| CONRADO T. VALIX CHRISTIAN ARIS M. VALIX \ yyACCOUNTING VOLUME TWO CONRADO T. VALIX, BSC, LLB. Certified Public Accountant and Lawyer President, Review Ditector and CPA Reviewer CPA Review Schoo! ofthe Philippines PAR Lifetime Member Integrated Bar ofthe Philippines CHRISTIAN ARIS M. VALIX, BSME, BSA Certified Public Accountant ‘Ateneo Management Engineering Graduate ‘San Beds Bachelor of Science in Accountancy ‘Assistant Rewiew Dicector and CPA Reviewer CPA Review School ofthe Philippines CPAR 2021 Revised EditionCopyright 2021 by Conrado. Vs Christian Aris M. Valix Any copy of this book not bearing the signature of one of the authors onthis page is unauthorized and shall ‘ve considered as proceeding froman illegal source, ISBN: 978-621-416-103-4 PUBLISHED AND PRINTED BY: GIC ENTERPRISES & CO., INC. ‘National Book Development Board Registered 2017 CM. Recto Avenue Manila, Philippines PREFACE Thisbook is primarily intended asa Reviewerin Financial Accounting and Reporting in the Philippine CPA Licensure Examinations. Ins prepared in confornity with the new CPAsyllabus approved by Board of Accountancy and based on current PAS, PERS, IAS, Sand IFRIC, A chapter on small and medium-sized entities is included in jecordance With PERS for SMEs, The proble: are lifted from the following sources: PHILCPA Ph ppine CPA Licensure Examinations given by the eof Accoumtancy AICPA UniformC?AExninations given by the American Institute of Certified Public Accountants IAA ‘Adapted problems fom variousintermediate accounting, books IFRS Problems and ilustations from Application Guidance of International Financial Reporting Standards ACP ‘Author constructed problems to exemplify Philippi GAAP, TAS, IFRS and IFRIC More often, the particular Philippine Accounting Standard, Philippine Financial Reporting Standard, 1AS, Intemational Financial Reporting Standard and [FRIC are cited to authoritatively support the solution to a problem, Tais CPA Examination textbook reviewer will definitely help the reviewers in large mezs.rein prepeing for the Philippine CPA Licensure Examinations in Financial Accounting and Reporting. CONRADOT, VALIX CHRISTIAN ARIS M. VALIX June 2021CONTENTS CHAPTER aw an 10 MW 12 13 14 15s 16 PREMIUM LIABILITY WARRANTY LIABILITY DEFERRED REVENL ACCRUED | LIABIL .ATIES Bonuscompulaton PROVISION AND CONTINGENT LIABILITY NOTE PAYABLE, 3 Refinancing and fair value option DEBT RESTRUCTURE BONDS PAYABLE Fair value option EFFECTIVEINTEREST METHOD Market price of bonds COMPOUND FINANCIAL INSTRUMENT LESSEE ACCOUNTING LEASELIABILITY REMEASUREMENT OF LEASE LIABILITY OPERATING LEASE~LESSOR SALES TYPE LEASE-LESSOR DIRECT FINANCING LEASE -LESSOR 7 18 19 SALE AND LEASEB ACK POSTEMPLOYMENT Benet PROJECTED BEN act Fae NALUE OR mraeaeulgarion ‘AID/ACCRUED BENET Tteost OTHER EMPLOYEE DENEETTS ACCOUNTING Basic proba’ FOR INCOME TAX DEFERRED TAX ASSETAND LIABILITY COMPRET IVE INCOME: TAX anil psionanpecsh SHAREHOLDERS’ EQUITY aterent of fi SHAREHOLDERS' EQUITY ‘Treasury shes, outstanding shares, share spi RETAINED EARNIN 235 256 281 290 299 ail 335 349) 365 388 APPROPRIATION AND QUASI-REORGANIZATION 410 SHARE Share options SED COMPENSATION JARE-BASED COMP! Share appreciation rights STAION BOOK Vy PAND PREFE BASIC EARNINGS PER SHARE Simple problems BASIC EARNI Average shares i$ PER SHARE DILUTED EARNINGS PER SHARE Convertible preference shares Convertibie bonds payable ENCE DIVIDENDS 422. 447 414 495 507 31934 35 36 37 3 39 4 & 4 4 4 4 47 48 & a & 49 50 DILUTED EARNINGS PER SHARE. Share options DILUTED EARNINGS PER SHARE ‘Multiple potential ordinary shares SINGLEENTRY Basic problems SINGLEENTRY Comprehensive problems CASHBASIS ACCRUAL BASIS Basic problems ACCRUAL BASIS Comprehensive problems ERROR CORRECTION Basic problems ERROR CORRECTION Comprehensive probléms CASH FLOW - OPERATING CASH FLOW - INVESTING. AND FINANCING CASH FLOW -COMPREHENSIVE CASH FLOW -COMPLEX PROBLEMS HYPERINFLATION CURRENT COSTACCOUNTING SMEs ~FINANCIAL STATEMENTS SMEs—RECOGNITION AND MEASUREMENT $36 546 959 567 377 588 oll 625 634 659 674 684 72 ns 71 763 CHAPTE RI rr PREMIUM LIABILITY Problem 1-1 (AICPA Adapegy Inan effort to ine - promotional cmpatgy on lf Company inaugurated asales ea eree or Premium in cach package et oe sd ee sh premit eee ner tS tae ours fom etsona ious be poseticd bed ed that ely 60% customer to receive a on ‘reoupens ‘entity estimate ial eredcemed’ we tthe coupons issued ee For the six months end isavailable: Packages of cereal sold Premium purchased Coupons redeemed 1, What amount should be re, re Portedas current year? leak tye a. 640,000 hi b. 384,000 ‘ . 240,000 tes . 160,000 2, Whatamount shot i ium petat mount should bereporedasetinated premium Habiliyon | & 160,000 bef £29 5b, 224,000 ‘ 2 e. 288000 d. 384,000 Solution 1-1 Question] Answer Question 2 Answer b Coupons to be redeemed (160,000 x 60%) 96,000 Coupons redeemed 40,000) Coupons outstanding : 56,000 #4 Desetnber 31, the following information, 160,000 12,000, 40,000 expenie for the “dyed Premium expense (96,000 /5 = 19,200 x20) 384,000 Estimated i ity (56,0005 = 11,200.20) 224,000Problem 1-2(AICPAAdapted) During the current year, Day Company sold $00,000 boxes of cake mix under @ new sales promotional program Each box contained one coupon, which emtitled the customer to a baking pan upon remittance of P40. i The entity paid PSO per pan and PS for handling and shipping and estimated that 80% of the coupons would be redeemed, even though {00,000 coupons had been processed during the year. 1. What amount should be reported as premium expense for the current year? a. 6,000,000 ve ; b. 7,500,000 ea ©. 4,500,000 ality d. 2,000,000 - What amount should be reported a§ liability for unredeemed ‘coupons at year-end? a. 1,000,000 b. 1,500,000 : c. 3,000,000 Lo d. 5,000,000 FG nv Solution 1-2 Question 1 Answer a ‘Net premium expense (50 + 5 ~ 40) as ‘Coupons to be redeemed (80% x 500,000) 400,000 ‘Coupons redeemed (300,000) Coupons outstanding 100,000 Premium expense (400,000 x 15) Question 2 Answer b Liability for unredeemed coupons (100,000 x 15) 1,500,000 2 Problem 1-3 (AICPA agg In packages of the that may be presente” Curran products, ted) ucts, ‘ ‘ atreagy tT#4 Company included coupons ‘ores to abtain discounts on other Retailers were rein plus 10% ofthat amour s/t fe am fork }ount of coupons redeemed , andling costs Theentty honored eget jp tothree months afte the congury oP" redemption by real ‘Teentiy estimated tha np, ‘expiration date. be redeemed. The consumo The total face amount of eo a cateis Decen COUPON js ¥ payments to retailers during he arene 0 00 end te ot 1. Whatamount: 000. an Sepa a. 600,000 b. 180,000 c. 462,000 4, 198,000 308,000 200,000 242,000. 0 Bere Solwion 1-3 Question 1 Answer e Question 2 Answer c Total coupons to be redeemed _,, (600,000 x 70% x 110%), Total payments to retailers 462,000 (220,000) 242,000, Liability for unredeemed coupons Deserber 31 3Problem 1-4 (AICPA Adapted) Blake Company mailed couponsto consumers which may be presented ata stated expiration date atretal food stores to obtain discounts on certain Blake products. Retailers were reimbursed for the face value of coupons redeemed plus 10% of coupon face value as compensation for handling costs, ‘The entity honored requests for coupon redemption by retailers received up tothree months after the expiration date. Based on past experience, 60% of the coupons issued ultimately are redeemed, ‘The entity provided the following information with respect to the two separate series of coupons issued during the current year: Series A Series B Consumer expiration date June 30 Devermber3 1 ‘Total face value of coupons issued 1,000,000 2,000,000, ‘Total payments to retailers on December31 605,000 405,000 What amount should be reported as liability for unredeemed coupons on December 31? 7 = I 970,000 915,000 795,000 0 Solution 1-4 Answer b Total face value of coupons - Series B 2,000,000 Multiply by 60% Coupons to be redeemed 1,200,000 Compensation for handling costs (10% x 1,200,000) 120,000 ‘Total liability for coupons 1,320,000 Payments to retailers ~ Series B 405,000) Estimated liability - December 31 915,000 ‘The Series A coupons already expired on June 30 and therefore there isnomore estimated liability. s Problem 1-5 (AICPA Adanteay Case Cereal Coy ; products. On Oger Low & Xo00,000 © } | 4.” 7,500,000 2, Whatamountshould bereportedasesimated premixinlisbiliyat | -2.. Whatamount shouldbe sai year-end? le with this promotiona: yeaconk Stated ability associted CO & 3:909,000 x a. 4,128,000 b. 1,500,000 , b. 1,500,000 c. "750,000 ) e. 3,000,000 a. 0 a. 4,500,000 Solution 1-6 Solution 1-7 i A Question I Answer a Question 1 Answer a x Cost of glass 200 atc Remittance from customer Co Basketballs to be distributed (100,000 x 60% / 10) Wea iii oct 10 Basketballs distributed fad Balance Box tops to be redeemed (50% x 100,000) 50,000 Box tops redeemed 40,000 Cost of basketball (4,125,000/5,500) Outstanding 10,000 nes mium exper (6,000 x 750) Premium expense (50,000 /2=25,000>x 150) 3,750,000 pense: (6,000 750) Question 2 Answer b Question 2 Answer ¢ Estimated liability (2,000 x 750) 21,500,000 Estimated liability at year-end (10,000 /2=5,000x 150) 6Problem 1-8 (IAA) Charlene Company includes one coupon ineach box of laund sells. A towel is offered as a premi couponsand aremittance of PLO. NY soap it ium to customers who pp. 4 Distribution cost of premium is PS, Experience indicates that only 30% of the coupons will be redeemed, 2021 2022 Boxes of soap sold 2,000,000 2,500,000 ‘Number of towels purchased at PSO each $0,000 80,000 Coupons redeemed 400,000 700,000 1, What amount should bereyorted as premium expense for 20212 a 2,500,000 Jjry.so/|o x 1s nt |) b 2,400,000 c. 1,800,000 d. 2,700,000 2. What amount should bereported as estimated premium liability on December 31,2021? © .