Draft income statement of Franco Inc.

showed profit of P100,000 before considering the following:

(1) Closing inventory includes goods costing P20,000 which are expected to realize P19,000.
(2) A customer has taken legal action for damages of P50,000 against Franco. The lawyer of Franco has
advised the customer that he has a 25% chance of success.
(3) After the end of the reporting period, a vehicle was damaged in an accident. The carrying amount of
the vehicle was P6,000. It was not insured.
(4) Franco has sued one of its competitors for P60,000. The chances Franco winning the case are 75%.
The outcome will be known in three months.

What is the correct profit after considering the foregoing adjustments?

a.
P49,000
b.
P159,000
c.
P103,000
d.
P99,000
Question text
Deferred tax assets and liabilities shall be classified on the Statement of Financial Position as
a.
Partly current and partly noncurrent
b.
Current
c.
Part of equity
d.
Noncurrent
Question text
On December 31, 2020, Tigreal Company was involved in a tax dispute with BIR. Tigreal’s tax counsel
believed that an unfavorable outcome was probable and a reasonable estimate of additional taxes was
P275,000, as much as P425,000. After the 2020 financial statements were issued, Tigreal accepted the
BIR settlement offer of P325,000. What amount of additional taxes should have been accrued in 2020?
(nakalimot sa answer lol idk, di na mao haha)
a.
P -0-
b.
P425,000
c.
P275,000
d.
P325,000
Question text
The periodic unwinding of the discount in relation to decommissioning liability shall be recognized
a.
In profit or loss as depreciation.
b.
Either in P/L as a finance cost or as part of the carrying amount of the related asset.
c.
As part of the carrying amount of the related asset.
d.
In profit or loss as a finance cost as it occurs.
Question text
Use the following information for the next two items
The following accounts are found in the post-closing trial balance of Esmeralda Company, an SME, on
June 30, 2020:
Account title Credit Balance
Accounts payable P1,730,000
Accrued expenses 450,000
Notes payable 1,000,000
Mortgage payable P2,500,000

Additional information:
The notes payable accounts consist of two notes of P500,000 each. One note is due on September 30,
2020 and the other is due on November 30, 2021
The mortgage payable is payable in semi-annual installment of P50,000 each plus interest. The next
payment is due on October 31, 2020. Interest has been properly accrued and is included in accrued
expenses.

P2,780,000
1. The total current liabilities of East Company as of June 30, 2020 is
P2,900,000
2. The total noncurrent liabilities of East Company as of June 30, 2020 is
Question 6
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A court case decided on 21 December 2020 awarded damages against Pylon. The judge has announced
that the amount of damages will be set at a future date, expected to be in March 2017. Pylon has
received advice form its lawyers that the amount of the damages could be anything between P20,000
and P7,000,000. As of December 31, 2020, how much should be recognized in the statement of financial
position regarding this court case?
a.
P -0-
b.
P20,000
c.
P3,510,000
d.
P7,000,000
Clear my choice
Question text
During current year, Minotaur Company won a litigation award for P2,000,000 which was tripled to
P6,000,000 to include punitive damages. The defendant, who is financially stable, has appealed only the
P4,000,000 punitive damages. Minotaur was awarded P1,000,000 in an unrelated suit it files, which is
being appealed by the defendant. Counsel is unable to estimate the outcome of the appeals. In its
current year income statement, Minotaur should report what amount of pre-tax gain?
a.
P6,000,000
b.
P2,000,000
c.
P3,000,000
d.
P4,000,000
Question text
In an effort to increase sales, Gatotkaca Company inaugurated a sales promotion campaign on June 30,
2020, whereby Gatotcaka placed a coupon in each package of razor blades sold, the coupons being
redeemable for a premium. Each premium costs Gatotkaca P.50 and 5 coupons must be presented by a
customer to receive a premium. Gatotkaca estimated that only 60 percent of the coupons issued will be
redeemed. For the six months ended December 31, 2020, the following information is available:

Packages of razor blades sold 400,000

Premiums purchased 30,000
Coupons redeemed 100,000

What is the estimated liability for premium claims outstanding at December 31, 2020?

