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Problem 1-1 (AICPA adapted) CFAS SOLUTION
Accounting (FEU Institute of Technology)
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Problem 1-1 (AICPA adapted)
In an effort to increase sales, Mills Company inaugurated a sales promotional campaign on June 30,
2013. The entity placed a coupon redeemable for a premium each package of cereal sold. Each premium
cost P20 and five coupons must be presented by a customer to receive a premium. The entity estimated
that only 60% of the coupons issued would be redeemed. For the six months ended December 31, 2013,
the following information is available.
Packages
cereal sold
160,000
Premiums
purchased
12,000
Coupons
redeemed
40,000
What is the estimated liability for premiums on Dec. 31, 2013?
A. 160,000
B. 224,000
C. 288,000
D. 384,000
Problem 1-8 (IAA)
Love Company included one coupon in each package sold. Atowel is offerd as premium to customers
who send in 10 coupons:
2013
2014
Packages of cereal sold
5000,000
800,000
Number of towel distributed as premium
30,000
60,000
Number of towel to be distributed
20,000
50,000
5,000
3,000
Premium next period
What amount should be reported as premium expense in 2014?
A. 2,400,000
B. 2,000,000
C. 2,120,000
D. 1,920,000
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Problem 1-9 (IAA)
Clam Company offers the customers a pottery cereal bowl if they send in three box tops from the
products and P10. The entity estimated that 60% of the box tops would be redeemed. In 2013, he entity
sold 675,000 boxes and customers redeemed 330,000 box tops receiving 110,000. The cost bowl is P25.
What is the liability for outstanding premiums on Dec 31, 2013?
A. 250,000
B. 375,000
C. 625,000
D. 875,000
Problem 1-14 (AICPA Adapted)
Miles Company sells washing machines that carry a three-year warranty against manufacture’s defects.
Based on the entity’s experience, warranty costs are estimated at P300 per machine. During the current
year, the entity sold 2,400 washing machines and paid warranty costs of P170, 000. What should be
reported as warranty expense for the current year?
A. 170,000
B. 240,000
C. 550,000
D. 720,000
Problem 1-18 (IAA)
Bass Company manufactures high-end home electronics systems. The entity provides a one-year
warranty for all products sold. The entity estimated that the warranty cost of P650, 000 on Jan. 1, 2013.
During the current year, the entity sold 5,000 units for a total of P9, 000,000 and paid warranty claims of
P750, 000 on current and prior year’s sales. What is the warranty liability on Dec. 31, 2013?
A. 250,000
B. 350,000
C. 900,000
D. 750,000
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Problem 3-1 (AICPA Adapted)
Kemp Company must determine the Dec. 31, 2013 accruals for advertising and rent expense. P50, 000
advertising bill was received Jan. 7, 2014 comprising costs of P35, 000 for advertisements in Dec 2013
issues, and P15, 000 for advertisements in Jan 2014 issues of the newspapers.
A store lease, effective Dec. 16, 2013, calls for fixed rent of P120,000 per month, payable one month
from the effective date and monthly thereafter. In addition, rent equal to 5% of the net sales over P6,
000,000 per calendar year payable on Jan 31 of the following year. What sales for 2013 totaled
P9, 000,000? On Dec. 31, 2013 what amount should be reported as accrued liabilities?
A. 260,000
B. 185,000
C. 210,000
D. 245,000
Problem 3-13 (AICPA Adapted)
Leslie Company pays all salaried employees on a Monday for the five-day workweek ended the previous
Friday. The last payroll recorded for the year ended December 31,2013 was for the week ended
December 25,2013. The payroll for the week ended January 1,2014, included regular weekly salaries of
P80,000 and vacation pay of P25,000 for vacation time earned in 2013 not taken by December 31,2013.
The entity has accrued a liability of P20,000 for vacation pay on December 31,2012. On December
31,2013, what amount should be reported as accrued salary and vacation pay?
