded on January 10,
2024, Upon inspection of invoice's details, it was found out that the related goods
Required: Determine the journal entries for the years 2023 and 2024. were shipped FOB shipping point on December 29, 2023. The goods were
actually received on January 8, 2024.

51 52

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 Chapter 2 — Accounts Payable and Notes Payable Chapter 2 - Accounts Payable and Notes Payable

From the given information, the adjusted accounts payable balance as of December
31, 2023 shall be
4. On April 1, 2023, CHARMAINE Company issued a six-year promissory note with a
a. P2,870,000 c. P3,030,000 total face amount of P6,000,000. The note is payable in P1,000,000 annua]
b. P2,830,000 d. P3,150,000 installments every March 31 of each year, starting on March 31, 2024. The
promissory note bears interest of 12% that is payable on the same dates as the
_ As of the end of 2023, SANTORINI Company reported an inventory balance of principal installment payments.
P2,000,000 based on physical count and an unadjusted balance in accounts payable
amounting to P1,800,000. The Company’s cut-off procedures generated the Total interest expense for the year 2024 shall be
following information on some of the purchase invoices: a. P720,000 c. P600,000
e Goods shipped FOB shipping point on December 29, 2023 were actually received b. P630,000 d. P540,000
on January 5, 2024. The related invoice amounting to P190,000 was received and
Total interest expense for the year 2025 shall be
recorded only on January 7, 2024.
a. P660,000 c. P510,000
e Goods shipped FOB destination on December 28, 2023 were actually received on
b. P600,000 d. P480,000
January 4, 2024. The related invoice amounting to P120,000 was received and
recorded on December 30, 2023. ; 5. October 1, 2023, MAUI Company issued a seven-year, noninterest-bearing
e Goods shipped FOB shipping point on December 26, 2023 were actually received promissory note with face amount of P5,000,000. Market rates as of October 1, 2023
on January 2, 2024. The related invoice amounting to P240,000 was received and and December 31, 2023 averaged 9% and 11%, respectively.
recorded on December 29, 2023.
Total interest expense for the year 2024 shall be
The adjusted accounts payable balance as of December 31, 2023 shall be a. P251,704 c. P246,165
a. P1,870,000 c. P2,060,000 b. 267,903 _ d.P278,904
b. P1,930,000 d. P2,320,000
Carrying amount of the note payable as of December 31, 2024 shall be
The adjusted inventory balance as of December 31, 2023 shall be
a. P2,981,335 c. P3,249,655
a. P2,190,000 c. P2,440,000
b. P3,048,415 d. P3,105,842 ©
b. P2,430,000 d. P2,550,000
Total interest expense for the year 2025 shall be
. RHODES Company reported an unadjusted accounts payable balance of P3,400,000 a. P268,320 c. P277,892
as of December 31, 2023. The following additional data were gathered as part of the b. P292,469 d. P274,357
Company's purchase cut-off procedures:
Carrying amount of the note payable as of December 31, 2025 shall be
Date the goods _ Date the invoice a. P3,249,655 ¢. P3,322,772
Invoice Amount Dateshipped werereceived was recorded b. P3,542,124 d. P3,489,043
1 P210,000 12/28/23 01/03/24 01/03/24
2 150,000 12/30/23 01/06/24 01/07/24 6. On July 1, 2023, HILO Company issued a noninterest-bearing promissory note with
3 280,000 12/27/23 12/31/23 12/30/24 face amount of P7,000,000. Maturity date of the note is set on June 30, 2027. In
4 180,000 01/03/24 01/09/24 01/10/24 addition, the principal amounts are payable in equal annual installments every June
5 300,000 12/24/23 01/05/24 12/28/23 30 of each year, starting on June 30, 2024. Market rates on July 1, 2023 averaged
10%.
Invoices 1, 3, and 4 were shipped FOB shipping point, while Invoices 2 and 5 were
shipped FOB destination. In addition, there were checks totaling P450,000 that were Carrying amount of the note payable as of December 31, 2023 shall be
unclaimed by the payees as of December 31, 2023. a. P5,547,264 c, P4,351,990
b. P5,824,627 d. P4,569,590
The adjusted accounts payable balance as of December 31, 2023 shall be
a. P3,830,000 c. P3,610,000 Total interest expense for the year 2024 shall be
b. P3,990,000 d. P3,310,000 a. P494,963 c. P435,199
b. P554,726 d. P489,902

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Chapter 2 — Accounts Payable and Notes Payable Chapter 2 —- Accounts Payable and Notes Payable

Carrying amount of the note payable as of December 31, 2024 shall be 9. At the beginning of 2023, MUMBLE Company issued a financial liability to be |
a. P4,351,990 c. P4,569,590 accounted at FVTPL. This liability has a face amount of P5,000,000, maturity date of
b. P3,037,189 d. P3,524,789
December 31, 2029, and interest of 7% that is payable every December 31 of each
Total interest expense for the year 2025 shall be year. Fast forward to December 31, 2023, the market rates averaged 8%. Lastly,
a. P435,199 c. P303,719 benchmark rates averaged 3% and 3.50% as of January 1, 2023 and December 31, ©
b. P369,459 d. P296,793 2023, respectively.

7. On January 1, 2023, BROOKLYN Company issued a ten-year, 2% interest-bearing

The financial liability’s carrying amount as of December 31, 2023 shall be
note with face amount of P8,000,000. Market rates as of that date averaged 10%. The a. P5,000,000 c. P4,768,858
interest is payable every December 31 of each year. b. P4,882,656 d. P4,954,903

Total interest expense for the year 2024 shall be The net amount to be reported in the Company’s 2023 profit or loss shall be
a. P800,000 c. P406,748 a. P117,344 gain c. P113,798 gain
b. P160,000 d. P431,422 b. P117,344 loss d. P113,798 loss
Carrying amount of the note payable as of December 31, 2024 shall be The net amount to be reported in the Company's 2023 OCI shall be
a. P4,585,645 c. P4,769,032 a. P117,344 gain c. P113,798 gain
b. P8,000,000 d. P4,884,210 b. P117,344 loss d. P113,798 loss

Total interest expense for the year 2025 shall be

a. P431,422 c. P431,422
b. P458,565 d. P488,421

Carrying amount of the note payable as of December 31, 2025 shall be

a. P4,585,645 c. P4,769,032
b. P8,000,000 d. P4,884,210

8. On April 1, 2023, AMBASSADOR Company issued a six-year, 7% interest-bearing

financial liability with P3,000,000 face amount to finance the acquisition of
investment in debt securities. This investment is to be accounted for at FVTPL. To
reduce the accounting mismatch, the financial liability is to be accounted at FVTPL.
Interest is payable every March 31 of each year.
As of December 31, 2023 and 2024, financial liability’s fair value amounted to
P3,100,000 and P3,190,000, respectively. During 2023, there were no changes in the
Company’s own credit risk. However, during 2024, changes in the Company’s own
credit risk contributed P30,000 to the increase in the financial liability’s fair value.

The net amount to be recognized in the Company’s 2023 profit or loss shall be
a. P210,000 net decrease c. P110,000 net decrease
b. P157,500 net decrease d. P257,500 net decrease

The net amount to be recognized in the Company’s 2024 profit or loss shall be
a. P270,000 net decrease c. P300,000 net decrease
b. P150,000 net decrease d. P240,000 net decrease

55

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 Chapter 3 - Introduction to Provisions Chapter 3 — Introduction to Provisions

3. An obligating event will result to either legal obligation or constructive obligation.

CHAPTER 3: SELF-TEST EXERCISES Sources of legal obligation include the following, except
a. operation of law
True or False b. contract
1, Provisions are recorded as liabilities while contingent liabilities are disclosed only c. legislation
in the notes to the financial statements. d. none of the above
Z Probable means at most 50% likelihood of happening.
3. If a reliable estimate of the obligation cannot be made, no liability shall be 4. Based on the current rules and regulations, an entity engaged in transportation
recognized even if the likelihood is probable. services shall replace the tires of its vehicles every five years. As of the reporting
An obligation arising from contract is considered as a constructive obligation. period, there is only two years left before the tires are required to be replaced. Based
on this information,
U1

