dD & PaNaA EDUCATION ACC 108 Provisions, Contingent Liability, and Contingent Asset Part |: Conceptual: Multiple Choice 1. Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved éan be reasonably estimated. Based on the above facts, an estimated loss contingency should be a accrued. ~ b. disclosed but not accrued. neither accrued nor disclosed. d._ classified as an appropriation of retained earnings. 2. Which of the following best describes the aceru a. Expensed when paid. ~ b._Expensed when warranty claims are certain. © Expensed based on estimate in year of sale. dd. Expensed when incurred, £ ‘ method of accounting fof warranty costs? 3. Accrued liabilities are disclosed in financial statements by a. a footnote to the statements. b. showing the amount among the liabilities but not extending it to the liability total, © an appropriation of retained earnings 4. appropriately classifying them as regular liabilities in the balance sheet. 4. Acontingent lability a. definitely exists as a liability but its amount and due date are indeterminable. b. is accrued even though not reasonably estimated. isnot disclosed in the financial statements. 4. is the result of a loss contingency. Use the following information for the next two questions: BUGS Appliance Company's accountant has been reviewing the firm's past television sales. For the past years, BUGS has been offering a special service warranty on all televisions sold. With the purchase of a television, the customer has the right to purchase a 3-year service contract for an extra ®600) Information concerning past television and warranty contract sales is given below: 2021) 2020 Television sales in units 550460 Sales price per unit . P5,000 4,000 Number of service contracts sold 350 300 Expenses relating to television warranties 38,520 13,400 BUGS’ accountant has estimated from past records that the pattern of repairs has beer( 40% in the year of sale 36% First year after sale and 24% on 2nd year of sale. Sales of the contracts are made evenly during the year. 5X What is the adjusted batance ofthe unearned service contract as of December 31, 20217 a. 111,600 —— erence This document is the property of PHINMA EDUCATION2020 Qoxuoo) /2= 4K BS so.roucmon BIO Da 1072-202 age yg?" ir V9 ox ok Sok HH, BAY Hh 21 , 168,600 2022 5479-8 od apy ° qo He wh Re Ah 2D 211200 9935 21UFUD — on D 4.243600 997 25.2 Cammed ah gh x 0o4 54 al t of How a Pat onesies Srussiwous ton cooing ee wie = 16K b. 69,400 B-4442 = MOD \o5k aol MK 36, 97. au, 252% TA (3050) od took 0 Wh qrK HE FH WY 15.2 : N60 “aK TS 3 2s. C7. Vista newspapers sold 6,000 of annual subscriptions anPr2s)each on September-1. How much unearned revenue will exist as of December 37? — a. PO. b. 500,000. “e P250,000. 4. P750,000. Good x (2S ¥ , = 25op00 bs Purchase Retailer made cash sales during the month of October of P227,000. The sales are subject to 4 6% ales tax that 35 also Zollected. Which of the following would be included in the summary journal entry to reflect the sale AN A. 9. During January 20x9, Haze Corp. won a litigation award for.P15,000, which was tripled to P45,000 to include punitive damages. The defendant, who is financially stable, has appealed only the P30,000 punitive damages. Haze was awarded 50,000 in an unrelated suit it filed, which is being appealed by the defendant. Counsel is unable to estimate the ‘outcome of these appeals. In its 20x9 financial statements, Haze should report what amount of pretax gain? "2. 15,000 ~ . 45,000 «. 50,000 4. 95,000 ‘exchange for 50 centavos and five coupons. The toys cost eae each. Eventuall of the coupons will be redeemed. During December, Mill sold 110,000 packages of candy and no coupons were redeemed. In its December 31, 20xi, balance sheet, what emount should Mill report as estimated liability for coupons? A iY In December 20x1, Mill Co. began including éne coupod in each package of candy that i ‘3 -sells and offering a toy in | a, 3,960 | b. 10,560 ODODE ¥X-GO= 13200 c, 19,800 : y% 376 d. 52,800 — Jaw 2 a CER SEER ES OA EA RETESTED This document is the property of PHINMA EDUCATIONgs PHINMA EDUCATION ACC 108 59. Whatis @ contingency? 1) 2 An exstng stuationyinere certainty exits as to 2 gin or loss that vl be resolved ‘when one or more future events occur or filto occur. b. An existing situation where uncertainty exists as to possible loss that will be resolved ‘when one oF more future events occur An existing stuation where uncertainty enists as to possible gain or loss that will not bbe resolved in the foreseeable future. Ben. wents coterie? Pe ee ty exiatet cc. When the future events are probable to occur. ‘When the future events wil possibly occur and the amount can be reasonably ‘estimated. 