Chapter 22

Financial and Non-Financial Liabilities

&

Accounting for Provisions

Measure of Liabilities

Upon incurrence - PV of future cash outlay to liquidate the accounting

liabilities xx

Amount liquidated thru:

a. Payment of cash

b. Payment of non-cash asset

c. Performance of service (xx)

d. Amortization (passage of time)

e. Forfeiture/expiration

PV/FV estimated value of additional liability incurred

xx

Upon Balance sheet presentation - Carrying Value

xx

PV of future cash outflows to settle the obligation - is the amount of cash required to liquidate the
obligation if it were paid today; which is equal to any of the following:

□ face value of the liability (for liabilities that are definite in amount)

□ estimated value (provision or liabilities that are estimated)

□ present value or discounted value (for long term non-interest bearing liabilities)
Current and Non-current Classification

Liabilities are classified as current when it satisfies any of the following:

a. It is expected to be settled in the entity's normal operating cycle;

b. It is held primarily for the purpose of being traded;

c. It is due to be settled within twelve months after the balance sheet date; or

d. The entity does not have an unconditional right to defer settlement of the liability for at least twelve
months after the balance sheet date.

Example of Liabilities held for trading:

a. An issued debt instrument that the entity intends to repurchase in the near term to make a gain from
short-term movements in interest rates.

b. The obligation that arises when an entity sells a security that it has borrowed and costs not owned (a
so-called short sale).

Non-current liabilities - are liabilities not classified as current. These include the following: non-current
portion of long-term, capital lease liability, non-current deferred tax liability, long-term obligations to
company officers, long-term deferred revenue.

Short-term debt that is expected to be refinanced

An entity classifies its financial liabilities as current when they are due to be settled within twelve
months after the balance sheet date, even if,
a. The original term was for a period longer than twelve months; and

b. The intention is supported by an agreement to refinance, or reschedule payments, on a long-term

basis is completed after the balance sheet date and completed before the financial statements are
authorized for issue.

If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve
months after the balance sheet date under an existing loan facility, it classifies the obligation as non-
current, even if it would otherwise be due within a shorter period. However, when refinancing or rolling
over the obligation is not at the discretion of the entity, the potential to refinance is not considered and
the obligation is classified as current.

Breach of an undertaking or violation of debt covenants.

When an entity breaches an undertaking under a long-term agreement on or before the balance sheet
date with the effect that the liability becomes payable on demand, the liability is classified as current,
even if the lender had agreed, after the balance sheet date and before the authorization of financial
statements for issue, not to demand payment as a consequence of the breach. The liability is classified
as current because, at the balance sheet date, the entity does not have an unconditional right to defer
its settlement for at least twelve months after that date.

Provision
Is an existing liabilities of uncertain timing or uncertain amount. The liability does exist on balance sheet
date but the amount is indefinite or the date the obligation is due and in some cases the payee cannot
be determined.

It is the equivalent of estimated liability or loss of contingency that is accrued because it is both
probable and measurable.

a. Recognition of provision - the following conditions must be met:

□ The enterprise has a present obligation, legal or constructive, as a result of a past event.

□ It is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation.

□ The amount of the obligation can be measured reliably.

b. Measurement of the provision - the amount recognized as a provision should be the best estimate of
the expenditure required to settle the present obligation at the balance sheet date. The best estimate is
the amount that an enterprise would rationally pay to settle the obligation at the balance sheet or to
transfer it to a third party at that time. The estimates of outcome are determined by the judgment of
management of the enterprise supplemented by experience of similar transactions, and reports from
independent experts.
c. Expected value method - this is the statistical method of estimation applied where the provision
being measured involves a large population of items. Under this method, the obligation is estimated by
"weighing" all possible outcomes by their associated possibilities.

Provisions for restructuring costs are treated as follows:

• The cost of terminating a contract before the end of its term should be recognized when the entity
terminates the contract. The liability for costs that will continue to be incurred under a contract for its
remaining term without economic benefit to the entity should be recognized in accordance with the
requirements of onerous contracts.

• The recognition of involuntary termination benefits requires the communication of those benefits to
the employees.

• When employees are required to render services beyond any notification period to be entitled to the
termination benefits and those benefits are not paid pursuant to any pre-existing benefit arrangement
(i.e. they are one-time benefits), those benefits should be recognized over the future service period.

• Voluntary termination benefits are recognized when employees accept the offer of voluntary
termination.

