1.

The primary objective of financial reporting is to provide useful information to

a. Management b. Capital providers c. Regulatory body d. Government
2. Which is not an objective of financial reporting?
a. To provide information about assets and claims against those assets
b. To provide information useful in assessing sources and uses of cash
c. To provide information useful in lending and investing decisions
d. To provide information about liquidation value of an entity
3. Classifying liabilities as either current or noncurrent helps creditors assess
a. Profitability c. The degree of an entity’s liabilities
b. The relative risk of an entity’s liabilities d. The amount of an entity’s liabilities
4. Which situation would not require a noncurrent liability to be reported as current?
a. The long-term debt is callable by the creditor.
b. The creditor has the right to demand payment due to a contractual violation.
c. The long-term debt matures within the upcoming year.
d. All of these require the current classification
5. Which of the following is a characteristic of a current liability but not a noncurrent liability?
a. Unavoidable obligation
b. Present obligation to transfer an economic resource
c. Settlement is expected within the normal operating cycle or within 12 months, whichever is longer
d. The obligating event has already occurred
6. An entity had a note payable due next year. After the end of the reporting period and before the
issuance of the current year financial statements, the entity issued long-term bonds payable. Proceeds
from the bonds were used to repay the note when due. How should the entity classify the note payable
at current year-end?
a. Current liability with separate disclosure of the note refinancing
b. Current liability with no disclosure required
c. Noncurrent liability with separate disclosure of the note refinancing
d. Noncurrent liability with no separate disclosure required
7. A department store received cash and issued a gift certificate redeemable in merchandise. When the
gift certificate was issued.
a. Deferred revenue account should be decreased c. Revenue account should be decreased.
b. Deferred revenue account should be increased d. Revenue account should be increased.
8. The cost of customer premium offer should be charged to expense
a. When the related product is sold c. Over the life cycle of the product
b. When the premium offer expires. d. When the premium is claimed
9. Which of the following best describes the accrual approach of accounting for warranty cost?
a. Expensed when paid c. Expensed based on estimate in a year of sale
b. Expensed when warranty claims are certain d. Expensed when incurred
a. 120,000 b. 150,000 c. 250,000 d. 320,000
10. What is the accounting for the transaction price of a contract of sale with customer options for free
product, discount or rebate?
a. Entirely as product sales revenue
b. Allocated to customer options equal to stand-alone selling and the balance to product sales
c. Allocated between product sales revenue and coupons based on stand-alone selling price
d. Entirely as coupon revenue
11. What do you call the nonredemption of gift certificates?
a. Forfeiture b. Breakage c. Rebate d. Waiver
Use the following information for Problem 12-14:
During 2021, Wakanda Company introduced a new product carrying a two-year warranty against defects.
The estimated warranty costs related to peso sales are 4% within 12 months following sale and 6% in the
second 12 months following sale.
The entity reported sales of P5,000,000 for 2021 and P6,000,000 for 2022. The actual expenditures
incurred amounted to P150,000 for 2021 and P550,000 for 2022.
12. What amount should be reported as warranty expense for 2021?
a. 500,000 b. 200,000 c. 250,000 d. 300,000
13. What amount should be reported as estimated warranty liability on 12/31/2021?
a. 350,000 b. 150,000 c. 100,000 c. 50,000
14. What amount should be reported as estimated warranty liability on 12/31/2022?
a. 360,000 b. 400,000 c. 240,000 d. 100,000
15. What is the stand-alone selling price of rebate coupons?
a. Discount on products sold during the current year
b. Discount on products sold during the current year adjusted by expected redemption
c. Cost of product sold
d. Fair value of rebate coupons
16. A legal obligation is an obligation that is derived from all of the following, except
a. Legislation b. Contract c. Other operation of law d. Present obligation
17. An outflow of resources embodying economic benefits is regarded as “probable” when
a. The probability that the event will occur is greater than the probability that the event will not occur
b. The probability that the event will not occur is greater than the probability that the event will occur.
c. The probability that the event will occur is the same as the probability that the event will not occur
d. The probability that the event will occur is 90% likely
18. The bonus agreement of Elsa Company provides that the general manager shall receive an annual
bonus of 10% of the net income after bonus and tax. The income tax rate is 30%. The general manager
received P280,000 for the current year as bonus. What was reported as income before bonus and tax?
a. 4,280,000 b. 4,000,000 c. 2,800,000 d. 3,720,000
19. After three profitable years, Sven Inc. decided to offer a bonus to the 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 the current year. The bonus is computed on income as excess of P1,000,000 after
deducting the bonus by before deducting tax.
What amount should be reported as bonus of the branch manager for the current year?
a. 120,000 b. 150,000 c. 250,000 d. 320,000
Use the following information for Problem 20-21:
During the current year, Solaya Company sold 500,000 boxes of cake mix under a new sales promotional
program. Each box contained one coupon, which entitled the customer to a baking pan upon remittance of
P40.
The entity paid P50 per pan and P5 for handling and shipping and estimated that 80% of the coupons
would be redeemed, even though only 300,000 coupons had been processed during the year.
20. What amount should be reported as premium expense for the current year?
a. 6,000,000 b. 7,500,000 c. 4,500,000 d. 2,000,000
21. What amount should be reported as liability for unredeemed coupons at year-end?
a. 1,000,000 b. 1,500,000 c. 3,000,000 d. 5,000,000
22. These are restrictions on the borrower such as undertaking further borrowings, paying dividends,
maintaining specified level of working capital attached to borrowing agreements
a. Premiums b. Discounts c. Covenants d. Customer Options
23. At the end of the current year, an entity received an advance payment of 60% of the sales price for
special order goods to be manufactured and delivered within five months. At the same time, the entity
subcontracted for production of the special order goods at a price equal to 40% of the main contract
price. What liabilities should be reported in the year-end statement of financial position?
a. None
b. Deferred revenue equal to 60% of the main contract price and payable to subcontractor equal to 40%
of the main contract price
c. Deferred revenue equal to 60% of the main contract price and no payable to subcontractor
d. No deferred revenue but payable to subcontractor is reported at 40% of the main contract price
24. A retail store received cash and issued gift certificates that are redeemable in merchandise. How would
the deferred revenue account be affected by the redemption and non redemption of certificates,
respectively?
a. Decrease and No effect c. No effect and No effect
b. Decrease and Decrease d. No effect and Decrease
Part II. Identify whether the following item is classified as
A. Current liability            B. Noncurrent liability C. Not a liability
25. Share Dividends Payable
26. Claim for increase in salary covered in a pending lawsuit
27. Accounts Payable Debit Balance
28. Bonds Payable
29. Accounts Receivable Credit Balance
30. 10% Note Payable maturing in 9 months. The entity always had the discretion to refinance the
obligation for at least 12 months since the beginning of the contract.
PROBLEM SOLVING:
Cascade Company manufactures a special 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. Distribution cost is P5
per towel. Data for the premium offer are.
2020 2021
Soap sales 2,500,000 3,125,000
Towel purchases, P100 per towel 175,000 200,000
Number of towels distributed as premium 1,000 1,800
Number of towels expected to be distributed in 600 800
subsequent period
Required:
31. Prepare journal entries for 2020 and 2021.
32. Compute the estimated premium liability to be reported on 12/31/2021.
Given: Product with promo: 50% discount coupon for purchases of at least P10,000
It is expected that 80% of the coupons will be redeemed and customers have to spend at least P10,500
to use the coupons. Sales for 2022 amounted to P8,000,000 and the company issued 120 coupons
during the year.
33. Compute the stand-alone price of coupons.
34. How much is the allocated price for the product sold and customer discount?