Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

CURRENT LIABILITIES
Accounting 122
TRUE OR FALSE. Determine whether the following statements are correct or not. Write A if the statement is
correct and write B if not. Final answers should be written on the answer sheet provided with this questionnaire.
Erasures are strictly not allowed.
1. Rent revenue collected one year in advance should be reported as a current liability. A
2. Gift certificates are articles of value and in some cases cash payments given to customers as a result of past
sales or sales promotion activities. B
3. Under a customer loyalty program, if a third party supplies the awards and the entity is collecting the
consideration for the award credits as principal in the transaction, the consideration allocated to the award
credits shall be recognized initially as deferred revenue and subsequently recognized as revenue upon the
redemption of the award credits. B
4. The container’s deposit account is usually classified as a current liability. A
5. An entity sells appliances on installment contracts and offers a service contract which must be paid in full at
the time of sale. In this set up, collections received by the entity for service contracts should be recorded as
an increase in a service revenue account. B
6. The accrual approach in recognizing warranty costs properly matches cost with revenue. A
7. In June of the current year, an entity sold refundable merchandise coupons. The entity received a certain
amount for each coupon redeemable from July 1 to December 31 of the current year, for merchandise with a
certain retail price. At June 30 of the current year, these coupon transactions should be reported by the entity
as unearned revenue at the merchandise’s retail price. B
8. Warranty liabilities are incurred at the point of sale. A
9. Premiums are generally designed to reward customers for past purchases and to provide them incentives to
make further purchases. B
10. The proceeds received from the advance sale of non-refundable tickets for a theatrical performance should
be reported in the statement of financial position before the performance as unearned revenue to the extent
of related costs expended. B
11. The redemption and lapse of gift certificates would both decrease the deferred revenue (gift certificates
payable) account. A
12. To determine the net VAT liability of an entity, the output VAT is deducted from the input VAT. B
13. The consideration allocated to the award credits is measured at fair value of the award credits less any costs
to distribute them. B
14. Magazine subscriptions collected in advance should be treated as a contra account to the magazine
subscriptions receivable account. B
15. Under a royalty agreement, an entity will receive royalties from the assignment of a patent for four years.
The royalties received in advance should be recognized as revenue evenly over the life of the royalty
agreement. B
16. Under a customer loyalty program, if the entity supplies the award itself, the consideration allocated to the
award credits shall be recognized as revenue immediately. B
17. Estimated liabilities are disclosed in financial statements by classifying them as regular liabilities in the
statement of financial position. A
18. If an entity received an advance payment for special order goods that are to be manufactured and delivered
within six months, such advance payment shall be reported in the entity’s statement of financial position as a
current liability. A
19. When premiums are purchased, an entry debiting premium expense shall be made. B
20. If a third party supplies the awards, the revenue from the award credit is recognized at the point of sale
whether the entity acts as principal or agent. A

JOURNAL ENTRIES. For each independent case below, provide all the necessary journal entries that must be
made in order to reflect the transactions mentioned. Final answers should be written on the space provided for in the
answer sheet. Erasures are strictly not allowed.
CASE 1: An entity manufactures certain product and sells it at P300 per unit on cash basis. A soup bowl is offered
to customers on the return of 5 wrappers plus a remittance of P10. The bowl costs P50 and it is estimated that 60%
of the wrappers will be redeemed. The data for 2011, the first year of implementation, concerning the premium plan
are summarized below:
Sales P 3,000,000
Soup bowls purchased at P50 each 2,000 units
Wrappers redeemed 4,000 pieces
CASE 2: An entity, a retailer of electrical goods, participates in a customer loyalty program operated by an airline.
The entity grants program members one air travel point for every P1,000 spent on electrical goods. Program
members can redeem the points for travel with the airline subject to availability. The entity pays the airline P90 for
each point. During 2011, the entity sold electrical goods for P5,000,000 and granted 5,000 points. The fair value of a