~ fp & 4903000 gene) b 1,100, aay cfs & Gepte ye boa Dirty ef = Fol d. 900,000 3. Whatamount should be reported as:premium expense for 2022?) a. 3,000,000 / 25m %.% fin rHe = P3750 C b. 3,750,000 ~ c. 3,375,000 d. 4,000,000 4. Whatamount should be reported as estimated premium liability on December 31, 2022? a 1,000,000 'b. 1,250,000 rm — © 1,125,000 d. 1,375,000 send in.J0 5, Solution 1-8 Question I Answer a Cost of towel s Remittance from custo Distributioncos, (10) Net premium cost oe Coupons to be redeemed Coupons redeemed in 20n) 7021 (2,000,000 x 30%) 600,000 (400.000) Coupons outstanding ~ December 31, 2991 200,000 Premium eens for2001 (64040010 45) -220mh00 Question 2 Answer d Batimated Viability =13/3472631 @oo.900/10x45) 900,000 Question 3 Answer ¢ Coupons to be redeemed in 2022 (2,500,000 x 30%) Premium expense for2022 (750000, 10 x45) Question 4 Answer é Coupons outstanding ~ December 31, 2021 5 200,000 Coupons to be redeemed in 2022 (2,500,000 30%) 750,000 Total coupons to be redeemed 950,000 Coupons redeemed in 2022 (200,000) Coupons outstanding ~ December 31, 2022 250,000 Estimated liability - 12/31/2022 (250,000/10%45) 1,125,000Problem 1-9 (IAA) Love Company included one coupon in each package so isofferedto customers who sendin icons ee 2021 2022 ‘Number of packages sold 500,000 800,000 Number of premiums purchased at P40 each 30,000 60,000. Number of premiums distributed 20,000 50,000. ~ Number of premiums to be distributed next period 5,000 3,000- 1, Whatamount should be reported as premium expense for20217 a. 1,000,000 Sh xy b. 1,200,000 c. 600,000 a $00,000 2. What mount shouldbe reported as estimate premium libilityon December 31, 2021? a, 400,000 b. 200,000 ¢. 600,000 d+ 300,000 3. Whatamount should be reported as ogg expense in2022?_ >, a 2,400,000 = ale x49 b. 2,000,000 . 2,120,000 =I Rooy d. 1,920,000 4. What amountshould bereposted as estimated premum liability on December 31, 2022? a. 320,000 nr wd b: 400,000 - c. 120,000 4. $20,000 10 Solution 1-9 Question } Answer a ‘Number of premiums di ist Number of premiums tg veaeina ! 2022 buted in Total premiums in 2924 Promm stpetse for2081 gon 0 Question 2. Answer Estimated lability 1273172991 (5495 40) x Question 3 Answer d Premiums distributed in 2022 Premiums to be distributed in 2003 Total Premiums arising from 2021 sates disibuted in 2029 Premiums applicable to 2029 Premium expense for 2022 (48,000 x 49) Question 4 Answer ¢ Estimated liability 1238172022 (6,000 x 40) 20,000Problem 1-10 (IAA) Energy Company offered a cash rebate of P20 on each P1S0 package ‘of batteries sold during the current year. Historically, 10% of customers sail in the rebate form. = During the year, 600,000 packages of batteries are sold, and 25,000 P20 rebates are mailed to customers. 1. Whatamountofrebate expense should be reported forthe current year? = 5 fan y a. 1,200,000 * b. 1,500,000 ce. $00,000 d. 600,000 2. What amount should be reported agrebate liability at year-end? 700,000 500,000 350,000 400,000 BoP Solution 1-10 Question 1 Answer a Rebate expense (10% x 600,000 x 20) Question 2 Answer a Rebate expense 1,200,000 Rebate paid (25,000 x 20) (500,000) Rebate liability 700,000 wz Problem 1-11 Tay During the current year, under anew sales prom lite Company sold 80,000 reversible belts which entitled the customer nae tam. Each belt camied one coupon O-cash rebate ‘rc estimated ha 70% tic coupon litendistesi will be redeemed even yeat ‘Ponshad been processed during the current though only 35,000 cou, a. 4,000,000 b. 2,800,000 ¢. 1,750,000 d. 2,250,000 2, What amount should be coupons at year-end? 1,750,000 1,050,000 Bose Solution 1-21 Question 1 Answer b Coupons to be redeemed (70% x 80,000) Multiply by cash rebate per coupon ren Rebate expense 2,800,000 Question 2 Answer b Rebate expense 2,800,000 Rebate paid (35,000x 50) (4,750,000) Rebate liability 050,000 B(Cb. 210,000 Problem 1-12 (IFRS) Arianne Company, a grocery retailer, operates a customer loyalty program. The entity grants program members loyalty points when they spenda specified amounton groceries. Program members can redeem the points for further groceries, The points have no expirty date. During 2021, the sales amounted to P7,000,000 based on stand-alone selling price, During the year, the entity granted {0,000 pointS. But management expected that only 80% of 8,000 points wilk-be redeemed, ‘The stand alone selling price of each loyalty point is P100. . On December 3 1, 2021, 4,800 points have been redeemed . In 2022, management revised its expectations and now expected that, 90% 0r9,000 points will beredeemed altogether. During 2022, the entity redeemed 2, 400 pints 1. What amount should be reported ds. Jes evenud including he revenue eamed from points for 2021?, Pile — Fy KF ery a. 7,000,000 £ iI ee Tw b. 8,000,000 ft fy PML 4550 J ovrftk 46h ¢. 6,125,000 d. 6,650,000 2. What amount should be reported as revenue ear ‘eamned from loyalty. pointsfor20222 400 a. 700,000 £qe? ¢. 175,000 d. 200,000 Solution 1-12 Question 1 Answer ¢ Product sales 7,000,000 5 000 8,009, Points (100,00 on999% 000000) S1zs000 Total transaction price fe cous) ue 3 Product sales a Revenue froin points red, t (2,800/8,000..875 00)"" ‘eam Ree ‘Total revenue in 2021 Se 6,650,000 Cash ene Sales LS ae Uneamed revenue — points 5125 000 875,000 Uneared revenue ~ points Sales $25,000 sds oe 525,000 Question 2 Answer e rears ae Points redeemed in 2021 Points redeemed in 2022 =~ 400 Total points redeemed to December31, 2022 oe Cumulative revenue on Decembe 31,2022 7,200 9,000 x875,000) x Revenue from points recognized in 2021 (220m) Revenue from points eared in 2022 175,000 Uoeaned revenue — points 175000 sales 175,000 15Problem 1-13 (IFRS) Jamaica Company, a retailer of electrical goods, participates in a customer loyalty program operated by an airline. Z ‘The entity grants program members one air travel point for every P1,000) spent oneleetrical goods, ‘ Program members can redeem the points for travel with the airline subject toavailability. The entity pays the airline P60 for each point. During the current year, the entity sold electrical goods for consideration totaling P-4,500,000 based on stand-alone selling price and granted 5,000 points with stand-alone selling price of P100 per point, What amount shouldbe reognizedas product sles revenue? 4 a 4,500,000” ‘ >». 4,080,000 - ¢. 5,000,000 4. 2,500,000 2. What amount should be reported as net revenue from points? 450,000 150,000 4 10 466 ovd 43h 300,000 Solution 1-13 Question 1 Answer b Question 2 Answer b Selling price Fraction Allocated, Product sales = * 4500000 45/50 4,050,000 Points (5,000 x 100) $00,000 5/50, 450,000 5,000,000 4,500,000 Revenue from points 450,000 Payment to airline (5,000 x 60) (300,000) ‘Net revenue fiom points’ 150,000 Junaica Company has fulfilled its obligation by granting the points. “Therefore, revenue from points is recognized when the electrical goods are sold. 16 Ob. 489,600 Problem 1-14 (Ips) Alyanna Company o, grants program meppett!eSa customer loyal . The entit Eu an nga ans Ty Program members can points have no expiry dane the points for further purchases. The During 2021, thecustoiner, that 100% of these points ays 000 points, Mah: pase of eachloly pa eg HE Te and sone ‘The sales during 202 Tho ating peice 8 "amouttedto P6800 000 based on stand-alone On December 31, 2021, exchange for purchases.” 12022, the management rev ofthe points to be redeem} 1n2022, the entity redeemed 1, $8,800 points have been redeemed in Selexpectaionsandnowexpeds90% “b. 1200000 P - ce. 1,020,000 a 0 2, What amountshout . points for202t Pre "fdas evenue eam from loyalty & sro isting ¢. 510,000 a. 0 3. What amount should points for2022? \® 224,400 b. 714,000 170,000 a 0 3 Teported asfevenive eamed from loyalty. GOF X.4D = Cy oodSolution: 1-14 Question 1 Answere Points granted duri Product sales 2021, (60,000. 20) Tova Allocated price of points (1,200 8,000 x 6,800,000) Question 2. Answer b Points to be redeemed in 2021. (100% x 60,000) Revenue from points to be recognized in 2021 (28,800 /60,000 x 1,020,000) Question 3 Answer a Points to be redeemed in 2022 (90% x 60,000) Points redeemed in 2021 Points redeemed in 2022 Total points redeemed to December 31, 2022 Cumulative revenue from points December 31, 2022 (37,800/ 54,000 1,020,000) Revenue from points recognized in 2021 Revenue from points to be recognized in 2022 18 Problem 1-15 (Leg) Erika Company o rates, loyalty points for goods 2°8S!0mer loyalty program. Thecnti the customers Purchased. Telayalte rela a eae tapi date eNChags oe ileal poiscanbewselby During 2021;;theentityig, yt 80% of these award ge S944 30,000, selling price orm is shall beredas nee Teese i 1,000,000. n 2091 tye granted is rehalge are consideration of P7,009 0 ah, Si ods ee for a total alone selling price. The award credits rede be redeemed each yearqree’ th total award credits expected to Red omni ‘Semed Expected to be redeemed 5 Pol 25 Syy » aoSw 90% dS 1, Whatamount shouldbe reponed ae’ Lee pone age : a 328,125 S$ Fd qa rare Pot for 20287 bE fine LIN Ie agp) d. 175,000 ‘On Fin Is Mh mE } Be 2. Whatamount should be ee : Teported as revenue from points for 302 » by eo . 