Constantino, CP Jay T.

BSA 2-1

INTERMEDIATE ACCOUNTING 2
Chapter 1

Problem #8
Answer: A
Solution:
Accounts Payable 4,000,000
Debit Balance on Suppliers Account 100,000
Accrued Expense 1,500,000
Credit Balances of customer’s account 500,000
Estimated Coupon Liability 600,000
Total Current Liabilities 6,700,000

Problem #9
Answer: C
Solution:
Accounts Payable 1,900,000
Dividends Payable 500,000
Income Tax Payable 900,000
Note Payable 600,000
Total Current Liabilities 3,900,000

Problem #10
Answer: D
Solution:
14% Note Payable, due 2021 30,000
8% Note Payable, Current Portion 100,000
Total Current Liabilities 130,000

Problem #11
Answer: B
Solution:
Whole portion of the 12%
Note Payable – refinanced on
January 31, 2021 5,000,000

Problem #12
Answer: C
Solution:
Accounts Payable & Accrued
Interest 1,000,000
10% Debentures Payable-
Current Portion 500,000
Total Current Liabilities 1,500,000
 Constantino, CP Jay T.
BSA 2-1

INTERMEDIATE ACCOUNTING 2
Chapter 2

Problem#6
Answer: 1.A
2. B
Solution:
1. Premium Expense
160,000/5= 32,000 x 60% = 19,200 x 20 384,000

2. Estimated Premium Liability

56,000 (balance) / 5 = 11,200 x 20 224,000

Problem #8
Answer: B
Solution:
Estimated basketballs to be distributed
10,000 x 60% / 10 6,000
Less: Actual distributed 4,000
Balance 2,000
Cost of basketball (4,125,000/4,000) x 750
Estimated Liability 1,500,000

Problem #9
Answer: A
Solution:
Coupons Expected 12,000
Total Cost (45+5) 50
Total Liability for Coupons 600,000
Less payment (250,000)
Balance – Estimated Liability 350,000

Problem #14
Answer: C
Solution:
Expected Redemption 50,000
Actual Redemption 40,000
Balance 10,000
/ 2
5,000
Cost x 150
750,000

Problem# 17
Answer: B
Solution:
Units sold x expected rate less actual rebate
80,000 x 70% = 56,000 – 35,000 = 21,000
Multiply: cash rebate 50
Estimated Liability 1,050,000
 Constantino, CP Jay T.
BSA 2-1

INTERMEDIATE ACCOUNTING 2
Chapter 3

Problem #8
Answer: B
Warranty Expense 1,900,000
Less: increase in warranty liability 200,000
1,700,000
Problem# 14
Answer: A
Solution:
Warranty Liability after adjustment 640,000
At 8% of net sales x 8%
8,000,000
Problem #10
Answer: C
Solution:
Warranty Expenditures 2,500,000
Less: Warranty Liability Balance 800,000
Bal. 1,700,000
Net Sales Less Bal, (2,400,000 – 1,700,000) 700,000

Problem #9
Answer: A
Solution:
Warranty Expense ( 50,000,000 x 4%) 2,000,000
Add: warranty liability bal 40,000
Warranty Expenditures 2,040,000

Problem #11
Answer: 1. D
2.A
Solution:
1. Warranty Expense (2,400 x 300) 720,000
2. Warranty Liability (720,000 – 170,000) 550,000
 Constantino, CP Jay T.
BSA 2-1

INTERMEDIATE ACCOUNTING 2
Chapter 4 (Summary)

Definition of provision
- it is an existing liability of uncertain amount
- the uncertainty distinguishes provisions from other liabilities

I. Recognition:
according to pas 37, paragraph 14, provisions is recognized as liability in the financial
statements when:

1. The entity has a present obligation, as a result of past event.

the present obligation is classified into:

a. Legal obligation
- obligation arises from a contract or other operation of law.

b. Constructive obligation
- obligation that is derived from entity’s action
- it exists when the entity from an established pattern of practice has created a valid
expectation that it will accept certain responsibilities

as a result to past event,

* obligating event
-past event that leads to a present obligation

◦ accounting provisions cannot be created in expectation o a future event.

◦ the event must have already occurred which give rise to the present obligation.

◦ to sum up, the obligating event is an event that creates present obligation because the
entity has no alternatives but to settle the obligation created. Cases where:

a. Settlement can be enforced by the law.

b. The event creates valid expectation s on the part of other parties that the
establishment will dismiss the obligation, as in the case of constructive obligation.