The amount recognized for the provision shall be the best estimate of the
a. the entity shall disclose in the notes to financial statements a contingent liability
expenditure required to settle the present obligation.
the legal requirement to replace the tires.
Expected value method shall be used when there is a continuous range of possible
b. _ the entity shall recognize a provision equal to the present value of the estimated
outcomes, and each point in that range is as likely as any other. costs of replacing the tires.
Mid-point of range method is used when the provision being measured involves a c. the entity shall not recognize a provision nor disclose informaiton’ in the notes
large population of items. to the financial statements.
Actual settlement of a provision after the reporting date may be considered in d. the entity shall recognize a provision equal to the present value of the estimated
determining the carrying amount of the provision as of the reporting date. costs of replacing the tires and make a disclosure to the notes.
Expected proceeds from the disposal of an asset shall be recognized as a receivable,
even though the control is not yet transferred to the buyer. 5. One of the manufacturing entity’s plants has exploded, releasing harmful chemicals
10. Generally, the amount of provision shall be recognized as loss in the entity’s profit in the air. These released chemicals are considered health hazards and may cause
or loss. severe lung issues to the people who inhaled. As to the entity’s obligation, there is a
law requiring it to shoulder the hospitalization costs of the affected people.
11. Changes in the estimate of provision shall result to the restatement of previously
However, the entity is not able to reliably estimate the ultimate amount of total
reported financial information related to prior years.
hospitalization costs. In this case,
a2: Restructuring provision shall exclude costs associated with the ongoing activities
a. no recognition of provision nor disclosure shall be made.
of the entity operations. b. a provision shall be recognized as liability.
c. acorresponding loss shall be recognized in the income statement.
Multiple Choice - Theories d. only a contingent liability shall be disclosed in the notes.
L The following are correct accounting and reporting for provisions and contingent
liabilities, except 6. During the current year, one of the entity's ships sank and caused a widespread oil
a. Provision is not disclosed in the notes since this has already been recognized in spill. There is no specific law requiring the entity to clean-up the spill and
the balance sheet. rehabilitate the affected area. However, the entity has published a public statement
b. Contingent liability is disclosed in the notes to the financial statements. that it will accept responsibility for the disaster. Costs of cleaning and rehabilitating
c. Provision is recognized as liability in the balance sheet. the area are reliably measurable. In this case,
d. Contingent liability is not recognized as liability in the balance sheet. a. no recognition of provision nor disclosure shall be made.
b. aprovision shall be recognized as liability.
Obligations with the following likelihood are required to be disclosed in the notes to c. acorresponding increase in goodwill shall be recognized in the balance sheet.
the financial statements, except d. only a contingent liability shall be disclosed in the notes.
a. probable
7. Some customers filed a case against an entity related to the adverse side effects of
b. possible
its medicine. According to the entity's lawyer, there is a 30% chance that the entity
c. remote
may lose the case. Damages that may be paid to these customers are measurable
d. none of the above since all obligations of an entity shall be disclosed, regardless reliably. In this case,
of the likelihood of their occurrence, a. aprovision equal to the amount of reliably estimated amount of damages.
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Chapter 3 - Introduction to Provisions Chapter 3 - Introduction to Provisions

b. a provision equal to the amount of reliably estimated amount of damages times 13. The amount of provision to be recognized from onerous contracts shall be equal to
a. costs of fulfilling the onerous contract
the 30% likelihood that the entity may be held liable.
b. any compensation or penalties arising from failure to fulfill the onerous
c. only acontingent liability shall be disclosed in the notes.
contract.
d. no recognition of provision nor disclosure shall be made. C: higher ofa and b
8. The following concepts on measuring the provision are true, except d. lower of a and b
a. The amount recognized as a provision shall be the best estimate of the 14. The following are examples of restructuring, except
expenditure required to settle the present obligation at the end of the reporting a. sale or termination of a line of business.
period. b. the closure of business locations in a country or region or the relocation of
b. If the effect of the time value is material, the amount of provision shall be the business activities from one country or region to another.
present value of the estimated expenditures to settle the obligation. Cc. termination of employees in different departments due to their unreasonable
c. Expected value shall be used if the provision being measured involves a large absences.
population of items. d. changes in management structure.
d. Mid-point of range is used when there is a continuous range of possible
outcomes, but some points in that range are more likely than other points. [Link] entity transferred its operations from Country X to Country Y. In this case,
restructuring provision shall exclude all of the following, except
9. The following are not incorporated in the measurement of a provision, except a. termination benefits given to retrenched employees
a. events after the reporting period b. marketing and advertising costs in Country Y
b. plaintiff's offer of out-of-court settlement c. costs of relocating continuing staff
c. expected gain from the disposal of an asset d. costs of training new staff in Country Y
d. expected proceeds from the disposal of an asset
Straight Problems
[Link] of interest from a provision measured at present value shall be
1. For each of the give events below, determine the journal entry to recognize the
a. recognized as interest expense
provision, if any, on December 31, 2023:
b. added to the related provision a. One of the entity’s tanker leaked hundreds of gallons of oil to the ocean on
c. added to the entity's goodwill balance October 1, 2023. There is no law requiring the entity to clean-up the spilled oil.
d. bothaandb However, the entity is committed to make good of any environmental damage it
[Link] of the following is the correct accounting procedure if there is a change in the previously made during the prior years as part of its corporate social
estimate of a provision? responsibility. Costs of cleaning and rehabilitating the affected area are reliably
a. The change shall be recognized in the current period's profit or loss estimated at P6,000,000.
b. The prior periods’ financial statements shall be restated, One of the entity’s tanker leaked hundreds of gallons of oil to the ocean on
c. The beginning retained earnings shall be restated, October 1, 2023. There is a law requiring the entity to clean-up the spilled oil.
d. The provision is debited if there is an increase in estimate and credited if there However, costs of cleaning and rehabilitating the affected area are not reliably
is a decrease in estimate. measurable.
Cc. An entity’s new medicine released to the public during 2023 caused unwanted
[Link] Year 1, one of the entity’s former employees filed a case against the entity's
labor practices, As of the end of Year 1, it was reliably assessed that itis not probable side effects that resulted to mental anguish and physical suffering of some of the
that the entity will be held liable. Consequently, no provision was recognized during users. These users filed a single legal suit against the entity. Based on the reliable
Year 1. However, during Year 2, it was reliably assessed that it is now probable that estimate, there is an 80% chance that the entity will be prosecuted and required
to pay a total of P4,000,000 damages.
the entity will be held liable in the labor case. In this case,
a. Financial statements for Year 1 shall be restated by recognizing a provision and An entity’s new medicine released to the public in 2023 caused unwanted side
corresponding loss. effects that resulted to mental anguish and physical suffering of some of the
b. Financial statements for Year 2 shall reflect the recognition of the provision in users. These users filed a single legal suit against the entity which has a 45%
the balance sheet and the corresponding loss in the income statement. likelihood that will make the entity liable for P7,000,000 damages.
c. Retained earnings balance at the beginning of Year 2 shall be restated,
79
d. Only a disclosure in the notes shall be made during Year 2,
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 Chapter 3 - Introduction to Provisions Chapter 3 — Introduction to Provisions

