UNIVERSITY

OF SANTO TOMAS
UST-Alfredo M. Velayo – College of Accountancy
España, Manila

2ND TERM, A.Y. 2019-2020

IAC 11 – INTEGRATED REVIEW IN FINANCIAL ACCOUNTING AND REPORTING

CURRENT LIABILITIES

The following information was provided to you by Manila

Corporation with regard to its currently maturing obligations as
of 31 December 2019:

• On 31 December 2019, Manila had P1,000,000 short-term notes

payable due 14 February 2020. On 15 January 2020, the
company issued bonds with a face value of P900,000. The
proceeds from the issuance of bond plus additional cash
held by the company on 31 December 2019 were used to
liquidate the P1,000,000 of short-term notes.

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• A P500,000 notes payable is due on 15 March 2020. On 31

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December 2019, Manila signed an agreement to borrow up to

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P500,000 to refinance the notes payable on a long-term
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basis. The financing agreement called for borrowings not to
exceed 80 percent of the value of collateral Manila was

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providing. At the date of issue of the 31 December 2019
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financial statements, the value of collateral was P450,000

and was not expected to fall below this amount during 2020.

•
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The financial statements of Manila were authorized to be

issued on 31 March 2020.
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1. How much liabilities are current as of 31 December 2019?

a. P360,000
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b. P500,000
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c. P1,140,000
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d. P1,360,000

Valencia Corporation has the following liabilities at December

31, 2019:
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8.9% note payable issued 1 November 2019, maturing

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31 October 2020 P1,150,000

7.25% note payable issued 1 August 2019 payable in
twelve equal annual installments of P90,000
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beginning 1 August 2020 1,080,000

Valencia’s 31 December 2019 financial statements were issued on

19 March 2020. On 23 January 2020, the entire P1,150,000 balance
of the 8.9% note was refinanced by issuance of a long-term
obligation payable in a lump sum. In addition, on 29 December
2019, Valencia consummated a non-cancelable agreement with the
lender to refinance the 7.25%, P1,080,000 note on a long-term
basis, on readily determinable terms that have not yet been
implemented.

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 2. On the 31 December 2019 statement of financial position,
the amount of these notes payable that Valencia should
classify as short-term obligations is
a. P0.
b. P1,080,000.
c. P1,150,000.
d.P2,230,000.

On 5 January 2020, Ginebra Company received a P5,000,000-

complaint from one of its employees who suffered an accident
while in the Ginebra’s production department last 30 December
2019. Ginebra’s legal counsel believed it would probably lose
the case and the best estimate of the loss was P2,000,000. The
complainant offered an out of court settlement of P3,000,000 but
Ginebra did not accept.

On 28 February 2020, the court ordered Ginebra to pay

P2,500,000. Ginebra paid the employee on 31 March 2020.

Ginebra’s P10,000,000 comprehensive insurance policy has

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P500,000 deductible clauses. Ginebra’s financial statements were

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issued on 15 March 2020.

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3. What amount of loss from lawsuit should Ginebra recognize

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in its 31 December 2019 statement of comprehensive income?
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a. 500,000
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b. 2,000,000
c. 2,500,000
d. 5,000,000
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4. What amount of liability from lawsuit should Ginebra

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recognize in its 31 December 2019 statement of financial

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position?
a. 500,000
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b. 2,000,000
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c. 2,500,000
d. 5,000,000
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Below are three independent situations.

I. In August 2019 a worker was injured in the factory in an
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accident partially the result of his own negligence. The

worker has sued Wesley Co. for P800,000. Counsel believes
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it is possible but not probable that the outcome of the

suit will be unfavorable and that the settlement would cost
the company from P250,000 to P500,000.
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II. A suit for breach of contract seeking damages of P2,400,000

was filed by an author against Greer Co. on October 4,
2019. Greer's legal counsel believes that an unfavorable
outcome is probable. A reasonable estimate of the award to
the plaintiff is between P600,000 and P1,800,000. No amount
within this range is a better estimate of potential damages
than any other amount.

II. Quinn is involved in a pending court case. Quinn’s lawyers

believe it is probable that Quinn will be awarded damages
of P1,000,000.

