Provisions

1) On December 25, 2024, an employee filed a P3,000,000 a lawsuit against Ox Ford Company for
damages suffered when one of Ox Ford’s equipment malfunctioned in August of 2024. The legal
counsel of the company believes that it is probable that Ox Ford will pay the damages raging
between P500,000 to P1,000,000. Each point within the range is as likely as any other. On March
1, 2025, the employee has offered to settle the lawsuit out of court for P900,000 and the company
accepted the offer and settled the amount. The financial statements were authorized to be issued
on March 31, 2025.

How much is the provision that should be recognized as of December 31, 2024?
A. 820,000 B. 900,000 C. 750,000 D. 1,000,000

2) During 2019, Angles company guaranteed a supplier’s P750,000 loan from a bank. On October 1,
2019, Angels was notified that the supplier had defaulted on the loan and filed for bankruptcy
protection. Counsel believes Angels will probably have to pay between P375,000 and P675,000
under its guarantee. As a result of the supplier’s bankruptcy, Angels entered into a contract in
December 2019 to retool its machines to that Angles could accept parts from other suppliers.
Retooling costs are estimated to be P450,000.

What amount should Angels report as a liability in its December 31, 2019, statement of financial
position?
A. 375,000 B. 525,000 C. 675,000 D. 975,000
3) A court case decided on December 31, 2019 awarded damages against Rangers. The judge has
announced that the amount of damages will be set at a future date, expected to be in March 2020.
Ranger has received advice from its lawyer that the amount of the damages could be anything
between P20,000 and P7,000,000.

As of December 31, 2019, how much should be recognized in the statement of financial position
regarding this court case?
A. 20,000 B. 7,000,000 C. 3,510,000 D. 0

4) Ace Company was involved in litigation regarding a faulty product sold in a prior year. The entity
consulted with an attorney and determined that it is possible that it may lose the case. The attorney
estimated that there is a 50% chance of losing. If this is the case, the attorney estimated that the
amount of any payment would be P500,000.

What is the required journal entry as a result of this litigation?

A. Debit Litigation Expense and credit Litigation Liability P500,000.
B. No Journal entry is required but disclosure is necessary.
C. Debit Litigation Expense and credit Litigation Liability P250,000.
 D. No journal entry and disclosure are required.

5) Mill Company sells washing machines that carry a three-year warranty against manufacturer’s
defects. Based on the entity’s experience, warranty costs are estimated at P300 per machine.
During the current year, the entity sold 2,400 washing machines and paid warranty costs of
P170,000. What amount should be reported as warranty expense and warranty liability at year-end?
A. B. C. D.
Warranty expense 550,000 240,000 550,000 720,000
Warranty liability 170,000 550,000 720,000 550,000

6) In 2019, Shiftry Corporation began selling a new line of products that carry a two-year warranty
against defects. Based upon past experience with other products, the estimated warranty costs
related to peso sales are as follows:

First year of warranty 4%

Second year of warranty 6%

Sales and actual expenditures for 2019 and 2020 are presented below:
2018 2019
Sales 500,000 700,000
Actual warranty 15,000 47,000
expenditures

What amount should Shiftry report as its estimated warranty liability at December 31, 2019?
A. 0 B. 16,000 C. 42,000 D. 58,000

7) Pilfering Company introduced in 2017 a new TV model with a two-year warranty against defect.
Pilfering Company estimates the warranty costs at 2% of sales within 12 months following the sales
and 4% in the second 12 months following the sale. Sales and actual warranty costs for the year
ended December 31, 2017 are P3,000,000 and P45,000 respectively.

Pilfering Company should report an estimated warranty liability in its December 31, 2017 balance
sheet is
A. 180,000 B. 150,000 C. 135,000 D. 75,000

8) Xoiswa Company manufactures a product that is packaged and sold. A plate is offered to
customers sending in three wrappers accompanied by a remittance of P10. Data with respect to
the premium offer are summarized below:

9) 2018 2019
Sales 3,600,000 4,200,000
Purchase of premium, P50 per plate 390,000 580,000
 Number of plates distributed as premiums 5,000 9,000
Estimated number of plates to be distributed in next 2,000 3,000
period
Distribution cost P20 per plate

What is the premium expense for 2019?

A. 600,000 B. 400,000 C. 700,000 D. 720,000

Use the following information for the next two (2) questions:
Topsy Company stated a new promotional program. For every 10 box tops returned, customers
received a basketball. The entity estimated that only 60% of the box tops reaching the market would be
redeemed.