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 1
point is P100. Subsequently, the entity paid the airline P450,000 relating to the points granted for the current year.
The entity has collected the consideration allocated to the points on behalf of the airline.
CASE 3: An entity, a grocer retailer, operates a customer loyalty program. The entity grants program members
loyalty points when they spend a specified amount on groceries. Program members can redeem the points for further
groceries. The points have no expiry date. During 2011, the entity granted 10,000 points. Management expects that
80% or 8,000 of these points will be redeemed. The fair value of each loyalty point is estimated at P100. The sales,
all on cash basis, during 2011 amounted to P8,000,000 including the loyalty points. On December 31, 2011, 4,000
points have been redeemed in exchange for groceries.
In 2012, the management revised its expectations and now expects that 90% or 9,000 points will be redeemed
altogether. During 2012, the entity redeemed 4,100 points. In 2013, a further 900 points are redeemed. Management
continues to expect that only 9,000 points will ever be redeemed, meaning, no more points will be redeemed after
2013.
CASE 4: An entity, a retailer of electrical goods, participates in a customer loyalty program operated by an airline.
The entity grants program members one air travel point for every P1,000 spent on electrical goods. Program
members can redeem the points for travel with the airline subject to availability. The entity pays the airline P90 for
each point. During 2011, the entity sold electrical goods for P5,000,000 and granted 5,000 points. The fair value of a
point is P100. Subsequently, the entity paid the airline P450,000 relating to the points granted for the current year.
The entity has collected the consideration allocated to the points on its own account.
CASE 5: An entity sells refrigerators that carry a two-year warranty against defects. The sales and warranty repairs
are made evenly throughout the year. Based on past experience, the entity projects an estimated warranty cost as a
percentage of sales as follows:
First year of warranty 4%
Second year of warranty 10%
Sales and actual warranty repairs for two years are as follows:
2011 2012
Sales P 5,000,000 P 6,000,000
Actual warranty repairs 140,000 300,000
CASE 6: During March, an entity sold goods to customers on account for P5,600,000 including value-added taxes
of P600,000. In the same month, the entity purchased goods on account from suppliers for P2,240,000, including
value added taxes of P240,000. At the end of the month, the net VAT liability was determined and paid in the
succeeding month.
CASE 7: An entity reported the following payroll of the employees for the month of January:
Gross payroll P 500,000
Income tax withheld 20,000
SSS contribution 4,000
Philhealth contribution 2,000
Pag-ibig contribution 1,000
In relation to the payroll for the month of January, the entity is required to make the following additional
contribution:
SSS contribution P 6,000
Philhealth contribution 3,000
Pag-ibig contribution 2,000
On the first week of February, the amounts withheld and the additional contributions were remitted to the concerned
agencies.
CASE 8: Mega Department Store sells gift certificates redeemable only when merchandise is purchased. These gift
certificates have an expiration date of two years after issuance date. Upon redemption or expiration, Mega
recognizes the unearned revenue as realized. Information for 2011 is as follows:
Gift certificates payable, January 1 P 260,000
Gift certificates sold 900,000
Gift certificates redeemed 780,000
Expired gift certificates 40,000
Cost of goods sold 60%
CASE 9: Farr Company sells its products with reusable, expensive containers. The customer is charged a deposit for
each container delivered and receives a refund for each container returned within two years after the year of
delivery. Information for 2011 is as follows:
A. Containers held by customers on January 1, 2011 from deliveries in: 2009 – P75,000; 2010 – P215,000.
B. Containers delivered in 2011 – P390,000.
C. Containers returned in 2011 from deliveries in: 2009 – P45,000; 2010 – P125,000; 2011 – P143,000.
CASE 10: Greene 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 the
lives of the contracts. Additional information for the year ended December 31, 2011 is as follows:
Unearned service contract revenue, January 1 P 600,000