144375. 2a. yore = 47e Sad De 415,68 7fyy ESE = meee a 236,250 ReieAiE) 2» 47928 What amount should be: Teported as revenue from poit a, 525,000 b. 350,000 © $2,500 a 78,750 ‘What amount should be: Feported as revenue from points for 20247 _ & 787,500 S ) b. 183750 / e. 131280 4. 262;500 ints for2023? / > Isu/famr Worse = 28H i é ay > 19,Question 1 Answer a ourtallocated to the points: AmsiW590,000 5,000,000 x 7,000,000) igus to be redeemed in 2021 (8096 x 50,000) revenue from points for 2021 Reve g0 a0 000% 875.000) Question 2 Answer Points to be redeemed in 2022 (6: otal points redeemed to 12/31/2022 (15,000+7,950) 50,000) Cumulative revenue ~ December 31, 2022 (22,950/ 42,500 x 875,000) Revenue from points for 2021 Revenue from points for 2022 Question 3 Answer e Points to be redeemed in 2023 (88% x 50,000) ‘otal points redeemed to December 31, 2023 (15,000 + 7,950 +2,550) Cumulative revenue ~ December 31, 2023 (25,500 /42,500 x 875,000) ‘Cumulativerevenue recognized in 2022 Revenue from points for 2023 Question 4 Answer d Points to be redeemed in 2024 (90% x $0,000) Total points reccemed to December 31, 2024 (15,000 + 7,950 + 2,550+ 15,000) Cumalative revenue ~ December 31, 2024 __ (40,500/ 45,000x 875,000) Cumulative revenue recognized in 2023 Revenue from points for 2024 20 787,500 (625,000) 262,500 Problem 2-1 (Arca, faa Mill Company sels IY Sells Washing mach; warranty against mang fae mchines that carry a three-year Based on the ity = —reets. Paar Based on the entity’ experience. vn i p300 per machine. iTanty costs are estimated at During the current year the, paid warranty costs of p} ae '2,400 washing machines and current year? a. 170,000 b. 240,000 As c. 550,000 4. 720,000 2, Whatamount should be reposted a. $50,000 |b. 720,000 c. 170,000 d. 0 Solution 2-1 Question 1 Answer d Warranty expense for current year (2,400 x 300) 720,900 Question 2 Answer a Warranty expense for current year 720,000 Warranty payment (170,000) Warranty liability * ablem 2-2 (AICPA Adapted) On April 1 Ash Company began offering a new product for sale ‘under one-year warranty. OF the 50,000 units i by June 30, inventory on April 1, 30,000 had been sold y estimated Based on its experience with similar products, the cali nas that the average warranty cost per unit sold would be P80. 0 Actual warranty costs ineurred from April | through June 3 amounted to P70,000. 1. What amount should be reported as warranty ¢xpense? a 2,400,000 b. 4,000,000 ce. 2,000,000 d. 1,200,000 2. On June 30, what amount should be reported as estimated warranty liability? a. 900,000 b. 1,600,000 c. 1,700,000 ~ 4. 3,300,000 Solution 2-2 Question I Answer a ‘Warranty expense (30,000 x 80) Question 2 Answer c 2,400,000 ‘Warranty expense 400, ‘Actual warranty cost 700,000) Warranty liability -June30 1,700,000 22 Problem 2-3 (AICPA Adaptea lh Ce i ora net saleg std the annual warranty expense 1 2% of rari Ret sales for the current year amounied to Z “$y, On Jamuary 1, the warranty esp d IY iabili 0, ee payments during thecument ear toned PSG 00 een 1. Whatamountshoutd year? bereporedas warranty expense forthe current a. 70,000 b. 50,000 c. 80,000 d. 60,000 2 ‘What amount shouldbe reported as wamany ibility at year-end? a. 10,000 ‘ b. 70,000 ce. 80,000 4. 90,000 DIC Solution 2-3 Question 1 Answer ¢ Warranty expense for current year (2% x 4,000,000) 80.000 Question 2 Answer d Warranty liability - January 1 60,000 Warranty expense for current year (2% x 4,000,000) _80,000 Total Warranty payments during current year Warranty liability ~ December 31 23 aProblem 2-4 (AICPA Adapted) Wall Compaay sole'a product under atwo-year waranty: The estimated Costof warranty repairs is 2% of net sales. During the first wwo years in business, the entity made the following les and incurred the following wamay repair costs 2021 2022 Net sales 2,500,000 3,000,000 Total repair costs incurred 45,000 50,000 What emount should be reported as warranty expense for 20227 2 60,000 b. $0,000 xl 10,000 d. 59.000 Solution 2-4 Answer a Warranty expense for 2022 (2% x 3,000,000) 60,000 Problem 2-5 (IAA) Bass Company manufactures high-end home electronic systems. The ceatity provides a one-year warranty for ll products sold. The entity estimated thatthe warranty cost if P200 per unit sold and sported a liability for estimated warranty cost of 'P650,000 atthe beginningofthe year. During the current year, the entity ‘ 9,000,000 and paid waranty claims of P750,000 on current and prior year sales. ‘What amount should be reported as warranty liability at year-end? a. 250,000 eae b. 350,000 Suny A c. 900,000 d. 750,000 Solution 2-5 Answer ¢ Warranty liability January | Warranty expense for the year (5,000 x 200) ‘Varranty payments ‘Warranty liability December 3 | 24 Problem2-6 (Atcpg 4, — 12021, Dubious ¢, * Om ‘carry atWo-year waranty pt ling new line of produets that Based upon past exper : ‘perier ‘it warranty costs.as a eenage te Products, the entity estimated First yoar of warran ae Second year of warranty Sales ‘Actual warranty cost J. What ammount shouldbe repo as 2. Whatamount shou! 31,2021? ld be repontedas a. 150,000 b. 250,000 ©. 125,000 d. 0 ‘What amount shoud be reported es watanty expense for a. 300,000 = ~ b. 350,000 i 490,000 re d. 140,000 4. What amount shouldbe ted as warranty liability on December. 31, 20227 a a. 390,000 A > 440,000 J ec. 490,000 d. 840,000Solution 2.6 Question 1 Answer a ‘Warranty expense for 2021 (5,000,000 x 7%) Question 2 Answer b Warranty expense for 2021 Actual warranty cost in 2021 lity — December 31, 2021 Warranty li Question 3 Answer e Warranty expense for 2022 (7,000,000 x 7%) Question 4 Answser b Warranty liability ~ December 31, 2021 Warranty expense for 2022 Total ‘Actual warranty cost in 2022 ‘Warranty liability — December 31, 2022 26 740,000 (300,000) Problem 2-7 (AICPA Adapted) During 2021, Namnain, carrying & two-year ‘ara many jntoduced a new product The estimated Warrany . 2 12months following YY Costs related to. peso sales are 4% within sales Bsleang oy in the second 12 ai following Pagan Pet 3 0t5.000 coo econo 6,000,000 ” anc a , for 2022. ‘The actual expenditures ine and P350,000-for 2939-4 amounted to P1S0,000 for 2021 2. What amount should be reported as ia December 31, 202 ated warrany ibility | a. 350,000 ee hb. 150,000 Ink) * ¢. 100,000 is 4. 50,000 ION 3. What amount should bs TeporedasYaranty expense for 20229 a. 650,000 ane — b. 600,000 - GMX fh ©. $00,000 a. 550,000 4. What amount should be reported asestintated warranty liability on December 31, 20222 : ~ 360,000 .. 400,000 240,000 100,000 oP aeSolution Question 1 Answer a Warranty expense for 2021 (10% % $,000,000) Question 2 Answer a Warranty expense for 2021 _ Actual warranty expenditure in 2 ‘Warranty liability ~ December 31, 2021 1 Answer b Question Warranty expense for 2022 (10% x 6,000,000) Question 4 Answer b Warranty liability ~ December 31, 2021 Warranty expense for 2022 Total Actual warranty expenditure in 2022 December 31, 2022 Warranty liabi 28 300,000 150,000) 350,000 350,000 500,000 950,000 (550,000) Problem 2-8 (PHL cp, ii l) Cyprus Company stay three-year warranty, tnd witessin 2021. sells printers witha percentage of peso sales. N'Y estimated its warranty cost as a Based on pastexperienes igisec: 2 dhe Fist year of waram gop sated thal ill berepaired during waranty an en a edness = year: 4 12021 and 2022, theentiy wag aa units, respectively ata sali sable to sell 7,500 uni inept tO ran a 10,000 @\ 5,400,000 . 7,200,000 9,400,000 . 4,800,000 2, What is the predicted warrahf expense coveri sales of 2021 and 2022 still under warranty after Decciber 1 30207 se 9,675,000 CR 9,600,000 I 9,300,000 |. 