a.
P14,000
b.
P10,000
c.
P24,000
d.
P18,000
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Loser Company is being sued for illness caused to local residents as a result of negligence on the
company’s part in permitting the local residents to be exposed to highly toxic chemicals from its plant.
Loser’s lawyer states that it is probable that Loser will lose the suit and be found liable for a judgment
costing Loser anywhere form P1,200,000 to P6,000,000. However, the lawyer states that the most
probable cost is P3,600,000. As a result of the above facts, Loser should accrue
a.
a loss contingency of P3,600,000 and not disclose any additional contingency.
b.
a loss contingency of P3,600,000 and disclose an additional contingency of up to P2,400,000.
c.
a loss contingency of P1,200,000 and disclose an additional contingency of up to P4,800,000.
d.
no loss contingency but disclose a contingency of P1,200,000 to P6,000,000.
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Lolita Company has purchased land that will serve as a temporary repository for nuclear waste. The site
will function for 30 years, at which time Lolita will be required to completely decontaminate the land.
The purchase price for the land is P500,000. Lolita knows that the land will have to be decontaminated
but isn’t sure which of several possible approaches will be sufficient to reach the level of
decontamination necessary by law. The costs of each approach will be the one used, follow:

Approach 1 – 10% probability of total decontamination cost of P5,000 at the end of 30 years.
Approach 2 – 20% probability of total decontamination cost of P100,000 at the end of 30 years.
Approach 3 – 70% probability of total decontamination cost of P1,500,000 at the end of 30 years.

Assuming that the appropriate interest rate is 8%, the cost of the nuclear waste repository site is

a.
P156,072
b.
P500,000
c.
P659,500
d.
P606,408
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Khufra Corporation gives warranties at the time of sale to purchasers of its product. Under the terms of
the contract for sale the manufacturer undertakes to make good, by repair or replacement,
manufacturing defects that become apparent within one year from the date of sale. On the basis of
experience, it is probable (i.e. more likely than not) that there will be some claims under the warranties.
Sales of P10 million were made evenly throughout 2020.
At 31 December 2020 the expenditures for warranty repairs and replacements for the product sold in
2020 are expected to be made 50 percent in 2020 and 50 percent in 2021. Assume for simplicity that all
the 2021 outflows of economic benefits related to the warranty repairs and replacements take place on
30 June 2021.
Experience indicates that 95 percent of products sold require no warranty repairs; 3 percent of products
sold require minor repairs costing 10 percent of the sale price; and 2 percent of products sold require
major repairs or replacement costing 90 percent of sale price.
The entity has no reason to believe future warranty claims will be different from its experience.
At 31 December 2020 the appropriate discount factor for cash flows expected to occur on 30 June 2021
is 0.95238. Furthermore, an appropriate risk adjustment factor to reflect the uncertainties in the cash
flow estimates is an increment of 6 percent to the probability-weighted expected cash flows.
At 31 December 2020 the entity recognizes a warranty provision measured at:

a.
P113,300
b.
P106,000
c.
P222,600
d.
P210,000
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Carmilla is a company involved in the electricity generating industry. It operates some nuclear power
stations for which environmental clean-up costs can be a large item of expenditure. The company
operates in some countries where environmental costs have to be incurred as they are written into the
licensing agreement, and in other countries where they are not, a legal requirement. The details of a
recent contract Carmilla entered into are:
A new nuclear power stations has been built at a cost of P200 million and was brought into commission
on October 1, 2019. The license to produce electricity at this station is for 10 years. This is also the
estimated economic life of the power station. The terms of the license require the power station to be
demolished at the end of the license. It also requires that the spent nuclear fuel rods (a waste product)
have to be buried deep in the cost of cleaning up any contamination leaks that may occur from the
water-cooling system that surrounds the fuel rods when they are in use.
Carmina estimates that the cost of the demolition of the power station and the fuel rod ‘sealing’
operation will be P180 million in ten years’ time. The present value of these costs at an appropriate
discount rate is P120 million. From past experience there is a 30% chance of a contaminating water leak
occurring in any 12-month period. The cost of cleaning up a leak varies between P20 million and P40
million depending on the severity of the contamination. No contamination from water leakage occurred
in the year to September 30, 2020.