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 Cash receipts from service contracts sold 980,000
Service contract revenue recognized 860,000
Service contract expense 520,000
SHORT PROBLEMS. Compute for the amount/s asked by each problem. Final answers should be written on the
answer sheet provided with this questionnaire. Solutions are to be written in a separate sheet of paper to be
submitted along with the answer sheet. Erasures are strictly not allowed.
PROBLEM 1: Pop Company sells banana juice. In order to promote the drink among teenagers and others who
might otherwise be indifferent to the product, the entity inaugurates in 2012 a premium plan called, “Drink-N-Win.”
For every 10 bottle caps and P5 turned in, customers receive an attractive ballpen and become eligible for a grand
prize of P5,000 in cash which is awarded for every 100 tops turned in. The entity estimates that only 25% of bottle
caps reaching the hands of customers will be presented for redemption.
During 2012, the entity sells 400,000 bottles of banana juice at P9.00 each, purchases 10,000 ballpoint pens for a
total cost of P900,000 and incurs non-deferrable costs of P30,000 applicable to the premium plan. A total of 8,000
pens have been redeemed and 30 grand prizes have been awarded. At the end of each year, the entity recognizes an
estimated liability equal to the estimated cost of prizes outstanding.
1. What is the balance of the premiums – ball point pens at December 31, 2012? 180,000
2. What is the balance of the estimated premium liability at December 31, 2012? 170,000
3. The total premium expense for 2012 is: 1,030,000
PROBLEM 2: Cascade Company manufactures a single laundry soap. A towel is offered as a premium to
customers who send in two proof-of-purchase seals from the soap boxes and a remittance of P20. The corporation
incurs a distribution cost of P5 per towel. Data for the premium offer are:
2011 2012
Soap sales P 2,500,000 P 3,125,000
Towel purchases (P100 per towel) 175,000 200,000
Number of towels distributed as premium 1,000 pieces 1,800 pieces
Number of towels expected to be distributed as
premium in the subsequent period 600 pieces 800 pieces
4. What is the premium expense for 2011? 136,000
5. What is the premium expense for 2012? 170,000
6. What is the balance of the estimated premium liability at December 31, 2012? 68,000
PROBLEM 3: In an effort to increase sales, Mills Company inaugurated a sales promotional campaign on June 30,
2011. Mills Company placed a coupon redeemable for a premium in each package of cereal sold. Each premium
cost P20 and five coupons must be presented by a customer to receive a premium. Mills Company estimated that
only 60% of the coupons issued will be redeemed. For the six months ended December 31, 2011, the following
information is available:

Packages of cereal sold Premiums purchased Coupons redeemed

150,000 12,000 42,000
7. What is the estimated liability for premium claims outstanding on December 31, 2011? 192,000
PROBLEM 4: On January 1, 2011, Rocamora Company began marketing a new soft drink. To help promote the
soft drink, the management is offering a special gift, a t-shirt, to each customer who returns 10 bottle caps. Roca
Company estimates that out of the 250,000 bottles sold in 2011, only 80% will be redeemed. On December 31,
2011, the following information was collected:
Units Amount
T-shirts purchased 18,000 P 3,600,000
T-shirts distributed 15,000
8. What is the estimated liability on December 31, 2011? 1,000,000
PROBLEM 5: Case Cereal Corporation frequently distributes coupons to promote new products. On October 1,
2012, Case mailed 1,000,000 coupons for P0.45 off each box of cereal purchased. Case expects 120,000 of these
coupons to be redeemed before the December 31, 2012, expiration date. It takes thirty days from the redemption
date for Case to receive the coupons from the retailers. Case reimburses the retailers an additional P0.05 for each
coupon redeemed. As of December 31, 2012, Case had paid retailers P2,500 related to these coupons and had 50,000
coupons on hand that had not been processed for payment.
9. What amount should Case report as a liability for coupons in its December 31, 2012 balance sheet? 35,000
PROBLEM 6: In packages of its products, Curran Company includes coupons that may be presented at retail stores
to obtain discounts on other Curran products. Retailers are reimbursed for the face amount of coupons redeemed
plus 10% of that amount for handling costs. Curran Company honors requests for coupon redemption by retailers up
to three months after the consumer expiration date. Curran Company estimates that 60% of all coupons issued will
ultimately be redeemed. Information relating to coupons issued during 2011 is as follows:
Consumer expiration date 12/31/2011
Total face amount of coupons issued P 600,000
Total payments to retailers as of December 31, 2011 220,000

