Answer-F=UNIT 2 - Practice and exercises PDF

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AE 211

SUGGESTED ANSWERS

Unit 2: FORMATIVE Activity CL

Prepared by: JRM

1. Burma Company disclosed the following information about liabilities at year-end: Accounts payable, after deducting debit balances in suppliers' accounts amounting to P100,000 = 4,000,000; Accrued expenses = 1,500,000; Credit balances of customers' accounts = 500,000; Share dividend payable = 1,000,000; Claims for increase in wages and allowance by employees of the entity, covered in a pending lawsuit = 400,000; Estimated expenses in redeeming prize coupons presented by customers = 600,000. What total amount should be presented as current liabilities at year-end? 6,700,000 6,600,000 7,100,000 7,100,000 2. Eliot Company reported the following liabilities on December 31, 2020: accounts payable and accrued interest = 1,000,000; 12% note payable issued November 1, 2019 maturing July 1, 2021 = 2,000,000; 10% debentures payable, next annual principal installment of P500,000 due February 1, 2021 = 7,000,000. On December 31, 2020, the entity consummated a noncancelable agreement with the lender to refinance the 12% note payable on a long-term basis. On December 31, 2020, what total amount should be reported as current liabilities? 1,500,000 2,500,000 3,000,000 3,500,000 3. Regal Company sells gift certificates, redeemable for store merchandise. The gift certificates have no expiration date. The entity has the following information pertaining to the gift certificate sales and redemptions: Unearned revenue on January 1, 2020 = 750,000; 2020 sales = 2,500,000; 2020 redemptions of prior year sales = 250,000; 2020 redemptions of current year sales = 1,750,000. What amount should be reported as unearned revenue on December 31, 2020? 1,250,000 1,125,000 1,000,000 500,000 4. Baker Company sold consumer products that are packaged in boxes. The entity offered an unbreakable glass in exchange for two box tops and P50 as a promotion during the current year. The cost of the glass was P200. The entity estimated at the end the year that it would be probable that 50% of the box tops will be redeemed. The entity sold 100,000 boxes of the product during the current year and 40,000 box tops were redeemed during the year. What amount should be reported as estimated liability at year-end? 3,000,000 1,500,000 750,000 0 5. Hanna Company reported warranty expense of P1,900,000 for the current year. The warranty liability account increased by P200,000 during the year. What amount was incurred for warranty expenditures during the year? 1,700,000 1,900,000 2,100,000 0 6. Carpet Company had a balance of P800,000 in the warranty liability account on December 31, 2020. The warranty expenditures totaled P2,500,000 for 2021. The warranty expense is calculated at 6% of sales. Sales amounted to P40,000,000 for 2021. What was the balance in the warranty liability account on December 31, 2021? 700,000 800,000 2,400,000 3,200,000 7. The accrual approach in accounting for warranty: A. is required for income tax reporting. B. is frequently justified on the basis of expediency. C. finds the expense account being charged when the seller performs in compliance with the warranty. D. represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

SUGGESTED ANSWERS A/P net of debit bal. of supplier Add back: Debit bal. of suppliers' accounts Accrued expenses Credit balances of customers' accounts Est. expenses - prize coupons Total

A/P and accrued interest 10% debentures payable Feb. 1, 2021 Total

4,000,000 100,000 1,500,000 500,000 600,000 6,700,000

1,000,000 500,000 1,500,000

Unearned revenue – Jan . 1, 2020 750,000 2020 sales 2,500,000 2020 redemptions of prior year sales (250,000) 2020 redemptions of current year sales (1,750,000) Unearned revenue - Dec. 31, 2020 1,250,000

Est. liability units (100T box/2) x 50% Redeemed units ( 40T box/2) Est. liability - unredeemed units Cost/unit (P200 - P50) Est. liability in pesos

25,000 (20,000) 5,000 150 750,000

warranty expense reported warranty liability decrease (increase) warranty expenditure (payments)

1,900,000 (200,000) 1,700,000

warranty liability - Dec. 31, 2020 warranty expense - 2021 (6% x P40M) warranty expenditures (payments) warranty liability - Dec. 31, 2021

800,000 2,400,000 (2,500,000) 700,000

AE 211

SUGGESTED ANSWERS

Unit 2: FORMATIVE Activity CL

Prepared by: JRM

8. Which of the following best describes the expense as incurred approach of accounting for warranty cost? A. Expensed based on estimate in year of sale. B. Expensed when liability is accrued. C. Expensed when warranty claims are certain. D. Expensed when incurred. 9. On November 5, 2020, a Dunn Company truck was in an accident with an auto driven by Bell. The entity received notice on January 12, 2021 of a lawsuit for Expected value of P200,000 x 50% P700,000 damages for personal injuries suffered by Bell. The entity's counsel Expected value of P500,000 x 50% believed it is probable that Bell will be awarded an estimated amount in the range Total Expected value between P200,000 and P500,000. The possible outcomes are equally likely. The accounting year ends on December 31 and the 2020 financial statements were issued on March 31, 2021. What amount of provision should be accrued on December 31, 2020? 350,000 500,000 A. 0 200,000 10. During the current year, Haze Company won a litigation award for P1,500,000 which was tripled to P4,500,000 to include punitive damages. The defendant, who is financially stable, has appealed only the P3,000,000 punitive damages. The entity was awarded P5,000,000 in an unrelated suit it filed, which is being appealed by the defendant. Counsel is unable to estimate the outcome of these appeals. What amount of pretax gain should be reported? A. 1,500,000 4,500,000 5,000,000 9,500,000

100,000 250,000 350,000

litigation award received - uncontested Conservative - pre tax gain

1,500,000

The P3M punitive damages as well as the P5M unrelated suit initially awarded to Haze Company can’t be recognized yet as gain (income) since they are under appeal by the defendant and therefore the outcome is not yet probable in favor of Haze Company....