QUIZ # 1 Theories Which of the following is an essential characteristic of a liability? I, II, and III Which of the following shall generally be classified as current even if they are due to be settled more than twelve months after the end of the reporting period? Trade payables and accrued operating expenses On August 1, 2021, WANDA Company borrowed cash and signed a two-year interest-bearing note on which the principal is due on July 31, 2023 while the interest on the note is payable every July 31 starting July 31, 2022. How will the note payable and the accrued interest be classified in the statement of financial position at December 31, 2021? * Option B Advance payments from customers represent * Liabilities until the product is provided. How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the statement of financial position before the performance? * Unearned revenue for the entire proceeds The cost of customer premium offer should be charged to expense * When the related product is sold. Which of the following best describes the accrual approach of accounting for warranty cost? Expensed based on estimate in year of sale. QUIZ # 1 Which of the following statements are correct? I, II, and IV Which of the following uncertainties is normally accrued? Obligations related to product warranties. Which of the following sets of conditions would give rise to the accrual of a loss or an expense? * Amount of loss is reasonably estimable and occurrence of event is probable. After a wedding in 2020, ten people died, possibly as a result of food poisoning during the wedding reception from products sold by the enterprise. Legal proceedings are started seeking damages from the enterprise but the enterprise disputes the liability. Up to the date of authorization of the financial statements for the year ended December 31, 2020 issue, the enterprise’s lawyers advise that it is probable that the enterprise will not be found liable. However, when the enterprise prepares the financial statements for the year ended December 31, 2021, its lawyers advise that, owing to developments in the case, it is probable that the enterprise will be found liable. What is the proper disposition for the foregoing facts for the years 2020 and 2021? No provision is recognized in 2020, though the matter may be disclosed as a contingent liability; a provision is recognized in 2021. Rambeau Co. has co-signed the mortgage note on the residential house of its president guaranteeing the indebtedness in the event that the president should default. Rambeau considers the likelihood of default to be unlikely. How should the guaranty be treated in Rambeau’s financial statements? Neither accrued nor disclosed An entity did not record an accrual for a present obligation but disclose the nature of the obligation and the range of the loss. How likely is the loss? Reasonably possible When the provision involves a large population of items, the estimate of the amount Reflects the weighting of all possible outcomes by their associated probabilities. Which statement is incorrect when the expenditures require to settle a provision is expected to be reimbursed by another party? The reimbursement shall be “netted” against the estimated liability for the provision. QUIZ # 1 PROBLEMS PROBLEM 1 How much of the above items should be classified as current liabilities on December 31, 2020? QUIZ # 1 PROBLEM 2 How much of the above items to be included as current liabilities on December 31, 2020? How much of the above items to be included as noncurrent liabilities on December 31, 2020? PROBLEM 3 Scarlett Co. pays bonuses to its sales manager and two sales agents. The company had profit for 2020 of P4,500,000 before bonuses and 30% income tax. The sales manager gets 8% and each sales agent gets 6% of profit after bonuses and income tax. How much is the bonus payable to the sales manager? How much is the bonus payable to each sales agent? QUIZ # 1 PROBLEM 4 How much service contract revenue would be recognized in the year 2020? How much is the unearned service contract on December 31, 2020? How much service contract revenue would be recognized in the year 2021? How much is the unearned service contract on December 31, 2021? PROBLEM 5 What is the premium expense for 2019? What is the premium expense for 2020? What is the premium liability on December 31, 2020? PROBLEM 6 What is the warranty liability on December 31, 2021? What is the warranty expense for 2022? What is the warranty liability on December 31, 2022? QUIZ # 1 PROBLEM 7 What total amount of provision should be recognized on December 31, 2020? PROBLEM 8 What total amount of provision should be recognized on December 31, 2020? QUIZ # 1 PROBLEM 9 During 2020, Air Supply Company is the defendant in a patent infringement suit. The entity’s lawyers believe there is a 25% chance that the court will dismiss the case and the company will incur an outflow of economic benefits. However, if the court rules in favor of the claimant, the lawyers believe that there is a 30% chance that the company will be required to pay damages of P500,000 and a 70% chance that the entity will be required to pay damages of P200,000. Other outcomes are highly unlikely. The court is expected to rule in late December 2021. There is no indication that the claimant will settle out of court. A 5% risk adjustment factor to the expected cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates. An appropriate discount rate of 6% per year. The present value of 1 at 6% for one period is 0.9434 What amount shall be reported as provision for lawsuit on December 31, 2020? PROBLEM 10 In May 2019, Rhodey Company filed suit against James Company seeking P1,900,000 damages for patent infringement. A court verdict in November 2019 awarded Rhodey P1,500,000 in damages, but James’s appeal is not expected to be decided before 2020. Rhodey’s counsel believed it is probable that Rhodey will be successful against James for an estimated amount in the range between P800,000 and P1,100,000, with P1,000,000 considered the most likely amount. What amount should Rhodey record as income from the lawsuit for the year ended December 31, 2019? PROBLEM 11 During the latter part of the year, Howl Company won a litigation award for P1,500,000 which was tripled to P4,500,000 to include punitive damages. The defendant, who is financially stable, has appealed only the P3,000,000 punitive damages. The company was awarded P5,000,000 in an unrelated suit it filed, which is being appealed by the defendant. Counsel is unable to estimate the outcome of these appeals. What amount should be reported as pre-tax gain for the year?