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 10. What amount should Curran Company report as a liability for unredeemed coupons on December 31,
2011? 176,000
11. In the 2011 income statement, the total premium expense would be shown at: 396,000
PROBLEM 7: Bare 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 P20. Data for the premium offer are:
2011 2012
Boxes of soap sold 500,000 800,000
Towels purchased (P100 each) P 2,000,000 P 2,500,000
Number of coupons redeemed 140,000 200,000
Bare Company’s experience indicates that only 40% of the coupons will be redeemed.
12. How much is the estimated liability for premiums on December 31, 2012? 1,440,000
PROBLEM 8: Susan Company participates in a customer loyalty program operated by an airline in which
customers earn air travel points when they purchase goods from the entity. The air travel points can be redeemed for
free air travel. The entity pays the airline P100 per air travel point and considers that the fair value of the air travel
point is P120. During the current year, Susan Company sold goods for P5,000,000 and granted 2,500 points. Susan
paid the airline in the subsequent year for its all of its travel point transactions during the current year.
13. The total revenue to be recognized in the current year in relation to the points assuming the entity is the
principal in the transaction is: 300,000
14. The total revenue to be recognized in the current year in relation to the points assuming the entity is an agent
of the airline is: 50,000
PROBLEM 9: Erika Company operates a customer loyalty program. The entity grants loyalty points for goods
purchased. The loyalty points can be used by the customers in exchange for goods of the entity. The points have no
expiry date. During 2011, the entity issued 50,000 award credits and expects that 80% of these award credits shall be
redeemed. The fair value of the award credits is reliably measured at P2,000,000. In 2011, the entity sold goods to
customers for a total consideration of P9,000,000 including the fair value of the award credits. The award credits
redeemed and the total award credits expected to be redeemed each year are as follows:

Redeemed Expected to be Redeemed

2011 15,000 80%
2012 7,950 85%
2013 2,550 80%
2014 15,000 90%
15. The total revenue to be recognized in relation to the points in 2011 is: 750,000
16. The unearned revenue from the points at December 31, 2012 is: 920,000
17. The total revenue to be recognized in relation to the points in 2013 is: 195,000
18. The unearned revenue from the points at December 31, 2013 is: 725,000
19. The customer loyalty program expense to be recognized in 2014 is: 0
PROBLEM 10: James Company operates a customer loyalty program. The entity grants program members loyalty
points when they spend a specified amount on purchases. Program members can redeem the points for further
purchases. The points have no expiry date. During 2011, the entity granted 80,000 points. Management expects that
90% of these points will be redeemed. The fair value of each loyalty point is estimated at P20. The sales during 2011
amounted to P9,000,000 including the loyalty points. On December 31, 2011, 28,800 points have been redeemed in
exchange for purchases. In 2012, the management revised its expectations and now expects 85% of the points to be
redeemed altogether. During 2012, the entity redeemed 12,000 points.
20. What is the revenue earned from loyalty points for the year ended December 31, 2012? 320,000
PROBLEM 11: Socorro Company sells color television sets with a two-year repair warranty. The sales price for
each set is P15,000. The average repair cost per set is P800. Research has shown that 20% of all sets sold are
repaired in the first year and 40% in the second year. The number of sets sold were as follows: 300 in 2011 and 500
in 2012. Total payments for repairs associated with the warranties were P40,000 in 2011 and P150,000 in 2012. The
sales and warranty repairs were made evenly during the year.
21. Determine the estimated warranty liability on December 31, 2012. 194,000
22. After performing an analysis to ascertain whether actual warranty costs approximate the estimate, the
estimated warranty liability on December 31, 2012 should be increased (decreased) by: 10,000 increase
PROBLEM 12: In 2011, Plumpton Company started selling new computer that carried a 2 year warranty against
defects. Based on the manufacturer’s recommendations, Plumpton Company projects estimated warranty costs as a
percentage of sales as follows:
First year of warranty 3%
Second year of warranty 9%
Sales and actual warranty repairs for 2011 and 2012 are as follows:
2012 2011
Sales P 7,000,000 P 5,000,000
Actual warranty repairs 250,000 100,000

