ACC51110 – INTEGRATED REVIEW IN FINANCIAL ACCOUNTING AND

REPORTING
SPECIAL TERM, AY 2023 – 2024

PROVISIONS, CONTINGENT LIABILITIES, AND CONTINGENT ASSETS (IAS 37)

THEORIES

Test I. Identify whether the following obligations are Financial (F) or Non-financial (NF)
obligation.

1. Accounts payable.
2. Warranties payable.
3. Bank loan.
4. Bank overdraft.
5. Sales/income tax payable.
6. Notes payable.
7. Unearned income.
8. Finance lease obligation.
9. Bonds payable.
10. Obligation under customer loyalty plan.

Test II. Multiple choices

1. A liability shall be classified as current when it satisfies any of the following criteria, except
A. It is expected to be settled in the entity’s normal operating cycle
B. It is held primarily for the purpose of being traded
C. It is due to be settled within twelve months after the balance sheet date
D. The entity has an unconditional right to defer settlement of the liability for at least twelve
months after the balance sheet date

2. An example of an item which is not a liability is

A. Bonus issue
B. Advance from customer on contract
C. Accrued estimated warranty cost
D. The portion of long-term debt due within one year

3. Which of the following is an accrued liability?

A. Cash dividends payable
B. Wages payable
C. Rent revenue collected one month in advance
D. Portion of long-term debt payable in current year

4. Current liabilities include

A. Only obligations which are expected to be settled within the normal operating cycle
B. Only obligations which are due to be settled within one year from the balance sheet date.
C. Obligations which are expected to be settled within the normal operating cycle and obligations
which are due to be settled within one year from the balance sheet date.
D. Refinanced long-term debt falling due within one year from the balance sheet date.

5. Some obligations that are due to be repaid within the next operating cycle and expected to be
refinanced or rolled over should be classified as noncurrent
A. If the refinancing or rolling over is at the discretion of the enterprise and the refinancing
agreement has been reached before the issuance of financial statements
B. If the refinancing or rolling over is at the discretion of the enterprise regardless of whether
the refinancing agreement had been reached or not before the issuance of the statements
C. If the refinancing or rolling over is not at the discretion of the enterprise
 D. Subject to no conditions

6. An accrued expense can be described as an amount

A. Paid and currently matched with earnings
B. Paid and not currently matched with earnings
C. Not paid and not currently matched with earnings
D. Not paid and currently matched with earnings

7. Which of the following is a current liability?

I. Noncurrent portion of long-term debt
II. Long-term liability due in 3 months from the balance sheet date and refinanced on a long-
term basis between the balance sheet date and the date of the issuance of financial statements.
III. Long-term liability due in 3 months from the balance sheet date and refinanced on a long-
term basis on or before the balance sheet date
IV. Currently maturing obligation where the entity has the discretion to refinance or roll over
the obligation for more than twelve months after the balance sheet date under the existing
loan facility.

A. I only
B. II only
C. III only
D. IV only

8. An outflow of resources embodying economic benefits is regarded as “probable” when

A. The probability that the event will occur is greater than the probability that the event will not
occur
B. The probability that the event will not occur is greater than the probability that the event will
occur
C. The probability that the event will not occur is the same as the probability of the event will
occur
D. The probability that the event will occur is 90% likely.

9. Which of the following statements is true concerning contingent liabilities?

A. Such liabilities should include obligations of known existence but of unknown amount
B. If the definite amount is involved, it is not a contingent liability
C. Such liabilities are generally reported and totaled with other liabilities to make up the liability
section of most balance sheets.
D. Such liabilities should include obligations known in amount but unknown in existence

10. Vadis Company sells appliances that include a three-year warranty. Service calls under the
warranty are performed by an independent mechanic under a contract with Vadis. Based on
experience, warranty costs are estimated at P 300 for each machine sold. When should Vadis
recognize these warranty costs?
A. Evenly over the life of the warranty
B. When the service calls are performed
C. When payments are made to the mechanic
D. When the machines are sold

11. A retail store received cash and issued gift certificates that are redeemable in merchandise. The
gift certificates lapse one year after they are issued. How should the deferred revenue account be
affected by each of the following transactions?