e. A common carrier entity is legally required to periodically replace the tires of its Required: From this information and ignoring the time value of money, determine
fleet of provincial buses every five years as a precondition for the renewal of its the journal entries to be made for the years 2023 and 2024.
franchise. As of December 31, 2023, there are still three years before the required
replacement of tires. Costs of tire replacement after three years are estimated at 4. During 2023, some of the users of VERONICA Company’s products filed a legal
P2,000,000. Relevant discount rate is 8%. complaint against the Company because of the skin damage caused by one the
Company’s beauty products. According to the Company’s lawyers, if the lawsuit is
As of December 31, 2023, based on the current state of an entity's mining successful against the Company, total damages to be paid will amount to P6,000,000.
operations, it is probable that an environmental damage will happen in few There is a 35% likelihood that the Company will lose the case and will be required
months’ time. Local regulation requires the reparation of such damages. In case to pay the complainants.
there is an actual environmental damage, costs to rehabilitate the affected are
estimated to be P3,000,000. Required: Determine the amount of provision to be recognized, if there is any, as of
December 31, 2023 based on the given information.
2. Under each of the following independent scenarios, determine the journal entry to
5. During the latter parts of 2023, one of the PEREZ Company’s mining operations has
recognize the provision, if any, on December 31, 2023:
On November 1, 2023, the board of directors have agreed to close down inadvertently released harmful chemicals to the major river in the locality. The
a. its
operations in one of its geographical areas, effective on the 24 quarter of 2024. mining regulatory body required the Company to clean up the river and restore it to
The decision is known in the headquarters but is yet to reach the affected its condition before the environmental disaster. This is the first time that the
operations. Total costs of restructuring are estimated at P10,000,000. Company is involved in this kind of situation.
On October 15, 2023, the board of directors have agreed to close down its Required: Under each of the following independent scenarios, determine the amount
operations in one of its geographical areas, effective on the 2"4 quarter of 2024. of provision that the Company shall recognize as of December 31, 2023:
The decision has already been communicated to affected operations. Total costs 1. The following are the possible amounts of clean up and restoration costs and
of restructuring are estimated at P8,000,000. their related probabilities:
An entity is in the process of downsizing its business in one particular area. It Estimated Cash Outflow Probability
plans to transfer some of its equipment to another area and expects to incur P1,800,000 30%
estimated transportation, handling and deployment costs totaling P1,500,000. 2,600,000 50%
3,500,000 20%
On November 2023, amendments to taxation law introduced a lot of changes
which made the current knowledge of an entity's finance department employees. 2. The range of clean up and restoration costs is from P1,800,000 to P3,500,000
Because of this, it plans to conduct a training for the amendments on January and the points between amounts are equally likely to occur as the other points.
2024 at an estimated cost of P400,000.
6. On December 31, 2023, LAMBDA Company estimates the possible adverse financial
As of December 31, 2023, an entity plans to have its factory equipment repaired impact of a lawsuit in which it is a defendant. Based on the Company’s best estimate,
in February 2023 at an estimated cost of P600,000. it is possible that it may pay the plaintiff P4,500,000.
Some ofan entity’s customers who availed Botox treatment suffered adverse side As of December 31, 2024, the lawsuit has not yet settled, but based on preliminary
effects and decided to file a single case against the entity. The entity’s lawyers hearings, it became probable that the Company will be held liable and pay
assessed that there is 100% chance that the entity will be held liable and P3,800,000, based on best estimate,
estimated that the amount of damages to be paid range from P4,000,000 to
P8,000,000. Each amount in that range has an equal likelihood of happening as Required: From this information, determine the amounts to be recognized as
the other amounts in the same range. provision or disclosed as contingent liability as of December 31, 2023 and 2024.
3. During December 2023, MELANIE Company’s oil tanker ran aground and caused a
major oil spill. The Company is required to clean it up at an estimated total cost of | 7. On October 31, 2023, DAMSEL Company became a defendant for a lawsuit brought
P5,000,000. During 2024, the Company made partial clean-up operations incurring
by its former employee. As of year-end 2023, the Company assessed that it is
a total cost of P2,700,000. As of December 31, 2024, the estimate of total remaining probable that it will pay P1,200,000 based on its best and reliable estimate. As of
clean-up costs amounted to P2,800,000., year-end 2024, the Company assessed that it is still probable to pay the plaintiff but
with revised amount of P1,500,000 based on the its revised best estimate.

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Chapter 3 — Introduction to Provisions

Chapter 3 - Introduction to Provisions

2. NANCY Company became involved in a litigation involving the accident caused by

Required: Determine the journal entries to be made for the years 2023 and 2024, one of its transportation trucks during the latter parts of the year 2023. The accident
8. SYLVESTER Company became a defendant for a lawsuit brought by its customers caused widespread property damage, but luckily, resulting to only slight physical
related to the alleged harmful effects of its products. As of year-end 2023, the injuries. In connection with this, the affected entities and individuals filed a lawsuit
claiming P5,000,000 damages. In addition, there was also a one-time offer from the
Company assessed thatit is possible that it will pay P1,450,000 based on its best and
plaintiffs for an out-of-court settlement amounting to P4,000,000.
reliable estimate. As of year-end 2024, the Company reassessed that it is now
probable that it will lose the case and that it will pay P1,600,000 based on its revised On the other hand, the Company reliably estimates that it will be held liable for
best estimate. damages ranging from P3,500,000 to P4,500,000, with each point in the range is
likely as any other point. In addition, settlement is expected to happen after two
Required: Determine the journal entries to be made for the years 2023 and 2024. years. Relevant discount rate is 7%.

9. In December 2023, DRAGON Company's former CFO filed a lawsuit against the From the given information, the amount of provision that the Company shall
Company on account of its labor practices that are detrimental to its employees. recognize as of December 31, 2023 shall be
a. P3,057,036 c. P3,493,755
Based on the Company’s assessment, there is a 30% chance that it will not be held b. P3,930,474 d. P4,367,194
liable for damages. In cases the Company will be held liable, there is a 40%
probability that it will pay P8,000,000, 40% probability that it will pay P6,000,000 3. During December 2023, it was alleged that SAMUEL Company’s toys contain
and 20% probability that it will pay P5,000,000. Due to lengthy legal procedures substances that are harmful to the children playing with them. As a result, a group
of parents sued the Company for total damages of P7,000,000. Since, this is the first
involving labor cases, the Company estimates that it will pay the plaintiff after three
time that the Company has become involved in such a case, it consulted with an
years.
outside lawyer. This lawyer estimated that the Company has a 60% chance of losing
In addition, the Company incorporated a 10% upward cash flow adjustment to the case, and if that is the case, the Company will be required to pay the following
account for the possible differences between the estimated cash outflows and the likely amount of damages:
amount of actual cash outflows. Relevant discount rate is 9%. Estimated Cash Outflow Probability
P6,000,000 30%
Fast forward to December 31, 2024, things became clearer with the Company being
6,500,000 60%
able to make its best estimate of its obligation at P7,000,000, to be incurred after 7,500,000 10%
two years. In addition, there is now a 100% chance that the Company will be held
liable for damages. Relevant discount rate is 8%. It was also estimated that the courts will have their final decision in few months.

Required: Determine the journal entries to be made for the years 2023 and 2024. From the given information, the amount of provision that the Company shall
recognize as of December 31, 2023 shall be
Multiple Choice - Problems a. P3,870,000 c. P4,200,000
1. During 2023, one of MANDY Company’s trains became derailed causing serious b. P6,450,000 d. PO
physical injuries to some of the passengers. In connection with this, the affected 4, In November 2023, VEGETABLE Company became involved ina litigation in which
passengers filed a lawsuit claiming P2,300,000 damages. The Company’s lawyers it was reasonably assessed that there is 30% chance that it will lose the case. In case
assessed that the Company is most certainly be held liable for damages from the Company has lost the case, there is a 60% chance that it will be required to pay
P1,800,000 up to P3,000,000, with each point within that range have the same P4,000,000 damages and 40% chance that it will be required to pay P5,500,000
likelihood of occurrence as the other points in the said range. The courts are damages. It was also estimated that the courts will have their final decision in few
expected to have judgment during 2024, so the effect of time value of money is months.
immaterial.
From the given information, the amount of provision that the Company shall
From the given information, the amount of provision that the Company shall recognize as of December 31, 2023 shall be
a. P1,380,000 c. P4,600,000
recognize as of December 31, 2023 shall be
b. P4,000,000 d. PO
a. P2,300,000 c, P3,000,000
b. P1,800,000 d, P2,400,000 83

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 Chapter 3 - Introduction to Provisions
Chapter 4 - Warranties
5. As of December 31, 2023, CARROT Company is currently a defendant in a lawsuit
involving the health hazards of the chemicals it released in the air. As of the same f CHAPTER 4: SELF-TEST EXERCISES
date, the Company reasonably estimated that there is an 80% chance that it may be
held liable for P5,000,000, as the best estimate of its obligation. True or False
On February 1, 2024, the court has made its final and appealable decision requiring 1. For accounting purposes, warranties are classified as assurance-type or service-
the Company to pay P5,500,000 damages. type.
2. Aside from rectifying a damaged product covered by warranty, an entity may also
From the given information, the amount of provision that the Company shalj
provide a replacement product if the damage cannot be rectified anymore.
recognize as of December 31, 2023 shall be
Assurance-type warranties are those that are not required by legislation.