Contingencies:
a. Contingent liability - is a possible obligation that arises from past event and whose existence will be
confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly
within the control of the enterprise. It is a present obligation that arises from past event but is not
recognized because it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation or the amount of the obligation cannot be measured reliably.

b. Contingent asset - is a possible asset that arises from past event and whose existence will be
confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly
within the control of the enterprise.

Accounting for contingent liabilities and contingent assets

Contingent Contingent

Liabilities Assets

Virtually certain (therefore, not contingent) Provide Recognize

Probable Provide Disclose by note

Possible Disclose by note No disclosure

Remote No disclosure No disclosure

Degrees of probability - PAS 37 recognizes four degrees of probability for contingencies but it gives no
guidance as to the meaning of the terms. One possible interpretation could be:
 Virtually certain probability above 95%

Probable probability above 50% and up to 95%

Possible probability of 5% and up to 50%

Remote probability below 5%

Problem 22 - 1: (Current Liabilities)

On December 31, 2014, the bookkeeper of Gremlin Company provided the following information:

Accounts payable, including deposits and advances

from customers of P500,000 P2,500,000

Notes payable, including note payable to bank on

December 31, 2016 for P1,000,000 3,000,000

Share dividends payable 800,000

Credit balance in customers' accounts 400,000

Serial bonds, payable in semiannual installments

of P1,000,000 10,000,000

Accrued interest on bonds payable 300,000

Contested BIR tax assessment 600,000

Unearned rent income 100,000

In the December 31, 2014 statement of financial position, how much current liabilities should be
reported?

a) P6,800,000

b) P7,300,000

c) P7,900,000
d) P8,700,000

Answer: b

Accounts payable P2,000,000

Deposits & advances from customers 500,000

Notes payable 2,000,000

Credit balance in customers' accounts 400,000

Current portion of serial bonds 2,000,000

Accrued interest on bonds payable 300,000

Unearned rent income 100,000

Total current liabilities P7,300,000

• The notes payable to bank due on December 31, 2013 should be reported as a non-current liability.

• Share dividends payable is reported as a component of shareholders' equity.

• Contested BIR tax assessment should only be disclosed in the notes to Financial Statements (F/S).

• In the absence of any information, the unearned rent income should be classified as current liability.

Problem 22 - 2: (Current Liabilities)

An analysis of Preston Company's liabilities disclosed the following:

Accounts payable, after deducting debit balances in

suppliers' accounts amounting to P22,500 (accounts

payable included non-trade liabilities of P32,500)

P105,000

Accrued expenses 15,000

Credit balances of customers' accounts 13,500

Stock dividends payable 70,000

Claims for increase in wages and allowances by

employees of the company, covered in a pending lawsuit

125,000

Estimated liabilities for premiums 60,000

How much should be presented as total current liabilities in the statement of financial position?

a) P 6,000

b) P168,500

c) P183,500

d) P216,000

Answer: d

Accounts Payable (P105,000 + P22,500) P127,500

Accrued expenses 15,000

Credit balance in customers' accounts 13,500

Estimated liabilities for premiums 60,000

Total current liabilities P216,000

* Debit balance in creditor's account should be shown separately under current assets.

* Claims or increase in wages covered by pending litigation should only be disclosed in the notes to
financial statement since the outcome of which will be confirmed only on the occurrence or non-
occurrence of uncertain future events.

Problem 22 - 3: (Current Liabilities - Accounts Payable)

The balance in Crawford Company's accounts payable account at December 31, 2014 was P1,170,000
before any year-end adjustments relating to the following:

□ Goods were in transit from a vendor to Crawford on December 31, 2014. The invoice cost was
P65,000 and the goods were shipped FOB shipping point on December 29, 2014. The goods were
received on January 2, 2015.

□ Goods shipped FOB shipping point on December 20, 2014 from a vendor to Crawford, were lost in
transit. The invoice cost was P32,500. On January 5, 2015, Crawford filed a P32,500 claim against the
common carrier.

□ Goods shipped FOB destination on December 21, 2014, from a vendor to Crawford, were received on
January 6, 2015. The invoice cost was P19,500.
What amount should Crawford report as accounts payable on its December 31, 2014 statement of
financial position?

a) P1,202,500

b) P1,222,000

c) P1,235,000

d) P1,267,500

Answer: d

Accounts payable - unadjusted P1,170,000

Goods in transit 65,000

Goods lost in transit - shipped FOB shipping point 32,500

Accounts payable - December 31, 2014, adjusted

P1,267,500

• For goods shipped FOB shipping point - title to the goods passes from seller to the buyer at the point
of shipment or point of delivery while goods shipped FOB destination - title to the goods passes to the
buyer upon receipt of the goods.

