Liabilities

1. Pukaki Company sold 700,000 boxes of “Puto mix” under a new sales promotional program. Each box contains one coupon,
which if submitted with P40, entitles the customer to a kitchen knife. Pukaki pays P60 per knife and P5 fro handling and
shipping. Pukaki estimates that 70% of the coupons will be redeemed, even though only 250,000 coupons had benn
processed during 2007. How much should Pukaki report as liability for unredeemed coupons at December 31, 2007?

60 +5 -40 = 25
700,000 x 70% = 490,000
(250,000)
240,000
x 25 (60 +5 - 40 = 25)
6,000,000
2. Topsy Company started a new promotional program. For every 10 box tops returned to Topsy, customers receive a
basketball. Topsy estimates that only 60% of the box tops reaching the market will be redeemed. Additional information as
follows:
UNITS AMOUNT
Sales of product 100,000 30,000,000
Basketballs purchased 5,500 4,125,000
Basketballs distributed 4,000
What is the amount of year-end estimated liability associated with this promotion?

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100,000 x 60% /10 = 6,000

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4,000

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2,000 eH w
x 750

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1,500,000
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3. Mill Company sells washing machines that carry a three-year warranty against manufacturer’s defects. Based on company
experience, warranty costs are estimated at P300 per machine. During the current year, Mill sold 2,400 washing machines
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and paid warranty costs of P170,000. In its income statement for the current year, Mill should report warranty expense
of____________.
aC s
vi re

2,400 x 300 = 720,000

y

4. During 2011, Rex Company introduced a new product carrying a two-year warranty against defects. The estimated warranty
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costs related to peso sales are 2% within 12 months following sale and 4% in the second 12 months following sales. Sales
and actual warranty expenditures for the years ended December 31, 2011 and 2012 are as follows:
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SALES ACTUAL WARRANTY

EXPENDITURES
2011 6,000,000 90,000
2012 10,000,000 300,000
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16,000,000 390,000
Th

======= ======
At December 31, 2012, Rex should report an estimated warranty liability of_______.

2011 6,000,000 x 0.06 = 360,000

sh

2012 10,000,000 x 0.06 = 600,000

960,000
(390,000)
570,000

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 5. Cobb Departments Store sells gift certificates redeemable only when merchandise is purchased. These gift certificates have
an expiration date of two years after issuance date. Upon redemption or expiration, Cobb recognizes the unearned revenue as
realized. Information for the current year is as follows:
Unearned revenue, 1/1 650,000
Gift certificates sold 2,250,000
Gift certificates redeemed 1,950,000
Expired gift certificates 100,000
Cost of goods sold 60%
On December 31, what amount should Cobb report as unearned revenue?

1,950,000 650,000
100,000 2,250,000
2,050,000 2,900,000
850,000

6. Black Company requires advance payments with special orders for machinery constructed to customer specifications. These
advances are nonrefundable. Information for the current year is as follows:
Customer advances-January 1 1,180,000
Advances received with orders 1,840,000
Advances applied to orders shipped 1,640,000
Advances applicable to orders cancelled 500,000

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In Blacks December 31 balance sheet, what amount should be reported as a current liability for advances from customers?

er as
co
1,640,000 1,180,000 eH w
500,000 1,840,000

o.
2,140,000 3,020,000
rs e
880,000
ou urc

7. Fell Company operates a retail grocery store that is required by law to collect refundable deposits of P5 on soda cans.
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Information for the current year follows:

Liability for refundable deposit-January 1 150,000
aC s

Cans of soda sold 100,000

vi re

Soda cans returned 110,000

On February 1, Fell subleased space and received a P25,000 deposit to be applied against rent at the expiration of the lease
in 5 years. In Fell’s December 31 balance sheet, the current liability for deposit amounts to_________.
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Liability for Refundable deposit – January 1 150,000

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Deposit made (100,000 x5) 500,000

Total 650,000
Deposit Refunded (110 x 5) (550,000)
December 31 – Current Liability 100,000
is
Th

8. Strand, Inc. provides an incentive compensation plan under which its president receives a bonus equal to 10% of the
corporation’s income in excess of P600,000 before income tax but after deduction of the bonus.
If income before tax and bonus is P1,920,000 and the tax rate is 32%, the amount of the bonus would be___________.
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1,920,000 – 600,000 = 1,320,000 / 1.1

1,200,000 x 0.1 = 120,000

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 9. On November 5, 2011, a Dunn Company truck was in an accident with an auto driven by Bell, Dunn received notice on
January 12, 2012 of a lawsuit for P700,000 damages for personal injuries suffered by Bell. Dunn’s counsel believes it is
probable that Bell will be awarded an estimated amount in the range between P200,000 and P450,000, and no amount is
better estimate of potential liability than any other amount. Dunn’s accounting year ends on December 31, and the 2011
financial statements were issued on March 2, 2012. What amount of loss should Dunn accrue at December 31, 2011?

Midpoint of the range (200,000 +450,000/2) = 325,000

10. Dob Company sells appliance service contracts to repair appliances for a two-year period. Dob’s past experience is that, of
the total amount spent for repairs on service contracts, 40 percent is incurred evenly during the first contract year and 60
percent is incurred evenly during the second contract year. Receipts from service contract sales for the two years ended
December 31, 2005, are P250,000 in 2004 and P300,000 in 2005. Receipts from contracts are credited to unearned service
contract revenue. Assume that all contract sales are made evenly during the year. What amount should Dob report as
unearned service contract revenue at December 31, 2005?

2004 250,000 x 60% x ½ = 75,000

2005 300,000 x 40% x ½ = 60,000
300,000 x 60% = 180,000
315,000

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Answers:

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co
1. 6,000,000 eH w
2. 1,500,000

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rs e
3. 720,000
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4. 570,000
5. 850,000
6. 880,000
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7. 100,000
aC s
vi re

8. 120,000
9. 325,000
y

10. 315,000
ed d
ar stu
is
Th
sh

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