Pim Ww
a. P4,000,000 c. P5,500,000
Service-type warranties provide the customer with a service.
b. P5,000,000 d. PO
Assurance-type warranties cover periods that are usually shorter than the periods
covered by service-type warranties.
6. During the October 2023 meeting of its board of directors, QUEEN Company decided
6. Warranty expense from assurance-type warranties shall be recognized during the
to close one of its divisions involved in manufacturing micro-chips on April 1, 2024,
period the actual warranty costs were incurred.
The decision was immediately communicated to the affected employees. Estimated
7. Actual warranty costs incurred for assurance-type warranties shall increase the
costs that may be relevant are the following:
amount of estimated warranty liability.
Estimated redundancy payments _P3,500,000 8. Service-type warranties are accounted under PFRS 15, Revenue from Contracts with
Costs of transferring some of the equipment used in micro-chip Customers.
division to other division 450,000 9. The transaction price allocated to service-type warranty shall be immediately
Estimated payments to employees that will remain until the recognized as income.
actual closure, 20% of their time will be utilized in managing 10. Warranty costs incurred related to service-type warranty are recognized during the
the closure, while the remaining 80% will be utilized in period when the related goods were sold.
managing the existing customers 1,200,000
Multiple Choice - Theories
Costs of dismantling the equipment used in micro-chip division
that will not be used in other divisions 250,000
1. Assurance-type warranties have the following general characteristics, except
Costs of airfare for transferring the executives to other divisions 300,000 a. These are usually required by regulations.
Costs of tearing down the micro-chip division’s factory 800,000 b. These usually cover a shorter period of time.
Purchase of equipment to be used in other divisions 500,000
c. These provide guarantee that the covered product will function as the parties
intended.
From the given information, the amount of restructuring provision that shall be d. None of the above
recognized as of December 31, 2023 shall be 2. Service-type warranties have the following general characteristics, except
a. P1,290,000 c. P5,680,000 a. The entity granting these warranties provides services to the customer.
b. P4,790,000 d. P6,790,000 b. These usually cover a longer period of time.
c. Thereisno option for the customers to separately acquire this type of warranty.
d. None of the above.
3. Which of the following correctly indicates the applicable accounting standard/s to
the different types of warranties?
a. Assurance-type warranties are accounted under PAS 37 while service-type
warranties are accounted under PFRS 15.
b. Assurance-type warranties are accounted under PFRS 15 while service-type
warranties are accounted under PAS 37.
c. Both assurance-type warranties and service-type warranties are accounted
under PAS 37.
4. Both assurance-type warranties and service-type warranties are accounted
84 under PFRS 15.
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Chapter 4 — Warranties Chapter 4 — Warranties

4. Warranty expense from assurance-type shall be recognized average repair cost of P1,400 per unit. Actual warranty costs incurred during the
a. During the period when warranty costs were actually incurred. year amounted to P3,220,000.
b. During the period when the related goods were sold.
Required: From the given information, determine the following:
c. During the end of the warranty period. a. Journal entries for the year 2023.
d. None of the above. b. Estimated warranty liability balance as of December 31, 2023
5. What is the effect of incurring actual warranty costs from an assurance-type
warranty? 3. Atthe beginning of the year 2023, SANCTITY Company reported estimated warranty
liability amounted to P930,000. For the years 2023 and 2024, it reported the
a. Warranty expense shall be recognized when an entity actually incurs warranty
costs. following information:
b. Warranty liability shall be decreased by the amount of actual warranty costs. 2023 2024
c. Theactual amounts incurred by the entity shall be deferred as prepaid asset and Sales revenue P24,000,000 P29,000,000
expensed at the end of the period covered by the warranty. Actual warranty costs 860,000 750,000
d. The actual amounts incurred by the entity shall be added to the balance of
warranty liability. The Company estimates its warranty costs as 3% of its sales revenue.
6. The amounts received or allocated as service-type warranty shall be initially Required: From the given information, determine the following:
recognized as a. Journal entries for the years 2023 and 2024.
a. income b. Estimated warranty liability balance as of December 31, 2023 and 2024
b. expense
c. asset 4. SANCTUARY Company had sold 90,000 units and 110,000 units of its product during
d. liability the years 2023 and 2024, respectively. It was reliably estimated that 2% of sold units
will need to be rectified within one year after the sale, while another 1% of the units
7. Subsequent to initial recognition, the initially recognized amount of service-type will need to be rectified beyond one year after the sale. Average warranty cost is
warranty shall be recognized as estimated at P800 per unit. Actual warranty costs during the years 2023 and 2024
a. income using straight-line method amounted to P2,140,000 and P2,430,000, respectively. Estimated warranty liability
b. expense using straight-line method had a balance of P850,000 as of January 1, 2023.
c. asset, but expensed at the end of the warranty period
d. liability, but recognized as income at the end of the warranty period Required: From the given information, determine the following:
a. Journal entries for the years 2023 and 2024.
Straight Problems b. Estimated warranty liability balance as of December 31, 2023 and 2024
1. At the beginning of the year 2023, JUMPSTART Company reported a beginning
estimated warranty liability of P1,500,000. During the year, it generated a total sales 5. MESMERIZING Company maintains a warranty program wherein the covered
revenue of P36,000,000, which are covered by an assurance-type warranty. The defective products are replaceable with a brand-new unit. During the year 2023, the
Company expects the warranty costs to be 4.50% of the sales revenue. In addition, Company manufactured 100,000 units of its product for a total manufacturing cost
actual warranty costs of P1,430,000 were incurred during the year. of P35,000,000 and was able to sold 80,000 of these units. It is expected that 2% of
the sold units will be replaced as part of the warranty program. The damaged goods
Required: From the given information, determine the following: returned by the customers have net realizable value of P80/unit. In addition, the
a. Journal entries for the year 2023. Company also shoulders transportation costs related to the replacement units at an
b. Estimated warranty liability balance as of December 31, 2023 average cost of P30/unit. For the year 2023, 1,050 units were replaced. On January
1, 2023, the Company had an estimated warranty liability balance of P72,000.
2. On January 1, 2023, DEMEANOR Company reported estimated warranty liability Required: From the given information, determine the following:
amounting to P1,900,000. During the same year, the Company had sold 80,000 units a. Journal entries for the year 2023 and 2024.
of its product which are covered by the Company's assurance-type warranty. Out of b. Estimated warranty liability balance as of December 31, 2023 and 2024
these units, the Company expects that 4% will have minor damage with an average
repair cost of P600 per unit, while 1% of these will have major damage with an
100
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 Chapter 4 - Warranties
Chapter 4 — Warranties
offers in its kitchen appliances. During the year 2023, it sold the following service.
6. AMBITIOUS Company offers one-year warranty to its sold products. For the years type warranties:
2022 to 2024, the Company had the following information:
Date Duration of Warranty No. of Contracts Sold
2022 2023 2024 January 1, 2023 three years 4
Sales P24,000,000 P34,000,000 P32,000,000 January 1, 2023 four years 5
Actual warranty costs from: April 1, 2023 three years 3
2022 sales P680,000 P230,000 = April 1, 2023 four years 2
2023 sales - 1,200,000 400,000 October 1, 2023 three years 6
2024 sales - - 1,050,000 October 1, 2023 four years 4
Total actual warranty costs P680,000 P1,430,000 P1,450,000
The Company adjusts its records only every December 31 of each year. In addition,
Warranty costs are expected to be 5% of the sales amount. The Company started its actual costs incurred for the repairs covered by the service-type warranty amounted
operations on January 1, 2022. to P15,000 and P20,000 during the years 2023 and 2024, respectively.