Units Amount
Sales of product 100,000 30,000,000
Basketballs purchased 5,500 4,125,000
Basketball distributed 4,000

9What is the premium expense for the year?

A. 4,500,000 B. 1,500,000 C. 4,125,000 D. 7,500,000

10) What is the amount of year-end estimated liability associated with this promotion?
A. 4,125,000 B. 1,500,000 C. 3,000,000 D. 4,500,000

Trade & Other Payables

1. T’challa Company reported the following information on December 31, 2017:

Accounts payable 800,000

Bonds payable, due 2018 3,000,000
Premium on bonds payable 150,000
Deferred tax liability 250,000

The deferred tax liability is not related to an asset for financial reporting purposes and is expected
to reverse in 2018.

What total amount should be reported as current liabilities on December 31, 2017?
A. 3,650,000 B. 4,200,000 C. 3,900,000 D. 3,950,000

2. Erik Killmonger Company reported the following liability account balances on December
31, 2017:
Accounts payable 2,000,000
Bonds payable, due 2018 4,000,000
 Discount on bonds payable 400,000
Deferred tax liability 500,000
Dividend payable due on February 15, 2019 1,000,000
Income tax payable 800,000
Note payable due January 15, 2019 1,200,000

The deferred tax liability is based on temporary differences stemming from different depreciation
method for financial reporting and income tax purpose.

What total amount should be reported as current liabilities on December 31, 2017?
A. 6,400,000 B. 7,200,000 C. 7,400,000 D. 7,600,000

3. Fatima Corporation’s account payable at December 31, 2017, totaled P900,000 before
any necessary year-end adjustments relating to the following transactions:
• On December 27, 2017, Fatima wrote and recorded checks to creditors totaling P350,000
causing an overdraft of P100,000 in Fatima’s bank account at December 31, 2017. The checks
were mailed out on January 10, 2018.
• On December 28, 2017, Fatima purchased and received goods for P200,000, terms 2/10, n/30.
Fatima records purchases and accounts payable at net amount. The invoice was recorded and
paid January 3, 2018.
• Goods shipped FOB destination on December 20, 2017 from a vendor to Fatima were received
January 2, 2018. The invoice cost was P65,000.

At December 31, 2017, what amount should Fatima report as total accounts payable?
A. 1,511,000 C 1,150,000
.
B. 1,446,000 D 1,100,000
.

4. On December 31, 2014, Combustion Company reported inventory and accounts payable
amounting to P2,500,000 and P4,000,000, respectively, before possible adjustment for
the following:

• Goods in transit from a vendor to Combustion on December 31, 2014 with an invoice cost of
P200,000 FOB shipping point was not yet recorded.

• Goods shipped FOB shipping point from a vendor to Combustion was lost in transit. The invoice
cost of P80,000 was not yet recorded.

• Goods shipped FOB shipping point from a vendor to Combustion on December 31, 2014
amounting to P32,000 was recorded and included in the year-end physical count as “goods in
transit”.
• Goods in transit from a vendor to Combustion on December 31, 2014 with an invoice cost of
P40,000 purchased FOB destination was not yet recorded. The goods were received in January
2015.

• Goods with invoice cost of P60,000 was recorded and included in the year-end physical count
as “goods in transit.” It was found out that the goods were shipped from a vendor under FOB
destination.

What is the adjusted accounts payable on December 31, 2014?

A. 4,340,000 B. 4,292,000 C. 4,252,000 D. 4,220,000

5. The profit for 2019 of Dwight Company before any deduction for bonus and income tax
amounted to P2,500,000. Under an incentive compensation plan, the general manager is
entitled to year-end bonus of 10% of the profit before deducting the bonus but after
deducting the income tax. Income tax rate is 30%. The manager’s bonus for 2019 was
A. 169,903 B. 180,412 C. 227,273 D. 163,551

6. On January 1,2017 Precision Company sold appliance service contracts agreeing to repair
appliances for a 2-year period. Precision’s past experience is that, of the total amount
spent for repairs on service contracts, 40% is incurred evenly in the first contract year and
60% evenly in the second contract year. Receipts from service contract sales for the past
two years were P500,000 in 2017 and P600,000 in 2018. All contract sales are made
evenly during the year. What is the correct balance of unearned service contract revenue
as of December 31, 2018?
A. 790,000 B. 630,000 C. 360,000 D. 0

