Intermediate Accounting 2 Quiz 2

PROBLEM NO. 1
BE HELPFUL COMPANY carries a wide variety of musical instruments, sound reproduction
equipment, recorded music, and sheet music. Helpful uses two sales promotion techniques—
warranties and premiums to attract customers.

Musical instruments and sound equipment are sold with one year for replacement of parts
and labor. The estimated warranty cost, based on past experience, is 2% of sales.
The premium is offered on the recorded and sheet music. Customers receive a coupon for each
peso spent on recorded music or sheet music. Customers may exchange 200 coupons and P20
for cap. Helpful pays P34 for each cap and estimates that 60% of the coupons given to customers
will be redeemed.

Helpful’s total sales for 2024 were P7,200,000, --- P5,400,000 from musical instruments
and sound reproduction equipment and Pl,800,000 from recorded music and sheet music.
Replacement parts and labor for warranty work totaled P164,000 during 2024. A total of 6,500
caps used in the premium program were purchased during the year and there were 1,200,000
coupons redeemed in 2024.

The accrual method is used by Helpful to account for the warranty and premium costs for
financial reporting purposes. The balances in the accounts related to warranties and premiums
on January 1, 2024, were as shown below:

Inventory of caps P 39,950

Estimated Premium Claim Outstanding 44,800
Estimated Liability for Warranties 136,000

Determine the amounts that will be shown on the 2024 financial statements for the following:
1. Warranty expense

Sales from musical instruments and sound reprod. Equipment P 5,400,000

2%
Warranty Expense P 108,000

2. Estimated liability from warranties

Warranty Expense P 108,000

Estimated liabilities for warranties P 136,000
Total P 244,000
Less: replacement parts and labor for warranty P 164,000
Est. Liability warranty P 80,000

3. Premium expense

Coupon issued P 1,800,000

Expected redemption rate 60%
Est. coupon to be redeemed P 1,080,000
Exchange rate ÷ 200
Total 5,400
Net cost (P20 – P34) × 14
Premium expense P 75,600

4. Inventory of caps

Inventory of caps bal. P 39,950

Premium caps (6,500 × P34) 221, 000
Total P 260,950
Actual coupons (1.2m / 200 x P34) 204,000
Total Inventory of Caps P 56,950

5. Estimated liability for premiums

Estimated premiums claim outstanding P 44,800

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 Intermediate Accounting 2 Quiz 2

Premium expense 75,600

Total ↱ (20-34) P 120,400
Less: actual redemption ’24 (1.2m / 200 x 14) 84,000
Estimated liability for premiums P 36,400

PROBLEM NO.2
You are auditing VENERATION CORPORATION’s various liability accounts. The following
schedule of liabilities was presented to you by the company’s accountant in relation to your audit:
Accounts payable P460,000
Accrued expenses 29,400
Warranties payable 153,250
Salaries payable 268,500
10%, Note payable – bank 2,000,000

Audit notes:
a. You have rendered a purchases cut-off to ascertain the completeness of the company’s
accounts payable balance. The following is the summary of the entries 10 days before
and after the balance sheet date and your audit observations:

Purchases Journal Entries: Dec. 20 – Dec. 31, 2023:

RR Receiving Report Suppliers Amount FOB Term/Remark
number Date Invoice Date
9910 Dec. 20, 2023 Dec. 19, 2023 30,000 From Consignor
9911 Dec. 23, 2023 Dec. 22, 2023 60,000 Shipping Point
9912 Dec. 28, 2023 Dec. 26, 2023 42,000 Destination
9914 Jan. 2, 2024 Dec 29, 2023 45,000 Destination
9915 Jan. 3, 2024 Jan. 2, 2024 30,000 Shipping point

Purchases Journal Entries: January 2 – January 10, 2024

RR number Receiving Suppliers Amount FOB
Report Date Invoice Date Term/Remark
9916 Jan. 2, 2024 Dec. 28, 2023 P20,000 From
Consignor
9917 Jan. 3, 2024 Dec. 30, 2023 55,000 Destination

9918 Jan. 4, 2024 Dec. 31, 2023 34,000 Shipping Point

9919 Jan. 5, 2024 Jan. 3, 2024 42,000 Shipping Point

*note 1: RR number 9913 is for goods received on December 30, but the related
suppliers’ invoice document has not been received yet, thus was not recorded in the
purchases journal yet. Cost of these goods amounts to P25,000.