2. It is probable that an outflow of resources contains economic benefits would required to settle
the obligation.

3. The amount of the obligation is measured reliably.

 Constantino, CP Jay T.
BSA 2-1

Ii. Measurement

conceptually, the amount recognized is required to be the best estimate of the expenditure
to:
◦ settle the present obligation at the end of the reporting period
◦ transfer to a third party at that time

if single obligation is measured,the individual most likely outcome adjusted for the effect
of other possible outcomes maybe the best estimate.

if there is continuous range of possible outcomes and each point were similar as any, the
midpoint of range is used.

if a large population of items were measured, “expected value” method is used.

expected value method

- is an estimate which weighs all possible outcomes by their associated possibilities.

Other measurement considerations

1. Risk and uncertainties

- shall be taken into account in reaching the best estimate to a provision.

◦risk
- describes variability of outcome
-a risk adjustment may increase the amount at which liability is measured

◦ uncertainty
- as prudence dictates, caution is needed in making judgment so that income and assets
are not overstated and expense and liabilities are not understated.
-doesn’t justify deliberate overstatement of liabilities

2. Present value of obligation

- it is used to settle the obligation, if the effect of the time value of money is material
- discount rate should be a pretax rate that reflect current market assessment of the time
value of money and the risk specific to liability

note: discount rate should not reflect risk if the cash flow has been adjusted.

3. Future events
- if it affects the amount requires to settle an obligation, it shall be reflected in the amount
of provisions where there is an evidence that it will occur
- it includes new legislation and changes in technology
 Constantino, CP Jay T.
BSA 2-1

4. Expected disposal of asset

- any cash inflows from disposal are treated separately from the measurement of
provisions

5. Reimbursements
- if it another party expects reimbursements , it shall be recognized when it is virtually
certain that it would be received it the entity settles obligation

6. Changes in provisions
- provisions must be reviewed every end of the reporting period and adjusted to reflect
current best estimate
- provisions shall be reversed if it is no longer probable that an outflow of economic
benefit would require to settle the obligation

7. Use of provision
- provision shall be used only for expenditures which the provision was originally
recognized

8. Future operating losses

- provision shall not be recognized for future operating losses
- note that expectation of future losses is an indication that certain asset may be impaired

9. Onerous contract
- is a contract which the unavoidable costs of meeting the obligation under the contract
exceeds the economic benefit expected to be received
- shall recognized and measured as a provision
- according to pas 37, paragraph 68, unavoidable costs under the contract represents the “
least net cost of existing from the contract”

least net cost of existing from the contract”

- penalty arising from failure to fulfill the contract

○examples of provisions
1. Warranties 4. Court case
2. Environmental contamination 5. Guarantee
3. Decommissioning costs

contingent liability
according to pas 37, paragraph 10, contingent liability defined in two ways:
a. It is a possible obligation, arises from past event and existence will be confirmed only
by occurrence or non occurrence of uncertain future events not wholly within the entity’s control
b. It is a present obligation, arises from past event but is not recognized because the
amount of obligation can’t be measured reliably.

○provisions
 Constantino, CP Jay T.
BSA 2-1

- it is a present obligation which is probable and can be measured reliably

decommissioning liability
- also called as asset retirement obligation
- an obligation to dismantle, remove or restore an ppe as required by the law or contract

journal entries of decommissioning liability

1. Acquisition
asset
cash
decommissioning liability

2. Settlement of decommissioning liability

decommissioning liability
cash
note : if a loss is incurred debit, if gain credit

3. Expense incurred
interest expense
decommissioning liability

◦ change in decommissioning liability

under ifric 1 , when change in measurement occurs , decommissioning liability shall be
accounted as follows:
1. Decrease in liability is deducted from cost of asset.
note: if decrease exceeds carrying amount, excess is recognized in profit or loss.

2. Increase in liability is added from cost of asset.

note; it shall consider whether this is an indication that the carrying amount of the
asset may not be fully recoverable and it should be tested for impairment.

Iii. Financial statement presentation

◦ provision (balance sheet)

i.current liabilities
1. Trade and other payables
2. Current provisions
3. Short-term borrowing
4. Current portion of long-term debt
5. Current tax liability
ii. Non-current liabilities
 Constantino, CP Jay T.
BSA 2-1

◦ contingent liability (notes to financial statement)

- shall be disclosed only
- if it is remote, disclosure is not necessary
- required disclosures are :
1. Brief description of the nature of the contingent liability
2. Estimate of its financial effects
3. Indication of uncertainties exist
4. Possibility of any reimbursement

Iv. Journal entries of provision

Debit Credit

Recognition of provision Expense / asset Liability - provision

Unwinding the discount Cost Liability - provision

Use of provision Liability - provision Cash

If reimbursements occur Reimbursement asset Expense