INTERMEDIATE ACCOUNTING II (AE 16)

QUIZ 1.2

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Compute the following problems.

Problem #1:

On April 1, 2018, Keem Both Company began offering a new product for sale
under a one-year warranty. Of the 5,000 units in inventory at April 1, 2018,
3,000 had been sold by June 30, 2018. Based on its experience with similar
products, the entity estimated that the average warranty cost per unit sold
would be P80. Actual warranty costs incurred from April 1 through June 30,
2018 were P70,000. On June 30, 2018, what amount should be reported as
estimated warranty liability?

Problem #2:

Keri Bells Company sells its product under a one-year warranty. For the year,
it sold 20,000 units. Based on its experience with similar products, the entity
estimated that 35% of the units sold will be returned for repair. The average
warranty cost per unit sold would be P120. Actual warranty costs incurred
were P470,000. On December 31, 2018, what amount should be reported as
estimated warranty liability?

Problem #3:

During 2018, Beshie Company introduced a new product carrying a two-year

warranty against defects. The estimated warranty costs related to peso sales
are 6%. Sales are P6,000,000 for 2018 and P10,000,000 for 2019. actual
warranty expenditures are P90,000 for 2018 and P300,000 for 2019. On
December 31, 2019, what is the estimated warranty liability?

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Problem #4:

East Company manufactures stereo systems that carry a two-year warranty

against defects. Based on past experience, warranty costs are estimated at
5% of sales for the warranty period. During 2018, stereo system sales
amounted to P5,000,000 and warranty costs of P100,000 were incurred. What
amount should be reported as warranty expense for 2018? Estimated
warranty liability?

Problem #5:

PhaBie Dakha Company estimates its annual warranty expense at 3% of net

sales. The net sales for 2018 amounted to P2,000,000. On January 1, 2018,
the warranty liability is P50,000 and the warranty payments during 2018
totaled P70,000. What is the warranty liability on December 31, 2018?

Problem #6:

Forever Shop sells its product under a one-year warranty. For the year, it sold
4,000 units. Based on its experience with similar products, the entity
estimated that 40% of the units sold will be returned for repair. The average
warranty cost per unit sold would be P70. Actual warranty costs incurred
were P95,000. On December 31, 2018, what amount should be reported as
estimated warranty liability?

Problem #7:

During 2017 Beal Company became involved in a tax dispute with the BIR.
On December 31, 2017, the entity’s tax advisor believed that an unfavorable
outcome was probable and the best estimate of additional tax was P500,000,
but could be as much P650,000. after the 2017 Financial Statements were
issued, Beal Company received and accepted a BIR settlement offer of
P550,000. what amount of accrued liability should be reported on December
31, 2017?

Problem #8:

On December 31, 2017, Mith Company was a defendant in a pending lawsuit.

In the opinion of the entity’s attorney, it is probable that Mith Company will
have to pay P500,000 and it is reasonably possible that Mith Company will
have to pay P600,000 as a result of this lawsuit. What should be reported in
the 2017 financial statements?

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Problem #9:

Caress Company carried a provision of P2,000,000 in its draft financial

statements on December 31, 2018 in relation to an unresolved court case. On
January 31, 2019, when the financial statements on December 31, 2018 had
not yet been authorized for issue, the case was settled and the court decided
the damages payable by Caress Company to be P2,800,000. What amount
should be adjusted on December 31, 2018 in relation to this event?