Redemption of certificates Lapse of certificates

A. No effect Decrease
B. Decrease Decrease
C. Decrease No effect
D. No effect No effect
12. How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical
performance is reported in the seller’s financial statements before the performance?
A. Unearned Revenue for the entire proceeds
B. Revenue to the extent of related costs expended
C. Unearned revenue to the extent of related costs expended
D. None of the above

13. Where there is continuous range of possible outcomes, and each point in that range is as likely as
any other, the range to be used is the
A. Minimum
B. Sum of minimum and maximum
C. Maximum
D. Midpoint

14. On August 1 2022, ABC Company borrowed cash and signed a two-year interest-bearing note on
which the principal is due on August 1, 2024 and interest are payable annually starting on 1 August
2023. How will the note payable and accrued interest be classified in the balance sheet at
December 31, 2022?
Note Payable Accrued interest
A. Current liability Non-current liability
B. Non-current liability Current liability
C. Current liability Current liability
D. Non-current liability Current asset

15. Where the provision being measured involves a large population of items, the obligation is
estimated by “weighting” all possible outcomes by their associated probabilities. The name fort
his statistical method of estimation is
A. Expected value
B. Present value
C. Bifurcation
D. Extrapolation
 ACC51110 – INTEGRATED REVIEW IN FINANCIAL ACCOUNTING AND
REPORTING
SPECIAL TERM, AY 2023 – 2024

PROVISIONS, CONTINGENT LIABILITIES, AND CONTINGENT ASSETS (IAS 37)

PROBLEMS

On January 5 2022, Ginebra Company received a P5,000,000-complaint from one of its employees
who suffered an accident while in the Ginebra’s production department last December 30, 2021.
Ginebra’s legal counsel believed it would probably lose the case and the best estimate of the loss was
P2,000,000. The complainant offered an out of court settlement of P3,000,000 but Ginebra did not
accept.

On February 28, 2023, the court ordered Ginebra to pay P2,500,000. Ginebra paid the employee on
March 1, 2023.

Ginebra’s P10,000,000 comprehensive insurance policy has P500,000 deductible clauses. Ginebra’s
financial statements were issued on March 15, 2023.

1. What amount of loss from lawsuit should Ginebra recognize in its 31 December 2022 statement
of comprehensive income?
A. 500,000
B. 2,000,000
C. 2,500,000
D. 5,000,000

2. What amount of liability from lawsuit should Ginebra recognize in its 31 December 2022
statement of financial position?
A. 500,000
B. 2,000,000
C. 2,500,000
D. 5,000,000

Below are three independent situations.

I. In August 2022 a worker was injured in the factory in an accident partially the result of his
own negligence. The worker has sued Wesley Co. for P800,000. Counsel believes it is
possible but not probable that the outcome of the suit will be unfavorable and that the
settlement would cost the company from P250,000 to P500,000.

II. A suit for breach of contract seeking damages of P2,400,000 was filed by an author against
Greer Co. on October 4, 2022. Greer's legal counsel believes that an unfavorable outcome
is probable. A reasonable estimate of the award to the plaintiff is between P600,000 and
P1,800,000. No amount within this range is a better estimate of potential damages than
any other amount.

III. Quinn is involved in a pending court case. Quinn’s lawyers believe it is probable that
Quinn will be awarded damages of P1,000,000.

Edge Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are
paid back by payroll deductions. Information relating to salaries for the calendar year 2022 is as
follows:

12/31/21 12/31/22
Employee advances P12,000 P18,000
Accrued salaries payable 65,000 ?
 Salaries expense during the year 650,000
Salaries paid during the year 625,000

3. At 31 December 2022, what amount should Edge report for accrued salaries payable?
A. P90,000
B. P84,000
C. P72,000
D. P25,000

Hello Company is considering two different proposals for computing the bonus for its new company
president. The first plan states that the bonus would be equal to 6% of profits after the bonus but
before tax have been deducted. The second method is based on profits after both tax and bonus have
been deducted at the rate of 12%. Income before income tax and bonus for 2022 is
P9,000,000. Income tax rate is 35%.

