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ACC222 /
Introduction to Liabilities, Premium Liability, Warranty Liability, Provisions and Bonds Payable
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Midterm Exam

Started on Wednesday, 21 April 2021, 3:37 PM

State Finished
Completed on Wednesday, 21 April 2021, 4:32 PM
Time taken 55 mins 17 secs
Marks 18.00/20.00
Grade 9.00 out of 10.00 (90%)

Question 1
Emong Candy Company offers a coffee mug as a premium
for every ten 50-cent candy bar wrappers presented by
Complete
customers together with
P1.00. The purchase price of each mug to the company is 90 cents; in addition
it costs 60 cents
Mark 1.00 out of
to mail each mug. The results of the premium plans for the
years 2017 and 2018 are as follows.
1.00

The estimated liability for premiums as of December

31, 2018 is

Answer: 90000
Question 2
Dawson Company manufactures television components and sells
them with a 6-month warranty under which defective
Complete
components will be replaced
without charge.
Mark 1.00 out of
1.00 On January 1, 2020, the warranty liability had a balance of
P620,000.
By June 30, 2020, this balance had been reduced to P120,400
by debits for estimated net cost of components returned
that had been sold in
2019.
The entity started out in 2020 expecting 7% of sales to be
returned. However, due to the introduction of new models
during the year, this
estimated percentage of returns was increased to 10% on May 1.

It is assumed that no components sold during a given month

are returned 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 likely

pattern of sales returns 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 30%

Second 20%

Third 20%

Fourth through sixth - 10% each month 30%

  100%

Gross sales of components were as follows for the first six

months of 2020:

Month AmountMonth Amount

January 4,200,000April 3,250,000

February 4,700,000May 2,400,000

March 3,900,000June 1,900,000

The warranty also covers the payment of freight cost on

defective components returned and on the new components sent
out as
replacements.

The freight cost runs approximately 5% of the sales price of

the components returned.

The manufacturing cost of the components is roughly 70% of

sales price, and the salvage value of returned components
averages 10% of their
sales price.

Returned components on hand on January 1, 2020, were thus

valued in inventory at 10% of their original sales price.

Required:
Determine the increase in warranty liability on June 30, 2020.

Answer: 301353

Question 3
Candelaria Company’s
president gets an annual bonus of 10% of net income after bonus and income tax.
Assume the tax
Complete
rate of 30% and the correct income before bonus and tax is
P9,600,000. How much is the bonus payable to the president?
Mark 1.00 out of
1.00

Answer: 628000
Question 4
Toy Company provided the following facts regarding pending
litigation on December 31, 2020:
Complete
* The entity is defending against a first lawsuit and
believes there is a 51% chance it will lose in court. The entity estimates
Mark 1.00 out of
1.00 that
damages will be P1,000,000.

* The entity is defending against a second lawsuit for which

management believes it is virtually certain to lose in court. If it
loses the
lawsuit, management estimates damages will fall somewhere in the range of
P3,000,000 to P5,000,000 with each
amount in that range equally likely to
occur.

*The entity is defending against a third lawsuit but the

relevant loss will only occur far into the future. The present values
of the
endpoints of the range are P1,500,000 and P2,500,000. The management believes the effects of time value of
money
on these amounts are material but also believes the timing of these amounts is
uncertain.

* The entity is defending against a fourth lawsuit and believes

there is only a 25% chance it will lose in court. If the entity
loses, management believes damages will fall
somewhere in the range of P3,000,000 to P4,000,000 with each amount in
that
range equally likely to occur.

Answer: 7000000

Question 5
Dawson Company manufactures television components and sells
them with a 6-month warranty under which defective
Complete
components will be replaced
without charge.
Mark 0.00 out of
1.00 On January 1, 2020, the warranty liability had a balance of
P620,000.

By June 30, 2020, this balance had been reduced to P120,400

by debits for estimated net cost of components returned
that had been sold in
2019.

The entity started out in 2020 expecting 7% of sales to be

returned. However, due to the introduction of new models
during the year, this
estimated percentage of returns was increased to 10% on May 1.

It is assumed that no components sold during a given month

are returned 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 likely

pattern of sales returns 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 30%

Second 20%

Third 20%

Fourth through sixth - 10% each month 30%

  100%
Gross sales of components were as follows for the first six
months of 2020:

Month AmountMonth Amount

January 4,200,000April 3,250,000

February 4,700,000May 2,400,000

March 3,900,000June 1,900,000

The warranty also covers the payment of freight cost on

defective components returned and on the new components sent
out as
replacements.

The freight cost runs approximately 5% of the sales price of

the components returned.

The manufacturing cost of the components is roughly 70% of

sales price, and the salvage value of returned components
averages 10% of their
sales price.

Returned components on hand on January 1, 2020, were thus

valued in inventory at 10% of their original sales price.

Required:

1. Determine the estimated sales returns subsequent to June

30, 2020.