7. On the first day of each month, Denise Company received from a customer an escrow
deposit of P25,000 for real estate tax. The entity recorded the P25,000 in escrow account.
The customer’s real estate tax is P280,000, payable in equal installments of the first day
of each calendar quarter. On January 1, 2019, the balance of the escrow account was
P30,000. On September 30, 2019, what amount should be reported as escrow liability?
A. 15,000 B. 45,000 C. 85,000 D. 115,000

8. Shuri Company reported the following liability balance on December 31, 2017:

12% note payable issued on March 1, 2016, maturing on March 1, 2018 5,000,000
10% note payable issued on October 1, 2016, maturing October 1, 2018 3,000,000
The 2017 financial statements were issued on March 31, 2018. On January 31, 2018, the entire
P5,000,000 balance of the 12% note payable was refinanced through issuance of a long-term
obligation payable lump sum.

Under the loan agreement for the 10% note payable, the entity has the discretion to refinance the
obligation for at least twelve months after December 31, 2017.

What amount of the note should be classified as current on December 31, 2017?
A. 8,000,000 B. 5,000,000 C. 3,000,000 D. 0

9. T’Chaka Company reported the following liabilities on December 31, 2017:

Accounts payable 750,000
Short-term borrowings 400,000
Mortgage payable, current portion P100,000 3,500,000
Bank loan payable, due June 30, 2018 1,000,000

The P1,000,000 bank loan was refinanced with a 5-year loan on January 15, 2018, with the first
principal payment due January 15, 2019. The financial statements were issued February 28, 2018.

What total amount should be reported as current liabilities on December 31, 2017?
A. 1,150,000 B. 2,250,000 C. 1,250,000 D. 850,000

10. The following information pertains to Malabon Company as at September 30, 2022:

• Note payable – bank, P3,500

• Accounts payable arising from purchase of goods, P112,500
• Dividends in arrears on preference shares, not yet declared, P25,000
• Share dividends payable, P20,000
• Income tax payable, P13,400
• Accrued liabilities, P4,200
• Mortgage payable, P225,000
• Customers’ deposit, P8,900
• Reserve for contingencies, P25,000

Based on the above date, what is the total amount of actual liabilities to be reported on the balance
sheet of September 30, 2022?
A. 367,500 B. 297,500 C. 437,500 D. 142,500
 11. The following information pertains to Braves Company issuance of bonds on July 1, 2016.
Face amount – P1,000,000; Term – 10 years; Stated interest rate – 8%; interest payment
dates – July 1 and January 1; Effective yield – 12%.
At 4% At 6%
Present value of an ordinary annuity of P1 for 10 8.11 7.36
periods
Present value of an ordinary annuity of P1 for 20 13.59 11.47
periods
Present value of P1 for 10 periods 0.68 0.56
Present value of P1 for 20 periods 0.46 0.31

At 8% At 12%
Present value of an ordinary annuity of P1 for 10 6.71 6.14
periods
Present value of an ordinary annuity of P1 for 20 9.82 8.51
periods
Present value of P1 for 10 periods 0.46 0.56
Present value of P1 for 20 periods 0.21 0.31

What should be the total issue price of the bonds?

A. 659,600 B. 768,800 C. 1,229,400 D. 1,340,400

12. At the beginning of current year, Glocie issued ten-year bonds with a face amount of
P5,000,000 and stated interest rate of 8% payable annually at every year-end. The bonds
were price to yield 10%

PV of 1 for 10 periods at 10% 0.3855

PV of an ordinary annuity of 1 for 10 periods at 10% 6.1450

What is the issue price of the bonds?

A. 5,000,000 B. 1,927,500 C. 5,614,500 D. 4,385,500

13. On March 1, 2022, Erik Company issued 10,000 of its P1,000 face value bonds at 95 plus
accrued interest. Erik Company paid bond issue cost of P1,000,000. The bonds were
dated November 1, 2021, mature on November 1, 2031, and bear interest at 12% payable
semiannually on November 1 and May 1.