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 23. What is the estimated warranty liability on December 31, 2012? 1,090,000
PROBLEM 13: Precise Company sells an electric timer that carries a 90-day unconditional warranty against
product failure. Based on a reliable statistical analysis, Precise Company knows that between the sale and lapse of
the product warranty, 2% of units sold will require an average cost of P150 per unit. The following data reflect the
recent experience of Precise Company for the current year:
October November December
Units sold 32,000 28,000 40,000
Known product failure from sales of:
October 160 320 160
November 80 280
December 180
24. What is the estimated warranty liability at December 31? 123,000
PROBLEM 14: On April 1, 2011, Ash Company began offering a new product for sale under a one-year warranty.
Of the 5,000 units in inventory at April 1, 2011, 3,000 had been sold by June 30, 2011. 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, 2011 were P70,000.
25. The total warranty expense recognized under the “expense as incurred” approach would be higher (lower) to
that recognized under the “accrual” approach by: 170,000 lower

PROBLEM 15: Erwin Company offers a three-year warranty on its products. The entity previously estimated
warranty costs to be 2% of sales. Due to a technological advancement in production at the beginning of 2011, Erwin
Company now believes 1% of sales to be a better estimate of warrant costs. Warranty costs of P80,000 and P96,000
were reported in 2009 and 2010, respectively. Sales for 2011 amounted to P5,000,000.
26. What amount should be reported in 2011 as warranty expense? 50,000
PROBLEM 16: Villa Company estimates its annual warranty expense at 8% of net sales. The following data relate
to calendar year 2011:
Net sales ?
Warranty liability account:
December 31, 2010 P 150,000
Warranty payments during 2011 300,000
December 31, 2011 as adjusted 540,000
27. What is the amount of net sales for the current year? 8,625,000
PROBLEM 17: During 2011, Rex Company introduced a new product carrying a two-year warranty against
defects. The estimated warranty costs related to peso sales are 2% within 12 months following sale and 4% in the
second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2011
and 2012 are as follows:
Sales Actual warranty expenditures
2011 P 6,000,000 P 90,000
2012 10,000,000 300,000
28. What amount should be reported as warranty expense for 2012? 600,000
PROBLEM 18: Sonia Company reported gross payroll of P600,000 for the month of January. The entity paid the
payroll net of the following deductions:
Income tax P 70,000
SSS contribution 10,000
Philhealth contribution 5,000
Pag-ibig contribution 7,500
In addition, the entity recognized its additional contributions for the following in relation to January payroll:
SSS contribution 15,000
Philhealth contribution 6,000
Pag-ibig contribution 8,000
29. The salaries expense to be recognized by Sonia for the month of January is: 600,000
30. The payroll tax expense to be recognized by Sonia for the month of January is: 29,000
31. The total payroll tax liability to be reported as of January 31, 2012 is: 121,500
PROBLEM 19: Miyuki Company operates a retail store. All items are sold subject to a 12% VAT which Miyuki
collects and records as sales revenue. Miyuki files quarterly sales tax returns when due by the twentieth day
following the end of the sales quarter. However, in accordance with state requirements, Miyuki remits VAT
collected by the twentieth day of the month following any month such collections exceed P50,000. Miyuki takes
these payments as credits to quarterly sales tax return. The VAT paid by Miyuki are charged against sales revenue.
Following is a monthly summary appearing in the first quarter 2011 sales revenue account:
Debit Credit
January – P 560,000
February P 60,000 392,000