Answer: 168000
Question 6
Zomboss Corporation constructed a
nuclear plant at a cost of P110 million and started operating it on January 1,
2008.
Complete
The plant has a useful life of 40 years. Zomboss is required to
decommission the plant at the end of its useful life at an
Mark 0.00 out of
estimated amount of
P80 million. The risk-adjusted rate is 5 percent. The entity’s financial year
ends on December 31.
1.00
On December 31, 2017, the discount
rate has not changed. However, Zomboss estimates that, as a result of
technological
advances, the net present value of the decommissioning liability
has decreased by P8 million.

The depreciation amount to be

reported for the year ended December 31, 2018 is (in millions)

Answer: 2.834

Question 7
Troy Company decided on November
1, 2020 to restructure the entity's operations.
Complete
*Mindanao Branch would be closed
down November 30, 2020 to concentrate on Manila operations.
Mark 1.00 out of
1.00 *200 employees working in
Mindanao Branch would be retrenched on November 30, 2020, and would be paid
their
accumulated entitlements plus three months' wages.

 *The remaining 50 employees working in

Mindanao Branch would be transferred to Manila, which would continue
operating.

*Five executives would be

retrenched on December 31, 2020, and would be paid their accumulated
entitlements plus
three months' wages.

*The 200 retrenched employees

have left and their accumulated entitlements have been paid. However, an amount
of
P1,500,000, representing a portion of the three months' wages for the retrenched
employees, has still not been paid.

 *Costs of P400,000 were expected to be

incurred in transferring the 50 employees to their new work in Manila. The
transfer is planned for January 15, 2021.

*Four of the five executives who

have been retrenched have had their accumulated entitlements paid, including
the three
months' wages. However, one remains in order to complete
administrative tasks relating to the closure of Mindanao
Branch and the
transfer of staff to Manila. This executive is expected to stay until January
31, 2021. His salary for January
will be P50,000 and his retrenchment package
will be P200,000, all of which will be paid on the day he leaves. He
estimates
that he would spend 60% of his time administering the closure of Mindanao
Branch, 30% on administering the
transfer of staff to Manila, and the remaining
10% on general administration.

What total amount should be recognized as restructuring provision on December 31, 2020?

Answer: 1730000
Question 8
Cavalier Company provided the following information on December
31, 2020:
Complete
Accounts
payable                                                           6,500,000
Mark 1.00 out of
1.00 Notes
payable - bank                                                     8,000,000

Interest
payable                                                                150,000

Mortgage
note payable - 10%                                      2,000,000

Bonds
payable                                                               4,000,000

 
* Bank notes payable include two separate notes payable to
First Bank.

A P3,000,000, 10% note issued March 1, 2019, payable on

demand. Interest is payable every six months.

A one-year, P5,000,000, 11% note issued January 2, 2020. On

December 31, 2020, the entity negotiated a written
agreement with First Bank to
replace the note with a 2-year, P5,000,000, 10% note to be issued January 2,
2021.

*The 10% mortgage note was issued October 1, 2019 with a

term of 10 years.

Terms of the note give the holder the right to demand

immediate payment if the entity fails to make a monthly interest
payment within
10 days of the date the payment is due.

On December 31, 2020, the entity is three months behind in

paying the required interest payment.

*The bonds payable are 10-year, 8% bonds, issued June 30,

2011. Interest is payable semiannually on June 30 and
December 31.

Required:

Compute the total current liabilities on December 31, 2020.

Answer: 15650000
Question 9
Dawson Company manufactures television components and sells
them with a 6-month warranty under which defective
Complete
components will be replaced
without charge.
Mark 1.00 out of
1.00 On January 1, 2020, the warranty liability had a balance of
P620,000.

By June 30, 2020, this balance had been reduced to P120,400

by debits for estimated net cost of components returned
that had been sold in
2019.

The entity started out in 2020 expecting 7% of sales to be

returned. However, due to the introduction of new models
during the year, this
estimated percentage of returns was increased to 10% on May 1.

It is assumed that no components sold during a given month

are returned 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 likely

pattern of sales returns 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 30%

Second 20%

Third 20%

Fourth through sixth - 10% each month 30%

  100%

Gross sales of components were as follows for the first six

months of 2020:

Month AmountMonth Amount

January 4,200,000April 3,250,000

February 4,700,000May 2,400,000

March 3,900,000June 1,900,000

The warranty also covers the payment of freight cost on

defective components returned and on the new components sent
out as
replacements.

The freight cost runs approximately 5% of the sales price of

the components returned.

The manufacturing cost of the components is roughly 70% of

sales price, and the salvage value of returned components
averages 10% of their
sales price.

Returned components on hand on January 1, 2020, were thus

valued in inventory at 10% of their original sales price.

Required:

Determine the required estimated warranty liability on

June 30, 2020.

Answer: 421753

Question 10
On June 1, 2020, Jefferson Controls
Inc., issued a P12,000,000 of 10 percent bonds at P10,348,080. Interest is
payable
Complete
semiannually on May 31 and November 30. The bonds mature in 15 years.
Jefferson Controls, Inc. is a calendar year
Mark 1.00 out of
corporation.
1.00
Determine the carrying amount of the
bonds as of December 31, 2020.

