INTERMEDIATE ACCOUNTING II

Practice Set 1 (Current Liabilities) – Part I

Premiums

1. An entity manufactures t-shirts and sells these for P250 per unit. Each t-shirt comes with 1 coupon. A mug is
offered to customers on the return of 5 coupons. The mug costs P30 and it is estimated that 70% of the coupons
will be redeemed.

The data for the first year concerning the premium plan are:
Sales (8,000 units), in PhP 2,000,000
Mugs purchased (1,600 units), in PhP 48,000
Coupons redeemed, in quantity 4,200

a. Give the entry to record the sales

b. Give the entry to record the purchase of premiums
c. Give the entry to record the redemption of 4,200 coupons
d. Give the entry to record the liability for premiums at the end of the period
e. Give the total amount of premiums to be declared as assets
f. Give the total amount of estimated premium liability
g. Give the total premium expense for the period

2. An entity manufactures t-shirts and sells these for P250 per unit. Each t-shirt comes with 1 coupon. A mug is
offered to customers on the return of 5 coupons and P10. The mug costs P30 and it is estimated that 70% of the
coupons will be redeemed.

The data for the first year concerning the premium plan are:
Sales (8,000 units), in PhP 2,000,000
Mugs purchased (1,600 units), in PhP 48,000
Coupons redeemed, in quantity 4,200

a. Give the entry to record the sales

b. Give the entry to record the purchase of premiums
c. Give the entry to record the redemption of 4,200 coupons
d. Give the entry to record the liability for premiums at the end of the period
e. Give the total amount of premiums to be declared as assets
f. Give the total amount of estimated premium liability
g. Give the total premium expense for the period

3. CCK, a grocery retailer, operated a customer loyalty program whereby members gain loyalty points when they
spend a specified amount on groceries. During 2019, the entity granted 20,000 points. Management expects that
80% of these points will be redeemed. The fair value of each loyalty point is estimated at P40.

The sales during 2019 amounted to P6,000,000 including the loyalty points. On December 31, 2019, 6,000 points
have been redeemed in exchange for groceries.

In 2020, management revised its expectations and now expects that 90% of the points will be redeemed
altogether. During 2020, an additional 9,500 points was redeemed.

In 2021, a further 1,500 points were redeemed. Management continues to expect that only 90% of the points will
ever be redeemed.

a. Give the entry for the initial sale during 2019

b. Give the entry for the redemption of points during 2019
c. Give the entry for the redemption of points during 2020
d. Give the entry for the redemption of points during 2021
e. Give the balance of the unearned revenue for points at December 31, 2021

4. CCK, a grocery retailer, operated a customer loyalty program whereby members gain loyalty points when they
spend a specified amount on groceries. During 2019, the entity granted 20,000 points. Management expects that
80% of these points will be redeemed. The fair value of each loyalty point is estimated at P40.

The sales during 2019 amounted to P6,000,000 including the loyalty points. On December 31, 2019, 6,000 points
have been redeemed in exchange for groceries.

In 2020, management revised its expectations and now expects that 90% of the points will be redeemed
altogether. During 2020, an additional 9,500 points was redeemed.

In 2021, a further 4,500 points were redeemed.

 a. Give the entry for the initial sale during 2019
b. Give the entry for the redemption of points during 2019
c. Give the entry for the redemption of points during 2020
d. Give the entry for the redemption of points during 2021
e. Give the balance of the unearned revenue for points at December 31, 2021

5. An entity, a retailer of electrical goods, participates in a customer loyalty program operated by an airline. The
entity grants program members one air travel point for every P2,000 spent on electrical goods. Program members
can redeem the points for travel with the airline subject to availability.

The entity pays the airline P80 for each point. During the current year, the entity sold a total of P8,000,000 of
electrical goods and granted 4,000 points. The fair value of a point is P100.

Assuming the entity collects the consideration allocated to the points on its own account:
a. Give the entry to record the initial sale (together with the fair value of the points)
b. Give the entry for the payment to the airlines related to the points

Assuming the entity collects the consideration on behalf of the airline:

c. Give the entry to record the initial sale (together with the fair value of the points)
d. Give the entry for the payment to the airlines related to the points

6. An entity sells a single type of motorcycle which happens to be patronized greatly by the buying public. Each unit
costs P70,000. Each motorcycle is under warranty for two years and the entity has estimated from past
experience that warranty cost will probably average P2,000 per unit and that only 20% of the units sold will be
returned for repair.

For the year 2018, 400 units of motorcycles were sold. The entity incurred P60,000 and P90,000 for repairs during
2018 and 2019, respectively with respect to the units sold in 2018.

a. Give the entry to record the sales during 2018

Assuming the accrual approach is used:

b. Give the entry to set up the estimated warranty liability
c. Give the entry to record payment of the actual cost

Assuming the expense as incurred approach is used:

d. Give the entry to set up the estimated warranty liability
e. Give the entry to record payment of the actual cost

7. An entity sold a product for P2,100,000. The regular warranty period for the product is two years. The entity sold
an additional warranty of three years at a cost of P75,000. The extended warranty contract starts only after the
expiration of the regular two-year warranty period.

a. Give the entry for the sale of the product together with the warranties attached
b. Give the entry to amortize the unearned warranty revenue at the end of the third year.

8. An entity reported the following payroll of the employees for the month of December 2019:
Gross payroll 800,000
Income tax withheld (120,000)
SSS contribution (30,000)
HDMF contribution (25,000)
PHIC contribution (25,000)
Net payroll 600,000

9. XYZ Company is a VAT-registered retailer. During the year, it had sales of P10,640,000 and purchases of
P6,272,000. VAT is at 12%.
a. Give the entry to recognize sales (assume credit sales)
b. Give the entry to recognize purchases (assume credit purchases)
c. Give the entry to settle the VAT liability (or refund)

10. XYZ Company is a VAT-registered retailer. During the year, it had sales of P4,480,000 and purchases of
P5,600,000. VAT is at 12%.
a. Give the entry to recognize sales (assume credit sales)
b. Give the entry to recognize purchases (assume credit purchases)
c. Give the entry to settle the VAT liability (or refund)