Problem 1
Cummings Inc. manufactures and sells air conditioning units with a 12 month warranty under which
defective air conditioning units will be replaced free of any charges.
The company started out in 2019 expecting 10% of the sales to be returned. However, due to the
innovations and improvements made to the products during the year, the estimated percentage of
returns increased to 15% on July 1. It is assumed that no units sold during a given quarter are returned in
that quarter. Each unit is stamped with a date at time of sale so that the warranty may be properly
administered. The following table of percentages indicates the pattern of sales return during the 12-
month period of warranty, starting with the quarter following the sale of air conditioning units.
QUARTER FOLLOWING QUARTER OF SALE % OF TOTAL RETURNS EXPECTED
FIRST QUARTER 40%
SECOND QUARTER 30%
THIRD QUARTER 20%
FOURTH QUARTER 10%
Gross sales of air conditioning units in 2019 are as follows:
QUARTER SALES IN PESO
FIRST P16,200,000
SECOND 14,850,000
THIRD 12,000,000
FOURTH 8,100,000
The company also pays for the freight costs of the return and the delivery of the defective units
returned and the new replacement units, respectively. The freight cost were approximately 10% of the
sales price of the air conditioning units returned. The manufacturing cost of the air conditioning units
are roughly 805 of the sale price. The returned units can be salvaged at an estimated value of 15% of
their sales price. Returned units on hand at December 31, 2014, were thus valued in the inventory at
15% of their original sales price.
1. What is the total estimated returns for the year ended December 31,2019?
a. 5115,000 b. 6,120,000 c. 6,300,000 d. 7,672,500
2. What is the warranty expense for the year ended December 31, 2019?
a. 4,590,000 b. 4,896,000 c. 5,508,000 d. 6,120,000
3. What is the estimated warranties payable as of December 31, 2019?
a. 2,176,875 b. 2,205,900 c. 2,322,000 d, 2,612,250
Problem 2
Mountain Province Home Depot carries a wide variety of promotion techniques to attract customers.
Kitchen and home appliances are sold in a one-year warranty for replacement of parts and labor. The
estimated warranty cost, based on experience, is 5% of sales.
The premium is offered on the home furniture. Customers received a coupon for each spent on home
furniture. Customers may exchange 2,000 coupons and P50 for a rice cooker which the company
purchased at P340 for each rice cooker and estimates that 605 of the coupons given to customers will be
redeemed.
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The company’s total sales for 2019 were P115.2 M-P86.4M from kitchen and home appliances and P28.8
M from home furniture. Replacement parts and labor for warranty work totaled P2.624M during 2019. A
total of 5,200 rice cookers used in the premium program were purchased during the year and there were
9,600,000 coupons redeemed in 2019.
The accrual method is used by the company to account for the warranty and premium costs for financial
reporting purposes. The balance in the accounts related to warranties and premiums on January 1, 209
were as shown below:
Inventory of Premium items P340,000
Estimated liabilities for premiums 716,000
Estimated liabilities for warranties 2,176,000
Based on the information above, determine:
1. Promotional expense related to premiums for the current year 2019?
a. 1,392,000 b.1,632,000 c, 2,505,600 d. 2,937,600
2. Estimated liabilities for premiums as of December 31, 2019?
a. 716,000 b. 1,829,600 c. 2,021,600 d. 1,589,600
3. Estimated liabilities for warranties as of December 31, 2019?
a. 2,624,000 b. 3,872,000 c. 4,320,000 d. 5,312,000
Problem 3
Ocampo Appliance Center reports the following liability items in its balance sheet as of December 31,
2014:
Liability for unredeemed coupons P109,750
Unearned service contracts 300,000
Accrued officer bonuses 0
The liability for unredeemed coupons are in relation to discount coupons distributed by the company to
customers who may present the same within a stated expiration date to various company distributors to
avail of them discounts as indicated in the face of the coupons. Distributors are reimbursed for the face
value of coupons redeemed, plus 10% of the coupon value for handling costs. The company honors
requests for coupons reimbursements to distributors three months after the expiration date. In
Ocampo;s experience, 75% of the coupons issued ultimately are redeemed by the customers. Total face
value of coupons issued during the year and expiring on December 31, 2014 amounted to P250,000
while total payments to distributors as of the same is at P140,250. The total coupon value was set up as
a liability while the total payments were charged against the liability set up.
Aside from the company’s normal selling operations, it also sells equipment service contacts agreeing to
service equipment for a two-year period. Revenue from service contracts is recognized as earned over
the lives of the contracts. Additional information shows that Unearned service contract revenue at
January 1, 2014 is at P300,000; cash receipts from service contracts sold is at P490,000 recorded as
revenue; service contact revenue actually realized is at P430,000.