Required: From the given information, determine the following: Required: From the given information, determine the following:
a. Journal entries for the years 2022, 2023, and 2024. a. Journal entries for the years 2023 and 2024.
b. Estimated warranty liability balance as of December 31, 2022, 2023, and 2024. b. Contract liability - warranty balance as of December 31, 2023 and 2024

7. On January 1, 2023, PROGRESSIVE Company reported an estimated warranty [Link] Company offers one-year assurance-type warranty for the gadgets it sells
liability of P1,050,000. Over the next two years, 2023 and 2024, the Company The Company estimates its assurance-type warranty costs to be 3% of its sales
reported the following financial information: revenue. In addition, during 2023, the Company also started to offer a voluntary
four-year service-type warranty services which covers a broader scope of gadget
2023 2024
care compared to the assurance-type warranty.
Sales P26,000,000 P30,000,000
Actual warranty costs 900,000 1,650,000 During the year 2023, the Company had the following information:

The Company estimates warranty costs as 3% of its revenue. However, starting Beginning assurance-type warranty liability P640,000
2024, the Company’s quality control became relaxed, prompting the Company to Sales revenue 35,000,000
revise the warranty costs as 5% of its revenue. Actual warranty costs - assurance-type warranty 1,200,000
Required: From the given information, determine the following: Actual warranty costs - service-type warranty 800,000
a. Journal entries for the years 2023 and 2024. Service-type warranties sold on January 1, 2023 3,600,000
Service-type warranties sold on July 1, 2023 4,000,000
b. Estimated warranty liability balance as of December 31, 2023 and 2024
Required: From the given information, determine the following:
8. On July 1, 2023, SAMARITAN Company sold a gaming laptop for a total amount of
P200,000. Included in the price is the extended warranty service for the next four a. Journal entries for the year 2023.
years. Stand-alone prices of the gaming laptop and warranty services were P198,000
b, Estimated warranty liability balance from assurance-type warranty as of
and P22,000, respectively. During the year 2024, warranty repairs were made to this December 31, 2023.
gaming laptop costing the Company P2,000. c. Contract liability - warranty balance from service-type warranty as of
December 31, 2023.
Required: From the given information, determine the following:
a. Journal entries for the years 2023 and 2024. Multiple Choice - Problems
b. Contract liability - warranty balance as of December 31, 2023 and 2024 1, CANOPUS Company estimates its warranty costs to be 6.50% ofits sales revenue. On
January 1, 2023, the Company had an estimated warranty liability balance of
9, POLARIS Company offers three-year service-type warranty for P15,000 and four- P1,540,000. For the years 2023 and 2024, sales revenue amounted to P45,000,000
year warranting for P18,000, both in addition to the assurance-type warranty it and P42,000,000, respectively. In addition, actual warranty costs amounted t0
P3,250,000 and P2,650,000 during 2023 and 2024, respectively.
102
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Chapter 4 — Warranties
Chapter 4 — Warranties
In addition, the Company replaced 5,400 units and 5,750 units during 2023 angq
Estimated warranty expense for the year 2023 shall be 2024, respectively. Estimated warranty liability as of January 1, 2023 amounted tf
a. P2,925,000 c. P2,730,000 P1,080,000.
b. P3,250,000 d. P2,650,000
Estimated warranty liability as of December 31, 2023 shall be
Estimated warranty liability as of December 31, 2024 shall be a. P270,000 c, P540,000
a. P1,278,000 c. P1,295,000 b. P360,000 d. P620,000
b. P1,185,000 d. P1,215,000
Estimated warranty expense for the year 2024 shall be
2. On January 1, 2023, CENTAURUS Company reported a beginning estimated a. P2,840,000 c. P2,390,000
warranty liability balance of P900,000. As to estimated warranty costs, the Company b. P2,700,000 d. P2,430,000
estimates that 3.50% of the warranty costs will be incurred within one year from the
date of sale, while 2.50% of the warranty costs will be incurred beyond one year Estimated warranty liability as of December 31, 2024 shall be
from the date of sale. Actual warranty costs for 2023 and 2024 amounted to a. P126,500 c. P124,500
P1,950,000 and P1,520,000, respectively. Total sales revenue for 2023 and 2024 b. P112,500 d. P180,500
amounted to P30,000,000 and P28,000,000, respectively.
. ACAPELLA Company offers two-year warranty covering its sold products. The
Estimated warranty liability as of December 31, 2023 shall be
Company started its operations on January 1, 2022. The Company estimates its
a. P610,000 c. P720,000
warranty costs as 5% ofits sales revenues. Estimated warranty liability as of January
b. P750,000 d. P840,000
1, 2023 amounted to P600,000. For 2023 to 2025, the Company reported the
Estimated warranty liability as of December 31, 2024 shall be following financial information:
a. P690,000 c. P860,000
2023 2024 2025
b. P780,000 d. P910,000
Sales P30,000,000 28,000,000 P34,000,000
3. ARCTURUS Company estimates that 3% of the sold units will have minor defects Actual warranty costs from:
while 1% of the sold units will have major defects. Warranty costs of repairing units 2022 sales P300,000 P120,000 P-
with minor defects and major defects are estimated to be P400/unit and 2023 sales 800,000 350,000 150,000
P1,000/unit, respectively. Total number of units sold during 2023 and 2024 2024 sales ~ 720,000 300,000
numbered 120,000 units and 140,000 units, respectively. Actual warranty costs 2025 sales - 950,000
incurred during 2023 and 2024 amounted to P2,750,000 and P2,860,000, Total actual warranty costs P1,100,000 P1,190,000 P1,400,000
respectively. Estimated warranty liability had a balance of P1,100,000 on January 1,
2023. Estimated warranty expense for the year 2024 shall be
a. P1,220,000 c. P1,540,000
Estimated warranty liability as of December 31, 2023 shall be b. P1,400,000 d. P1,630,000
a. P1,090,000 c. P840,000
b. P990,000 d. P720,000 Estimated warranty liability as of December 31, 2024 shall be
a. P1,350,000 c. P1,030,000
Estimated warranty liability as of December 31, 2024 shall be
b. P1,190,000 d. P990,000
a. P980,000 c. P1,210,000
b. P1,120,000 d. P1,450,000 Estimated warranty expense for the year 2025 shall be
4. VEGA Company offers a replacement unit for defective goods covered by its a. P1,250,000 c. P1,500,000
warranty. Manufacturing costs are P500/unit while the returned and defective units b. P1,450,000 d. P1,700,000
have net realizable value of P100/unit. In addition, the Company also shoulders the Estimated warranty liability as of December 31, 2025 shall be
transportation costs for the return of the defective units and for the transfer of the
a. P1,050,000 c. P1,360,000
replacement units. Average transportation costs are estimated to be PSO/unit.
b. P1,130,000 d. P1,490,000
During 2023 and 2024, the Company has sold 200,000 units and 180,000 units,
respectively. The Company estimates that 3% of the sold units will become defective.

103 104

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 Chapter 5 - Premiums, Rebates, Discounts and Other Deferred Income Items
Chapter 4 — Warranties
CHAPTER 5: SELF-TEST EXERCISES
6. Starting January 1, 2023, HADAR Company offered its customers a four-year service
warranty on its sold products on top of the assurance-type warranty that it is True or False
providing. Total price for this warranty is P20,000, On January 1, 2023, 10 service a Under PFRS 15, premium expense shall be recognized during the period when the
warranty contracts were sold, while on July 1, 2023, 15 service warranty contracts related products were sold.
were sold. No other service warranty contracts were sold during 2023. Actual Z. Under PAS 37, premium liability shall be recognized as an income when there is an
warranty Costs incurred for the damages claimed during 2023 amounted to P35,000. actual distribution of the items of premium.
3 Under PFRS 15, the transaction price shall be allocated to the products sold and to
Net income from this service-type warranty for the year 2023 shall be
items of premium based on their relative stand-alone selling prices.
a. P62,500 c. P87,500 The stand-alone selling price of the items of premium shall be determined by
b. P48,500 d. P52,500 considering the amount of effective discount that the customers will receive by
The balance of the contract liability - warranty as of December 31, 2023 shall be exercising their rights under the premium coupons.
a. P412,500 c. P280,500 In granting loyalty points due to sales to the customers, an entity has two
b. P372,500 d. P250,500 performance obligations.
An entity acts as a principal if other entities will supply the goods or services
- ALTAIR Company started its operations on January 1, 2023. Starting on the same
covered by the customer loyalty program.
date, the Company offered three-year service warranty for all of the gadgets sold. In
In customer loyalty program where the entity acts as the agent, the amount of
connection with this warranty, the Company had the following financial information
income it recognizes shall be the net amount to which the entity is entitled.
during 2023 and 2024:
Changes in the estimate of the number of points to be redeemed shall result to the
Proceeds from service warranties sold on: restatement of the previously reported income from points.
January 1, 2023 P432,000 Under PFRS 15, an entity shall recognize rebate expense and corresponding rebate
July 1, 2023 720,000 liability equal to the estimate of the total amount of rebates that will be used by
October 1, 2023 900,000 customers.
January 1, 2024 648,000 10. The stand-alone selling price of a free product is equal to its supposed selling price
April 1, 2024 1,080,000 times the probability that the customer will avail the free product.
August 1, 2024 864,000 11. Ifan entity makes a sales promotion where a customer can have one unit of product
Actual repair costs claimed by customers during the: in the future for free if it buys four units of the same product now, then the amount
Year 2023 150,000 received from this customer shall be allocated to the four units sold and to the free
Year 2024 220,000 one unit of product to be given to the customer in the future.
Net income from the service warranty during 2023 shall be 12. The amount initially received as advances from customers shall be recognized as
a. P339,000 c. P440,000 revenue at the time of receipt.
b. P189,000 d. P290,000 13, Amounts received from selling gift certificates shall be recognized as revenue only
when the holders used these certificates to avail the entity’s products and/or
The balance of the contract liability - warranty as of December 31, 2023 shall be services.
a. P1,612,000 c. P2,052,000 14, The total amount received from selling goods which can be returned by the
b. P1,762,000 d. P1,713,000 customers shall be fully recognized as sales revenue when the goods are delivered
Net income from the service warranty during 2024 shall be to the customers.
a. P1,070,000 c. P1,518,000 15. In case there is an actual return from a customer, the amount refunded to that
b. P1,290,000 d. P1,678,000 customer shall be recognized as an expense.