• The goods shipped FOB shipping point on December 20, 2014 but lost in transit does not negate the
liability of Crawford Company to the seller.

Problem 22 - 4: (Current Liabilities - Accounts Payable)

The balance in Roblox Corporation's accounts payable account at December 31, 2014 was P1,350,000
before any necessary year-end adjustments relating to the following:

□ Goods were in transit to Roblox from a vendor on December 31, 2014. The invoice cost was P75,000.
The goods were shipped FOB shipping point on December 29, 2014 and were received on January 2,
2015.

□ Goods shipped FOB destination on December 21, 2014, from a vendor to Roblox, were received on
January 6, 2015. The invoice cost was P37,500.

□ On December 27, 2014, Roblox wrote and recorded checks totaling P60,000 which were mailed on
January 10, 2015.

In Roblox's December 31, 2014 statement of financial position, how much should be the accounts
payable?

a) P1,410,000

b) P1,425,000

c) P1,462,500

d) P1,485,000

Answer: d

Accounts payable - unadjusted P1,350,000

Goods in transit - FOB shipping point 75,000

Undelivered check 60,000

 Adjusted Accounts payable balance P1,485,000

Unreleased/undelivered creditor's check should be restored to the cash balance; as a result, accounts
payable will increase by the amount of check.

Problem 22 - 6: (Current Liabilities)

Smiley Corporation's current liabilities at December 31, 2014 totaled P1,500,000 before any necessary
year-end adjustment relating to the following transactions:

□ On December 23, 2014, a vendor authorized Smiley to return for full credit, merchandise shipped and
billed at P45,000 on December 9, 2014. Smiley shipped the returned items on December 29, 2014. A
P45,000 credit memo was received and recorded by Smiley on January 2, 2012.

□ During December 2014, Smiley received P75,000 from Beauty, a customer, as an advance payment for
a handicraft that Smiley will make to Beauty's specifications. From this transaction, Smiley has a
P75,000 credit balance in its accounts receivable from Beauty at December 31, 2014.

What amount should Smiley report as total current liabilities in its December 31, 2014 statement of
financial position?

a) P1,455,000
b) P1,470,000

c) P1,530,000

d) P1,575,000

Answer: c

Current liability per book P1,500,000

Unrecorded credit memo (45,000)

Advance payment from a customer 75,000

Correct amount of current liabilities P1,530,000

Problem 22 - 7: (Current Liabilities - Unearned Revenue)

Jack Company sells office equipment contracts agreeing to service equipment for a two-year period.
Cash receipts from contracts are credited to unearned service contract revenue and service contract
costs are charged to service contract expense as incurred. Revenue from service contract is recognized
as earned over the lives of the contracts.

Additional information for the year ended December 31, 2014 is as follows:

Unearned service contract revenue, January 1, 2014

P600,000

Cash receipts from service contracts sold 980,000

Service contract revenue recognized 860,000

Service contract expense 520,000

What amount should Jack report as unearned service contract revenue at December 31, 2014?

a) P460,000

b) P480,000

c) P490,000

d) P720,000

Answer: d

Unearned service contract, January 1, 2014 P600,000

Unearned service contract - 2014 980,000

Service contract revenue recognized (860,000)

Unearned service contract, December 31, 2014 P720,000

Problem 22 - 8: (Current Liabilities - Unearned Service Contract)

Bunny Appliance Company's accountant has been reviewing the firm's past television sales. For the past
years, Bunny has been offering a special service warranty on all televisions sold. With the purchase of a
television, the customer has the right to purchase a 3-year service contract for an extra P600.

Information concerning past television and warranty contract sales is given below:
 2012 2011

Television sales in units 550 460

Sales price per unit P 5,000 P 4,000

Number of service contracts sold 350 300

Expenses relating to television warranties P38,520

P13,400

Bunny's accountant has estimated from past records that the pattern of repairs has been 40% in the
year of sale, 36% first year after sale and 24% on 2nd year of sale. Sales of the contracts are made
evenly during the year.

