INTERMEDIATE ACCOUNTING II

Practice Set 1 (Current Liabilities) – Part II

1. SanKim is a mall operating in Tacurong City. As part of its marketing efforts for 2020, it initiated a program
whereby gift certificates would be sold to customers. The fair value of each gift certificate is estimated to be P150
when redeemed in merchandise and is valid for two years.

For 2020, SanKim sold 12,000 gift certificates. During 2020, 7,000 gift certificates were redeemed while an
additional 4,000 were redeemed in 2021. The unredeemed gift certificates were forfeited by 2022.

a. Give the entry for the sale of gift certificates in 2020

b. Give the entry for the redemption of gift certificates in 2020
c. Give the entry for the redemption of gift certificates in 2021

2. Starla Store is a small grocery store. It sells carbonated drinks among other products. For each 1L carbonated
drink sold, Starla asks a P7 deposit from customers. The deposit made for bottles sold for a particular month are
deemed forfeited if the bottles are not returned within the following month. Each bottle costs P5.

For January 2020, Starla sold 200 1L bottles of its carbonated drink, of which 190 were returned as of February
2020.

a. Give the entry to recognize the January 2020 sales

b. Give the entry to record the receipt of the deposits for January 2020
c. Give the entry to record the return of the bottles and the corresponding deposit
d. Give the entry to recognize the forfeiture of deposits for the unreturned bottles

3. XYZ Corporation, in order to increase productivity and morale among its top officials, has instituted a program of
performance bonus for 2019. As a result, the company’s chief executive officer was given a 10% bonus based on
the income of P4,000,000. The income tax rate is 20%.

Compute for the correct amount of bonus if it is given:

a. Before bonus and before tax
b. After bonus but before tax
c. After bonus and after tax
d. After tax but before bonus

4. Renta Company has a commercial building with all its offices and floor spaces up for lease. Upa Company
entered into a contract of lease for the entire first floor of the building at a rate of P100,000 per month and paid a
year’s worth of payment on April 1, 2019.

Under the nominal method:

a. Give the entry on April 1, 2019
b. Give the adjusting entry on December 31, 2019
c. Compute for the rent revenue for 2019
d. Compute for the unearned rent revenue for 2019

Under the real method:

e. Give the entry on April 1, 2019
f. Give the adjusting entry on December 31, 2019
g. Compute for the rent revenue for 2019
h. Compute for the unearned rent revenue for 2019

5. An entity sells goods with a warranty under which customers are covered for the cost of repairs of any
manufacturing defects that become apparent within 6 months after purchase.

If minor defects are detected in all products sold, repair costs would be about P650,000. If major defects are
detected in all products sold, repair costs of P2,400,000 would result.

The entity’s past experience and future expectations indicate that 80% of the goods sold will have no defects,
15% will have minor defects, and 5% will have major defects.

Give the entry for the provision of warranty liability.

6. An entity sells goods with a warranty under which customers are covered for the cost of repairs of any
manufacturing defects that become apparent within 5 years after purchase.

If minor defects are detected in all products sold, repair costs would be about P650,000. If major defects are
detected in all products sold, repair costs of P2,400,000 would result.
 The entity’s past experience and future expectations indicate that 80% of the goods sold will have no defects,
15% will have minor defects, and 5% will have major defects. The estimated defects are to be incurred evenly
during the 5-year warranty period. The discount rate is 7%.

Give the entry for the provision of warranty liability.

7. On June 4, 2019, the delivery truck of XYZ Corporation struck the side of the building of ABC Store and the latter
sued the former for damage to property. The lawyers believe there is a 60% chance that the court will not dismiss
the case and the entity will incur an outflow of future economic benefits.

If the court rules against the entity the lawyers believe there is a 30% chance the entity will be required to pay
damages of P700,000 and a 70% chance that the damages will be P1,000,000. A 10% risk adjustment factor to
the probabilities of the expected cash flows is considered appropriate to reflect the uncertainties in the cash flow
estimate.

Give the estimated amount of provision.

8. On June 4, 2019, the delivery truck of XYZ Corporation struck the side of the building of ABC Store and the latter
sued the former for damage to property. The lawyers believe there is a 50% chance that the court will not dismiss
the case and the entity will incur an outflow of future economic benefits.

If the court rules against the entity the lawyers believe there is a 20% chance the entity will be required to pay
damages of P10,000 and an 80% chance that the damages will be P1,000,000. A 10% risk adjustment factor to
the probabilities of the expected cash flows is considered appropriate to reflect the uncertainties in the cash flow
estimate.

Give the estimated amount of provision.

9. An entity extracts natural gas and oil from the Benham Rise. ON January 1, 2019, the entity constructed a drilling
platform for P60,000,000 and is required by Philippine law to remove and dismantle the platform at the end of its
useful life of 15 years. The straight line method is used in depreciating the drilling platform.

The entity has estimated that such decommissioning will cost P8,000,000. The discount rate is 11%.

On December 31, 2033, the entity contracted with another entity to dismantle and remove the drilling platform for
P8,400,000.

a. Give the entry to recognize the cost of the drilling platform

b. Give the entry for the depreciation of the frilling platform in 2019
c. Give the entry for the amortization of the decommissioning liability in 2019
d. Give the entry for the settlement of the decommissioning liability in 2033.

10. On August 1, 2019, an entity selling food products was sued by a group of customers who claimed they
experienced food poisoning after consuming the entity’s products. It was later discovered that the entity delivered
the products in good condition to the carrier. It was while the goods were in the custody of the carrier that they got
contaminated. The charges have not been dropped but the entity’s lawyers set a 5% chance of paying a fine of
P200,000. Internal evaluation led to a conclusion that payment was not probable.

Give the estimated amount of contingent liability to be shown in the Statement of Financial Position.