TRADE AND OTHER PAYABLES, ESTIMATED LIABILITIES

& CONTINGENT LIABILITIES – Quiz Material

1. Current liabilities are likely to arise from:

(a) accrued interest on long-term loans.
(b) receipt of advance payment for services to be rendered.
(c) purchase of inventory and operating supplies.
(d) all of the above.

2. An example of estimated liability is:

(a) interest payable on bonds (c) allowance for uncollectibles
(b) wages payable (d) product warranties obligation

3. An example of contingent liability is:

(a) unearned subscription revenue
(b) bond premium
(c) wages payable
(d) potential future payment on a pending breach of contract lawsuit

4. A particular warranty obligation is probable and the amount of loss can be reasonably
estimated. The particular parties that will make claims under the warranty are not
identifiable. An estimated loss contingency should then be:
(a) classified as an appropriation of retained earnings
(b) neither accrued nor disclosed
(c) disclosed but not accrued
(d) accrued

5. Reserves for general contingencies for general or unspecified business risks should:
(a) be accrued on the financial statements and disclosed on the notes thereto
(b) not be accrued on the financial statements but should be disclosed on the notes thereto
(c) not be accrued on the financial statements and need not be disclosed on the notes
thereto
(d) be accrued on the financial statements but need not be disclosed on the notes thereto

6. Which is not an essential characteristic of an accounting liability?

(a) The liability is the present obligation of a particular enterprise.
(b) The liability arises from past transaction or event.
(c) The settlement of the liability requires an outflow of resources embodying economic
benefits.
(d) The liability is payable to a specifically identified payee.

7. The principal classifications of liabilities are:

(a) current liabilities and noncurrent liabilities.
wcurrent liabilities, noncurrent liabilities and deferred revenue.
(b) current liabilities and deferred revenue.
(c) noncurrent liabilities and deferred revenue.

8. A long-term debt falling due within one year should be reported as noncurrent liability
should be reported as noncurrent liability if the following conditions are met (choose the
incorrect one):
(a) The original term is for a period of more than one year.
(b) The enterprise intends to refinance the obligation on a long-term basis.
(c) The intent to refinance is supported by an agreement to refinance which is completed
before the issuance of the financial statements.
 (d) The intent to refinance is supported by an agreement to refinance which is completed
after the issuance of the financial statements.

9. Which will demonstrate an agreement to refinance (choose the incorrect one)?

(a) Long-term obligation has in fact been issued before the issuance of the financial
statements for the purpose of refinancing.
(b) Equity security has in fact been issued before the issuance of the financial statements
for the purpose of refinancing.
(c) Before the issuance of the financial statements, the enterprise has in fact entered into a
financing agreement that clearly permits the enterprise to refinance the currently
maturing long-term debt on a long-term basis.
(d) Preferred stock has in fact been issued before the issuance of financial statements for
the purpose of obtaining working capital.

10. A provision is recognized as liability when (choose the incorrect one):

(a) the enterprise has a present obligation as a result of past event.
(b) the enterprise has a possible obligation as a result of past event.
(c) it is probable that a transfer of economic benefits will be required to settle the
obligations.
(d) the amount of the obligations can be measured reliably.

11. An accrued expense can be best described as an amount:

(a) paid and currently matched with earnings.
(b) not paid and not currently matched with earnings.
(c) paid and not currently matched with earnings.
(d) not paid and currently matched with earnings.

12. Which of the following statements is true concerning contingent liabilities?

(a) Such liabilities should include obligations of known existence but of unknown amount.
(b) If the definite amount is involved, it is not a contingent liability.
(c) Such liabilities are generally reported and totaled with other liabilities to make up the
liability section of most balance sheets.
(d) Such liabilities should include obligations known in amount but unknown in existence.

13. An item that is not a contingent liability is:

(a) premium offer to customers for labels or box tops.
(b) accommodation endorsement on customer note.
(c) additional compensation that may be payable on a dispute now being arbitrated.
(d) note receivable discounted.