The net amount that Erik receive from the bond issuance is
A. 8,900,000 B. 9,000,000 C. 9,500,000 D. 8,500,000

14. On January 1, 2020, AAA Co. issued 10%, P12,000,000 bonds at 105. Transaction costs
incurred amounted to P177,096. Principal on the bonds mature in three equal annual
installments. Interest payments are also made annually at each year-end.
How much is the carrying amount of the bonds on December 31, 2020?
A. 8,844,635 B. 8,793,368 C. 8,312,341 D. 8,216,735

15. On January 1, 2016, Cardinals Company issued its 9% P2 million bonds, which mature
on January 1, 2026. The bonds were issued for P1,878,000 to yield 10% resulting in a
bond discount of P122,000. Interest is payable annually on December 31.

What is the carrying amount of the bonds at December 31, 2016?

A. 1,885,800 B. 1,896,000 C. 1,896,780 D. 1,898,000

16. On January 1, 2019, Nice Company issued 1,000 P4,000, 10% 3 year bonds for
P3,807,852. Principal is due on December 31, 2021 but interests are due annually every
year-end. The effective interest rate is 12%. Nice Co. incorrectly used the straight line
method instead of the effective interest method to amortize the discount.

What is the effect of the error on the carrying amount of the bonds on December 31, 2019?
A. 7,107 over B. 7,107 under C. 6,341 over D. 6,341 under

17. On January 1, 2018, Kimber Company issued 9% bonds in face amount of P8,000,000,
which mature on January 1, 2028. The bonds were issued for P7,512,000 to yield 10%.
The entity used the interest method of amortizing bond discount. Interest is payable
annually on December 31.

On December 31, 2018, what is the carrying amount of bonds payable?

A. 7,543,000 B. 7,584,000 C. 7,587,120 D. 7,592,000

18. On December 31, 2017, Dome Company issued P4,000,000, 8% serial bonds, to be
repaid in the amount of P800,000 each year. Interest is payable annually on December
31. The bonds were issued to yield 10% a year. The bond proceeds totaled P3,805,600
based on the present value on December 31, 2017 of five annual payments.
Due date Principal Interest Present value on
12/31/17
12/31/18 800,000 320,000 1,018,000
12/31/19 800,000 256,000 872,200
12/31/20 800,000 192,000 745,000
12/31/21 800,000 128,000 633,800
12/31/22 800,000 64,000 536,600
3,805,600

What is the carrying amount of the bonds payable on December 31, 2018 using the interest
method of amortizing the bond discount?
A. 3,066,160 B. 3,866,160 C. 3,386,160 D. 2,354,775

19. Prescott Corporation issued ten thousand P1,000 bonds on January 1, 2018. They have
a ten-year term and pay interest semiannually. This is the partial bond amortization
schedule for the bonds.
 Payment Cash Effective Decrease in Outstanding
interest balance balance
11,487,747
1 400,000 344,632 55,368 11,432,379
2 400,000 342,971 57,029 11,375,350
3 400,000 341,261 58,739 11,316,611
4 400,000

What is the effective annual rate of interest on the bonds?

A. 3% B. 4% C. 6% D. 8%

20. On December 31, 2015, Ariana Grande Corporation issued 20-year, nonconvertible bonds
of P5,000,000 for P5,851,160 to yield 10%. Interest is payable annually on December 31
at 12%. On April 1, 2017, Ariana Grande retires 2,000 of its own P1,000 bonds at 102 plus
accrued interest. The accounting period of Ariana Grande Corporation is the calendar
year.

What is the amount of gain or loss on early retirement of bond that will be reported in 2017 income
statement?
A. 292,873 gain B. 292,873 loss C. 232,873 loss D. 232,873 gain

21. IT Corporation December 31, 2019 balance sheet contained the following items in the
long-term liabilities section:

9.25% registered debentures, callable in 11 years, due in 16 years 700,000

9.25% collateral trust bonds, convertible into common stock beginning in 2028, due 600,000
in 19 years
10% subordinated debentures (P30,000 maturing annually beginning in 2020) 300,000

What is the total amount of IT’s term bonds?

A. 600,000
B. 700,000
C. 1,000,000
D. 1,300,000

22. IT Corporation December 31, 2018 balance sheet contained the following items in the
long-term liabilities section:

10% registered bonds, callable in 2019, due in 2023, secured by machinery 3,000,000
11% bonds, convertible into common stock beginning in 2018, due in 2025, secured 5,000,000
by realty
12% collateral trust bonds (P50,000 maturing annually) 7,000,000

What are the total amounts of IT’s secured bonds?