8,100,000 i Bose 29Solution 2-8 Question I Answer ¢ Percentage of warranty’ cost each year (3% + 5% + 10%) 18% Warranty expense: 2021 (18% x 30,000,000) 5,400,000 2022 (18% x 40,000,000) 77200,000 12,600,000 Warranty payments: 2021 * 800,000 2022 2,400,000 _ 3,200,000 Recorded warranty liability ~ December 31, 2022 .9:400,000 Sales 2021 ( 7,500%4,000) _ 30,000,000 Sales 2022 (10,000x4,000) 49,000,000 Question 2 Answer a When sales occurevenly during the yeas itis fair to assume that halfof the sales were made on January 1 and the other halfon July 1. Sales 2021 January 1,2021 sales 130,000,000 x 1/2) 15,000,000 July 1,2021 sales 10,000,000 x 1/2) 15,000,000 Sales 2022 January 1,202 sales (40,000,000 1/2) 20,090,000 July 1,202 sales (40,000,000.x 1/2) 20,000,000 30 Warranty 'Y &XPense related to January 1,2021 sales First contract year Secon! contact year 3yyy {34% 15,000,000) 450,000 Third contract year ( $%x 15,000,000) 750,000 2023 (10% 15,000,000) 1,500,000 ‘Worran Skene relaioa te uly i/siiz1 aniea First contract year Ju) @%X 15,000,000), 1.2021 to june 30,2022 Second contract year Ju 450,000 (Soe 15003 oon 220220 Sune 30,2023 Third contract year July 750,000 {ove 15,00n an 222 Jane30,202¢ ‘Total warranty expense for 2004 2021 sales still under warranty. after December 31, 2022 Third contract year 2023 ~ J, Sond contac eee ap 22 ales 150000 Januiary |, 2623 to June 36, 29 ° , 2023) 3 third contastyear aly 22sec aoe Sgt 2021 sales still under warranty afer December31,2022 3,375,000 iTWarranty expense related to January 1, 2022 sales 2 ( 3% x 20,000,000) 23 ( $%x 20,000,000) 24 (10% x 20,000,000) First contract year Second contract year Third contract year Warranty expense related to July 1, 2022 sales First contract year July 1, 2022 to June 30, 2023 6%x20,000,000) ‘Second contract year July 1, 2023 to June 30, 2024 (5% 8 20,000,000) ‘Third contract year July 1, 2024 to Sune 30, 2025 (10% x 20,000,000) Total warraaty expense for 2022 600,000, 1,000,000, 2,000,000 2022 sales still under warranty after December 31,2022 Second contract year 2023 —January , 2022 sales Third contract year 2023 — January 1, 2022 sales First contract year ~ July 1, 2022 sales January 1, 2023 to.June 30, 2023 (600,000 x 6/12) ‘second contract year — July 1, 2022 sales July 1,2023 to June 30,2024 Third contract year - July-1, 2022 sales July 1,2024 to June 30,2025 2022 seles still under warranty after December 31, 2022 2021 sales still under warranty after December 31, 2022 2022 sales still under warranty after December 31,2022 Predicted sales still under warranty after December 31, 2022 32 1,000,000 2,000,000, 300,000 3,375,000 6,300,000 Problem 2-9 (IFRS) ‘Toyo Company owns a car dealership that it uses for servicing cars under warranty. The entity sold SOO ars durngthe year ; ‘The entity’s experience with warranty claims is that (0% of all cars sold ina yeat have zero defect,25% ofall cars sold in a year have normal defect, and'15% of all cars sold ina year have significant detect. c —— ing “normal defect" ina car is P10,000. The cost of ignificant defect" in acaris P30,000. ‘What amount should be reported as warranty’ ity at year-end? a. 3,500,000 OQ» % BIE » be 1,750,000 t ~ 20K 7 c. 1,400,000 d. 4,000,000 Solution 2-9 Answer a Normal defect (25% x 500 x P10,000) 1,230,000 Significant defect (15% x 500 x P30,000) 2,250,000 Warranty liability 3,500,000 Problem 2-10 (IFRS) Chato Company sold electrical goods covered by a one-year warranty for any defects. Of the sales of P70,000,000 for the year, the entity estimated that@% will have major defect 6% will have minor defect and 92% will have no defect. ‘The cost of repairs would be P5,000,000 ifall the products sold had major defect and P3,000,000 ifall had minor defect. ‘What amount should be recognized as.a warranty liability? > a. 8,000,000 % b. 5,600,000 Cc ce. 300,000 4. 190,000 Solution 2-10 Answer ¢ Major defect (3% x P5,000,000) 150,000 Minor defect (5%X P3,000,00) 150,000 Total warranty provision 33Problem 2-11 (IFRS) topurchasers of xi, by repair OF within one Electro Company gives wauramtigs atthe time of sale its produst, The entity undertakes to make goo replacement, manufacturing defects that becorne appare™ year from the date of sale - Sales of P5,000,000 were made evenly throug iat Pca een iS ‘and replacements for the P penditurs for warranty repairs and placements For Pt sold in 2022 are expected to be made 50% in 2 The 2023 ourflows of economic benefits related tothe warranty will take place on December 31,2023. The entity estimated that 75% of produets sold requize no er 15% of products sold require minoc repairs costing P 106 ga products sold equite major repairs costing P400,000. orto reflect the uncertainties in the An! iace risk adjustment fect tows : of 6% to the probability weighted ‘cash flow estimates isan increment expectedcashfiows. “The appropriate discount facto: for cash flows expected to occur on December 31, 2023 is 0.94. 1. What amount should be reported as waranty expense for 2022? yi a. $00,000 ; 498,200 ue Leh, } c. 514,100 =tzok 20. 4 Les * ~ 4. $30,000 sor a ( ne He 2. Whatamount should bemportedas ron fai on Dsetobor 31, 2022? = a. 265,000 b. 249,100. ©. 250,000 4. 235,000 Se Solution 2-12 Question # Answer Cost of minor repair Cost of major repair Total warranty cost Multiply by Total cash flow after risk adjustment Expenditure in 2022 (330,000 50%) Expenditure in 2023 at present value (265,000 x 0.94) ‘Warranty expense for 2022 Question 2 Answer’ ‘Total cash flow for warranty Paid in 2022 (50% x 530,000) Warranty cost to be paid in 2023 Multiply by PY factor Wattanty linbity December 31.2022 35 530,000 (265,000) 265,000 249,100Problem 2-12 (IFRS) Humaniizer Company gives warranties atthe time of sale o purchasers ofits product. Under the terms of the sale, the entity undertakes to ‘uke good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale, On December 31,2021, the entity appropriately secognized 750,000 warranty liability, During 2022, the entity incured ane charged P 40,000 against the Warranty liability. Outofthe P140,000, an amount of P80,000 related to warranties for sales made in 2022. ‘The increase during 2022 in the discounted amount recognized asa warranty liability on December 31, 2021 arising from the passage of time is P5,000. On December 31, 2022, the entity estimated that it would inewr the following expendituresin 2023 to meet its warranty obligations on December 31,2022: 5% probabilityof P400,000 ~} 20% probabilityof P200,000 | [ot 50% probabilityof P 80,000 25% probabilityof P 20,000 ‘Assume for simplicity that the 2023 cash flows for warranty repairs and replacements take place on December 31,2023. Anappropriate discount rate is 10% per year. The PV of 1 at 10% for ‘one yearisO.91. oe An appropriate risk adjustment factor to reflect the uncertainties in the «ash flowestimatesisan increment of 20% tthe probability-weighted expected cash flows. ” ©. 242,060 1, What is the amount of undiscounted cash flows for warranty on December 31,2022 disfegarcing the risk adjustment factor? . a. 105,000 b. 350,000 , c. 100,000 i 4. 200,000 2. Whatistheamount oFundiseounted cash flows for warranty After >) considering the risk adjustment factor? a. 126,000 pb. 266,000 +, 120,000 4, 211,000 3. Whatamount should bseportdas uray 31,2022? — 2 e a. 126,000 {24k x b. 114,660 14 feo d. 187,460 4, Whatamount should be recognized as warranty expeise for 2022? yk a. 194,660 Oo” b, 199,660 Idee . 206,000 . 211,000 379 Solution 2-12 CHAPTER 3 Question ? Answera Question 3 Answer —_——_—.s $——r ates Answer a Question 4 Ansswer b DEFERRED REVENUE Warranty expense 50,000 Wareanty liability — Problem3-1 (AICPA Adapted) 2022 Cobb Department Store sels gift certificates redeemable only when Warranty lisbility 30,000 merchandise is purchased. These gift certificates have no expiration Fameccat 5,000 date. Upon redemption or expiration, the entity recognizes the ‘Wkpadiy expense 85,000 unearned revenueas realized. Cash 140,000 ‘The emtity provided the following information for the current year: Warvanty expense related to 2022 sales 80,000 Unearned revenue, Janvary 1 650.000 Warranty expense related to 2021 sales (60,000 - 55,000) _ 5,000 Gift certificates sold 2,250,000 $5,000 Gift certificates redeemed 1,980,000 Toes a inaty sot one se aye 2 Gift certificates expected not to be redeemed 100,000 st of goods sold 60% Warranty expense 114,60 Cost of goods sol wns Worranty liability 114,660 On December 31, what amouint should be reported as gnearmied, venue? = Weighted probabilities: a 51000 5% x 490,000 20,000 b. $70,000 20% x 200,000 49,000 c. 850,000 50% x 80,000 40,000 950, 25% x 20,000 $,000 & Soom Expected cash flows (Question Ip 105,000 Soltsrion 3-1 Answer e ‘Multiply by risk adjustment factor (100% + 20%) issateaar sencnae “innsies 650,000 Adjusted cash flows (Question 2) Add: Gift certificates sold 2,250,000 Multiply by PV of I at 10% for one year Taal 2,900,000 Present value of eash flows (Question 3) Less: Gift certificates redeemed 1,980,000 Gift certificates expected not to be Warranty cost paid in 2022 redeemed 100,000 2,050,000 ‘Warranty lability related to 2022 sales 350,000 Unearned revenue - December 31 Total warranty expense in 2022 (Question 4) 39 38Problem 3-2 (AICPA Adapted) Regal Department Store sells gift certificates, redeemable for store merchandise and withno expitaton date The entity provided the following information pertsiningto the gift Certificate salesand redemptions during the current year: Unearned revenue on January | ,__ 750,000 Sales ofgiftcertificates 2,500,000 Redemptions of prior year sales ¢ it A Redemptions of current year sales What amount should be reported as unearned revenue at year-end? a 1,250,000 . b. 1,125,000 4 <. 