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 5. Discuss the proper accounting treatment for each of the
independent situation above.
I. _______________________________________________________
II. _______________________________________________________
III. _______________________________________________________

IV. Disclose in the notes to the financial statements the

existence of a possible contingent liability related
to the lawsuit. The note should indicate the range of
the possible loss. The contingent liability should not
be accrued because the loss is possible, not probable.

V. The probable award should be accrued by a charge to an

estimated loss and a credit to an estimated liability
of P1,200,000. With disclosure on the following: the
amount of the suit, the nature of the contingency, the
reason for the accrual, and the range of the possible
loss. The accrual is made because it is probable that
a liability has been incurred and a reasonable

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estimate can be made of the obligation amount. The

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midpoint amount in the range of possible losses is

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used when no amount is a better estimate than any
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other amount.

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VI. The P1,000,000 contingent asset should be disclosed
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because its outcome is considered probable.

SM Investment Corp.’s accounts payable at 31 December 2019,

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totaled P1,700,000 before any necessary year-end adjustments

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relating to the following transactions:

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• On 27 December 2019, SM Investment Corp. wrote and recorded

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checks to creditors totaling P400,000. The checks were

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mailed out on 10 January 2020.

•
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On 21 December 2019, SM Investment Corp. purchased and

received goods for P300,000, terms 2/10, n/30. The invoice
was recorded on 2 January 2020. The company is using the
gross method.
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• Goods shipped FOB Destination on 20 December 2019 from a

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vendor to SM Investment Corp. were lost in transit. The

invoice cost of P35,000 was not recorded as of the date of the
financial statement.
• Goods shipped FOB Destination on 26 December 2019 from a
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vendor were received 29 December 2019. The invoice cost of

P150,000 was recorded on 30 December 2019.
• Goods shipped FOB Supplier on 22 December 2019, from a
supplier, were still in transit on 31 December 2019. The
invoice cost of P47,500 was not recorded as of BS date.

6. At 31 December 2019, what amount should SM Investment Corp.

report as total accounts payable?
a. 2,482,500
b. 2,400,000
c. 2,447,500
d. 2,435,000

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 On June 18, 2019, Delighted Company received goods from Sad
Corporation, with a list price of P80,000 subject to 20%, 10%
trade discount and credit terms of 2/10, n/30. The goods were
shipped FOB Shipping point, freight collect, paying freight of P
1,500. Sad Corporation paid this account on July 8. Sad
Corporation records purchases net of cash discount offered.

7. At what amount should the accounts payable to Sad

Corporation be shown on Delighted Company’s June 30, 2017
balance sheet?
a. 56,448
b. 56,100
c. 54,948
d. 57,600

Tim Stark is the new accountant of Watts Company. Watts Company

purchased merchandise on account for P9,000,000. The credit
terms are 2/10, n/30. Tim has talked with the company's banker
and knows that he could earn 8% on any money invested in the

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company's savings account.

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8. What is Watts Company’s eH w savings or loss by taking the
discount?

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a. P135,000 savings
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b. P135,000 loss
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c. P140,000 savings
d. P140,000 loss
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Edge Company’s salaried employees are paid biweekly.

Occasionally, advances made to employees are paid back by
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payroll deductions. Information relating to salaries for the

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calendar year 2019 is as follows:

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12/31/18 12/31/19
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Employee advances P12,000 P18,000

Accrued salaries payable 65,000 ?
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Salaries expense during the year 650,000

Salaries paid during the year 625,000
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9. At 31 December 2019, what amount should Edge report for

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accrued salaries payable?

a. P90,000.
b. P84,000.
c. P72,000.
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d. P25,000.

Hello Company is considering two different proposals for

computing the bonus for its new company president. The first
plan states that the bonus would be equal to 6% of profits after
the bonus but before tax have been deducted. The second method
is based on profits after both tax and bonus have been deducted
at the rate of 12%. Income before income tax and bonus for 2018
is P 9,000,000. Income tax rate is 35%.

10. How much is the amount of bonus under the first plan?
a. 540,000

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 b. 358,529
c. 337,825
d. 509,434

11. How much is the amount of bonus under the second plan?
a. 651,206
b. 702,000
c. 964,286
d. 732,777

Johnson Company sells contracts agreeing to service equipment

for a three-year period. Information for the year ended December
31, 2020 is as follows:

Cash receipts from service contracts sold P1,920,000

Service contract revenue recognized 1,560,000
Unearned service contract revenue, January 1 1,080,000

12. In its 31 December 2020 statement of financial position,

what amount should Johnson report as unearned service

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contract revenue?