Answer: 10372655
Question 11
Case Corporation had
accounts payable of P5,000,000 recorded in the general ledger as of December
31, 2020 before
Complete
consideration of the following unrecorded transactions:
Mark 1.00 out of
1.00

In December 31, 2020

statement of financial position, the accounts payable should be reported in the
amount of

Answer: 6050000

Question 12
Emong Candy Company offers a coffee mug as a premium
for every ten 50-cent candy bar wrappers presented by
Complete
customers together with
P1.00. The purchase price of each mug to the company is 90 cents; in addition
it costs 60 cents
Mark 1.00 out of
to mail each mug. The results of the premium plans for the
years 2017 and 2018 are as follows.

1.00

The premium expense for the year ended December 31,

2018 is

Answer: 165000

Question 13
In 2019, Slimon Corporation began selling a new line
of products that carry a two-year warranty against defects. Based
Complete
upon past
experience with other products, the estimated warranty costs related to peso
sales are as follows:
Mark 1.00 out of
1.00 First
year of warranty                         2%

Second
year warranty                         5%

Sales and actual warranty expenditures for 2019 and

2020 are presented below:

What is the estimated warranty liability at the end of

2020?

Answer: 28500
Question 14
Emong Candy Company offers a coffee mug as a premium
for every ten 50-cent candy bar wrappers presented by
Complete
customers together with
P1.00. The purchase price of each mug to the company is 90 cents; in addition
it costs 60 cents
Mark 1.00 out of
to mail each mug. The results of the premium plans for the
years 2017 and 2018 are as follows.
1.00

The inventory of premium mugs as of December 31, 2018

is

Answer: 369000

Question 15 During the current year, Win Company won a litigation award for P2,000,000 which was tripled to P6,000,000 to include
Complete punitive damages. The defendant, who is financially stable, has appealed only the P4,000,000 punitive damages. Win was
Mark 1.00 out of awarded P1,000,000 in an unrelated suit it filed, which is being appealed by the defendant. Counsel is unable to estimate
1.00 the outcome of the appeals. In its current year income statement, Win should report what amount of pretax gain?

Answer: 2000000

Question 16
On December 31, 2019, Ulster Co.
issued P200,000 of 8% serial bonds, to be repaid in the amount of P40,000 each
year.
Complete
Interest is payable annually on December 31. The bonds were issued to
yield 10% a year. The bond proceeds were
Mark 1.00 out of
P190,280 based on the present values
at December 31, 2019 of the five annual payments. In its December 31, 2020
1.00
statement of financial position, at what amount should Ulster report the
carrying amount of the bonds?

Answer: 153308

Question 17
In May 2020, Chubby Company
relocated an employee from the company’s head office in another city. As of
June 30,
Complete
2020, the company’s period end, the relocation cost are estimated as
follows:
Mark 1.00 out of
1.00 Cost of shipping goods                                                                       P30,000

Airfare                                                                                                  60,000

Temporary accommodation cost for May and June                             80,000

Temporary accommodation cost for July and August                         90,000

Reimbursement for lease break cost paid in July.

The lease was terminated in May.                                                        20,000

Reimbursement for cost of living increases

for the period May 2020 to April 2021.                                             120,000

Total                                                                                                 P400,000

How much is the provision for relocation cost as of June 30, 2020?

Answer: 210000
Question 18
On March 1, 2020, Pyne Furniture Co.
issued P700,000 of 10 percent bonds to yield 8 percent. Interest is payable
Complete
semiannually on February 28 and August 31. The bonds mature in ten years. Pyne
Furniture Co. is a calendar year
Mark 1.00 out of
corporation. The interest expense to be
recognized in 2020 profit or loss is
1.00

Answer: 52925

Question 19
On January 1, 2020, Marimar Company
issued 10,000 of its 12%, P1,000 face value 5-year bonds at 105. Interest on
the
Complete
bonds is payable annually every December 31. In connection with the sale of
these bonds, Marimar paid the following
Mark 1.00 out of expenses:
1.00
Promotion Cost                                                           P100,000

Engraving and printing                                                 400,000

Underwriter’s commissions                                         500,000

Using the straight line method, what

amount should Marimar report as bond interest expense for the year 2020.

Answer: 1300000

Question 20
Dolan Co. pays all
salaried employees on a biweekly basis. Overtime pay, however, is paid in the
next biweekly period.
Complete
Dolan accrues salaries expense only at its December 31
year end. Data relating to salaries earned in December 2020 are as
Mark 1.00 out of
follows:
1.00
·      
Last payroll was
paid on 12/26/20, for the 2-week period ended 12/26/20.

·      
Overtime pay
earned in the 2-week period ended 12/26/20 was P5,000.

·      
Remaining work
days in 2020 were December 29, 30, 31, in which days there was no overtime.

·      
The recurring
biweekly salaries total P90,000.

Assuming a five-day work

week, Dolan should record liability at December 31, 2020 for accrued salaries
of

Answer: 32000

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