1,000,000 d. 500,000 Solution 3-2 Answer a suredeemed + January 1 150,000 Sales of gift certificates during eurrent year 2,500,000 Tol 3,250,000 Redemptions of prior year sales € 250,000) Redemptions of current year sales (1,750,000) Unearned reverie ~ December 31 1,250,000 40 Problem3-3 (IAA) Diversified Company sells perishable electronic products that are shippedin reusable containers. Customers pay a deposit for each container. The deposit is equal to the container cost, Customers receive a refund when the container is retumed. ': During the current year, deposits collected on containers shipped amounted t6 P 700,000, Deposits are forfeited if containers are not retumed in 18 months, — = Containers held by customers at the beginning of the year totaled 330,000. During the current yeas, an amount of P410,000 was refunded and deposits of P25,000 were forfeited. What amount should be reported as forrefundable deposit at Foor € a. 595,000 b. 620,000 h c. 645,000 d, 290,000 Solution 3-3 Answer a Containers held by customers beginning 330,000 Deposits collected from customers during the year 700,000 Toul a 1,030,000 Deposits refunded 410,000) Deposits forfeited 25,000) Liability for refundable deposit ending 595,000 atProblem3-4 (AICPA Adapted) Marr Com niners. The npany sells its products in reusable containers. ‘customer is charged a deposit for each container delivered und receives a refund for each container retumed within two yous #Iet the year of delivery, thin the time The entity secounts for the containers not returned limit as being retired by sale atthe deposit amount. The entity provided the following information for 2022 Container deposits on January 1, 2022 fiom deliveries in: 202 150,000 sa : 430,000) $80,000 Deposits for containers delivered in 2022 780,000 Deposits for containers retumed in 2022 from deliveriesin: 2020 90,000 2021 250,000. 2022 286,000 626,000 On December 31, 2022, what amount should be reported a lability for deposits? Bre Ve S a. 494,000 b. 584,000 c. 674,000 d. 734,000 Solution 3-4 Answer ¢ ‘Deposits on January |, 2022 from deliveries in 2021 430,000 Deposits for containers delivered in 2022 780,000 Toul 1,210,000 Less: Deposits returned in 2022 from deliveries in: maak 250,000 2022 286,000 _ $36,000 Liability for container deposits ~ December 31, 2022 _ 674,000 Deposits on January 1, 2022 from deliveriesin 2020 150,000 Deposits returned in 2022 from deliveries in 2020 (90,000) Expired and no fonger refundable 60,000 42 ase Problem 3-5 (AICPA Adapted) Fell Company operates a retail grocery store that is required by Jaw to collect refundable deposits of PS on soda cans. ‘The entity provided the following information for the current year: Liability for refundable deposit -January | 150,000 Cans of soda sold 100,000 110,000. Soda cans returned During the current year, the entity leased space and received a 25,000 deposit to be applied against rent at the expiration of the Jeasc in 5 years. The lessor appropriately classified the lease as an operating lease. ‘What amount should be reported as current liability for deposit ‘on December 31? a. 125,000 b, 140,000 c. 100,000 4. 25,000 Solution 3-5 Answere Liability for refundable deposit - January 1 Deposit made (100,000 x 5) 8 Total 650,000 Deposit refunded (110,000 x5) (350,000) Balance - December 31 (current liabilitf) 109,000 The lease deposit is a noncurrent liability. 43Problem 3-6 (AICPA Adapted) Greene Company sells office equipment service contracts agreeing, to service equipment fora two-year period. Cash receipts from contracts are credited to unearned service contract revenue. 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 current year: ‘Unearned service contract revenue at January 1 Cash receipts from service contracts sold Service contract revenue recognized Service contract expense 520,007 What amount should be reported as uneamed service eantract revenue on December 31? gf a, 460,000 t b. 480,000 ? ©. 490,000 : 4. 720,000 Solution 346 Answerd Unearned revenue - January 1 600,000 Cash receipts from service contracts sold 980,000 ‘Total Service contract revenue recognized Uncarned service contract revenue - December 31 44 Problem 3-7 (AICPA Adapted) Ryan Company sells major household appliance service contracts for cash. The service contracts are for a one-year, tWo-yeaty OF three-year period, Cash receipts from contracts are credited to. unearned contract revenue. This account had a balance of P720,000 on December 31, 2022 before year-end adjustment. 7 Service contract costs are charged as incurred to the serviee contract oe which had a balance of P180,000 on December 31, 2022. Outstanding service contracts on December 3 1, 2022 expire: During 2023 150,000 During 2024 225,000 During 2025 a What amount shauld be reported as unearned contract revenue on December 31,2022? — a, 340,000 ‘ b. 475,000 «, 295,000 4. 245,000 Solution 3-7 Answer b Outstanding contracts on December 31, 2022 that will expire during, 2023 150,000 2024 225,000 2028 . 190,000 Unearried contract revenue December 31, 2022 475,000 48Problem 3-8 (AICPA Adapted) Dunne Company sells equipment service contracts t two-year period. The sale price of each contract is P00. ‘The past experience is that, ofthe total pesos spent for epaits O service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year The entity sold 1,000 contracts evenly throughout 2021. that cover a 1. What amount should be reported as Gontract revenue for 2021? a 120,000 — Poni b. 240,000 pr RS ©. 300,000 jo» d. 150,000 2, What amount should be reported as deferred contract revenue on December 31,2021? 540,000 480,000 360,000 300,000 aege 3, What amount shouldbe reported as contract revenue for 2022? ° a. 180,000 Fok Ly b. 360,000 4 fo xf) «300,000 ‘ d. 120,000 4 4, Whatamunt should be reported as contractrevenu for 20232 240,000 360.000 f fz.- de 180,000 0 aoge 46 Solution 3-8 First contract year (40% x 600,000) 240,000 Second contract year (60% x 600,000) 360,000 ‘Total contracts sold in 2021 Since rhe contracts are sold eve 40% iseamed in2021 and one-half beeen in arorme One-half of theo ‘will be eamed in2022 and one-half will beeamed i . Question I Answer a Contract revenue for 2021 (240,000 x 1/2) 120,000 Question 2 Answer b otal contracts sold (1,000 x 600) 600,000 ‘Contrast revenue in 2021 (240,000.x 1/2) (120,000) Deferred contract revenue - December 31,2021 4 Question 3 Answer ¢ Remaining one-half of first contract year (240,000 x 1/2) , 120,000 First one-haif of the seeond contract year (360,000 x 1/2) 180,000 Total contract revenue in 2022 390,000 Question 4 Answer ¢ Remaining one-half of second contract year (360,000 x 1/2) Summary Contract revenue in 2031 Contract revenue in 2022 Contract revenue in 2023 Total contract revenue 47Problem 3-9 (AICPA Adapted) Cobb Company sells appliance service contracts agreeing t0 repair appliances fora two-year period. ‘The past experience is tha, of the total amount spent for repairs on service contracts, 40% is incurred eventy during the first contract year and 60%evenly during the second contrect yeas Receipts from service contract sales are P500,000 for 2021 and 600,000 for 2022, Receipts from contracts are credited to unearned contract revenue. All sales are made evenly during the year 1. What amount should be reported as Gontract revenue for 2024? _ a. 100,000 b. 200,000 ¢. 250,000 ‘i 4. 500,000 t 2. What amount should be reported as unearned contract revenue on December 31,2021? cn. § 300,000 400,000 200,000 apse 3. What amount should be report as contract reventie for 2022? fh L 7 - a. 240,000 ane me b. 360,000 ie P. ¢. 370,000 d, 250,000 4, What ammount should be reported as uneqmed contract revenue on December 31, 2022? 360,000 Beep yt 470,000 ie 480,000 630,000 63 Solution 3-9 Question J Answer a Question 2 Answer b 2021 sales 40% x 500,000 equals ?200,000. This amount is eamed one-half in 2021 oF P100,000 and one-half n 2023 or P 100,000. 60% x 500,000 equals P300,000, This amount is earned one-halfin 2022 or PI50,000 and one-alf in 2023 or P150,000. ‘Total contracts sold in 2021 500,000 Contract revenue in 2021 | (209,000) Uneamed contract revenue — December 31, 2021 400,000 Question 3 Answer e Question 4 Answer d+ 2022 sales 40% x 600,000 equals P240,000. This amount is eamed one-half in 2022 or P120,000 and one-half in 2022 or P120,000, 60% x 600,000 equals P360,000. This amount is eamed one-halfin 2023 and one-half in 2024. Remaining one-half of first contract year— 2021 sales (200,000 x 1/2) . 100,000 First one-half of second contract year 2021 sales (300,000 x 1/2) 150,000, First one-half of first contract year - 2022 sales (240,000 x 1/2) 120,000 Total contract revenue for 2022 ‘Total contracts sold in 2021 and 2022 41,100,000 Contract revenue in 2021 (100,000) Contract revenue in 2022 (370,000) Uneared contract revenue — December 31, 2022 630,000 The unearned contract revenue on December 31,2022 is P150,000 for the 2021 sales and P480,000 for2022 sales or atotal of P630,000. 49Problem 3-10 (AICPA Adapted) Kent Company sells magazine subs three-year period, Cash receipts from subscribers are credited to subscriptioncollected in advance, and this account hada balance of P2,400,000 on December 31,2022 before year-end adjustment. ‘Outstanding subscriptions on December 31,2022 expire: During 2023 : 600,000 During 2024 900,000 During 2025 400,000, aan ‘On December 31, 2022, what amount should be reported as (Subscription collected in advance? cz a 500,000 ¢ b. 1,200,000 = ©. 