4. How much is the amount of bonus under the first plan?

A. 540,000
B. 358,529
C. 337,825
D. 509,434

5. How much is the amount of bonus under the second plan?

A. 651,206
B. 702,000
C. 964,286
D. 732,777

6. Johnson Company sells contracts agreeing to service equipment for a three-year period.
Information for the year ended December 31, 2022 is as follows:

Cash receipts from service contracts sold P1,920,000

Service contract revenue recognized 1,560,000
Unearned service contract revenue, January 1 1,080,000

In its 31 December 2022 statement of financial position, what amount should Johnson report as
unearned service contract revenue?
A. P480,000
B. P780,000
C. P1,100,000
D. P1,440,000

Nixon Company sells 3-year service contracts for air conditioning units for P1,500 each. Sales of
service contracts and repairs are made evenly throughout each year. The company estimates that 15%
of repairs are done in the first year from the date of sale, 35% in the second year and 50% in the third
year. Service contracts sold are as follows:

2022 2023 2024

Number of service contracts sold 1,400 1,820 1,650

7. How much is the unearned revenue from service contracts as of December 31, 2022?
A. P1,417,500
B. P2,525,250
C. P3,942,750
D. P4,657,125

8. How much revenue from service contracts is recognized in 2023?

A. P204,750
B. P525,000
 C. P1,706,625
D. P1,760,625

9. How much revenue from service contracts sold in 2023 is realized in 2024?
A. P185,625
B. P618,750
C. P955,500
D. P371,250

10. How much is the unearned revenue from service contracts as of December 31, 2024?
A. P4,627,125
B. P3,468,750
C. P2,475,000
D. P1,237,500

11. Eastern Marketing sells split type air-conditioners. The company provides its customers an option
to purchase warranty contract for a two-year period for P2,250 for every unit of the air-conditioner
purchased priced at P45,000. If the customer chooses not to buy the warranty contract, the air-
conditioner sells for P42,750.

Sale of warranty contracts and repairs are made evenly throughout the year. Based on past records
of the entity, 30% of repairs are done in the first year from the date of sale and 70% in the second
year.

During 2022, Eastern sold 500 packages of the air-conditioners and warranty contracts. Cost of
servicing the units during 2020 amounted to P95,000.

Based on the given data, Eastern Company should report [1] unearned revenue from warranty
contracts as of December 31, 2022 and [2] profit from warranty contracts for the year 2022,
respectively:
A. P956,250; P168,750
B. P787,500; P168,750
C. P787,500; P73,750
D. P956,250; P73,750

Laxada Marketing launched a new sales promotional program. For every 10 seals of proof of purchase
of their product, customers receive a premium costing P8 each. This premium may separately be sold
for P12 each. Laxada Marketing estimates that 60% of the seals of proof of purchase reaching the
consumer market will be redeemed.

Product sales with seals of proof of purchase – 2,000,000 units for a total of P90,000,000
Premiums purchased – 100,000 units
Premiums distributed to customers – 82,000 units

12. How much of the total transaction price is allocated to the premium?
A. P2,337,662
B. P1,572,052
C. P1,417,323
D. P949,868

13. What is the amount of additional sales recognized by Laxada upon redemption of premiums?
A. P649,077
B. P968,504
C. P1,074,236
D. P1,597,402
In 2019, Exy Company started a promotional campaign for the sale of its new product by attaching a
coupon for its unit. For every five coupons plus P50, a customer can avail a premium which sells at
P150 (cost to Exy Company is P100).

Additional information (in units):

2022 2021
Sale of products (P500 each) 200,000 140,000
Coupons redeemed 90,000 40,000
Coupons expected to be redeemed in 80,000 30,000
the future

14. What is the amount of total revenue in 2022?

A. P99,470,523
B. P98,570,523
C. P97,716,461
D. P97,696,737

Carter Company sells gift certificates for P750 each. At December 31, 2021, Carter Company had
1,000 gift certificates outstanding. In 2022, Carter Company sold 4,000 gift certificates while a total
3,600 were redeemed. Also in 2022, 200 gift certificates expired.

Carter operates on a gross margin of 60%.

15. How much revenue pertaining to gift certificates should be deferred at December 31, 2022?
A. P540,000
B. P630,000
C. P900,000
D. P1,050,000

16. Casio Company sells a product for P1,000 each. For each product sold, Casio Company gives a
5% discount coupon for the future purchase of the same product with a validity of 60 days.

