Q1 Finacc2

QUIZ No. 1

Financial Accounting 2

Chapters 1-3

July 4, 2016

6:00-8:00 PM

THEORIES 1. Which of the following is not essential for recognition as a liability: a) There should be a present obligation to transfer economic benefit b) The obligating event triggering the obligation should have already happened c) The obligation to transfer economic benefit should be certain d) None of these 2. An electronics store is running a promotion where for every video game purchased, the customer receives a coupon upon checkout to purchase a second game at a 50% discount. The coupons expire in one year. The store normally recognized a gross profit margin of 40% of the selling price on video games. How would the store account for a purchase using the discount coupon? a. The reduction in sales price attributed to the coupon is recognized as premium expense. b. The difference between the cost of the video game and the cash received is recognized as premium expense. c. Premium expense is not recognized. d. The difference between the cost of the video game and the selling price prior to the coupon is recognized as premium expense. 3. Liabilities payable within one year can be excluded from current liabilities only if: a) The business intends to refinance the obligations on a long-term basis. b) The business has the demonstrated ability to refinance the obligations on a long-term basis. c) Both a and b. d) Liabilities payable within one year always must be classified as current liabilities. 4. The essential characteristics of a liability do not include: a) The existence of a past causal transaction or event. b) Present obligation. c) The existence of a legal obligation. d) A future sacrifice of economic benefits. 5. Which of the following is a current liability? a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue c. A long-term debt maturing currently, which is to be converted into common stock d. None of these 6. Which of the following does not demonstrate evidence regarding the ability to consummate a refinancing of short-term debt? a. Management indicated that they are going to refinance the obligation. b. Actually refinance the obligation. c. Have capacity under existing financing agreements that can be used to refinance the obligation. d. None of these 7. Which of the following best describes the cash-basis method of accounting for warranty costs? a. None of these b. Expensed when liability is accrued. c. Expensed when warranty claims are certain. d. Expensed when incurred. 8. Which of the following is a current liability? a. Preferred dividends in arrears b. A dividend payable in the form of additional shares of stock c. A cash dividend payable to preferred stockholders d. All of these 9. Which of the following are not factors that are considered when evaluating whether or not to record a liability for pending litigation? a. Time period in which the underlying cause of action occurred. b. The type of litigation involved. c. The probability of an unfavorable outcome. d. None of these 10. April Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and a. the Dean Company admits guilt. b. the court will decide the case within one year. c. None of these d. the cause for action occurred during the accounting period covered by the financial statements.

PROBLEM SOLVING (3pts. each) 1. Prille Inc. manufactures high-end whole home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is P200 per unit sold and reported a liability for estimated warranty costs P6.5 million at the beginning of this year. If during the current year, the company sold 50,000 units for a total of P243 million and paid warranty claims of P7,500,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year? a. P2,500,000. b. P3,500,000. c. P9,000,000. d. P10,000,000. 2. During 2014, GMA 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 for the first three-year period were as follows: Sales Actual Warranty Expenditures 2014 P 600,000 P 9,000 2015 1,500,000 45,000 2016 2,100,000 135,000 P 4,200,000 P 189,000 What amount should GMA report as a liability at December 31, 2016? a. P0 b. P15,000 c. P204,000 d. P315,000 3. Fuller Food Company distributes to consumers coupons which may be presented (on or before a stated expiration date) to grocers for discounts on certain products of Fuller. The grocers are reimbursed when they send the coupons to Fuller. In Fuller's experience, 50% of such coupons are redeemed, and generally one month elapses between the date a grocer receives a coupon from a consumer and the date Fuller receives it. During 2015 Fuller issued two separate series of coupons as follows: Issued On Total Value Consumer Expiration Date Amount Disbursed as of 12/31/15 1/1/15 P375,000 6/30/15 P177,000 7/1/15 540,000 12/31/15 225,000 The only journal entries to date recorded debits to coupon expense and credits to cash of P536,000. The December 31, 2015 balance sheet should include a liability for unredeemed coupons of a. P0. b. P45,000. c. P93,000. d. P270,000. Use the following information for questions 4-6. Mott Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Mott P2.00 each. Mott estimates that 40 percent of the coupons will be redeemed. Data for 2010 and 2011 are as follows: 2015 2016 Bags of dog food sold 500,000 600,000 Leashes purchased 18,000 22,000 Coupons redeemed 120,000 150,000 4. The premium expense for 2015 is a. P60,000. b. P20,000.

c.