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 March – 448,000
32. On March 31, 2011, what amount should be reported as VAT payable? 90,000
PROBLEM 20: Marie Hotel collects 15% in city sales taxes on room rentals in addition to a P2 per room, per night
occupancy tax. Sales taxes for each month are due at the end of the following month and occupancy taxes are due
fifteen days after the end of each calendar quarter. On January 3, 2012, Marie Hotel paid its November 2011 sales
taxes and its fourth quarter 2011 occupancy taxes. Additional information for the fourth quarter of 2011 is as
follows:
Room Rentals Room Nights
October P 100,000 1,100
November 110,000 1,200
December 150,000 1,800
33. What amount in total would be presented as part of current liabilities relating to these transactions in the
December 31, 2011 statement of financial position? 47,200

PROBLEM 21: Under state law, Stephen Company may pay 3% of eligible gross wages or it may reimburse the
state directly for actual unemployment claims. Stephen Company believes that actual unemployment claims will be
2% of eligible gross wages and has chosen to reimburse the state. Eligible gross wages are defined as the first
P100,000 of gross wages paid to each employee. Stephen Company had five employees each of whom earned
P200,000 during 2011.
34. On December 31, 2011, what amount should be reported as liability for unemployment claims? 10,000
PROBLEM 22: Cobb Company sells gift certificates redeemable only when merchandise is purchased. These gift
certificates have an expiration date of two years after issuance date. Upon redemption or expiration, Cobb Company
recognizes the unearned revenue as realized. Information for 2011 is as follows:
Unearned revenue, January 1 P 650,000
Gift certificates sold 2,250,000
Gift certificates redeemed 1,950,000
Expired gift certificates 100,000
Cost of goods sold 60%
35. On December 31, 2011, what amount should be reported as unearned revenue? 850,000

PROBLEM 23: Regal Company sells gift certificates, redeemable for store merchandise, that expire one year after
their issuance. Regal Company has the following information pertaining to its gift certificate sales and redemptions:
Unredeemed on January 1, 2011 P 750,000
2011 sales 2,500,000
2011 redemptions of prior year sales 250,000
2011 redemptions of current year sales 1,850,000
The entity’s experience indicates that 10% of gift certificates sold will not be redeemed.
36. In the December 31, 2011 income statement, how much revenue will be recognized from Regal’s gift
certificate transactions? 2,600,000
PROBLEM 24: Ryan Company sells major household appliance service contracts for cash. The service contracts
are for a one-year, two-year or three-year period. Cash receipts from contracts are credited to unearned service
contract revenue. This account had a balance of P720,000 at December 31, 2011 before year-end adjustments.
Service contract costs are charged as incurred to the service contract expense account which had a balance of
P180,000 on December 31, 2011. Outstanding service contracts on December 31, 2011 expire as follows:
During 2012 P 150,000
During 2013 225,000
During 2014 120,000
37. What amount should be reported as unearned service contract revenue in the December 31, 2011 statement
of financial position? 495,000
PROBLEM 25: Hart Company sells subscriptions to a specialized directory that is published semi-annually and
shipped to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30 cut-
off dates are held for the next publication. Cash from subscribers is received evenly during the year and is credited
to deferred revenue from subscriptions. Data relating to 2011 are as follows:
Deferred revenue from subscriptions, January 1 P 1,500,000
Cash receipts from subscribers 7,320,000
38. In the December 31, 2011 statement of financial position, what amount should be reported as deferred
revenue from subscription? 1,830,000
PROBLEM 26: Anette Video Company sells one-year and two-year subscriptions for its video of the month
business. Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity
revealed the following:
2011 2012
Sales P 420,000 P 500,000
Less: Cancellations 20,000 30,000