14. On September 1, 2001, a company borrowed cash and signed a two-year interest bearing
note on which both the principal and interest are payable on September 1, 2003. How
many months of accrued interest would be included in the liability for accrued interest at
December 31, 2001 and December 31, 2002?
December 31, 2001 December 31, 2002
(a) 4 months 16 months
(b) 4 months 4 months
(c) 12 months 24 months
(d) 20 months 8 months

15. On September 1, 2001, a company borrowed cash and signed a one-year interest bearing
on which both the principal and interest are payable on September 1, 2002. How will the
note payable and the accrued interest be classified In December 31, 2001 balance sheet?
Note payable Accrued interest
(a) Current liability Noncurrent liability
(b) Noncurrent liability Current liability
(c) Current liability Current liability
(d) Noncurrent liability No entry.
16. Grip Company started a new promotional campaign program. For every 10 box tops
returned to Grip, customers receive a ballpen. Grip estimates that only 40% of the box tops
reaching the market will not be redeemed. Additional information is as follows:
Units Amount
Sales of product 100,000 30,000,000
Ballpens purchased 5,500 4,125,000
Ballpens distributed 4,000
What is the amount of year-end estimated liability associated with this promotion?
(a) 4,125,000 (b) 1,500,000 (c) 3,000,000 (d) 4,500,000

17. On April 1, 2002, Art Corporation began offering a new product for sale under a one-year
warranty. Of the 50,000 units in inventory at April 1, 2002, 30,000 had been sold by June
30, 2002. Based on its experience with similar products, Art estimated that the average
warranty cost per unit sold would be P80. Actual warranty costs incurred from April 1
through June 30, 2002 were P700,000. At June 30, 2002, what amount should Art report
as warranty expense?
(a) 700,000 (b) 900,000 (c) 1,700,000 (d) 2,400,000

18. Right Store sells gift certificates, redeemable for store merchandise, that expire one year
after their issuance. Right has the following information pertaining to its gift certificate
sales and redemptions:
Unredeemed at 12/31/2002 750,000
2003 sales 2,500,000
2003 redemptions of prior year sales 250,000
2003 redemptions of current year sales 1,750,000
Right’s experience indicates that 10% of gift certificates sold will not be redeemed. In its
December 31, 2003 income statement, what amount should Right report as revenue?
(a) 2,500,000 (b) 2,000,000 (c) 1,250,000 (d) 500,000

19. Kite Company sells magazine subscriptions of one to three-year periods. Cash receipts from
subscribers are credited magazine subscriptions collected in advance, and this account had
a balance of P2,400,000 at December 31, 2002 before year-end adjustment. Outstanding
subscriptions at December 31, 2002 expire as follows:
During 2003 600,000
During 2004 900,000
During 2005 400,000
In its December 31, 2002 balance sheet, what amount should Kite report as the balance for
magazine subscriptions collected in advance?
(a) 500,000 (b) 1,200,000 (c) 1,900,000 (d) 2,400,000

20. Jar Company must determine the December 31, 2002 year-end accruals for advertising and
rent expense. A P50,000 advertising bill was received January 7, 2003 comprising costs of
P35,000 for advertisements in December 2002 issues, and P15,000 advertisements in
January 2003 issues of the newspaper.
A store lease, effective December 16, 2001, calls for fixed rent of P120,000 per month,
payable one month from the effective date and monthly thereafter. In addition, rent equal
to 5% of net sales over P6,000,000 per calendar year is payable on January 31 of the
following year. Net sales for 2003 were P9,000,000.
In its December 31, 2002 balance sheet, Jar should report accrued liabilities of:
(a) 260,000 (b) 185,000 (c) 210,000 (d) 245,000

21. On March 1, 2002, Fine Company borrowed P1,000,000 and signed a 2-year note bearing
interest at 12% per annum compounded annually. Interest is payable in full at maturity on
February 28, 2004. What amount should Fine report as a liability for accrued interest at
December 31, 2003?
(a) 112,000 (b) 120,000 (c) 232,000 (d) 0

For items 22 and 23:

On December 31, 2001, the bookkeeper of Glory Corporation provided the following
information:
Accounts payable, including deposits and advances from
customers of P25,000 P125,000
Notes payable, including note payable to bank on
 December 31, 2003 of P50,000 150,000
Acceptances payable 10,000
Liabilities under trust receipts 80,000
Stock dividends payable 200,000
Credit balances in customers’ accounts 20,000
Serial bonds payable in semiannual installment of P50,000 500,000
Accrued interest on bonds payable 15,000
Dividends in arrears on preferred stock 70,000
Contested BIR assessment 30,000
Unearned rent income 5,000

22. The amount of current liabilities on December 31, 2001 is:

(a) P455,000 (b) P480,000 (c) P450,000 (d) P485,000

23. The amount of noncurrent liabilities on December 31, 2001 is:

(a) P455,000 (b) P480,000 (c) P450,000 (d) P485,000

24. Anette Video Company sells 1-and 2-year subscriptions for its video-of-the-month business.
Subscriptions are collected in advance and credited to sales. An analysis of the recorded
sales activity revealed the following:
1997 1998
Sales P420,000 P500,000
Less: Cancelations 20,000 30,000
Net sales P400,000 P470.000