1,900,000 4. 2,400,000 2. Whatamount shouldbe reported as subscription revenue for 2022? a. 600,000 b. 500,000 . 900,000 4, 400,000 Solution 3-10 Question I Answer c All of the outstanding contracts of P1,900,000 are deferred, Question 2 Answer b Subscription collected in advance per book 2,400,000 ‘Adjusted amount ~ December 31, 2022 1,900,000) 500,000 50 Problem 3-11 (AICPA Adapted) Subscriptions zeceived after the March 31 and September 30 cut-off dates are held forthe next publication, Cash from subscribers isreocived it tyearand is cliche ddtrettoens tomer Deferred revenue from subscriptions — January | 1,500,000 Cash receipts from subscribers during the current year 7,200,000 1, What amount should be reported as deferred revenue from subscription on December 31 ferpee a. 1,800,000 F2f!/n =Lov b> b. 3,300,000 ‘ ¢. 37600,000 p> d. 5:400;000 / i 2, What amount should be reported as subscription revenue for the current year? a a. 7,200,000 FS te b. 6/900,000 # qa ce. 8,700,000 4. $100,000 Soltetion 3-11 Question } Answera Question 2 Answer b ‘Monthly subscriptions (7,200,000/12) ‘The subseriptions after the September 30 cut-offare: October November December Deferred revenue - December 31 ‘Theabove subscriptions will be served in the next publication next year. Deferred revenue — January | 1,500,000 Cash receipts from subnscribers 7,200,000 Total 8,700,000 Deferred revenue - December 31 (1'300,000) Subscription revere for current year 6.900.000 1Problem 3-12 (AICPA Adapted) Weaver Company sells magazine subseripions fora yeah 2-year or 3-year period. Cash receipts from subseribersare credited to magazine subscriptions collected inadvance and this aecounthad a balance of Pi,700,0000n January J “The entity provided the following infomation forthe current year: 2,100,000 1,500,000 Cash receipts from subscribers Subscription revenue credited on December 31 What amount should be reported as the balance for subscriptions collected in advance on December 31? 1,900,000 2,300,000 1,400,000 2,100,000 as op Solution 3-12 Answer b Subscriptions collected in advance —January 1 1,700,000 Cash receipts fram subscribers in current year 100,000 Total 3,800,000 Subscription revenue credited in current year (1,300,000) Subscriptions collected in advance ~ December 31 2,300,000 82 Problem 3-13 (AICPA Adapted) Anette Video Co: De jptions for thi Taleo ince Company sels 1-and 2-year subseriptions for the Subscriptions are collected in advance and credited to sales. ‘An analysis of the recorded sales activity revealed the following: 2021 2022 Sales 500,000 Less cancelations Sooo 30,000 Net sales 470,000 Subscription expirations: 2021 120,000 323 155,000._ 130,000. oat ais, 125,000 200,000 >) ‘(ek ¥0000- ~~ 470,000 On December:31,2022, whatamount should be reported as unearned ibscription reverie? hae a, 495,000 b. 470,000 / c. 465,000 4, 340,000 Solution 3-13 Answer ce Subseriptions received in 2021 that wil expire in 2023 _ 125,000 Subscriptions received in 2022 that will expire in 2023 "200,000 ‘Subscriptions rece ved in 2022 that will expire in 2024 140,000 Unearned subscription revenue - December 31, 2022 53 > box + The entity has real property subject to real property tax. The city’s fiscal year rans July Ito June 3b andthe te meoeod at 3% of al property on hands payatieon de 30,2023. 0,0) ‘The entity estimated thatthe real property tex will amour to 600,000 forthe city's fiscal year cing June 30, 2023. On December 31, 2022, what amount should be reported as accrued expenses? mee a. 950,000 , b. 770,000 pik ¢. 650,000 d. 710,000 Solution 4-1 Answer d Advertisement for December 2022 350,000 Accrued rent from December 16 to December 31, 2022 (120,000 x 6/12) £0,000 ‘Accrued real property tax (600,000 x 6/12) 300,000 710,000 Total accrued expenses 57 |Problem 4-2 (IAA) Sonia Company reported gross payroll of P600,000 forthe month of January. The entity paid the payroll net of the following: deductions: 70,000 ae 15,000 Phitheatth, oe Pagibig 100,000 Inaddition, the entity recognized its additional contributions forthe, following in relation to January payrol: sss Ne Phitheat 00 Pagibig ‘What amount should be reported astotal payroll tax: liability? a. 135,000 b. 100,000 c. 90,000 a. 65,000 Solution 4-2 Answer a Salaries and wages 600,000 Withholding tax payable 70,000 SSS payable - employee 15,000 Philhealth payable employee ae Pagibig payable - emplayee Cash 300,000 Payroll ax expense 35,000 $8S payable - employer Phithealth payable employer Pagibig payable —employer ity (100,000 + 35,000) Total payroll 58 Problem 4-3 (AICPA Adapted) Chester Company reported the followin, Il for the month of : 8 Payrol Total wages 00.000 Income tax withheld 0,000 Allwages paid were subject to SSS, The SSS tax rates were 7% each foremployeeand employer. Chester remits payroll taxes onthe 15thof the following nionth, ° Inthe financial statements forthe month ended January31, what amount should be reported respectively as otal payroll tax liability and payroll tax expense? a “ a, 60,000 and 70,000 aa b. 95,000 and 70,000 Mt ¢. 95,000 and 35,000 L d. 130,000 and 35,000 bx Solution 4-3 Answer d Income tax withheld 60,000 S85 — employee (7%x 500,000) 35,000 SSS —employer (%x 500,000) 35,000 “Total payroll tax lability “The pectinent entries for the month of January in relation to the payroll te abi Salaries and wages 00,000 Withholding tax payable 60,000 SSS payable—employee 35,000 Cash 405,000 Payroll tax expense 35,000 SSS payable ~ employer 35,000 3890 EN . i ee Problem 4-4 (AICPA Adapted) Miyuki Com Ca pany operates real store Alltems ane sold whee TS ayes added tax, which the entity collects and records as sales i= cemity files quarterly sales tax returns when due by the Hwentiett lay following the end of the sales quarter. However, inaccordance with state wit juirements, the exit added tax collected by the ree ‘day ofthe month ‘month such collections exceed P50,000. The entity takes these payments as credits on, the quarterly sales tax retum. The value added taxes aid by theenityarecharged against sales revenue, Following is a monthly summary appearing inthe firstquart revenue aécount: iy remits value following any jer sales Debit Credit Januar =. See Februsty «og 392,000 ‘March - 448,000 What amount should be reported as value added taxes payable on March 31? a. 150,000 b. | 168,000 c. 108,000 d. 90,000 Solution 4-4 Answer d Tanvery $60,000 February 392,000 March 48,000 Sales including VAT 1,400,000 Sales excluding VAT (1,400,000 1.12) 1,250,000 Output VAT 150,000 Payment of VAT in February 60,000) 90,000 ‘VAT payable ~ March 31 problem 4-5 (AICPA Adapted) na biweekly t Biloy Company pays all salaried employees 01 Gvertime pay however is paid in the next biweekly Per Tne gearues salaries expenses only at the December 31 ‘year-end. ‘Datu relating to salaris earned in Decernber are: {Last payroll was paid on December 26 for the 2-week period ended December 26 Overtime pay eamed for the 2-week period ended December 26 was: 420,000 ‘Remaining work days were December 29, there was no overtime. > -The recurring biweekly salaries totaled P7,500,000. , 30 and 3 1'on which days ‘assuming a5-day work week, what amount should be recorded as aesrued salaries payable on December 31? a. 2,670,000 LS RK] p yb. 4,300,000 2.) 2,250,000 4. 4,920,000 Solution 4-5 Answer a ‘Accrued salaries for December 29, 30 and 31 GM0x 7,500,000) Accrued overtime pay Accrued salaries payable ~ December 31 Since there is a 5-day work week, the recurring biweekly: salaries of P7,500,000 relate to 10 days. The three remaining work days of December are unpaid. The overtime pay for the 2-week period ended December 26 is acerued on! December 3] because overtime pay is paid in the next biweekly period. 61Problem 4-6 (AICPA Adapted) Ronald Company hasan incentive compensation plan under which ate Ich manager received 10% ofthe! branch income after deduction of the bonus but before dediiction of income tax. Branch income for the current year before the bonus and income tax was P1,650,000. The tax rate is 30%. What amount should be reported as bonus forthe current year? a. 126,000 . b. 150,000 ©. 165,000 d. 180,000 Solution 4-6 Answer b Income after bonus before tax (1,650,000/ 110%) (163% x 1,500,000) 150,000 1,500,000, Bonus Problem 4-7 (AICPA Adapted) decided to offera bonus ‘After three profitable years, Cairo Company qo the branch manager of 25% of income over ? 1,000,000 eared by the branch. ——— ‘The income for the branch was 1,600,000 before tax and before bonus for the eurent year. te be fine ‘The bonus is computed on income in excess of P1,000,00' deducting the bonus but before deducting tax. ‘What amount should be reported as bonus of the branch manager for the curent year? a. 120,000 b. 150,000 ec. 250,000 d. 320,000 Solution 4-7 Answer a Income after bonus but before tax (600,000/ 125%) 480,000 10 after Bonus (28% x 480,000) 120,000 62 Problem 4-8 (ACP) The bonusagreement of Christian Company provides that the general manager shall receivean annual bonuas of 10% of the net income after bonus and 1ax. The income fax rate is 30%. The general manager received P280,000 for the current year as bonus. ‘What amount was reported as income before bonus and) tax? a. 4,280,000 > b. 4,000,000 ¢. 