What is the adjusted balance of the unearned service contract as of December 31, 2012?

a) P111,600

b) P168,600

c) P211,200

d) P243,600

Question 1: d

From 2011 sales (P600 x 300 x 42%) P 75,600

From 2012 sales (P600 x 350 x 80%) 168,000

Total unearned service contract as of December 31, 2012

P243,600

Pattern of Realized Revenue in Percentage

2011 2011 2012

1st - 40% x 1/2 20% 20%

2nd - 36% x 1/2 - 18%

3rd - 24% x 1/2 - -

2012

1st - 40% x 1/2 - 20%

2nd - 36% x 1/2 - -

3rd - 24% x 1/2 - -

Realized Revenue - 2012:

From 2011 sales (P600 x 300 x 38%) P 68,400

From 2012 sales (P600 x 350 x 20%) 42,000

Total P110,400

Less: Expense - 2012 38,520

Profit on service contract P 71,880

Problem 22 - 10: (Current Liabilities - Deferred Revenue)

Colors Company offers 3 payment plans on its 12 months contracts. Information on the 3 plans and the
number of children enrolled in each plan for the September 1, 2011 through August 31, 2012 contract
year follows:

Initial Payment Monthly Fees Number of

Plan Per Child Per Child Children

1 P5,000 15
 2 2,000 P300 12

3 500 9

Colors received P99,000 of initial payments on September 1, 2011 ad P32,400 monthly fees during the
period September 1 through December 31, 2011. In its December 31, 2011 statement of financial
position, what amount should Colors report as deferred revenues?

a) P33,000

b) P43,800

c) P66,000

d) P99,000

Answer: c

Initial Payment

Plan 1 (P5,000 x 15) P75,000

Plan 2 (P2,000 x 12) 24,000

Total initial payment P99,000

x Ratio of unexpired term 8/12

Unearned Fees P66,000

Term of the Plan 12 months

Less: Expired term (Sept. to Dec. 31) 4 months

Unexpired term 8 months

Under the accrual basis, revenue is earned as time goes by and care is provided. Regardless of the
timing of cash receipts, revenue should be recognized when the equivalent amount of care is provided,
it is to be assumed, therefore, that the amount of care is provided on a uniform basis throughout the
term of the plan, straight-line method should be applied to amortize the initial fee, while the monthly
fees can be recognized on a monthly basis.

Problem 22 - 12: (Current Liabilities - Unearned Subscription)

In November and December 2014, Cadillac Company, a newly organized magazine publisher, received
P72,000 for 1,000, three-year subscriptions at P24,000 per year, starting with the November 2014 issue
of the magazine. Cadillac elected to include the entire P72,000 in its 2014 income tax return. How
much should Cadillac report in its 2014 statement of financial position as unearned subscriptions?

a) None Nov-14 72

b) P64,000 Oct-16 0

c) P68,000 72K good for 3 years

d) P72,000 24K every year

2K every month

Answer: c

Total amount received P72,000

Less: Realized subscription (72,000 x 2/36) 4,000

 Balance of unrealized subscription P68,000

Problem 22 - 16: (Current Liabilities - Gift Certificates)

Hades Department Store sells gift certificates, redeemable for store merchandise that expires one year
after their issuance. Hades has the merchandise that expires one year after their issuance. Hades has
the following information pertaining to its gift certificates sales and redemptions:

Unearned at December 31, 2014 600,000

2015 sales 2,000,000

2015 redemptions of prior-years sales 200,000

2015 redemptions of current-year sales 1,400,000

Hades' experience indicates that 10% of gift certificates sold will not be redeemed. In its December 31,
2015 statement of financial position, what amount should Hades report as unearned revenue?

a) P 400,000 2014 2015 TOTAL

b) P 600,000 Beg Liab 600,000 1,800,000 2,400,000

c) P 800,000 Redemptions in 2015 (200,000) (1,400,000) (1,600,000)

d) P1,000,000 Net balance 400,000 400,000 800,000

Expired (400,000) - (400,000)

Ending balance - 400,000 400,000

Answer: a

Expected gift certificates to be redeemed (90% x 2,000,000)

P1,800,000

Less: Gift certificates redeemed - 2015 sales 1,400,000

Unearned revenue on gift certificates P 400,000

Any unearned gift certificates from prior year sale, which has yet to be presented as of December 31,
2012, should be reversed due to expiration.

