Bato Institute of Science and Technology, Inc.

Dolho, Bato, Leyte

UNIT
2 SELF-LEARNING MODULE
BSBA-3 ACCTG 3 – FINANCIAL ACCOUNTING 2
Second Semester, S.Y. 2024-2025

APPLICATION

(FROM PPT PRESENTATION)

An entity manufactures a certain product and sells it at P 500.00 per unit. As a promotion, a soup bowl is offered to
customers on the return of 10 wrappers plus a remittance of P 25.00. The bowl costs P100.00, and is estimated
that 75% of the wrappers will be redeemed.
The data for the first year concerning the premium plan are summarized below.
• Sales, 10,000 units at P 500.00 each 5,000,000.00
• Soup bowls purchased, 2,000 units at P 100 each 200,000.00
• Estimated Premium Liability 18,750.00

Compute for the total wrappers to be redeemed, the total premiums to be distributed and wrappers redeemed

Estimated Premium Liability 18,750.00

Share on Premium Cost (P100-P25) ÷ 75
Outstanding Premiums (Premiums to be distributed) 250
Wrappers needed to redeem premium x 10
Wrappers to be redeemed 2,500

Total Estimated Premiums to be redeemed

(10,000x75%=7,500/10) 750
Outstanding Premiums 250
Premiums Distributed 500
Wrappers needed to redeem premium x 10
Wrappers redeemed 5,000.00

TEST I. MULTIPLE CHOICE/PROBLEM SOLVING. Answer the following questions: Show your computations

1. Clam Company offers customers a pottery cereal bowl if they send in three boxtops from its
products and P 10. The entity estimated that 60% of the boxtops will be redeemed. In 2021 the
entity sold 675,000 boxes and customers redeemed 330,000 boxtops receiving 110,000 bowls.
The cost of each bowl is P 25.

1.1 What is the premium expense for the current year?

a. 2,025,000
b. 6,075,000
c. 4,550,000
d. 1,650,000
Answer: A (675,000 x 60%) = 405,000/3 = 135,000 x 15 = 2,025,000

1.2 What is the liability for outstanding premiums on December 31, 2021?
a. 250,000
b. 375,000
c. 625,000
d. 875,000
Answer: B (75,000/3 x P15)
Boxtops to be redeemed 405,000
(675,000 x 60%)
Boxtops redeemed (330,000)
Boxtops Outstanding 75,000
Divided by (boxtops) 3
 X (Cost of Boxtops (Seller)) 15
Estimated Liability, Dec 31, 2021 375,000

2. Balm Company estimated annual warranty expense at 2% of annual net sales. The net sales for
the current year amounted to P 4,000,000. On January 1, 2021, the warranty liability was P 60,000
and the warranty payments during the year totalled P 50,000.

2.1 What is the warranty expense for 2021?

a. 70,000
b. 50,000
c. 80,000
d. 60,000
Answer: C (4,000,000 X 2%) = 80,000

2.2 What is the warranty liability on December 31, 2021?

a. 10,000
b. 70,000
c. 80,000
d. 90,000

Answer: D
Warranty Liability – Jan 1, 2021 60,000
Add: Warranty Expense, Year 2021 80,000
Total 140,000
Less: Warranty Payments during 2021 50,000
Warranty Liability – Dec. 31, 2021 90,000

3. Using the two problems on Premium Liability and Warranty Liability, prepare Journal Entries to
record the transactions for each companies.
Problem 1:
To record the redemption:
Cash (110,000 x P10) 1,100,000
Premium Expense (110,000 x P15) 1,650,000
Premiums (110,000 x P25) 2,750,000
#

To record the liability for the premiums at the end of the first year:
Premium Expense 375,000
Estimated Premium Liability 375,000
#
Problem 2:
To record the sales:
Cash 4,000,000
Sales 4,000,000
#

To set up the estimated liability on warranty:

Warranty Expense (4,000,000 x 2%) 80,000
Estimated Warranty Liability 80,000
#

To record the payment of the actual cost:

Estimated Warranty Liability 50,000
Cash 50,000
#
 4. Miracle Company manufacturers a product that is packaged and sold. A plate is offered to
customers sending in three wrappers accompanied by a remittance of P15.
Data with respect to the premium offer are summarized below.
2020 2021
Sales 5,400,000 6,300,000
Purchase of premium, P50 per plate 585,000 870,000
Number of plates distributed as premiums 7,500 13,500
Estimated number of plates to be
distributed in subsequent period 3,000 4,500
Distribution cost P20 per plate

Required:
Prepare journal entries that would be made in 2020 and 2021 to record sales, premium
purchases and redemptions, and year-end adjustments.

Year 2020 Year 2021

Cash 5,400,000 Cash 6,300,000
Sales 5,400,000 Sales 6,300,000
# #
Premiums – Plate 585,000 Premiums – Plate 870,000
Cash 585,000 Cash 870,000
# #
Cash (7,500 x P15) 112,500 Cash (13,500 x P15) 202,500
Premium Expense (7,500 x P35) 262,500 Premium Expense (13,500 x P35) 472,500
Premiums (7,500 x P50) 375,000 Premiums (13,500 x P50) 657,000
# #
Premium Expense (7,500 x P20) 150,000 Premium Expense (13,500 x P20) 270,000
Cash 150,000 Cash 270,000
# #
Premium Expense (3,000 x P55) 165,000 Premium Expense (4,500 x P55) 247,500
Estimated Premium Liability 165,000 Estimated Prem. Liab. 247,500
# #

5. Socorro Company sells color television sets with a two-year repair warranty. The sale price for
each set is P22,500. The average repair cost per set is P1,200.
Research has shown that 25% of all sets sold are repaired in the first year and 35% in the second
year.
2020 2021
Number of sets sold 450 750
Total payments for warranty repairs 60,000 225,000

Required:
5.1. Prepare journal entries in connection with the warranty using the "expense as incurred"
approach.
2020:
Cash (450 x P22,500) 10,125,000
Sales 10,125,000
#
Warranty Expense 60,000
Cash 60,000
#
2021:
Cash (750 x P22,500) 16,875,000
Sales 16,875,000
#
Warranty Expense 225,000
Cash 225,000
 #

5.2. Prepare journal entries in connection with the warranty using the "accrual" approach.
2020:
Cash 10,125,000
Sales 10,125,000
#
Warranty Expense (60% x 450 x P1,200) 324,000
Estimated Warranty Liability 324,000
#
Estimated Warranty Liability 60,000
Cash 60,000
#
2021:
Cash 16,875,000
Sales 16,875,000
#
Warranty Expense (60% x 750 x P1,200) 540,000
Estimated Warranty Liability 540,000
#
Estimated Warranty Liability 225,000
Cash 225,000
#
5.3. Determine the estimated warranty liability on December 31, 2021.
Warranty Expense:
2020 324,000
2021 540,000 864,000
Less: Actual Warranty Payments:
2020 60,000
2021 225,000 285,000
Estimated Warranty Liability, 12/31/21 579,000