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a. P480,000

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b. P780,000 eH w
c. P1,100,000

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d. P1,440,000
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Nixon Company sells 3-year service contracts for air

conditioning units for P 1,500 each. Sales of service contracts
and repairs are made evenly throughout each year. The company
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estimates that 15% of repairs are done in the first year from
the date of sale, 35% in the second year and 50% in the third
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year. Service contracts sold are as follows:

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2018 2019 2020

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Number of service contracts sold 1,400 1,82 1,650

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13. How much is the unearned revenue from service contracts as

of December 31, 2019?
a. P1,417,500
b. P2,525,250
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c. P3,942,750
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d. P4,657,125

14. How much revenue from service contracts is recognized in

2020?
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a. P204,750
b. P525,000
c. P1,706,625
d. P1,760,625

15. How much revenue from service contracts sold in 2020 is

realized in 2021?
a. P185,625
b. P618,750
c. P955,500
d. P371,250

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 16. How much is the unearned revenue from service contracts as
of December 31, 2020?
a. P4,627,125
b. P3,468,750
c. P2,475,000
d. P1,237,500

Eastern Marketing sells split type air-conditioners. The company

provides its customers an option to purchase warranty contract
for a two-year period for P2,250 for every unit of the air-
conditioner purchased priced at P45,000. If the customer chooses
not to buy the warranty contract, the air-conditioner sells for
P42,750.

Sale of warranty contracts and repairs are made evenly

throughout the year. Based on past records of the entity, 30% of
repairs are done in the first year from the date of sale and 70%
in the second year.

During 2020, Eastern sold 500 packages of the air-conditioners

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and warranty contracts. Cost of servicing the units during 2020

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amounted to P95,000.

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17. Based on the given data, Eastern Company should report [1]

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unearned revenue from warranty contracts as of 31 December
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2020 and [2] profit from warranty contracts for the year
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2020, respectively
a. P956,250; P168,750
b. P787,500; P168,750
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c. P787,500; P73,750
d. P956,250; P73,750
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Laxada Marketing launched a new sales promotional program. For

every 10 seals of proof of purchase of their product, customers
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receive a premium costing P8 each. This premium may separately

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be sold for P12 each. Laxada Marketing estimates that 60% of the
seals of proof of purchase reaching the consumer market will be
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redeemed.

Product sales with seals of proof of purchase – 2,000,000

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units for a total of P 90,000,000

Premiums purchased – 100,000 units
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Premiums distributed to customers – 82,000 units

18. How much of the total transaction price is allocated to the

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premium?
a. P2,337,662
b. P1,572,052
c. P1,417,323
d. P949,868

19. What is the amount of additional sales recognized by Laxada

upon redemption of premiums?
a. P649,077
b. P968,504
c. P1,074,236
d. P1,597,402

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 In 2019, Exy Company started a promotional campaign for the sale
of its new product by attaching a coupon for its unit. For every
five coupons plus P50, a customer can avail a premium which
sells at P150 (cost to Exy Company is P100).

Additional information (in units):

2020 2019
Sale of products (P500 each) 200,000 140,000
Coupons redeemed 90,000 40,000
Coupons expected to be redeemed in
the future 80,000 30,000

20. What is the amount of total revenue in 2020?

a. P99,470,523
b. P98,570,523
c. P97,716,461
d. P97,696,737

Carter Company sells gift certificates for P750 each. At 31

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December 2019, Carter Company had 1,000 gift certificates

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outstanding. In 2020, Carter Company sold 4,000 gift

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certificates while a total 3,600 were redeemed. Also in 2020,
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200 gift certificates expired.

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Carter operates on a gross margin of 60%.
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21. How much revenue pertaining to gift certificates should be

deferred at 31 December 2020?
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a. P540,000
b. P630,000
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c. P900,000
d. P1,050,000
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Casio Company sells a product for P1,000 each. For each product
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sold, Casio Company gives a 5% discount coupon for the future

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purchase of the same product with a validity of 60 days.