Problem 22 - 18: (Current Liabilities - Customers' Deposits)

Morgana Company requires refundable advance payments with special orders for machinery
constructed to customer's specifications. Information for 2014 is as follows:

Customer advances - balance, December 31, 2013 P

885,000

Advances received with orders in 2014 1,380,000

Advances applied to orders shipped in 2014 1,230,000

Advances applicable to orders cancelled in 2014 375,000

What amount should Morgana Company report as current liability for customer's deposits in its
December 31, 2014 statement of financial position?
 Entry upon receipt of customer advances -
885000

a) None Cash

b) P 660,000 Customer Advances -1380000

c) P1,035,000 Entry upon shipment of orders

d) P1,110,000 AR

Revenue

Entry upon reversal of customer advances

Customer Advances 1230000

AR

Entry upon cancellation of orders

Customer Advances 375000

Cash

(660,000)

Answer: c

Customer advances, December 31, 2013 P 885,000

Advances received with orders in 2014 1,380,000

Total P2,265,000

Less: Advances applied to orders shipped in 2014

1,230,000

Customer's deposit, December 31, 2014 P1,035,000

"Sales" account is credited for advances applied to orders delivered, however, if an order is cancelled,
the "revenue" account shall be credited instead, since the advance payments are nonrefundable. Both
transactions decrease the account "customers' advances".
Problem 22 - 19: (Current Liabilities - Employee Benefits)

All of Brass Company's employees are entitled to two weeks of paid vacation for each full year in Brass'
employ. Unused vacation time can be accumulated and carried forward to succeeding years and will be
compensated at the salary in effect when the vacation is taken. Alloy started her employment with
Brass on January 1, 2008. As of December 31, 2014, when Alloy's salary was P5,000 per week, Alloy had
used 10 weeks of her accumulated vacation time. In December 2014, Alloy notified Brass of Alloy's
intention to use her accumulated vacation weeks in June 2015. Brass regularly scheduled salary
adjustments in July of each year. Brass properly did not deduct compensation for unused vacations in
Alloy's 2014 income tax return. How much should Brass report as a liability at December 31,2014 for
Alloy's accumulated vacation time?

a) None

b) P 5,000

c) P10,000

d) P20,000

Answer: d

Years employed (January 1, 2005 to December 31, 2014)

7 years
x Vacation leave per year 2 weeks

Total accumulated vacation leaves 14 weeks

Less: Used vacation leave 10 weeks

Unused vacation leaves 4 weeks

x Salary per week P 5,000

Liability for accumulated vacation time P20,000

Short-term employee benefits include the following:

a) Wages, salaries and social security contributions.

b) Short-term compensated absences (such as paid annual leave and paid sick leave) where the
absences are expected to occur within twelve months after the end of the period in which the
employees render the related employee service.

c) Profit-sharing and bonuses payable within twelve months after the end of the period in which the
employees render the related service, and

d) Non-monetary benefits (such as medical care, housing, cars and free or subsidized goods or services)
for current employees.

Short-Term Employee Benefits - Recognition and Measurement

PAS 18, paragraph 10: When an employee has rendered service to an entity during an accounting
period, the entity shall recognize the undiscounted amount of short-term employee benefits expected
to be paid in exchange for that service.
a) As a liability (accrued expense), after deducting any amount already paid. If the amount already paid
exceeds the undiscounted amount of the benefits, an entity shall recognize that excess as an asset
(prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future
payments or a cash refund; and

b) As an expense, unless another standard requires or permits the inclusion of the benefits in the cost
of an asset (example, PAS 2 inventories and PAS 16 property, plant and equipment).

PAS 19, paragraph 11 states that an entity shall recognize the expected cost of short-term employee
benefits in the form of compensated absences as follows:

a. In the case of accumulating compensated absences, when the employees render service that
increases their entitlement to future compensated absences, and

b. In the case of non-accumulating compensated absences, when the absences occur.