P42,500.

d.

P50,000.

5. The estimated liability for premiums at December 31, 2015 is a. P60,000. b. P20,000. c. P42,500.

d.

P50,000.

6. The estimated liability for premiums at December 31, 2016 is a. P60,000. b. P20,000. c. P42,500.

d.

P50,000.

Use the following information for questions 7-10. Assume that Senbet Company has income of P100,000 before considering the bonus expense. According to the terms of the bonus agreement, Senbet is to set aside 20 percent of its income for distribution to employees. Tax rate is 40 percent. Compute the following: 7. Bonus based on income after bonus but before deducting tax. a. P 35,714 b. P 16,667 c. P13,043

d.

P10,714

8. Bonus based on income after deducting taxes but before deducting the bonus. a. P 35,714 b. P 16,667 c. P13,043 d.

P10,714

9. Bonus based on income after deducting taxes and after deducting the bonus. a. P 35,714 b. P 16,667 c. P13,043 d.

P10,714

10. Tax if bonus is based on income after deducting taxes and after deducting the bonus. a. P 35,714 b. P 16,667 c. P13,043 d. P10,714

REQUIRED (5pts. each) 1. Julie Company sells products with reusable and expensive containers. The customer is charged a deposit for each container returned within two years after the year of delivery. Containers held by customers on January 1, 2016 from deliveries in: 2014 75,000 2015 215,000 290,000 Containers delivered in 2016 390,000 Containers returned in 2016 from deliveries in: 2014 45,000 2015 125,000 2016 143,000 313,000 Required: Compute the liability for containers on December 31, 2016. 2. Aqua Company sells stereos under a 2 year warranty contract that requires the entity to replace defective parts and provide free labor on all repairs. During 2015, 1,000 units were sold at P9,000 each. In 2016, the entity sold an additional 900 units at P9,250 each. Sales occurred on the last day of the year for both 2015 and 2016. Based on past experience, the estimated 2 year warranty costs are P200 for parts and P250 for labor per unit. It is also estimated that 40% of the warranty expenditures will occur in the first year and 60% in the second year. Actual warranty expenditures are as follows: Stereos sold in 2015 Stereos sold in 2016

2016 180,000

2017 280,000 190,000

Required: Balance of Estimated warranty liability after adjustment.

REQUIRED (5pts. each) 1. Julie Company sells products with reusable and expensive containers. The customer is charged a deposit for each container returned within two years after the year of delivery. Containers held by customers on January 1, 2016 from deliveries in: 2014 75,000 2015 215,000 290,000 Containers delivered in 2016 390,000 Containers returned in 2016 from deliveries in: 2014 45,000 2015 125,000 2016 143,000 313,000 Required: Compute the liability for containers on December 31, 2016. 2. Aqua Company sells stereos under a 2 year warranty contract that requires the entity to replace defective parts and provide free labor on all repairs. During 2015, 1,000 units were sold at P9,000 each. In 2016, the entity sold an additional 900 units at P9,250 each. Sales occurred on the last day of the year for both 2015 and 2016. Based on past experience, the estimated 2 year warranty costs are P200 for parts and P250 for labor per unit. It is also estimated that 40% of the warranty expenditures will occur in the first year and 60% in the second year. Actual warranty expenditures are as follows: Stereos sold in 2015 Stereos sold in 2016

2016 180,000

Required: Balance of Estimated warranty liability after adjustment.

2017 280,000 190,000