Subscription expirations:
1997 P120,000
1998 155,000 P130,000
1999 125,000 200,000
2000 ________ 140,000
P400,000 P470,000
In Anette’s December 31, 1998 balance sheet, the balance for unearned subscriptions
revenue should be:
(a) P495,000 (b) P470,000 (c) P465,000 (d) P340,000

25. Felly Company operates a retail grocery store that is required by law to collect refundable
deposits of P5 on soda cans. Information for 2001 follows:
Liability for refundable deposits – 12/31/2000 P150,000
Cans of soda sold in 2001 100,000
Soda cans returned in 2001 110,000

On February 1, 2001, Felly subleased space and received a P25,000 deposit to be applied
against rent at the expiration of the lease in 2005. In Felly ’s December 31, 2001 balance
sheet, the current and noncurrent liabilities for deposits were:
Current Noncurrent
(a) P125,000 P 0
(b) 100,000 25,000
(c) 100,000 0
(d) 25,000 100,000

26. In an effort to increase sales, Mills Company inaugurated a sales promotional campaign on
June 30, 1998. Mills placed a coupon redeemable for a premium in each package of cereal
sold. Each premium cost Mills P20 and a customer to receive a premium must present five
coupons. Mills estimated that only 60% of the coupons issued will must be redeemed. For
the 6 months ended December 31, 1998, the following information is available:
Packages of cereal sold Premiums purchased Coupons redeemed
160,000 12,000 40,000
What is the estimated liability for premium claims outstanding at December 31, 1998?
(a) P160,000 (b) P224,000 (c) P288,000 (d) P384,000 B

27. During 1998, Day Company sold 500,000 boxes of cake mix under a new sales promotional
program. Each box contains one coupon, which entitle the customer to a baking pan upon
remittance of P4.00. Day pays P5.00 per pan and P0.50 for handling and shipping. Day
estimates that 80% of the coupons will be redeemed, even though only 300,000 coupons
 had been processed during 1998. What amount should Day report as a liability for
unredeemed coupons at December 31, 1998?
(a) P100,000 (b) P150,000 (c) P300,000 (d) P500,000 B

28. Mill Company sells washing machines that carry a three-year warranty against
manufacturer’s defects. Based on company experience, warranty costs are estimated at
P30 per machine. During 1998, Mill sold 24,000 washing machines and paid warranty costs
of P170,000. In its income statement for the year ended December 31, 1998, Mill should
report warranty expense of:
(a) P170,000 (b) P240,000 (c) P550,000 (d) P720,000 D

29. Bold Company estimates its annual warranty expense at 2% of annual net sales. The
following data are available:
Net sales P4,000,000
Warranty liability:
December 31, 1997 P60,000 credit
Warranty payments during 1998 P50,000 debit
After recording the 1998 estimated warranty expense, the warranty liability account would
show a December 31, 1998 balance of:
(a) P10,000 (b) P70,000 (c) P80,000 (d) P90,000 D

30. At December 31, 1998, Raft Boutique had 1,000 gift certificates outstanding, which had
been sold to customers during 1998 for P70 each. Raft operates on a gross margin of 60%
of its sales. What amount of revenue pertaining to the 1,000 outstanding gift certificates
should be deferred at December 31, 1998?
(a) P 0 (b) P28,000 (c) P42,000 (d) P70,000 D

31. Ryan Company sells major appliance service contracts for cash. The service contracts are
for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to
unearned service contract revenue. This account had a balance of P720,000 at December
31, 1998 before year-end adjustment. Service contract costs are charged as incurred to the
service contract expense account, which had a balance of P180,000 at December 31, 1998.
Outstanding service contracts at December 31, 1998 expire as follows:
During 1999 P150,000
During 2000 225,000
During 2001 100,000
What amount should be reported as unearned service contract revenue in Ryan ’s December
31, 1998 balance sheet?
(a) P540,000 (b) P475,000 (c) P295,000 (d) P245,000 B

32. Kent Company, a division of National Realty Corporation, maintains escrow accounts and
pays real estate taxes for National’s mortgage customers. Escrow funds are kept in interest-
bearing accounts. Interest, less a 10% service fee, is credited to the mortgagee ’s account
and used to reduce future escrow payments. Additional information follows:
Escrow accounts liability, 1/1/2000 P 700,000
Escrow payments received during 2000 1,580,000
Real estate taxes paid during 2000 1,720,000
Interest on escrow funds during 2000 50,000