The balance of the contract liability - warranty as of December 31, 2024 shall be
a. P2,757,000 c. P3,187,000
b. P3,015,000 d. P3,457,000

105
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Chapter 5 — Premiums, Rebates, Discounts and Other Deferred Income Items

Chapter 5 — Premiums, Rebates, Discounts and Other Deferred Income Items
Multiple Choice - Theories
1. Under PAS 37, the following accounting procedures related to premiums are Correct, d, The amount of revenue to be recognized from exercising the points shall be net
except of the costs of providing the goods or services to the availing customers.
a. During the period when the related goods were sold, estimated premium
expense and corresponding estimated premium liability shall be recognized. 6. Ifan entity acts as the agent in its customer loyalty program, which of the following
b. During the period when the premiums were actually given to the availing is/are correct?
customers, additional premium expense shall be recorded. a. The goods or services covered by the loyalty program are provided by other
c. The undistributed items of premium shall be recorded as prepaid assets. entities.
d. None of the above. b. The amount of income to be recognized from points shall be gross of the
amounts paid to the other entities.
2. In determining the amount of estimated premium expense under PAS 37, the c. Bothaandb
following shall be considered, except d. Neither anor b
The unit purchase cost of the items of premium.
7. ABC Company instituted a customer loyalty program where the customers can use
oD

Number of expected coupons to be redeemed.

Amount of handling costs, if any. the points they earned for discounts in their future purchases of the Company’s
products. In this case, the following statements are correct, except
cr aA

Amount to be remitted by customers, if any.

None of the above. a. The Company acts as the principal in the customer loyalty program.
b. The Company shall allocate the transaction price based on the relative stand-
3. Under PFRS 15, the following accounting procedures related to the premiums are alone selling prices of the goods sold and the points distributed.
correct, except c. The amount allocated to the points shall be recognized as income when the
a. The transaction price shall be allocated to the products sold and the premium points were distributed to the customers.
items to be distributed in the future. d. The amount allocated to the products sold shall be recognized immediately as
b. The amount initially allocated to the products sold shall be recognized as sales revenue.
revenue when the products are delivered to the customers.
c. The amount initially allocated to the premium items shall be immediately 8. XYZ Company inked a memorandum of agreement with ABC Company where the
recognized as income when the main products are delivered to the customers. former will distribute loyalty points to its customers that can be used to purchase
d. None of the above. goods sold by the latter. XYZ Company will pay a certain amount to ABC Company
for every point it distributed. In this case, which of the following statements is not
4, Theallocation of the transaction price to the products sold and the items of premium true related to the accounting procedures in XYZ Company’s books?
under PFRS 15 shall be a. XYZ Company shall recognize income when the customers actually used the
a. basedonthe relative stand-alone selling prices of the product sold and the items points to purchase goods in ABC Company.
of premium. b. XYZ Company is considered as an agent in this customer loyalty program.
b. based on the relative cost of the product sold and the items of premium. Cc. XYZ Company shall recognize income from points equal to the portion of the
c. based on the relative number of units of the product sold the number of items transaction price allocated to loyalty points less the amounts paid to ABC
of premium expected to be distributed. Company.
d. equally. d. None of the above.
5. If an entity acts as the principal in its customer loyalty program, which of the 9. Under PFRS 15, rebates shall be accounted by
following accounting procedures is correct? a. recognizing estimated rebate expense and corresponding estimated rebate
a. The total transaction price shall be immediately recognized as revenue. liability.
b. The amount allocated to the loyalty points shall be equal to the total amount of b. recognizing estimated rebate income and corresponding estimated rebate
discount that the customers can have assuming all of the points will be receivable.
exercised. allocating the transaction price to the rebates equal to the total amount of
c. The amount allocated to the loyalty points shall be recognized as income only rebates that are expected to be exercised by the customers.
when the products or services were already transferred to the availing allocating the transaction price between the goods sold and the rebates based
customers,
on their relative stand-alone selling prices.
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 Chapter 5 - Premiums, Rebates, Discounts and Other Deferred Income Items |

Chapter 5 — Premiums, Rebates, Discounts and Other Deferred Income Items

[Link] entity recently offered a free product [Link] be availed in the future for every|
single purchase of three units of the same product. Which of the following is the | c. Bothaandb
correct accounting procedure for this promotional program? d. Neitheranorb
a. The entity shall allocate the transaction price between the products sold and the|
free product to be distributed in the future, based on their relative stand-alone | 15. The following are true regarding the accounting for the asset for the expected return,
prices. except
The entity shall recognize estimated free product expense and estimated free a. The initial recognition of this asset has an increasing effect in the amount of the
product liability equal to the manufacturing cost of the free product. cost of goods sold.
Cc. The entity shall recognize estimated free product income and estimated free | b. This asset is measured at the production cost of the goods expected to be
returned, less costs to recover, including the potential decreases in the value of
product receivable equal to the supposed selling price of this free product.
the goods.
d. None of the above.
c. If there is an actual return of goods from customers, this account shall be
11. Which of the following is/are correct related to the accounting for advances received credited.
from customers? d. None of the above.
a. The advances received shall be initially recognized as liability.
Straight Problems
b. The portion related to the advances where the related goods or services were 1. Starting on January 1, 2023, BULLFROG Company started offering a promotional
already provided to the customer shall be recognized as revenue. program wherein the customers shall present four coupons to be able to receive, for
Cc. Bothaandb free, a commemorative spoon and fork set from the Company. A coupon was
d. Neither a nor b included for every bottle of vitamins that the Company is selling.
12. The following are correct accounting procedures related to gift certificates, except During the year, the Company sold 100,000 bottles for P75 per bottle. The Company
a. Amounts received shall be initially recorded as liability. expects that only 40% of the coupons distributed will ever be used in redemption.
b. Amounts used by the customers in purchasing goods or services from the entity In addition, the Company bought 12,000 sets of premium items amounting to P50
shall be recognized as revenue. per set. Lastly, 6,600 sets were distributed to the redeeming customers.
c. Amounts that are not expected to be redeemed (“breakage”) shall be
immediately recognized as revenue upon receipt of cash from the purchaser of Required: Under each of the following independent scenarios, determine the journal
the certificate. entries for the year 2023:
d. None of the above. 1. The Company applies PAS 37 in accounting for premiums.
2. The Company applies PFRS 15 in accounting for premiums.
[Link] recording sales with a right of return, an entity shall recognize all of the 2. During the year 2023, TOAD Company has sold 200,000 boxes of its soap at P47.50
following, except | per box. Also, during the year, the Company started to include a coupon in each box
a. Revenue from the portion of the transaction price that is estimated not to be| | of soap it is selling. Ten of these coupons plus P10 cash will be required from
returned by the customers. customers to entitle them to a towel costing P33 per unit. In addition, costs of P8.25
b. Asset representing the right of the entity to recover the goods from the portion per towel will be shouldered by the Company to transport the towels to the
of the transaction price that is expected not to be returned by the customers. customers.
_c. Refund liability from the portion of the transaction price that is estimated to be
returned by the customers in the future. . ! The Company expects that only 80% of the coupons will be used in redeeming the
d. None of the above. | towels. During the year, the Company purchased 15,000 towels, 9,200 of which were
distributed to the customers.
[Link] liability shall be subsequently accounted using which of the following
Required: Under each of the following independent scenarios, determine the journal
accounting procedures?
entries for the year 2023;
a. This liability account shall be debited if customers make actual returns to the
1. The Company applies PAS 37 in accounting for premiums.
entity,
2. The Company applies PFRS 15 in accounting for premiums.
b. Changes in this liability account shall be accounted prospectively by adjusting
the amount of revenue during the period of change.

