ESTIMATED LIABILITIES - warranty and premium

Dolores' Music Emporium carries a wide variety of music promotion techniques - warranties and
premiums - to attract customers.

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.

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. Dolores pays P34 for each radio and estimates that 60% of the coupons given to customers will be
redeemed.

Dolores' total sales for 2010 were P57,600,000 - P43,200,000 from musical instrument and sound
reproduction equipment and P14,400,000 from recorded music and sheet music. Replacement parts and
labor for warranty work totaled P1,312,000 during 2010. A total of 52,000 Am/Fm radio used in the
premium program were purchased during the year and there were 9,600,000 coupons redeemed in
2010.

The accrual method is used by Dolores 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, 2010,
were as shown below:

Inventory of Premium Am/Fm radio P319,600

Estimated Premium Claims Outstanding 358,400

Estimated Liability from Warranties 1,088,000

Questions:

Based on the above and the result of your audit, determine the amounts that will be shown on the 2010
financial statements for the following:

1. Warranty expense

a. P864,000

b. P1,152,000

c. P1,312,000

d. P640,000
2. Estimated liability from warranties

a. P864,000

b. P1,312,000

c. P1,088,000

d. P640,000

3. Premium expense

a. P604,800

b. P1,468,800

c. P864,000

d. P1,008,000

4. Inventory of Am/Fm radio

a. P375,600

b. P319,600

c. P618,800

d. P455,600

5. Estimated liability for premiums -

a. P604,800

b. P291,200

c. P507,600

d. P358,400

BONDS PAYABLE

On January 1, 2009, Perez Corporation issued 5,000 of its 5-year, P1,000 face value, 11% bonds dated
January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each December 31. Perez
uses the effective interest method of amortization. On December 31, 2010, the 3,000 bonds were
extinguished early through acquisition in the open market by Perez for P2,970,000 plus accrued interest

Questions:
Based on the above and the result of your audit, determine the following: (round off present value
factors to four decimal places)

1. The issue price of the bonds on January 1, 2009 is

a. P5,388,835

b. P4,630,655

c. P5,282,135

d. P5,000,000

2. The carrying amount of the bonds on December 31, 2009 is

a. P4,755,930

b. P5,453,840

c. P5,323,830

d. P5,000,000

3. The gain on early retirement of bonds on December 31, 2010 is

a. P116,442

b. P266,811

c. P181,785

d. P130,800