2,800,000 d. 3,720,000 Solution 4-8 Answer a Income after bonus and tax (280,000/10% 2,800,000 Income before tax (2,800,000/70% 4,000,000 Income before bonus andtax (4, + 280,000) 4,280,000 Problem 4-9 (ACP) ‘Tobruk Company hasan agreement to pay its sales managera bonus of S%ofthe incomeafter bonus and after tax. eS ‘The income forthe eurent year before bonus and taxis'P5,250,000) ‘The income taxrateis 30%6of incomeafer bonus. ‘What amount should be reported as Bonus of the sales manager for the current year? S a, 262,500 b. 250,000 e. 171,536 - 186,548 Solution 4-9 Answer e £05 (5,250,000-B-T) 130(5,250,000-B) (05 (5,250,000 - B ~ 3 (5,250,000—B)] 205 (5,250,000~B ~ 1,575,000 + 30B) 262,500 -.05B - 78,750 +.015B = 262,500-78,750 183,750 183,750/ 1.035 = 177336 weeds 4 8 B +056 -.0151 1.0351 woe 63Problem 4-10 (AICPA Adapted) ‘Kent Realty Company maintains an eserow account and pays real estate taxes forthe mortgage customers. Escrow funds are Kept in interest-bearing accounts Interest, less a 10% service fee, is exedited to the mortgagee’s account and used to reduce fture escrow payments. Escrow account liability ~ January 1 B Escrow payments received during the year Real estate taxes paid during the year Interest on escrow funds 700,000 1,580,000 ( 1,720,000 50,000 ‘What amount should be reported as esrow account liability on December 31? ove a. 510,000 Sh b. 515,000 chor ©, 605,000 one) 4. 610,000 uae Solution 4-10 Answer e =a al ow accounts liability - January 1 ‘add: Eserow payments received 1,580,000 Interest on escrow funds 50,000 Tol Less: Real estate taxes paid 1,720,000 Service fee (10% x $0,000) $,000 Escrow accounts liability - December 31 64 wach 700,000 1,630,000, 2,330,000, 1,725,000 00 Problem 4-11 (AICPA Adapted) On the first day of each month, Bell Company received from Carr Company an escrow deposit of P250,000 for real estate taxes. Bell Company recorded the P250,000 in an escrow account. ‘The real estate tax for the current year is P2,800,000 payable in equal installments on the fist day of each calendar quarter. (On January 1, the balance in the escrow account was P300,000. ‘What amount: should bereportedas crow’ Jiability on September 30? a. 1,150,000. b. 2,250,000 |) e 850,000 d. 450,000 Solution 4-11 Answer d Eserow liability —January 1 300,000 Escrow deposit received from January 1 10 September 30 (250,000.x 9 months) 2,250,000 Total 2,550,000 Less: Payment for real estate tax from January 1 to September 30 or three quarters: (2,800,000 x 3/4) 2,400,000 Escrow liability - September 30 450,000 65(AICPA. Adapted) Problem 4-12 (AICI saga ened relia 3021, the Quezon City government issued re coat ce es Sica fended fune 30,2022. On September 1.2021, Zuma Company purch purchase price was reduced by # axe esate year's realestate obligation it instead re expenses at the end of each month by banca eon Pore ese es DE appropriate / ‘OnNovernber 1.2021. theentity pad the frst oftwo equal installers ‘of P600,000 for realty taxes. : What amount of the payment should be recorded as a debit to real estate taxes payable? A b. 400,000 . 500,000 d. 600,000 Solution 4-12 Answer ‘Monthly realty taxes (610,000 /6) 100,000 Journal entries Sept.1 Land (100,000 x2) 200,000 Taxes payable 200,000 Accrued taxes for the months ‘of July and August capitalized as cost of land. Sept.30 Taxes (for September) 100,000 Taxes payable 100,000 Oct. 31. Taxes (for October) 100,000 Taxes payable 100,000 Nov.1 Taxes payable 400,000 Taxes 200,000 Cash 600,000 ‘The payment is charged first to taxes payable and the balance to expense. 66 CHAPTER 5 PROVISION AND CONTINGENT LIABILITY problem 5-1 (IFRS) i . oh ——— Jriga Company provided the following data or the CUT Amount owing to another entity for services rendered ‘during December 300,000 Estimated long service leave owing to employees in respect of past services Estimated cOst of relocating an employee from head ‘office 0 a branch in another city and the employee will physically relocate extyear 71-0 (oy. 400,000 Estimated cost of overhauling machine every 5 years 150,000 What amount should be recognized as provi 1,200,000 = 1,300,000 4 1,600,000 7 1,750,000 \\.200,000 vat current year-end? Solution 5-4 Answer a Long term service leave 200,000 A provision isa present obligation that is uncertain in amount or (Giming. The present obligation must be both probable and micasurable The amount owing to another entity is a present abligation but technically itis not ¢ provision because the amount is certain. OF course, itis an acerued liability. The estimated cost of relocating the employee is a future cost because itis o be incurred next year. The estimated cost of overhaiil is not a provision because there is ‘no present obligation, The entity may decide to sell the machine or ot to repair it 67Problem 5-2 (IFRS) During the current year, Odyssey Company'is the defendantina patent infringement tawsut The en's awyers believe there 3076 chance thatthe court will dismiss the eascand teetitywilineur no outTowor economic benefits. PTE ahewne However, ifthe court rules in fvor oftheclaimant te lawyers believe that there isa 20% chance that the entity will be required to pay damages (of P200,000 and an 80% chance thatthe entity wil be equited f0 pay damages of P100,000. Other outcomes arc unlikely Thecourtis expected oruleinIate Decemberof next yest Thereis no indice that the claimant will: settleout of court. obabilty-weighted expected cash .flect the uncertainties in the cash A T%riskadjuiiment factor to the p flowsis considered appropriate tore flow estimates. > Anappropriatcdiscountrateis 5% per year The present value of | at 5% for one period is 0.95. What amount should be reported as provision for lawsuit? a. 100,000 b. 84,000 ©. 89.880 d. 85,386 Solution 3-2 Answer d ‘Weighted probabilities: 20% x 200,000 x 70% 28,000 80% x 100,000 x 70% 56,000 Weighted cash flows 84,000 Multiply by risk adjustment factor (100% ~ 7%) 107 ‘Adjusted cash flows 89,880 Multiply by PY of 1 at 5% for one period 95 Present value of eash flows 85,386 68 Problem §-3 (IFRS) any is the defendant ina breach of During the current year, Libya Comps fe fatent lawsuit, The lawyers blieve there is an $07 chance thatthe outflow of benefits Court will nat dismiss the case and the entity will incur ot Ifthe court rules in favor of the claimant, the lawyers believe that there is 4 60% chance that the entity will be required to pay damages of 2,000,000 and a 40% chance that the entity will be required to pay damages of P1,000,000, Other amounts of damages are unlikely. ‘The courts expected to nule in late December next year. There is no indication that theclaimant will settle out of court. ‘A Métisk adjustment factor tothe cash flows s considered appropriate to reflect the uncertuinties in the cash flowestimates, 19 ‘An appropriate discount rate is 10% peryear. The present value of 1 at 10% for one period is 691.) What amount should be reported as provision at current year-end? a, 1,280,000 b. 1,369,600 e. 1,500,000 d. 1,246,336 Solution 5-3 Answer d Weighted probabilities: 60% x 2,000,000 x 80% 40% x 1,000,000 x 80% Expected cash flows ‘Multiply by risk adjustment factor (100% + 7%) Adjusted cash flows Multiply by PV of 1 at 10% for one period Present value of cash flows 69ie oplem 5-6 (AICPA Adapted) “ involved ina tax ar, Beal Company EF ay advisor believed Problem 3-4 (AICPA Adapted) During the current year, Man fred Company guarantecd 2.5 lier’s: During the current ys © car, Man ypany: guaranteed 2 supp! during the npany Ue y was notified see with the BIR. On December 3}, er a ietiin unfavorable outcome ves prabeb Ie and a reasonable P500,000 loan from a bank, On Octol that the supplier had defaulted on the loan protection, Counsel believed that the entity woul ima pay P250,000 under the guarantee. ‘After the cul Teccived an he entity entered into a hat the entity coved What amount of acerued liabil re of additional taxes Was, went year financial statement id accepted a BIR settlement of ity'should have “fied for bankruptcy an probably have C0 c ts were issued, the entity ifrer of P550,000. As aresult of the supplier's bankruptey. been reported on contract in Decemberto retool its machines so ti accept parts from other suppliers, Retaoling costs are’ estimated to December 31? be P300,000. , 2. 