ACCOUNTING 4 PREMIUMS, WARRANTIES AND DEFERRED REVENUES
1.An entity provided warranty for all products sold during 2019. The entity sold 200,000 units during the
current year. It estimated that 75% of the products sold will have no defects, 15% of the products sold
will have a minor defect and 10% of the products sold will have a major defect. The cost of a minor
defect is P100 per unit while the cost of a major defect is P300. The entity is also involved in a tax
dispute with the BIR in 2019. Based on the legal advice, there is a 40% chance that the entity will lose
the case and that the entity will have to pay P500,000.
What is the total amount of provisions should be recorded on December 31,2019?
a) 9,300,000
b) 9,200,000
c) 9,000,000
d) 9,500,000
2. Paige Candy 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 2017 and
2018 are as follows (assume all purchases and sales are for cash):
2017 2018
Coffee mugs purchased 720,000 800,000
Candy bars sold 5,600,000 6,750,000
Wrappers redeemed 2,800,000 4,200,000
2017 wrappers expected to be redeemed in 2018 2,000,000
2018 wrappers expected to be redeemed in 2019 2,700,000
Question 1: How much is the premium expense for year 2017 and 2018 respectively?
a. P140,000 and P100,000
b. P140,000 and P245,000
c. P240,000 and P135,000
d. P240,000 and P245,000
Question 2: What is the amount of premium liability as of the December 31, 2017 and 2018
respectively?
a. P100,000 and P135,000
b. P100,000 and P112,000
c. P135,000 and P168,000
d. P135,000 and P240,000
3.During 2016, vans Co. Introduced a new line of machines that carry a three-year warranty against
manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the
year of sale, 4% in the year after sale, and 6% in the second year after sale. Sales and actual warranty
expenditures in the year for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2016 P 600,000 P 9,000
2017 1,500,000 45,000
2018 2,100,000 135,000
P4,200,000 P189,000
What amount should Vans report as a liability at December 31, 2018?
a. None c. P204,000
b. P15,000 d. P315,000
4. Warranty4U provides extended service contracts on electronic equipment sold through major retailers.
The standard contract is for three years. During the current year, Warranty4U provided 21,000 such
warranty contracts at an average price of P81 each. Related to these contracts, the company spent
P200,000 servicing the contracts during the current year and expects to spend P1,050,000 more in the
future. What is the net profit that the company will recognize in the current year related to these
contracts?
a. P150,333
b. P367,000
c. P451,000
d. P1,501,000
5. Star Company has recently launched a new model of consumer car. Its cars are sold with a three-year
warranty for manufacturing defects. Past experience of similar models indicates that about 10% of the
cars sold are with some defects, of which 4% are minor defects, 3% are normal defects and 3% are
major defects. For the year ended December 31, 2017, the company sold 10,000 units of the new model.
The following information relates to the estimate of costs of defects associated with the new model:
Cost of repair/unit Probability Minor defects Normal defects Major defects
High 30% P 1,500 P4,000 P7,000
Medium 60% 1,200 3,000 5,000
Low 10% 1,000 1,500 2,000
What amount of provision should the company recognized for the year ended December 31, 2017?
a. None
b. P1,445,000
c. P1,590,000
d. P3,043,000
