1. On December 31, 2023, A has a 12%, 2,000,000, loan payable due on June 30, 2024.

Interest on
the loan is due every December 31. The financial statements were authorized for issue on March
1, 2024. How much is presented as current liability in relation to the loan on December 31, 2023
statement of financial position?

2,000,000
Assume both parties are financially capable of honoring the agreement’s provisions and A has the
discretion to refinance or roll over the loan for at least twelve months from December 31, 2023.
0
Assume that on December 15, 2016, A entered into a refinancing agreement with a bank to
refinance the loan on a long-term basis. The refinancing agreement was completed on December
31, 2023.
0
Assume that on January 5, 2024, A entered into a refinancing agreement with a bank to refinance
the loan on a long-term basis. The refinancing agreement was completed on January 31, 2024.
2,000,000
Assume that the loan is payable on demand although on December 31, 2023, there is no
indication that the payee on the note will demand payment over the next 12 months.
2,000,000
Assume instead that the loan agreement requires A to maintain a current ratio of 3:1. If the current
ratio falls this amount, the loan becomes payable on demand. As of December 31, 2023, A’s
current ratio is 2.5:1. On December 31, 2023, the creditor agreed not to collect the loan in 2024
and gave A 12 months to rectify the breach of loan agreement.
0
Assume instead that the loan agreement requires A to maintain a current ratio of 3:1. If the current
ratio falls the amount, the loan becomes payable on demand. As of December 31, 2023, A’s
current ratio is 2.5:1. On January 6, 2024, the creditor agreed not to collect the loan in 2024 and
gave 12 months to rectify the breach of loan agreement.
2,000,000

2. ABC Music Emporium carries a wide variety of music promotion techniques – warranties and
premiums – to attract customers.

Musical Instrument and sound equipment are sold in a one-year warranty for replacement of parts
and labor. The estimated warranty cost based on past experience is 2% of sales.

The premium is offered on the recorded and sheet music. Customers receive a coupon for each
peso spent on recorded music or sheet music.

Customers may exchange 200 coupons and P20 for an AM/FM radio. ABC pays P34 for each
radio and estimates that 60% of the coupons given to customers will be redeemed.

ABC total sales for 2022 were 57,600,000 (43,200,000 from musical instrument and sound
reproduction equipment and 14,400,000 from recorded music and sheet music).

Replacement parts and labor for warranty work totaled 1,312,000 during 2022. A total of 52,000
AM/FM radio used in the premium program were purchased during the year and there were
9,600,000 coupons redeemed in 2022.
The accrual method is used by ABC to account for the warranty and premium costs for financial
reporting purposes. The balance in the accounts related to warranties and premiums on January
1, 2022, were as shown below:

Inventory of Premium AM/FM radio 319,600

Estimated Premium Claims Outstanding 358,400
Estimated Liability from Warranties 1,088,000

Based on the details above and the result of your audit, determine the amounts that will be shown
on the 2022 financial statements.

Warranty expense 864,000

Estimated liability from warranties 640,000
Premium expense 604,800
Inventory of AM/FM radio 13,400 units or 455,600
Estimated liability for premiums 291,200
3. B Company sells computer to various computers. B company has been offering a special service
warranty on computer units it sold. With the purchase of the computer unit, the customer has the
right to purchase 3-year service contract for additional amount of 1,500. Data concerning sales of
computer and warranty contract are as follows:

2022 2023
Computer units sold 2,500 2,800
Sales price per unit 14,000 14,000
Number of service contract sold 1,000 1,200
Expenses relating to computer warranties 45,000 60,000

B company has estimated based on the available past records that the pattern of repairs has
been:

40% Year of Sales

36% 1st year of sale
24% year after sale

Sales of the contracts are made evenly during the year.

How much is the earned service contract would be recognized in year 2023?
How much profit on service contract would be recognized in year 2023?
How much is unearned service contract on December 31, 2023?

Journal Entry

20x2
Cash 35,000,000
Sales 35,000,000

Warranty Expense 1,500,000

Warranty Liability 1,500,000

20x3
Cash 39,200,000
Sales 39,200,000

Warranty Expense 1,800,000

Warranty Liability 1,800,000
4. On January 1, 20x1, XYZ Co began its business of selling computers to various customers. The
computer carries a 2-year warranty. Management believes 4% of the computers will require
repairs in the first year and 6% in the second year at an average cost of P3,000 per computer.
Each computer sells for 12,000.

Data concerning sales of computer and warranty contract are as follows:

20x1 20x2
Computer units sold 300 400
Actual warranty repairs 80,000 100,000

How much is the warranty expense for the year ended December 31, 20x1? 90,000
How much is the warranty expense for the year ended December 31, 20x2? 120,000
How much is the adjusted balance of the estimated warranty payable as of December 31, 20x2?
30,000
Assuming sales are made evenly throughout the year, how much is the adjusted balance of
estimated warranty payable as of December 31, 20x2?

Sir Yap’s Method

5. DEF Corporation manufactured television components and sells them with 6-month warranty
under defective components will be replaced without charge. On December 31, 2023, estimated
liability for product warranty had a balance of P765,000. By June 30, 2024, this balance had been
reduced to 120,375 by debits for estimated net cost of components returned that had been sold in
2023.

The company started out in 2024 expecting 8% of the peso volume of sales to be returned.
However, due to the introduction of new models during the year, this estimated percentage of
returns increased to 10% on May 1. It is assumed that no components sold during a given month
are return in that month. Each component is stamped with a date at time of sale so that the
warranty may be properly administered. The following table of percentages indicates the like
pattern of sales return during the 6-month period of the warranty, starting with the month following
the sale of components.

Month Following Sale Percentage of Total Returns

Expected
First 20%
Second 30%
Third 20%
Fourth through sixth – 10% each month 30%
100%

Gross sales of components were as follows for the first 6 months of 2024
Month Amount
January 5,400,000
 February 4,950,000
March 6,150,000
April 4,275,000
May 3,000,000
June 2,700,000

The company’s warranty also covers the payment of freight cost on defective components
returned and on the new components sent out as replacements. This freight cost runs
approximately 10% of the sales price of the components returned. The manufacturing cost of the
components is roughly 80% of the sales price, and the salvage value of returned components
averages 15% of their sales price. Returned components on hand at December 31, 2023, were
thus valued in inventory at 15% of their original sales price.

Based n the above and the result of your audit, answer the following:

The total estimated returns for the six-month period ended June 30, 2024
The warranty expense for the six-month period ended June 30, 2024
The estimated liability for product warranty as of June 30, 2024 should have a balance of
The adjusting entry on June 30, 2024 will indicate a debit to warranty expense of