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Chapter 5 — Premiums, Rebates, Discounts and Other Deferred Income Items

Chapter 5 — Premiums, Rebates, Discounts and Other Deferred Income Items
3. On January 1, 2023, MONKEY Company, a manufacturer of powdered juice products,
started to offer a special pitcher for every 20 empty packs of its powdered juice The customers have used the following number of points per year:
products. The pitcher has a cost of P500 per unit. During 2023 and 2024, the Year No. of Points Used
Company had the following information: 2023 180,000
2023 2024 2024 240,000
Sales revenue (P150 per pack) P12,000,000 P15,000,000
2025 120,000
Number of pitchers bought 1,200 units 1,000 units Starting January 1, 2025, the Company now estimates that a total of 80% of the
Number of pitchers redeemed 800 units 1,100 units points will be ultimately redeemed. Round-off the amounts to the nearest peso.
The Company expects that 75% of the packs will not be used in redeeming the special Required: From the given information, determine the following:
pitcher. a. Income from points to be recognized from 2023 to 2025.
b. Remaining balance of the contract liability - points as of December 31, 2023,
Required: Under each of the following independent scenarios, determine the journal 2024 and 2025.
entries for the years 2023 and 2024:
1. The Company applies PAS 37 in accounting for premiums. 6. During the year 2023, TARSIER Company, a gasoline station operator, introduced a
2. The Company applies PFRS 15 in accounting for premiums. customer loyalty program where a loyalty point is granted for every P200 of
petroleum purchases of its customers. Each loyalty point will reduce the customers’
4. ORANGUTAN Company, an instant coffee manufacturer, started to offer a future purchases by P4.00. For the year 2023, the Company reported a total revenue
promotional program where customers shall mail in 10 empty packs of the of P400,000,000. The Company expects that 20% of these points will not be
Company’s instant coffee, plus P15 cash, to be entitled to a special mug costing P120 exercised.
per unit. In addition, the Company will also shoulder the costs handling and shipping
the special mug to the customers which average P20 per mug. Selling price per pack The customers have used the following number of points per year:
of the instant coffee is P45.
Year No. of Points Used
For the years 2023 and 2024, the Company had the following information: 2023 200,000
2024 250,000
2023 2024 2025 160,000
Number of instant coffee packs sold 200,000 packs 240,000 packs 2026 220,000
Number of mugs redeemed 6,400 mugs —- 10,000 mugs
Number of mugs purchased 7,500 mugs 12,000 mugs Starting on January 1, 2026, the Company changed its estimate to 25% of the points
are expected that will never be exercised.
The Company expects that only 40% of the packs will be used in redeeming the
special mug. Required: From the given information, determine the following:
a. Income from points to be recognized from 2023 to 2026.
Required: Under each of the following independent scenarios, determine the journal b. Remaining balance of the contract liability - points as of December 31, 2023,
entries for the years 2023 and 2024: 2024, 2025 and 2026,
1. The Company applies PAS 37 in accounting for premiums.
2. The Company applies PFRS 15 in accounting for premiums, 7. From January 1, 2023 to April 30,2023, GORILLA Company has sold a total of 40,000
t-shirts at P250 unit selling price. Also, during the same period, the Company granted
5. Starting on January 1, 2023, LEMUR Company, an operator of grocery chain, a promotional program wherein for every purchase of four units of t-shirts, the
introduced a customer loyalty program where for every P100 purchase, the Company will grant a coupon for a free shirt (“buy four, get one free”). A total of
Company will a grant a point with five-year validity. Each point will reduce the 10,000 of such coupons were distributed. However, these coupons may be exercised
amount to be paid for future purchases by P1.00, During the year, the Company only from July 1, 2023 to June 30, 2024.
generated sales revenue of P100,000,000, resulting to the distribution of 1,000,000
total points. The Company expects that only 75% of these points will be used in the The Company expects that only 70% of these coupons will be redeemed before they
future before they lapse after five years, lapse on June 30, 2024, For the years 2023 and 2024, the customers used 4,500

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 Chapter 5 - Premiums, Rebates, Discounts and Other Deferred Income Items
Chapter 5 — Premiums, Rebates, Discounts and Other Deferred Income Items
coupons and 2,000 coupons, respectively. Round-off the amounts to the neares,
peso. Required: From the given information, determine the following:
a. Journal entries for the year 2023.
Required: From the given information, determine the following: b. Remaining balance of the contract liability - rebates as of December 31, 2023.
a. Journal entries from 2023 to 2024.
b. Remaining balance of the contract liability - coupons as of December 31, 2023, 11. During the year 2023, BONOBO Company sold gift certificates with total face amount
and 2024. of P6,000,000. The Company estimates that 2% of these certificates will never be
exercised due to a variety of reasons. During the remainder of the year, the
8. During the year 2023, BABOON Company, an entity involved in unlimited customers have used certificates with total face amount of P4,116,000.
samgyupsal business, introduced a marketing program wherein a card will be given
to customers. For every person who ate in the Company’s restaurant, the Company Required: From the given information, determine the following:
will puta stamp on the card. After accumulating 5 stamps on the card, the customer's a. Journal entries for the year 2023.
next visit will be free (i.¢., a free meal pass). The Company normally charges P500 b. Remaining balance of the unearned income - gift certificates as of December 31,
per person. 2023.

Allin all, during the year 2023, the Company reported a total samgyupsal revenue of [Link] October 1, 2023, CHIMPANZEE Company sold gift certificates with total face
P10,000,000 and distributed a total of 20,000 stamps. The Company expects that amount of P10,000,000. The Company expects that 5% of the face amount of the
only 80% of these stamps will be used to avail the free unlimited pass. During 2023, certificates will never be redeemed by the customers due to the loss of the certificate
12,000 of these stamps were used to avail the freebie. itself. The customers have used gift certificates with total face amounts of
P1,900,000, P2,850,000 and P2,375,000 during the months of October, November
Required: From the given information, determine the following: and December, respectively, all during 2023.
a. Journal entries for the year 2023.
Required: From the given information, determine the following:
b. Remaining balance of the contract liability - stamps as of December 31, 2023.
a. Journal entries for the year 2023.
9. During the month of January 2023, SAKI Company granted a rebate coupon worth b. Remaining balance of the unearned income - gift certificates as of December 31,
P187.50 for every customer’s P1,000 single receipt purchase. These rebate coupons 2023.
are exercisable starting on February 1, 2023 and have validity until January 31,
2025. [Link] the year 2023, MARMOSET had a total revenue of P7,000,000. The Company
expects that 5% of this amount will be returned. Gross profit rate of 40% have been
For the month of January 2023, the Company has reported total revenue of consistently applied during the year. On the other hand, the costs to recover the
P22,000,000 and granted 20,000 rebate coupons to the customers. However, the returned goods are non-existent since the customers will make the return directly
Company expects that only 80% of these coupons will be exercised before their to the Company’s premises. The Company uses the perpetual side method in
expiration dates. During 2023 and 2024, the customers have used 8,000 coupons recording its inventory transactions.
and 4,500 coupons, respectively.
During the year 2023, goods with total selling price of P200, 000 were returned to
Required: From the given information, determine the following: the Company.
a. Journal entries for the years 2023 and 2024.
b. Remaining balance of the contract liability - rebates as of December 31, 2023 Requifed: Determine the journal entriés for the year 2023.
and 2024.
[Link] Company reported the following information during the year 2023:
[Link] the year 2023, VERVET Company introduced a marketing program where for
Total sales (150,000 units) P30,000,000
P1,500 single or multiple receipt purchase, the Company will grant a coupon
Total manufacturing costs (200,000 units) 24,000,000
containing rebate of P312.50 for future purchases, These coupons have validity
Portion expected to be returned by customers 6%
period of one year. The Company expects that only 60% of these coupons will be
Estimated costs of recovering the returned units P10 per unit
used before the expiration date.
Units actually returned during the year 6,400 units
During the year, the Company generated a total revenue of P27,000,000 and granted
16,000 rebate coupons to the customers. Actual coupons exercised during the yea! Required: Determine the journal entries for the year 2023.
numbered 5,400 coupons.
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Chapter 5 - Premiums, Rebates, Discounts and Other Deferred Income Items