*note 2: assume suppliers’ invoice date as suppliers’ shipment date of goods and ending
inventories were appropriately established through an inventory count.

b. You also conducted a cash disbursement cut-off to search for unrecorded liabilities. Your
review is summarized below:
Entry date Voucher Description Amount Account
Reference Charged
Jan. 3, 2024 1–1 Legal services; 16,500 Accrued
received expense
12/2/2018
Jan. 4, 2024 1–2 Repairs services on 22,000 Repairs and
equipment in 2018 maintenance
expense

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 Intermediate Accounting 2 Quiz 2

Jan. 10, 2024 1–3 Payroll 84,500 Salaries and

12/21/2018 to wages
1/6/2019 (13 working expense
days, 5 days in Jan.)
Jan. 12, 2024 1–4 Electricity bill for 21,600 Utilities
December expense
Jan. 14, 2024 1–5 Water bill for 12,900 Accrued
December expense

c. The company started its 1-year warranty program for merchandise sold starting 2022.
The company estimates that it will incur P350 in parts and labor for repairing each unit
of merchandise. The company further estimates that 70% of the units sold shall be
returned for repairs. The following information is deemed relevant for your audit:
2022 2023
Number of units sold 1,250 1,410
Actual warranty costs P153,000 P250,000

The balance of the warranty payable is the accrued warranty cost at the end of 2022.
Actual warranty costs were charged to current year warranty expense. Adjusting entry
at the end of 2023 is yet to be made.

d. The 12% note payable to the bank was originated on June 30, 2021 and is due on June
30, 2024. Semi-annual interest on the note is payable every June 30 and December 31.
On December 31, 2023 the company has the option of refinancing the liability by issuing
another long-term debt security to the same bank due on June 30, 2025. The proceeds
of the loan to be made, as per agreement shall not exceed 80% of the fair market value
of the property to be attached to the loan as a collateral. As of the balance sheet date,
the said property has a fair value of P2,000,000 and is not expected to materially change
until the refinancing transaction is completed.

Required:
6. What is the adjusted balance of the accounts payable account?

Unadjusted account payables 460,000

Adjustments:
Less: From consignor RR 9910 (30,000)
Add: Goods Received RR 9913 25,000
Less: FOB Destination RR 9914 (45,000)
Less: Goods received in January RR 9915 (30,000)
Add: FOB Shipping point RR9918 34,000
Adjusted Accounts Payable 414,000

7. What is the correct balance of the accrued expenses account?

Unadjusted accrued expense 29,400

Adjustments:
Repairs and maintenance expense 22,000
Salaries wages expense (84.5k / 13d) 52,000
Utilities expense 21,600
Adjusted accrued expenses 125,000

8. What is the balance of warranties payable as of December 31, 2023?

Warranty expense for 2022 (1,250 x 70% x 350) 306,250

Less: actual warranty cost for 2022 153,000
Add: warranty expense for 2023 (1,410 x 70% x 350) 345,450

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 Intermediate Accounting 2 Quiz 2

Less: actual warranty cost for 2022 250,000

Warranty expense balance in 2023 248,700

9. How much from the 10% notes payable shall be presented as noncurrent?

Non-current liability portion (2m x 80%) P 1,600,000

PROBLEM NO.4
KINDNESS CORPORATION is an appliance dealer of televisions, refrigerators, air
conditioning systems, and home furniture. As part of its promotional campaign, it offered
customers premiums and warranties.

You were engaged to audit the financial statements of KINDNESS CORPORATION, most
particularly on the audit verification of its estimated liabilities. The following information was
extracted from the company’s records:
a. Customers received a coupon for each P1,000 purchase of any televisions,
refrigerators and air conditioning units. A DVD player is offered as a premium to
customers who send in 5 coupons. Each DVD player has a cost of P3,000 and it is
estimated that it would probably redeem 70% of the distributed coupons. Total cost
of DVD payers used in this premium program was at P1,500,000. A total of 2,000
coupons were redeemed in 2020.
b. With the introduction of its new designs on home furniture, it offered a one-year
warranty against manufacturer’s defects. Based on its experience, warranty cost is
estimated at 3% of sales. Actual warranty cost during 2020 was at P35,000.
c. Sales for the year 2020 totaled P4,500,000 (including P1,000,000 sales on home
furniture)

d. January 1, 2020 balances were:

Estimated liabilities on premiums P350,000

Estimated liabilities on warranties 50,000
Required:
10. On your audit working papers, how much is the corrected amount of Premium Expense

Total sales (4.5m – 1m) P 3,500,000

Total coupons (3.5m / 1000) 3,500
Coupon rate 70%
2,450
Total premium (2,450 / 5) 490
Premium expense (490/ 3000) P 1,470,000

11. On your audit working papers, how much is the corrected amount of Estimated liabilities
for premium as of December 31, 2020?
Est. liability on premium P 350,000
Premium expense 1,470,000
Total P 1,820,000
Less: Actual premium (400 x 3000) 1,200,000
Estimated liability for premium P 620,000

12. On your audit working papers, how much is the corrected amount of Warranties Expense
for 2020?

Sales on home furniture P 1,000,000

Estimated warranty cost at 3%
Warranty expense P 30,000

13. How much is the corrected amount of Estimated liabilities for warranties as of December
31, 2020?

Est. liabilities on warranties beg. P 50,000

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 Intermediate Accounting 2 Quiz 2

Warranty expense 30,000

Total P 80,000
Less: actual warranty cost 35,000
Estimated liabilities warranty for December 31 P 45,000

1. 108,000 11. 620,000

2. 80,000 12. 30,000

3. 75,600 13. 45,000

4. 56,950 14.
5. 36,400 15.

6. 414,000 16.

7. 125,000 17.

8. 248,700 18.

9. 1,600,000 19.

10. 1,470,000 20.

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