A. 15,000,000
 B. 12,000,000
C. 10,000,000
D. 8,000,000

23. Ava Company issued 10-year bonds payable with face amount of P4,000,000 on January
1, 2023. The interest is payable annually on December 31 at the 6% stated interest rate.
The bonds were issued to yield 9%.

The present value of 1 at 6% for 10 periods is 0.56 and the present value of an ordinary annuity of
1 at 6% for 10 periods is 7.36.

The present value of 1 at 9% for 10 periods is 0.42 and the present value of an ordinary annuity of
1 at 9% for 10 periods is 6.42.

What is the market price of the bonds on January 1, 2023?

A. 1,680,000
B. 3,991,200
C. 3,220,800
D. 4,000,000

24. Downing Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2022 on
January 1, 2022. The bonds pay interest semiannually on June 30 and December 31.
The bonds are issued to yield 5%.

Present value of PV of annuity of Present value of PV of annuity of

Periods 1 at 2.5% 1 at 2.5% 1 at 5% 1 at 5%
5 0.884 4.646 0.784 4.330
10 0.781 8.752 0.614 7.722

What are the proceeds form the bond issue?

A. 6,531,618
B. 5,216,494
C. 5,217,800
D. 5,215,050

25. Kim Chui Company issued bonds with face amount of P6,000,000 on January 1, 2021.
The nominal rate of 6% is payable annually on December 31. The bonds are issued with
an 8% effective yield. The bonds mature on every December 31 each year at the rate of
P2,000,000 for the three years.

Present value of 1 at 8%:

One period 0.9259

Two periods 0.8573
Three periods 0.7938

Determine the market price or issue price of the bonds:

A. 5,788,532
B. 5,690,555
C. 4,762,800
D. 5,960,555

26. On January 1, 2019, Frankie Company issue its P10,000,000 face amount, 10% bonds to
yield 8% per year. The bonds mature on January 1, 2024 and pay interest semiannually
on June 30 and December 31. The relevant present value factors are as follows:
Present value of 1 at 4% for 10 periods 0.6756
Present value for an ordinary annuity at 4% for 10 periods 8.11
Present value of 1 at 5% for 10 periods 0.6139
Present value of for an ordinary annuity at 5% for 10 7.72
periods

The carrying amount of this bond liability (round to the nearest thousand) on January 1, 2019 is
A 9,753,000 B. 10,721,000 C. 10,811,000 D. 11,148,000
.

27. On January 1, 2019, Seahawks Company issued 4,000 of its 8%, P1,000 bonds when the
prevailing rate of interest was 9%. The bonds are dated January 1, 2019, and mature on
January 1, 2023. Interest is payable annually every December 31. The following are the
present value factors:
Present value of 1 for 4 periods at 9% 0.7084
Present value of annuity of 1 for 4 periods at 9% 3.2397

What amount of proceeds did the company receive on the issue of debt instrument?
A 3,800,000 B. 3,870,304 C. 3,883,000 D. 3,920,000
.

28. On January 2, 2016, Lucban Company issued 9% bonds in the amount of P10,000,000
which mature on January 2, 2026. The bonds were issued for P9,390,000 to yield 10%
resulting in a bond discount of P610,000. Interest is payable annually on December 31.
Lucban uses the interest method of amortizing bond discount. in its December 31, 2016
statement of financial position, what amount should Lucban report as bond payable?
A 10,000,000 B. 9,451,000 C. 9,390,000 D. 9,429,000
.

29. On January 1, 2018, Kimber Company issued 9% bonds in face amount of P8,000,000,
which mature on January 1, 2028. The bonds were issued for P7,512,000 to yield 10%.
The entity used the interest method of amortizing bond discount. Interest is payable
annually on December 31. On December 31, 2018, what is the carrying amount of bonds
payable?
A. 7,543,000 C 7,587,120
.
B. 7,584,000 D 7,592,000
.
 30. On December 31, 2015, BonJovi Company issued P2,000,000, 12% serial bonds to be
repaid in the amount of P500,000 each year. Interest is payable annually on December
31. The bonds were issued to yield 10% a year. The bonds proceeds were P2,083,000
based on the present values at December 31, 2015. BonJovi company amortizes the bond
discount by the interest method.

In its December 31, 2016 statement of financial position, what amount should BonJovi Company
report the carrying amount of the bonds?
A 2,083,000 B. 2,051,300 C. 1,531,700 D. 1,551,300
.

xxx End xxx