Accumulating compensated absences are those that are carried forward and can be used in future
periods if the current period's entitlement is not used in full. Accumulating compensated absences may
be vesting (in other words, employees are entitled to a cash payment for unused entitlement on leaving
the entity) or non-vesting (when employees are not entitled to a cash settlement for unused entitlement
on leaving). An obligation arises, as employees render service that increases their entitlement to future
compensated absences. The obligation exists, and is recognized, even if the compensated absences are
non-vesting, although the possibility that employees may leave before they use an accumulated
entitlement affects the measurement of that obligation.
Problem 22 - 24: (Current Liabilities - Bonus Computations)

Supreme, Inc. provides an incentive compensation plan under which its president receives a bonus equal
to 10% of the corporations' income in excess of P600,000 before income tax but after deduction of the
bonus. If income before income tax and bonus is P1,920,000 and the tax rate is 32%, the amount of the
bonus would be

a) P120,000

b) P132,000

c) P174,360

d) P192,000

Answer: a

B = .10 [1,920,000 - 600,000 - B]

B = .10 [1,320,000 - B]

B = 132,000 - .10B

B + .10B = 132,000

B = 132,000 ÷ 1.1
B = 120,000

Problem 22 - 25: (Current Liabilities - Accrued Expense)

Firefly Corporation pays its outside salesperson fixed monthly salaries and commissions on net sales.
Sales commissions are computed and paid on a monthly basis (in the month following the month of
sale), and the fixed salaries are treated as advances against commissions. However, if the fixed salaries
for salespersons exceed their sales commissions earned for a month, such excess is not charged back to
them. Pertinent data for the month of April 2011 for the three salespersons in sales region 3 are as
follows:

Salesperson Fixed Salary Net Sales Commission Rate

A P10,000 P200,000 4%

B 14,000 400,000 6%

C 18,000 600,000 6%

Totals P42,000 P1,200,000

For sales region 3, what total amount should Firefly Company accrue for sales commission payable at
April 30, 2011?

a) P26,000

b) P28,000

c) P68,000

d) P70,000
Answer: b

Accrued Commission

Fixed (Excess of Commission over

Salesperson Commission Salary Fixed Salary)

A (P200,000 x 4%) P8,000 P10,000 P 0

B (P400,000 x 6%) 24,000 14,000 10,000

C (P600,000 x 6%) 36,000 18,000 18,000

Totals P28,000

Problem 22 - 26: (Current Liabilities - Returnable Containers)

Innova Company sells its products in reusable, expensive containers. The customer charged a deposit
for each container delivered and receives a refund for each container returned within two years after
the year of delivery. Innova accounts for the containers not returned within the time limit as being
retired by sale at the deposit amount. Information for 2012 is as follows:

Deposits for containers at December 31, 2011 from deliveries in:

2010 ……………………. P150,000

2011 ……………………. 430,000 P580,000

Deposits for containers delivered in 2012 780,000

Deposits for containers returned in 2012 from deliveries in:

2010 ……………………. 90,000

2011 ……………………. 250,000

2012 ……………………. 286,000 626,000

What amount should Innova Company report as a liability for deposits on returnable containers at
December 31, 2012?

a) P494,000 2010 2011 2012 Total

b) P644,000 Beg bal 150,000 430,000 780,000 1,360,000

c) P674,000 Refunds (90,000) (250,000) (286,000)

(626,000)

d) P734,000 Net balance 60,000 180,000 494,000 734,000

Expiration (60,000) - - (60,000)

End bal - 180,000 494,000 674,000

Answer: a

Deposits - Returned = Balance

2010 P150,000 P 90,000 P 60,000

2011 430,000 250,000 180,000

2012 780,000 286,000 494,000

The total amount of liability for deposits on returnable containers is P674,000 (2011 and 2012 balances),
because the company's policy is to refund deposits only if containers are returned within the two-year
prior from the year of delivery, as a result the P60,000 balance from 2010 delivery not returned at the
end of 2012 is no longer an accounting liability for the reason that the 2-year expiration period had
elapsed.
Problem 22 - 27: (Provision - Product Premiums)

Lander Company inaugurated a promotional campaign on January 2, 2011 to promote the salability of
their product. Lander Company placed a coupon redeemable for a premium in each package of cereal
sold at P200. Each premium costs P25 and 10 coupons must be presented by a customer to receive a
premium. Lander estimated that only 70% of the coupons issued would be redeemed. For the 6 months
ended July 31, 2011, the following transactions occurred:

Packages of cereal sold 120,000

Premium purchased 30,000 Asset

Coupons redeemed 54,000 Divide by 10

How much should be reported as estimated liability for coupons on the fiscal year ended July 31, 2011?