Based on experience, Casio Company estimates that there is a 50% chance the customers will use
the coupon prior to expiration.

In 2022, Casio Company recorded that a total of 25,000 units were sold.

How much of the total transaction price is allocated to the coupons?

A. P609,756
B. P625,000
C. P1,190,476
D. P1,250,000

17. The Barack Food Co. distributes to consumers coupons, which may be presented on or before a
stated expiration date to retail outlets on certain products of Barack. The retail outlets are
reimbursed when they send the coupons to Barack. In Barack’s experience, 50% of such coupons
are redeemed. The retail outlets are given one month to request full reimbursement from Barack
from the date it redeems the coupons from the consumers. During 2022, Barack issued two
separate series of coupons as follows:

Issued on Total value Consumer expiration date Amount distributed as of 12/31/22

1/1/22 P500,000 6/30/22 P236,000
7/1/22 P720,000 12/31/22 P300,000

The only journal entries to date recorded debits to coupon expense and credits to cash of
P536,000, representing total amount disbursed for the coupon redemption.
 The December 31, 2022 statement of financial position should include a Liability for Unredeemed
Coupons of
A. P0
B. P60,000
C. P124,000
D. P360,000

Bill Corporation sells washing machines that carry a three-year warranty against manufacturer’s
defects. Based on company experience, warranty costs were estimated at P300 per machine. During
2022, Bill sold 24,000 washing machines and paid warranty costs of P1,700,000.

18. In its profit or loss statement for the year ended December 31, 2022, Bill should report warranty
expense of?
A. P1,700,000
B. P2,400,000
C. P5,500,000
D. P7,200,000

19. Assuming that the company’s operations started in 2022, what is the liability for warranty reported
by Bill at December 31, 2022?
A. P1,700,000
B. P2,400,000
C. P5,500,000
D. P7,200,000

20. Ronald Company estimated its annual warranty expense as 4% of annual net sales. The following
data relate to the calendar year 2022:

Net Sales P1,500,000

Warranty liability account
Balance, 12/31/22 (debit, before adjustment) P10,000
Balance, 12/31/22 (credit, after adjustment) P50,000

Which of the following entries was made to record the 2022 estimated warranty expense?

A. Warranty Expense 60,000

Retained Earnings 10,000
Warranty Liability 50,000

B. Warranty Expense 50,000

Retained Earnings 10,000
Warranty Liability 60,000

C. Warranty Expense 40,000

Warranty Liability 40,000

D. Warranty Expense 60,000

Warranty Liability 60,000

Franklin Company sells magazine subscriptions for one-to three-year periods. Cash receipts from
subscribers are credited to Magazine Subscriptions Collected in Advance, and this account had a
balance of P2,400,000 at December 31, 2022, before year-end adjustments. Outstanding subscriptions
at December 31, 2022 expire as follows:

2023 – P600,000
2024 – P900,000
2025 – P400,000
21. In its December 31, 2022 statement of financial position, what amount should Franklin report as
the balance for magazine subscriptions collected in advance?
A. P500,000
B. P1,200,000
C. P1,900,000
D. P2,400,000

22. What amount should Franklin report as magazine subscriptions revenue for the year ended
December 31, 2022?
A. P500,000
B. P1,200,000
C. P1,900,000
D. P2,400,000

23. Jakarta Company operates a customer loyalty program. The entity grants loyalty points for goods
purchased. The loyalty points can be used by the customers in exchange for goods of the entity.

During 2021, the entity sold goods for a total consideration of P5,000,000 for which 4,000 points
were granted. The fair value of each loyalty point is P70. The company expects that 75% of the
award credits shall be redeemed. Furthermore, 1,200 points and 1,800 points were redeemed for
the years 2021 and 2022 respectively. However, during 2022, the company revised its expectations
and now expects that 80% of the award credits will be redeemed altogether.

How much is the liability to be presented in the 2022 statement of financial position relating to
customer loyalty awards?
A. P16,672
B. P159,092
C. P265,152
D. P280,000

-END OF HANDOUT-