Answer the following questions:

I. Bonus
Assume the following data for ABC Corporation:
•Profit before deducting bonus (B) and income tax (T) is P2,000,000. Bonus rate is 10% and
income tax rate is 30%.

Compute for the following:

1) Bonus is based on profit before deducting bonus but after deducting income tax.

B = .10 (2,000,000 – T) T = .30 (2,000,000 – B)

= .10 [2,000,000 - .30 (2,000,000-B)]

= .10 (2,000,000 – 600,000+ .30B)

= 200,000– 60,000+ .03B)

= -.30B = 200, 000 – 60,000 + .03b

.97B = 140,000

= 144,330

2) Bonus is based on profit after deducting both

bonus and income tax. 

B = .10 (2,000,000 – B - T) T = .30 (2,000,000 – B)

= .10 [2,000,000 – B-.30 (2,000,000-B)]

= .10 (2,000,000 –B- 600,000+ .30B)

= 200,000–.10B- 60,000+ .030B

B + .10B-.03B = 200, 000 – 60,000 + .03B

1.07B = 140,000/1.07

= 130, 841

T = .30 (2,000,000 – 130,841.12)

= 560,748
II. Provisions and Contingent Liabilities
3). As of December 31, 2021, ABC Company was sued by DEF Company in relation to violation of
patent rights. However, as of the date of the financial statements, it is only possible that a liability
of P5,000,000 would be incurred. As of reporting date, how much should be recognized as
provision? 

Answer: No provision is recognized. It is because as of the date of the financial statement, the
outflow economic benefit is possible to occur which means that the obligation is uncertain.

4) Rey Co has a published environmental policy. In this, Rey Co explains that they always replant
trees to counterbalance the environmental damage created by their operations. Rey Co has a
consistent history of honoring this policy. During 2021, Rey Co opened a new factory, leading to
some environmental damage. Rey Co estimates that the associated tree planting and
environmental clear up costs will be 5,000,000. How much should be recognized by Rey Co as a
provision as of December 31, 2021?

Answer: A provision is recognized for the estimated amount of the costs of the clear up which is
P5,000,000.

The entry for the provision is:

Environmental Clear up Expense 5,000,000

Provision for Environmental Clear up Expense 5,000,000

5) Simang Co has received legal advice that the most likely outcome of the court case from the
employee is that they will lose the case and Rey Co will have to pay damages. The legal team
think that Simang Co will pay ranging from P8M to P12M and the most reasonable estimate is
amounting to P10M. How much should be recognized as provision by Simang Co? How much
should be disclosed as additional possible obligation? 

Answer: A provision is recognized for the best estimate of the obligation. The best estimate is the
most likely outcome which is 10,000,000.

Additional possible obligation of 2,000,000 ( the difference between the recorded amount of
10,000,000 and the highest range in the estimated amount of 12,000,000) is to be disclosed in the
notes to the financial statements.

6) Abegail Company gives a year’s warranty with all goods sold during the year. Past experience
shows that Abegail Company needs to do no repairs on 85% of the goods. On average, 10% need
minor repairs, and 5% need major repairs. Abegail Company’s manufacturing manager has
calculated that if minor repairs were needed on all goods, it would cost P100,000 and major
repairs on all goods would cost P1M. How much should be recognized as provision for warranty
for the year?
Answer:

No defects 0 x 85% 0

Minor defects 100,000 x 10% 10,000

Major defects 1,000,000 x 5% 50,000

TOTAL 60,000

III. Accrued Liabilities

7) Assume that a company, with a five day work week, pays wages of its daily wages every Friday.
The average weekly payroll amounts to 15,000 and the last wage payment for the company's
fiscal year ending June 30 was Friday, June 25. How much should be recorded as accrued
liabilities at June 30? 

Answer:

15,000 / 5 days = 3,000 daily wages

3,000 x 3 days = 9,000 (recorded accrued liabilities at June 30)

IV. Long-Term Payables

Define the following:

8) Discounts on bonds payable

It is considered as a contra liability account. Discount on bonds payable occurs when the rate of the
bonds issued is less than the prevailing market interest rate. It is the difference between the face
amount of the bond and the issuer’s reduced price at which it was sold.

9) Premium on bonds payable

It arises when bonds payable are issued for an amount and is greater than its face amount, since
investors are willing to pay extra. The interest rate on the bonds exceeds the prevailing market interest
rate.

10) Effective interest rate

Effective interest rate caters the compounding periods during the payment term. It is used to compare
the annual interest between loans with different compounding periods.

11) Nominal interest rate

It is the stated interest rate in the contract loan and does not take into account the compounding
periods.