Answer: d

Net Cost/

Coupons Premiums Premium

Total estimate
(70% x 120,000) 84,000 ÷ 10 = 8,400 x 25 P210,000

Less: Redemptions 54,000 ÷ 10 = 5,400

Remaining/Outstanding 30,000 3,000 x 25 P 75,000

Premium Expense = P210,000

Premium Liability = 75,000

Problem 22 - 30: (Provision - Product Premiums)

During 2011, Maldita Company sold 500,000 boxes of hotcakes under a new sales promotional program.
Each box contains one coupon, which when submitted with P16, entitles the customer to a baking pan.
Maldita pays P20 per pan and P2 for handling and shipping. Maldita estimates that 80% of the coupons
will be redeemed, even though only 300,000 coupons had been processed during 2011. What amount
should Maldita report as a liability for unredeemed coupons at December 31, 2011?

a) P 300,000

b) P 400000

c) P 600,000

d) P1,000,000

Answer: c
Total estimated coupons to be redeemed (500,000 x 80%)
400,000

Less: Coupons processed/redeemed 300,000

Remaining coupons still to be redeemed/

# of premiums to be distributed 100,000

x Net cash outlay for every premium:

Purchase price P20

Handling and shipping 2

Remittance (16) P6

Estimated liability for unredeemed coupons

P600,000

Problem 22 - 34: (Provision - Product Warranty)

The selling price of Abenson Company's units is P80,000 each. The buyers are provided with a 2-year
warranty that is expected to cost the company P2,000 per unit in the year of sale and P6,000 per unit in
the year following the sale. The company sold 80 units in 2011 and 100 units in the 2012. Actual
payments for warranty claims were P80,000 and P520,000 in 2011 and 2012, respectively. How much
would be the warranty expense for 2012?

Answer: b
Warranty Expense:

2011 = P6,000 + P2,000 = P8,000 x 80 units = P640,000

2012 = P6,000 + P2,000 = P8,000 x 100 units = P800,000

Warranty expense is based on the total units sold in a particular year multiplied by total estimated
warranty cost per unit.

Problem 22 - 37: (Provision - Product Warranty)

On January 1, 2011, Monday Company offered a three-year warranty from date of sale on any of its
products sold after that date. The offer was part of a program to increase sales. Meeting terms of the
warranty was expected to cost 2% of sales. Sales made under warranty in 2011 amounted to
P9,000,000. One-fifth of the units sold in 2011 were returned. These units were repaired or replaced at
a cost of P32,500. What amount of warranty expense should be shown on Monday's 2011 profit or loss?

a) P 32,500

b) P 35,500

c) P 68,500

d) P180,000

Answer: d
Warranty expense is equal to the total estimate of P180,000 (P9,000,000 x 2%).

Problem 22 - 41: (Provision - Lawsuit)

On December 2, 2011, an employee filed a P3,000,000 lawsuit against Wizard Company for damages
suffered when one of Wizard's plants exploded on July 20, 2011. Wizard's legal counsel expects the
company will lose the lawsuit and estimates the loss to be between P500,000 and P1,000,000. The
employee has offered to settle the lawsuit out of court for P900,000, but Wizard will not agree to the
settlement.

It its December 31, 2011 statement of financial position, what amount should Wizard Company report as
provision from lawsuit?

a) P 500,000

b) P 750,000

c) P1,000,000

d) P3,000,000

Answer: b

In order to recognize a provision, PAS 37/IAS 37 requires that a provision should be recognized when a)
an enterprise has a present obligation (legal or constructive) as a result of past events, b) it is probable
that an outflow of resources embodying economic benefits will be required to settle the obligation, and
c) a reliable estimate can be made on the amount of the obligation.
Since it was probable that the company will lose the lawsuit and the amount can be reasonably
estimated, and when the reasonable estimate is a range of outcome, the amount of provision should be
the mid of range P750,000 (500,000 + 1,000,000 ÷ 2).

Problem 22 - 50: (Accrued Expenses)

Abraham Company salaried employees are paid biweekly. Occasionally, advances made to employees
are paid back by payroll deductions. Information relating to salaries for the calendar year 2011 is as
follows:

December 31, 2010 December 31, 2011

Employee advances P12,000 P 18,000

Accrued salaries payable 65,000 ?

Salaries expense during the year 815,000

Salaries paid during the year (gross) 780,000

At December 31, 2011, what amount should Abraham report as accrued salaries payable?

a) P 35,000

b) P 82,000

c) P 94,000

d) P100,000

Answer: d
Accrued salaries payable, January 1, 2011 P 65,000

Add: Salaries Expense 815,000

Total P880,000

Less: Salaries paid 780,000

Accrued salaries payable, December 31, 2011 P100,000