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 Net sales P 400,000 P 470,000
Subscriptions expirations:
2011 P 120,000
2012 155,000 P 130,000
2013 125,000 200,000
2014 140,000
39. On December 31, 2013, what amount should be reported as unearned subscriptions revenue? 140,000
PROBLEM 27: Fell Company operates a retail grocery store that is required by law to collect refundable deposits
of P5 on soda cans. Information for 2011 follows:
Liability for refundable deposits, January 1 P 150,000
Cans of soda sold 100,000
Soda cans returned 110,000
On February 1, 2011, Fell Company subleased space and received a P25,000 deposit to be applied against rent at the
expiration of the lease in December 31, 2012.
40. In the December 31, 2011 statement of financial position, what amounts should be reported as current
liabilities for deposits? 125,000
PROBLEM 28: Black Company requires advance payments with special orders from for machinery constructed ton
customer specifications. These advances are non-refundable. Information for 2011 is as follows:
Customer advances – January 1 P 1,180,000
Advances received with orders 1,840,000
Advances applied to orders shipped 1,640,000
Advances applicable to orders cancelled 500,000
41. In the December 31, 2011 statement of financial position, what amount should be reported as current
liability for advances from customers? 880,000
PROBLEM 29: Dunn Trading Stamp Company records stamp service revenue and provides for the cost of
redemptions in the year stamps are sold to licensees. Dunn’s past experience indicates that only 80% of the stamps
sold to licensees will be redeemed. Dunn’s liability for stamp redemptions was P6,000,000 at January 1, 2011.
Additional information for 2011 is as follows:
Stamp service revenue from stamps sold to licensees P 5,000,000
Cost of redemption (stamps sold prior to 1/1/2011) 2,750,000
If all the stamps sold in 2011 were presented for redemption in 2012, the redemption cost would be P2,300,000.
42. What amount should be reported as a liability for stamp redemptions on December 31, 2011? 5,090,000
PROBLEM 30: Kent Company, a division of National Realty, Inc., maintains escrow accounts and pays real estate
taxes for National’s mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10%
service fee, is credited to the mortgagee’s account and used to reduce future escrow payments. Additional
information follows:
Escrow accounts liability – January 1 P 700,000
Escrow payments 1,600,000
Real estate taxes paid 1,700,000
Interest on escrow funds 30,000
43. What amount should Kent report as escrow accounts liability in the December 31, 2011 statement of
financial position? 627,000
PROBLEM 31: On the first day of each month, Bell Company receives from Kaye Company an escrow deposit of
P250,000 for real estate taxes. Bell Company records the P250,000 in an escrow account. Kaye’s 2011 real estate
tax is P2,800,000 payable in equal installments on the first day of each calendar quarter. On January 1, 2011, the
balance in the escrow account was P300,000.
44. On June 30, 2011, what amount should Bell Company report as an escrow liability? 400,000

PROBLEM 32: Toddler Care Company offers three payment plans on its twelve-month contracts. Information on
the three plans and the number of children enrolled in each plan for the September 1, 2011 through August 31, 2012
contract year follows:
Initial Payment Monthly Fee
per Child per Child Number of Children
No. 1 P 50,000 18
No. 2 20,000 P 3,000 15
No. 3 5,000 12
Toddler received P1,200,000 of initial payments on September 1, 2011, and P420,000 of monthly fees during the
period September 1 through December 31, 2011.
45. In its December 31, 2011 statement of financial position, what amount should Toddler report as deferred
revenues? 800,000

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PROBLEM 33: After profitable years, Gretchen Company decided to offer a bonus to its branch manager of 25%
of income over P1,000,000 earned by the branch. The income for the branch was P1,600,000 before tax and before
bonus for 2011. The bonus is computed on income in excess of P1,000,000 after deducting bonus but before
deducting tax.
46. What is the bonus for 2011? 120,000
PROBLEM 34: Nature Company has an agreement to pay its sales manager a bonus of 5% of the entity’s earnings.
The income for the year before bonus and tax is P2,625,000. The income tax rate is 35% of income after bonus.
47. Determine the bonus for the current year assuming bonus is a certain percent of the income before bonus and
before tax. 131,250
48. Determine the bonus for the current year assuming bonus is a certain percent of the income after bonus but
before tax. 125,000
49. Determine the bonus for the current year assuming bonus is a certain percent of the income after bonus and
after tax. 82,627.12
50. Determine the bonus for the current year assuming bonus is a certain percent of the income after tax but
before bonus. 86,832.06

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 8