650,000 What amount should be reported as liability at current year-end? b. 550,000 a, 250,000 5 200,008 pb. $50,000 g eso Solution 5-6 Answer e | oo ‘The reasonable estimate of P500,000 is recorded. The accepted BIR . oiler is not recorded because it was made after the statements are fesued, Ince next year, when the BIR settlentent offer of P'50,000 is Solution 5-4 Answer @ “The guarantee shouldbe accrued a5.a provision because the ossis _ssued. Inthe net nal ibility of 750.000 shall be probabteand the amount can bereasonably estimated. accep, nadia ibilty of 3000 shal be reoeeize 3 Problem $-7 (TAA) Problem 5-5 (AICPA Adapted) On February 5, 2022, an employee filed a 2,000,000 lawsuit Nia Company is involved in litigation regarding faulty product sold in On Febru pa or aamages seed wher onc of Stel s a prior year. The enfity haseonsulted with an attorney‘and determined sett axploded on December 2, 2021. that it ispossible that the entity may losethe case. Thi legal counsel believed the entity would probably lose the lawsuit The attorney estimated that thereisa40%chanccof losing, Ifthisis the and estimated the loss to be P'300,000. a ese estimated that the aount ‘of any payment would be The employee offered 19 sete the lawsuit out ofeourt for P900,000 ogre Celt. a but the entity did not agree to the settlement, What is the required journal entry 28 a result of this litigation? Qndecemer 2021, what amount should be reported a8 ability Pa. Debitttigaion expense and credit litigation ibility P5,000,000. suit b. Nojournal eniry’s required. ¢. Debit litigation expense and credit litigation liability P2.000,000. a. 2,000,008 it lien d. Debit litigation expense and credit litigation liability P3,000,000. b, 1,000,000 e. "900,000 500,000 Solution 5-7 Answer b ‘The possible loss is only disclosed as a contingent liability sinee the Solution 5-5 Answerd eet : 7 ; probability of lossis 40%. The probability of loss sho Te loss is accrued as a provision because it is probable and the Sivajnordertobe aceredas poy as cape amount canbe reasonably estimated n 70Problem 5-8 (AICPA Adapted) On March 1, 2022, a suit was filed against Dean Company for patent ‘nffingement.Dean’s ee etic anuntvorsblcowcomets probable and estimated that Dean willave to pay’ between P850,000 and P900,000 in damages. However, Dean's legal counsel is of the opinion that P600,000 is a betterestimate than any than otheramountin the range, The imation was unchanged when he Decernber 31,2022 financial statements were released on February 15,2023. \Whatamount should be accrued as liability on December 31,2022in connection withthissuit? a. 900.000 b, 600,000 c. 500,000 a 0 Solution 3-8 Answer d Accrued liability ~ best est Problem 5-9 (AICPA Adapted) + November 5,202, a Dunn Company truck was inan accident via anauto driven by Bell. Dunn received notice on January 15, 3033 of 2 lawsuit for P700,000 damages for pepsonal injuries suffered by Bell. 12 = 320— ‘Theentity'scounsel believed itis probable that Bell willbe,awarded an estimated amount in the range between P200,000 and P450,000, and Tiability than any other noamount isa better estimate of potenti mount because each point in the rag is as likely as any other. ‘The 2022 finaneial statements were issued on March 1, 2023. What amouat of loss should be accrued on December 31, 20222 a. 450,000 b, 200,000 c. 325,000 a. 0 Solution 5-9 Answer € Midpoint of therange (200,000 + 450,000/2) n ng site thathas now sme Company has long ownet ufacturing si ow Pree coord to be contaminated with ionic WA The entity boon fice edged its responsibilty fo the contaminato™- A initial clean up feasibility study has shown that 309,000 to clean up the toxie waste. .ed_ for patent During the-current year, the entity has been su Pitinsement and lost the case. A preliminary judgment of P300,000 Nas issued and is under appeal. nig? The entity’sattorneys agree that it is lose this appeal What amount of provision should be accrued as liability? a. 500,000 b. 800,000 c. 300,000 a 0 Solution 5-10 Answer b Accrued liability (500,000 + 300,000) Problem S-11 (IAA) Winter omy ay sheng sd frliness conse to loa eient 28 result of negligence on the entity's partin permitting the local residents Ha iemdsohiphly toxtechencals from it ae ieee Theentiy’s lawyer stated that itis probable thar the entity would I thesutand he efiind Kale focajedgmentcosting he enlty ‘orywhere from P1,200,000 to P6,000,000. However, th the most probable cost is P3,600.000. se ‘What amount should be 4gerued and-diselosed? «teat tee aconagny of 300.80 P6,000,000. ¢ a contingency of P1,200,000 to Solution 3-1) Answer b I cost at least fee probable that the entity will 73Problem $-12 (AICPA Adapted) On November 25, 2022, an explasion occurred ata plant causing extensive property dantage to azea buildings 10, 2093, claims had been asserted against the ent ‘The management and counsel conclucted that itis Pro entity would be responsible for damages, and that P3: reasonable estimate ofthe liabili jras aP500,000 Rex’s P10,000,000 comprehensive public liability policy! Petal stements were sued on March 3, ex Company By Marcle able that the 500,000 isa 1. What amount afloss from lawsuit should bereported fr 2022? a. 3,500,000 b, 3,000,000 «$00,000 a. 0 be reported on 2, What ainount of liability from lawsuit should December 31,20 a, 3,500,000 b. 3,000,000 c. 500,000 a 0 Sohution 3-12 Question 1 Answer ¢ Question 2 Answer a timate of Viability Extent of liability ~ deductible elause reimbursement asset Insurance ‘The amount oflossis PS00, 000 only because itis the extent of liability of Rex under she compictensive isorance poles, However, the ansoutt of liability 10 be reported is equal to the total estimated amount. PAS 37, paragraph 53, provides that the reimbursement claim shall be__ treated as a separate asset. ree ‘Thearnount of loss may be presented net of the amount reeognized fora reimbursement. wees "4 ————_ °° © jem $-13 (AICPA Adapted) 022. Vienna Company 9 On 290,000 inconncetion with akawsuit. The: Eas efendant and itis expected that the appeal Proc completed by the end of 20: it i ‘ll be sattomey believed that iis highly probable that anaward wi " eld om appeal ut that the judgment may be reduc ed by 40%. Zone hat amount should be eported as qfeceivable’on December 31, Prabl juds tof (Op Novernber 1, 2 wwasawarded augment of {sion is being ree ess will be 2022? a. 1,500,000 , 600,000 hy © 900,000 LY . d 0 \ Solution 5-13 Answer d “The contingent assets only diselosed when probable and measurable. ‘The asset and related gain are recognized only when realized Problem 5-14 (AICPA Adapted) . Caso Company filed suit against Wayne Company seeking PI 900,000 damages for patent infringement. A court verdict in November 2022 awarded Caso P1.500,000 in damages, but ‘Wayne's appeal isnot expected to be decided before 2023. ‘Caso’s counsel believed it is probable that Caso will be successful against Wayne for an estimated amount in the range between P800,000 and PI.1.00,000, with P1.000,000 considered the most likely amount. What amount should Caso record as (income from the lawstit for the yeur ended December 31, 2022? —— a 1,500,000 b. 1i0n000 > «. 1.000000 # a. 0 Solution 3-14 Answer d A contingent asset and the related contingent gain are disclosed only where the inflow of economic benefitsis probable. 75(4 >> Problem 5-15 (AICPA Adapted) est Company seeking During 2022, Smith Company filed suitagainst Wes ce damages for patent infringement, OnDecember 3 2022, Smiths egal counsel believed that it was probable that Sri ule stores against West for an estimated amount of P1500. was awarded P1,000,000 and On March 1, 2023, Smith Company’ ig were received full payment thereof, The 2022 financial taremen e February 1,2023 How should the award be reported of1 December 31,20" a. Asareceivable and revenue of P1,000,000.. ay ib Asareceivable and deferred revenue of PLOODO- ¢. Asa disclosure ofa contingentasset ofP|,000 0) a fsa disclosure ofa contingent asetof 1.500.000. 22) Solution 5-15 Answer d . ‘ : < mtingentasetsdizslosed only Sino: thecae is setied on Maes 3 fierihe fsuance of te 2022 financial statements on February, Hie nun of PI.S0,000 shal be dselosed Problem 5-16 (AICPA Adapted) During the iter part the yea Haze Company wona litigation award a a ich was tripled 0 P4.500,000 co include punitive, damages. The defendant, who | ‘financially’ stable, has appealed only’ the ,000,000puntive damages vif “The emt was awarded 5,000,000 anunrcated siti filed, wich aa es by he defendant Couns is unable estimate the utoome ofthese appeal. What anaount shouldbe reported as pretax gain forthe year? a. 1,500,000 3%. 4'500,000 5.000000 & 91500.000 Solution 16 Answer a ‘AgainofPI,500,000 should be reported. However, the remainder of P3,000,000 is only di the oafuntas pyested iesadamute, 16 Problem 5-17 (AICPA Adap' ted) -Tone Company isthe defendant in lawsuit filed by Witt in 2021 disputing the validity of copyright held by Tone. On December 31,2021, Tone determined that Witt would probably be successful against Tone foran cstimated amount o 000. ‘Appropriately, a P2,000,000 loss was acerued by a charue (0 income forthe year ended December 31; 2021. ‘On December 31, 2022, Tone and Witt agreed to a settlement providing for cash payment of P1,250,000'by Tone to Witt, and transfer of Tone’s copyright to Witt.” ‘The carying amount of the copyright on Tone’s accounting records ‘was P250,000 on December 31, 2022. What would be the effect of the settlementon Tone's ineome before tax in 2022? a a, 750,000 increase BEN b. 750,000 decrease ¢. $00,000" increase 4. 500,000 decrease Solution 5-17 Answer c ‘Accrued liability on December 31,2021 . Cash settlement on December 31, 2022 Gist 000) Carrying amount of copyright transferred (250,000) - . 500,000 Gain-on settlement in 2022 Journal entry Estimated liability for lawsuit 2,000,000 Cash | 1,250,000 Copyright "250,000 Gain on settlement of lawsuit 500,000 1