The carrying amount of the power station at September 30, 2020 should be

a.
P315 million
b.
P288 million
c.
P180 million
d.
P369 million
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A liability shall be classified as a current liability when it satisfies any of the following criteria, except
a.
It is expected to be settled in the entity’s normal operating cycle
b.
The entity has an unconditional right to defer settlement of the liability for at least twelve months after
the end of the reporting period.
c.
It is due to be settled within twelve months after the end of the reporting period
d.
It is primarily held for the purpose of being traded
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Use the following information for the next two items
Alice company offers a cash rebate of P1 on each P4 package of batteries sold during 2020. Historically,
10% of customers mail in the rebate form. During 2020, 6,000,000 packages of batteries are sold, and
210,000 P1 rebates are mailed customers.
P600,000
1. What is the rebate expense shown on the 2020 financial statements?
P390,000
2. What is the rebate liability shown on the 2020 financial statements?
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On January 2, 2018, Johnson Company introduced a new line of products that carry a three-year
warranty against factory defects. Estimated warranty costs related to peso sales are as follows: 1% of
sales in the year of sale, 2% in the year after sales and 3% in the second year after sale.
Sales and actual warranty expenditures for the period 2018 to 2020 were as follows:

Actual Warranty
Sales
Expenditures
2018 P200,000 P1,500
2019 500,000 7,500
2020 700,000 22,500
Total P1,400,000 P31,500

What amount should Johnson report as warranty expense in 2020?

a.
P42,000
 b.
P52,500
c.
P23,000
d.
P22,500
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In May 2020, Baxia Company relocated an employee from the company’s head office to an office in
another city. As of June 30, 2020, the company’s period end, the relocation costs are estimated as
follows:
Cost of shipping goods P30,000
Airfare 60,000
Temporary accommodation costs for May and June 80,000
Temporary accommodation costs for July and August 90,000
Reimbursement for lease break cost paid in July. The lease was terminated
20,000
May.
Reimbursement for costs of living increases for the period
120,000
May 2020 to April 2021
Total P400,000

How much is the provision for relocation costs as of June 30, 2016?

a.
P400,000
b.
P190,000
c.
P210,000
d.
P280,000
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Use the following information for the next three questions.
Hylos Company offers a coffee mug as a premium for every ten 50-cent candy bar wrappers presented
by customers together with P1.00. The purchase price of each mug to the company is 90 cents; in
addition, it costs 60 cents to mail each mug. The results of the premium plan for the years 2019 and
2020 are as follows:
2019 2020
Coffee mugs purchased 480,000 400,00
Candy bars sold 3,750,000 4,500,000
Wrappers redeemed 1,900,000 2,800,000
2019 wrappers expected to be redeemed in 2020 1,300,000
2020 wrappers expected to be redeemed in 2021 1,800,000

1. The premium expense for the year ended December 31, 2020 is
2. The inventory of premium mugs as of December 31, 2020 is
3. The estimated liability for premiums as of December 31, 2020 is

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The amount recognized as a provision should be the best estimate of the expenditure required to settle
the present obligation at the end of the reporting period, that is the amount that an enterprise would
rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party.
Which of the following is an incorrect application of this principle?
a.
Where there is a continuous range of possible outcomes, and each point in that range is as likely as any
other, the mid-point of the range is used.
b.
Provisions for one-off events (restructuring environmental clean-up, settlement of a lawsuit) are
measured at the most likely amount.
c.
The provision is measured after tax.
d.
Provisions for large populations of events (warranties, customer refunds) are measured at a probability-
weighted expected value.
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”Provisions” under PAS 37 are liabilities of
a.
uncertain timing or amount
b.
certain timing but uncertain amount
c.
certain timing or amount
d.
uncertain timing but certain amount
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During 2020, Ruby Company guaranteed a supplier’s P750,000 loan from bank. On October 1, 2020,
Ruby was notified that the supplier had defaulted on the loan and filed for bankruptcy protection.
Counsel believes Ruby will probably have to pay between P375,000 and P675,000 under its guarantee.
As a result of the supplier’s bankruptcy, Ruby entered into a contract in December 2020 to retool its
machines so that Ruby could accept parts from other suppliers. Retooling costs are estimated to be
P450,000. What amount should Ruby report as a liability in its December 31, 2020, statement of
financial position?
a.
P675,000
b.
P375,000
c.
P525,000
 d.
P975,000
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Burger Company, manufacturer of cleaning products, is preparing annual financial statements at
December 31, 2020. Because of a recently proven health hazard in one of its cleaning products, the
government has clearly indicated its intention of having Burger recall all cans of this paint sold in the last
three months. The management of Burger estimates that this recall would cost P5,800,000. What
accounting recognition, if any, should be accorded this situation?
a.
Expense of P5,800,000 and retained earnings restriction of P5,800,000
b.
No recognition.
c.
Expense of P5,800,000 and liability of P5,800,000
d.
Note disclosure only.