1 61. vimicn or te fotowing is an example of a contingent iabiity? dD. Bossible receipt from a Panam cout case tah a probable Tava OaoIe 6 Taxloss canyforvards 1D) 62min ott foloing terms is associtd with recording contingent aby? 2 pessble ‘Likely. & Rents 16a. mien arte rtoxing ine proper vay to report a gan contingency? 2 hs an acted amount — Ae dtored revenue, © As an eecount Tecevble vith addtional decocue explaining the nature of the so 1D 64. vimicn of tm fotosing contingencies need rat be disclosed inthe francial statements oF the notes thereto? ‘2. Probable losses not reasonably estimable 'b. Environmental abies that cannot be reasonably estmated ¢. Guarantees of indebtedness of otners [Bes wmaen oe aang eso conan wl gh ef he acre conomey under current generally accepted accounting principles? A cc Event is unusual in nature and occurrence of event is probable. 4. Event is unusual in nature and event occurs infrequently. Bb 124 paier Festa Fakes Consany oft custoers pole cee Dot the endin _2boxtops from Paimer Frosted Flakes boxes and $1. The company estimates that. ‘he boxtops will be redeemed in 2012, the company sold 675.000 boxes of Frosted Flakes and custome’s regeemed 330,000 boxtops receiving 170,000 bovis. i te boxis cast Famer Company($3)each, ow much abi or eusanding premums shoul be Seanaee ee: Cow |ak601.* yp ¢ §75000 if & St3s000 1 27TH This document is the property of PHINMA EDUCATIONACC 108 {p25 Dusting 2011, Stabler Co, ntodueed & new tne of machines ta cam a ti 1) "7° Warranty against manufacturers cetecls Based on industry experience, warren costs are estimated Seles nthe yaar ota, the year after sale, and(¥ in the Second io Sales and elual warranty erpendtures fr Tre ft three-year Derg were a floss ‘Actual Warranty Expendtures aA zo 3 400000 $. 6.000 «00 =25 2012 “1,000,000, 40.000 a 2900 (isu) bors 1.490.000 9.000 oo 32200000 sie uy a ‘nat amount shoul Stabler report asa abilty at December 31,2013? 230 © S2e000 © $36000 & Stte000 trom LeMay Frosted Flakes boxes and $1. The company estimates that 60% of will be redeemed. In 2012, the company sold 500.000 boxes of Frosted Flakes and customers redeemed 220,000 boxtops receiving 55.000 bouts. If the bouts cost LeMay Company $3 each, hoi MUth liability for outstanding premiums should be Pam pg am ome ate omer reas oe Tr Viggo Bavd0d [yx LO = 75K b.$40,000 Az ¢ $60,000 $84,000 128. LeMay Frosted Flakes Company offers its customers a pottery cereal bout if they send in 4 boxtops trom LeMay Frosted Flakes boxes and S1. The company estimates that 60% of ‘the boxtops will be redeemed. In 2012, the company sold 500.000 boxes of Frosted Flakes and customers redeemed 220,000 baxtops receiving 55.000 bowls. I the bovis ‘cost LeMay Company $3 each, how much liability for outstanding premiums should be recorded at the end of 20127 ‘a. $150,000 b. $40,000 $60,000 Use the following information for questions 127, 128, and 129. Htt Co incudes one coupon in each bag of gag 00d sal. In return coupons cust sn The washes cout Mot(sS pach, Mot estates tat Spupons tbe redeemed. Data for 2012 and avts-ate ae folovs ie | ae Bags of dog food sold 500,000 600,000 teesnes puchases ‘3000 “22.000 » ‘Soupons redeemed 120000 150.000 a 127. The premium expense for 2012 i XB [B7S0 oa : sook}® X= ete & S500 4 150, 00 {> 128. The premium tiability at December 31, 2012 is (450) B25 | M00 2 s11750 0000/8 Vos 350 D $15000 € Seeosa 3 300 bb This document is the property of PHINMA EDUCATIONACC 108 128. The premium lability at December 31, 2013 is a $16875 bv. $31975. $e B ™= ge is being sued for ilness caused to local residents as a result of negligence on the company’s part in permitting the local resi exposed to toxic ‘rom its plant. Winter's lawyer states that itis ‘Winter val 10S sutt for 2 judgment costing Winter from §1,600,000 10 000.000. However, the lauyer states that the most probable cost is $4,600,000. As @ rest above facts, Winter should accrue 2 loss contingency of $1,600,000 and disclose an additonal contingency of up to ¢. loss contingency of $4,800,000 but not disclose any adctional contingency. ‘4. noloss contingency but disclose a contingency of $1,600,000 to $8,000,000. ‘D 131. Nance Company estimates ts annual warranty expense ‘annual net sales. The ‘ollovang data relate to the calenGar yea 2082—— Net sales ‘$1,500,000 ‘Warranty liabilty account Balance, Dec. 31,2012 $10.00 debit before adjustment Balance, Dec. 31, 2012 ‘50,000 credit after adjustment Wich one of the following entries was made to record the 2012 estimated warranty ‘expense? a. Warranty Expense... 30,000 Retained Eamings (prior period adjustment) 5,000 ‘Warranty Liabilty 25,000 b. Warranty Expense 25,000 Retained Earnings (prior-period adjustment) 5,000 Warranty Liability 30,000 c. Warranty Expense 20,000 ‘Warranty Liability : 20,000 bev x 27. = 20b0 This document is the property of PHINMA EDUCATION