Professional Documents
Culture Documents
23 Current Liabilities
23 Current Liabilities
2. Sariaya Company includes one coupon in each box of laundry soap it sells. A towel is
offered as a premium to customers who send in 10 coupons and a remittance of P5.
Data for the premium offer are:
2004 2005
Boxes of soap sold 1,000,000 1,500,000
Number of towels purchased at P50 per towel 40,000 65,000
Number of towels distributed as premium 35,000 58,000
Number of towels to be distributed as premium next period 3,000 5,000
In its 2005 income statement. Sariaya Company should report premium expense at
a. 3,000,000
b. 2,700,000
c. 2,610,000
d. 2,835,000
3. During 2004, Lucena Company introduced a new product carrying a two-year warranty
against defects. The estimated warranty costs related to peso sales are 5% within 12
months following sale and 10% in the second 12 months following sale. Sales and
actual warranty expenditures for the years ended December 31, 2004 and 2005 are as
follows:
Sales____ Actual expenditures
2004 20,000,000 1,500,000
2005 25,000,000 3,000,000
At December 31, 2005, Lucena would report estimated warranty liability of
a. 1,500,000
b. 2,250,000
c. 750,000
d. 500,000
Musical instrument and sound equipment are sold in a one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past
experience, is 2% of sales.
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The premium is offered on the recorded and sheet music. Customers receive a coupon
for each peso spent on recorded music or sheet music. Customers may exchange 200
coupons and P20 for an AM/FM radio. Lucban pays P34 for each radio and estimates
that 60% of the coupons given to customers will be redeemed.
Lucban’s total sales for 2005 were P7,200,000 - P5,400,000 from musical instrument
and sound reproduction equipment and P1,800,000 from recorded music and sheet
music. Replacement parts and labor for warranty work totaled P164,000 during 2005.
A total of 6,500 AM/FM radio used in the premium program were purchased during the
year and there were 1,200,000 coupons redeemed in 2005.
The accrual method is used by Lucban to account for the warranty and premium costs
for financial reporting purposes. The balance in the accounts related to warranties and
premiums on January 1, 2005, were as shown below:
Inventory of Premium AM/FM radio P39,950
Estimated Premium Claims Outstanding 44,800
Estimated Liability from Warranties 136,000
Determine the amounts that will be shown on the 2005 financial statements for the
following:
1. Warranty expense
a. P164,000 c. P108,000
b. 80,000 d. P144,000
2. Estimated liability from warranties
a. P108,000 c. P136,000
b. P164,000 d. P 80,000
3. Premium expense
a. P 75,600 c. P183,600
b. P126,000 d. P108,000
4. Inventory of AM/FM radio
a. P46,950 c. P77,350
b. P39,950 d. P56,950
5. Estimated liability for premiums
a. P75,600 c. P63,450
b. P36,400 d. P44,800
9. During January 2005, Tagkawayan Company won a litigation award for P2,000,000
which was tripled to P6,000,000 to include punitive damages. The defendant, who is
financially stable, has appealed only the P4,000,000 punitive damages. Tagkawayan
was awarded P1,000,000 in an unrelated suit it filed, which is being appealed by the
defendant. Counsel is unable to estimate the outcome of the appeals. In its 2005
income statement, Tagkawayan should report what amount of pretax gain?
a. 6,000,000 c. 2,000,000
b. 4,000,000 d. 3,000,000
10. Sariaya Company sells office equipment service 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 contracts is recognized as earned over
lives of the contracts. Information for the year 2005 is as follows:
Unearned service contract revenue – 1/1/2005 3,000,000
Cash receipts from service contracts sold 5,000,000
Service contract revenue recognized 4,500,000
Service contract expense 2,500,000
What amount should Sariaya report as unearned service contract revenue at
December 31, 2005?
a. 3,500,000 c. 2,000,000
b. 1,000,000 d. 500,000
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