Chapter 5 — Premiums, Rebates, Discounts and Other Deferred Income Items
Multiple Choice - Problems |
1. On January 1, 2023, SHORTHAIR Company, a manufacturer of breakfast cereals On January 1, 2025, the Company changed its estimate in the number of points that
introduced a promotional campaign by providing a free special bowl costing P69 will be exercised. The revised estimate is that only 80% of the points will be
each for every five coupons given by the customers. Consequently, the Company redeemed before maturity date.
included one coupon for every box of cereals it sells. The amount of income from points during 2024 shall be
For 2023 and 2024, the Company had the following information: a. P154,735 c. P165,156
b. P162,895 d. P172,654
2023 2024
Number of cereal boxes sold (at P400 unit price) 240,000 units 200,000 unit; The carrying amount of contract liability - points as of December 31, 2024 shall be
Number of special bowls redeemed 20,000 units 22,000 unit; a. P802,823 c. P707,813
b. P723,923 d. P682,363
The Company expects that only 50% of the distributed coupons will be used in
The amount of income from points during 2025 shall be
redeeming the special bowls. Round-off the amounts in the nearest peso.
a. P216,768 c. P153,359
Under PAS 37, the amount of estimated premium expense for the years 2023 and b. P172,529 d. P148,639
2024, respectively shall be The amount of income from points during 2026 shall be
a. P1,440,000; P1,320,000 c. P1,200,000; P1,200,000
a. P184,826 c. P163,925
b. P1,440,000; P1,200,000 d. P1,200,000; P1,320,000
b. P159,258 d. P176,826
Under PAS 37, the amount of estimated premium liability as of December 31, 2023 The carrying amount of contract liability - points as of December 31, 2027 shall be
and 2024, respectively shall be a. P403,567 c. P294,922
a. P240,000; P120,000 c. P288,000; P120,000 b. P348,729 d. P199,072
b. P240,000; P228,000 d. P288,000; P228,000
3. During November 2023, BURMESE Company, an owner of a department store,
Under PFRS 15, the amount of income from premium for the years 2023 and 2024, introduced a promotional program wherein for every eight pairs of socks sold ina
respectively shall be single receipt, a coupon will be given for a free pair of black shoes that the Company
a. P1,418,719; P1,300,492 c. P1,182,266; P1,300,492 is also selling. However, the coupons are exercisable from the period December 1,
b. P1,418,719; P1,182,266 d. P1,182,266; P1,182,266 2023 to March 31, 2024. Each pair of socks has a normal selling price of P50, while
the black shoes have normal selling price of P200 per pair.
Under PFRS 15, the amount of contract liability - premiums as of December 31, 2023
and 2024, respectively shall be The Company generated revenues of socks amounting to P8,000,000 and distributed
a. P246,783; P118,227 c. P236,783; P118,227 15,000 coupons. The Company estimates that only 2/3 of the coupons will be
b. P246,783; P135,732 d. P236,453; P118,227 redeemed in the future. Six thousand five hundred (6,500) coupons were redeemed
during December 2023.
2. During the year 2023, BENGAL Company distributed 500,000 customer loyalty The total amount of revenue from free product during 2023 shall be
points that will expire after eight years. Each point used will reduce future purchases
a. P560,000 c. P1,040,000
by P2.50. The source of these points is the total sales of P18,875,000. The Company
b. P680,000 d. P1,240,000
expects that 90% of these points will be redeemed before they expire. The customers
exercised the following number of loyalty points: The carrying amount of contract liability - free product as of December 31, 2023
shall be
Year No. of Points Used a. P560,000 c. P360,000
2023 80,000 points b. P640,000 d. P920,000
2024 70,000 points
4. For every single receipt purchase of P800, SIAMESE Company will grant P125 rebate
2025 65,000 points
coupon that can be used to reduce the amount to be paid on future purchases. During
2026 60,000 points
the year 2023, the Company generated total revenue of P18,000,000 and granted
2027 50,000 points
20,000 coupons. The Company estimates that only 80% of these coupons will be
used. During 2023, 12,500 of such coupons were exercised.
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 Chapter 5 - Premiums, Rebates, Discounts and Other Deferred Income Items
Chapter 5 - Premiums, Rebates, Discounts and Other Deferred Income Items
The total amount of revenue from rebate during 2023 shall be
a. P1,325,750 c, P1,525,250 The Company expects that 5% of the gift certificates sold will never be redeemed
b. P1,406,250 d, P1,785,750 due to the loss of the certificates

The carrying amount of contract liability - rebates as of December 31, 2023 shall be Total income from breakage during 2024 shall be
a. P180,000 c. P270,000
a. P274,750 c, P474,250
b. P245,000 d. P320,000
b. P14,250 d. P393,750
5. During November 2023, LION Company, a radio broadcaster, received P12,000,000 The total balance in the unearned income - gift certificates as of December 31, 2024
from a private entity. Based on this agreement, the Company is required to air the shall be
following number of video ads about the private entity: a. P7,000,000 c. P7,560,000
b. P7,180,000 d. P7,790,000
No. of Ads No. of Ads
November 2023 3 February 2024 3 8. During 2023, ANDAL Company reported total sales of P6,000,000, of these, 5% are
December 2023 5 March 2024 2 expected to be returned by customers. All throughout the year, the Company
January 2024 4 April 2024 3 consistently applied 40% gross profit rate. Costs to recover the returned inventories
The total amount of advertising revenue during 2023 shall be are estimated to be 20% of the inventory’s cost. By the end of the year, goods with
a. P4,800,000 c. P4,500,000 total selling price of P120,000 were returned during the year.
b. P4,000,000 d. P4,200,000 From this information, the net amount of cost of goods sold during 2023 shall be
The balance of unearned income as of December 31, 2023 shall be a. P3,600,000 c. P3,744,000
a. P7,000,000 c. P7,200,000 b. 3,456,000 d. P3,532,600
b. P7,400,000 d. P8,000,000 The carrying amount of the asset for expected recoveries as of December 31, 2023
6. On October 1, 2023, LYNX Company sold gift certificates with total face amount of shall be
P8,000,000. Based on the Company's experience, 10% of these certificates will never a. P68,600 c. P72,400
be redeemed by the customers. During the remainder of 2023, the customers b. P73,600 d. P86,400
redeemed the following face amounts of gift certificates: October, P864,000;
November, P1,080,000; December, P1,440,000. 9. For the year 2023, DEEP Company sold 300,000 units at P250 unit selling price. On
average, these sold units have total cost of P120 per unit. The Company estimates
Total revenue from the exercise of gift certificates during 2023 shall be that 6% of these goods will be returned and costs to recover will be incurred at P20
a. P3,054,000 c. P3,214,000 per unit. By the end of 2023, a total of 12,000 units were returned to the Company.
b. P3,184,000 d. P3,384,000
The amount of the sales revenue to be recognized immediately during 2023 shall be
Total income from breakage during 2023 shall be a. P72,600,000 c. P70,500,000
a. P376,000 c. P416,000 b. P68,700,000 d. P66,270,000
b. P424,000 d. P484,000
From this information, the net amount of cost of goods sold during 2023 shall be
Total unearned income - gift certificates as of December 31, 2023 shall be a. P34,200,000 c. P36,000,000
a. P0,000,000 c, P4,362,000 b. P33,840,000 d, P37,800,000
b. P4,240,000 d. P4,332,000
The carrying amount of the asset for expected recoveries as of December 31, 2023
7. For the years 2023 and 2024, WILDCAT Company had the following information: shall be
2023 2024 a. P480,000 c. P600,000
Gift certificates (GCs) sold P9,000,000 P7,000,000 b. P540,000 d. P720,000
Amount of GCs redeemed from:
GCs sold during 2023 3,420,000 2,137,500
GCs sold during 2024 - 2,992,500
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