What amount should Kent report as escrow accounts liability in its December 31, 2000
balance sheet?
(a) P510,000 (b) P515,000 (c) P605,000 (d) P610,000 C

33. Dix Company operates a retail store and must determine the proper December 31 200 year-
end accrual for the following expenses:
(a) The store lease calls for fixed rent P12,000 per month, payable at the beginning of the
month, and additional rent equal to 6% of net sales over P2,500,000 per calendar year,
payable on January 31 of the following year. Net sales for 2000 are P4,500,000.
(b) An electric bill of P8,500 covering the period December 31, 2000 through January
15,2002 was received January 22, 2001.
(c) A P4,000 telephone bill was received January 7, 2001 covering:
Service in advance for December 2001 P1,500
Local and toll calls for December 2000 2,500
In its December 31, 200 balance sheet, Dix should report accrued liabilities of:
 (a) P150,750 (b) P131,000 (c) P128,250 (d) P126,750 D

34. On September 1, 2000, Pine Company issued a note payable to National Bank in the
amount of P1,800,0000, bearing interest at 12% and payable in three equal annual principal
payments of P600,000. On this date, the bank ’s prime rate was 11%. The first interest and
principal payment was made on September 1, 2001. At December 31, 2001, Pine should
record accrued interest payable of:
(a) P44,000 (b) P48,000 (c) P66,000 (d) P72,000 B

35. Mann Corporation’s liability account balances at June 30,2001, included a 10% note payable
in the amount of P3,600,000. The note is dated October 1, 2000, and is payable in three
equal annual payments of P1,200,000 plus interest. The first interest and principal
payments were made on October 1, 2001. In its June 30, 2002 balance sheet, what amount
should Mann report as accrued interest payable for this note?
(a) P270,000 (b) P180,000 (c) P90,000 (d) P60,000 A

36. On January 1, 2000, Pares Company borrowed P3,600,000 from a major customer
evidenced by a non-interest bearing note due in three years. Pares agreed to supply the
customer’s inventory needs for the loan period at lower than market price. At the 12%
imputed interest rate for this type of loan, the present value of the note is P2,550,000 at
January 1, 2000. What amount of interest expanse should be included in Pares ’ 2000
income statement?
(a) P432,000 (b) P350,000 (c) P306,000 (d) P0 C

37. Able, Inc. had the following amounts of long-term debt outstanding at December 31, 2000:
14% term note, 2001 P 3,000
11% term note, due 2004 107,000
8% note, due in 11 equal annual principal payments,
plus interest beginning December 31, 2001 110,000
7% guaranteed debentures, due 2005 100,000
Total P320,000
Able’s annual sinking fund requirement on the guaranteed debentures is P4,000 per year.
What amount should Able report as current maturities of long-term debt in its December 31,
2000 balance sheet?
(a) P4,000 (b) P7,000 (c) P10,000 (d) P13,000 D

38. Eliot Corporation’s liabilities at December 31, 2000 were as follows:

Accounts payable and accrued interest P200,000
12% note payable issued November 1, 2000
maturing July 1,2001 60,000
10% debentures payable, next annual principal
installment of P100,000 due February 1, 2001 700,000
On March 1, 2001, Eliot consummated a noncancelable agreement with the lender to
refianace the 12% note payable on a long-ter basis, on readily determinable terms that
have not yet been implemented. Both parties are fianacially capable of honoring the
agreement’s provisions. Eliot’s December 31, 2000 financial statement were issued on March
31, 2001. In its December 31, 2000 balance sheet, Eliot should report current liabilities at:
(a) P200,000 (b) P260,000 (c) P300,000 (d) P360,000 C

39. On February 5, 2001, an employee filed a P2,000,000 lawsuit against Steel Company for
damages suffered when one of Steel’s plants exploded on December 29,2000. Steel ’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 Steel will not agree to the settlement. In its December 31, 2000 balance
sheet, what amount should Steel report as liability from lawsuit?
(a) P2,000,000 (b) P1,000,000 (c) P900,000 (d) P500,000 D

40. Sony Corporation sells color TV sets with a three-year repairs warranty. The sales price for
each set is P10,000. The average expense of repairing a set is P500. Research has shown
that 3% of all sets sold are repaired in the first year, 6% in the second year, and 11% in
the third year. The number of sets sold were as follows:
2000 500 units
2001 1,000 units
2002 2,000 units
Total payments for repairs associated with the warranties were: 2000, P20,000; 2001,
P70,000; and 2002, P150,000. Under the accrual approach, how much is the estimated
liability for warranties on December 31, 2002?
(a) P350,000 (b) P240,000 (c) P50,000 (d) P110,000 D