Based on experience, Casio Company estimates that there is a 50%

chance the customers will use the coupon prior to expiration.
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In 2020, Casio Company recorded that a total of 25,000 units

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were sold.

22. How much of the total transaction price is allocated to the

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coupons?
a. P609,756
b. P625,000
c. P1,190,476
d. P1,250,000

The Barack Food Co. distributes to consumers coupons, which may

be presented on or before a stated expiration date to retail
outlets on certain products of Barack. The retail outlets are
reimbursed when they send the coupons to Barack. In Barack’s
experience, 50% of such coupons are redeemed. The retail outlets
are given one month to request full reimbursement from Barack

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 from the date it redeems the coupons from the consumers. During
2020, Barack issued two separate series of coupons as follows:

Total Consumer Amount distributed

Issued on
value expiration date as of 12/31/20
1/1/20 P500,000 6/30/20 P236,000
7/1/20 720,000 12/31/20 300,000

The only journal entries to date recorded debits to coupon

expense and credits to cash of P536,000, representing total
amount disbursed for the coupon redemption.

23. The 31 December 2020 statement of financial position should

include a Liability for Unredeemed Coupons of
a. P0
b. P60,000
c. P124,000
d. P360,000

Bill Corporation sells washing machines that carry a three-year

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warranty against manufacturer’s defects. Based on company

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experience, warranty costs were estimated at P300 per machine.

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During 2020, Bill sold 24,000 washing machines and paid warranty
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costs of P1,700,000.

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24. In its profit or loss statement for the year ended 31
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December 2020, Bill should report warranty expense of

a. P1,700,000
b. P2,400,000
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c. P5,500,000
d. P7,200,000
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25. Assuming that the company’s operations started in 2020,

what is the liability for warranty reported by Bill at 31
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December 2020?
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a. P1,700,000
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b. P2,400,000
c. P5,500,000
d. P7,200,000
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Ronald Company estimated its annual warranty expense as 4% of

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annual net sales. The following data relate to the calendar year
2020:

Net Sales P1,500,000

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Warranty liability account

Balance, 12/31/20 (debit, before adjustment) 10,000
Balance, 12/31/20 (credit, after adjustment) 50,000

26. Which of the following entries was made to record the 2020
estimated warranty expense?

a. Warranty Expense 60,000

Retained Earnings 10,000
Warranty Liability 50,000

b. Warranty Expense 50,000

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 Retained Earnings 10,000
Warranty Liability 60,000

c. Warranty Expense 40,000

Warranty Liability 40,000

d. Warranty Expense 60,000

Warranty Liability 60,000

Franklin Company sells magazine subscriptions for one-to three-

year periods. Cash receipts from subscribers are credited to
Magazine Subscriptions Collected in Advance, and this account
had a balance of P2,400,000 at December 31, 2020, before year-
end adjustments. Outstanding subscriptions at December 31, 2020
expire as follows:

During 2021 – P600,000

2022 – 900,000
2023 – 400,000

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27. In its December 31, 2020 statement of financial position,

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what amount should Franklin report as the balance for

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magazine subscriptions collected in advance?
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a. P500,000
b. P1,200,000

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c. P1,900,000
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d. P2,400,000

28. What amount should Franklin report as magazine

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subscriptions revenue for the year ended December 31, 2020?

a. P500,000
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b. P1,200,000
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c. P1,900,000
d. P2,400,000
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Jakarta Company operates a customer loyalty program. The entity

grants loyalty points for goods purchased. The loyalty points
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can be used by the customers in exchange for goods of the

entity.
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During 2019, the entity sold goods for a total consideration of

P 5,000,000 for which 4,000 points were granted. The fair value
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of each loyalty point is P70. The company expects that 75% of

the award credits shall be redeemed. Furthermore, 1,200 points
and 1,800 points were redeemed for the years 2019 and 2020
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respectively. However, during 2020, the company revised its

expectations and now expects that 80% of the award credits will
be redeemed altogether.

29. How much is the liability to be presented in the 2020

statement of financial position relating to customer
loyalty awards?
a. P17,500
b. P150,500
c. P122,500
d. P168,000
END OF HANDOUT

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