The company provides a special bonus for its executive officers based on 10% of its net income before
bonus but after income tax. Net income for the year before tax and before adjustments related to the
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previous information is at P1,016,250. (Assume income tax rate at 35%). Accrual is yet to be made on the
bonuses.
1. What is the adjusted balance of the liability for unredeemed coupons?
a. 134,750 b. 109,750 c. 66,000 d. 47,250
2. What is the adjusted balance of the unearned service contracts?
a. 240,000 b. 300,000 c. 360,000 d. 490,000
3. What is the adjusted balance of the accrued officer bonuses accounts?
a. 61,032 b. 67,358 c. 90,909 d. 100,000
Problem 4
You were assigned to audit the financial statements of Pipino Corp. for the year ended December 31,
2014. The liability portion of the company’s balance sheet shows the following information:
Noncurrent Liabilities
Notes payable 7,195,000
Liability under capital lease 2,240,000 9,435,000
Current Liabilities
Accounts payable 1,840,500
Warranties liability (42,500)
Deferred tax liability 250,000 2,048,000
Total 11,483,000
Upon further investigation on the liabilities account, you discovered the following information:
a. The principal amount of the note payable is P8,000,000 and bears interest at 12% payable every
March 31. The noted is dated April 1, 2012 and is due 5 years after issuance. The prevailing
market rate of interest when the notes were issued at 15%. The entry made by the client on April
1, 2012 was to debit cash and credit note payable for the cash consideration received. No other
entry has been made since apart from the annual interest payments every Marhc31, being
debited to interest expense and credited to cash.
b. The capitalize lease is for a eight-year period beginning December 31, 2011. Equal annual
payments of P1,200,000 are due on December 31 of each year beginning December 31, 2011.
The implicit rate of the lease known to Pipino is 10%. The asset was recorded at the inception of
the lease at the cash selling price of the leased asset. The annual payments related to the lease
transaction has been recorded by the company as a debit to the liability under capital lease
account.
c. The result of a purchases cutoff on the company’s purchases transactions from December 15 to
January 15 you have rendered is shown below:
Receiving Invoice Receiving Report
Report No. Date Date Shipment Terms Amount
12/15/201 FOB SHIPPING
65212 4 12/15/2014 POINT 15,000
12/17/201 FOB SHIPPING
65213 4 12/20/2014 POINT 16,000
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12/21/201
65214 4 12/21/2014 FOB DESTINATION 17,500
12/26/201
65215 4 12/30/2014 FOB DESTINATION 20,000
12/30/201 FOB SHIPPING
65216 4 1/2/2015 POINT 30,000
12/30/201 FOB SHIPPING
65217 4 1/2/2015 POINT 28,000
12/31/201
65218 4 1/3/2015 FOB DESTINATION 19,000
65219 1/2/2015 1/5/2015 FOB BUYER 30,500
FOB SHIPPING
65220 1/5/2015 1/10/2015 POINT 41,000
FOB SHIPPING
65221 1/7/2015 1/11/2015 POINT 22,000
65222 1/10/2015 1/15/2015 FOB DESTINATION 25,000
Investigations revealed that the last receiving report recorded in the voucher register was RR65220.
d. The company has a two-year warranty on its products. The warranty estimates in the past years
were AT 5% of the net sales. During the current year because of increased returns the company
decided to increase warranty estimates at 8% of its total net sales, 70% of which is expected to
be incurred during the year of sale and the balance in the year following the year of sale.
Presented below are information relevant to your audit:
2012 2013 2014
Net Sales P24,000,000 P27,150,000 P31,650,000
Actual warranty costs paid 1,150,000 1,450,000 1,950,000
The company is yet to update its warranty liabilities as of December 31, 2014.
Required:
1. What is the correct balance of the notes payable as of December 31, 2014?
a. 7,314,250 b. 7,451,388 c.7,569,669 d. 7,609,096
2. What was the initial amount debited to the asset account at the inception of the finance lease?
a. 2,240,000 b. 3440,000 c. 5,640,000 d. 7,040,000
3. How much is the total non-current liabilities to be presented in the 2014 balance sheet?
a. 8,389,565 b. 10,550,813 c. 10,800,813 d. 11,370,709
4. What is the correct accounts payable as of December 31, 2014?
a. 1,722,000 b. 1,750,000 c. 1778,000 d. 1,797,000
5. What is the correct warranties expense in 2014?
a. 582,000 b. 1,582,500 c. 1,950,000 d. 2,532,000
6. How much should be presented as current liabilities in the balance sheet of Pilipino as of
December 31, 2014?
a. 2,289,500 b. 3,871,896 c. 3,109, 396 d. 5,539,500
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