A. 64,000
B. 68,000
C. 69,000
D. 89,000
Problem 4-9 (IAA)
Concord Company sells motorcycle helmets. In 2013, the entity sold 4,000,000 helmets before
discovering a significant defect in their construction. By December 31,2013, two lawsuits had been
filed against the entity. The first lawsuit, which the entity has little chance of winning , is expected to
be settled out of court for P1,500,000 in January 2014. The legal counsel believed that the entity has a
50-50 chance of winning the second lawsuit, which is for P1,000,000. What is the accrued liability on
December 31, 2013 as a result of the lawsuits?
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A. 1,500,00
B. 1,000,000
C. 2,500,000
D.
0
Problem 4-10 (IAA)
Prime company has long owned a manufacturing site that has now been discovered to be
contaminated with toxic waste. The entity has acknowledged its responsibility for the contamination.
An initial clean up feasibility study has shown that it will cost at least P500,000 to clean up the toxic
waste. During the current year, the entity has been sued for patent infringement and lost the case. A
preliminary judgment of P300,000 was issued and is under appeal. The entity’s attorneys agree that it
probable that the entity will lose this appeal. What amount of provision should be accrued as liability?
A. 500,000
B. 800,000
C. 300,000
D.
0
Problem 4-11 (IAA)
Eastern company has several contingent liabilities on December 31,2013. The auditor obtained the
following brief description of each liability.
In may 2013, Eastern Company became involved in litigation. In December 2013, the court assessed a
judgment for P1, 600,000 against Eastern. The entity is appealing the amount of the judgment. The
entity’s attorneys believed it is probable that they can reduce the assessment on appeal by 50%.
In July 2013, Pasig City brought action against Eastern Company for polluting the Pasig River with its
waste products. It is probable that Pasig City will be successful but the amount of damages Eastern
might have to pay should not exceed P1,500,000. What total amount should be accrued as provision
on December 31, 2013?
A. 1,600,000
B. 1,500,000
C. 3,100,000
D. 2,300,000
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Problem 5-1(AICPA Adapted)
On September 1, 2013, Pine Company issued a note payable to National Bank in the amount of P1,
800,000, bearing interest at 12%, and payable in three equal annual principal payments of P600, 000.
On this date, the bank’s prime was 11%. The first interest and principal was made on September 1,
2014. On December 31, 2014, what amount should be reported as accrued interest payable?
A. 44,000
B.48, 000
C.66, 000
D.72, 000
Problem 5-3 (AICPA Adapted)
On December 31, 2013, Roth Company issued a P1, 000,000 face value note payable to Wake
Company in exchange for services rendered to Roth. The note, made at usual trade terms, is due in
nine months and bears interest, payable at maturity, at the annual rate of 3%. The market interest is
8%. The compound interest factor of 1 due in nine months at 8% is.944.At what amount should the
note payable be reported on December 31, 2013?
A.1, 030,000
B.1, 000,000
C.965, 200
D.944, 000
Problem 5-5 (IAA)
Joshua Company bought a new machine on January 1,2013 and agreed to pay in equal annual
installment of P600, 000 at the end of each of the next five years . The prevailing interest rate is 12%.
The present value of an ordinary annuity of 1 at 12% for five periods is 3.60. The value of 1 at 12% for
five periods is 0.567. What is the interest expense on the note payable for 2013?
A.259, 200
B.187, 200
C.360, 000
D.457, 200
Problem 15-15 (AICPA Adapted)
On January 1, 2013, Jonathan Company borrowed P500, 000 8% noninterest-bearing note due in four
years. The present of the note on January 1, 2013 was P367, 500. The entity elects the fair value
method for reporting financial liabilities. On December 31, 2013, the fair value of the note is P408,
150. At what amount should the discount on note payable be presented on December 31, 2013?
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A.132, 500
B.103, 100
C.91, 850
D.
0
Problem 7-1 (AICPA Adapted)
Glen Company had the following long-term debt:
Sinking funds bond, maturing in installments
Industrial revenue bonds, maturing in installments
Subordinated bonds, maturing on a single date
2, 200, 000
1, 800, 000
3, 000, 000
What is the total amount of serial bonds?
A.3, 000, 000
B.4, 000 ,000
C.4, 800, 000
D.7, 000, 000
Problem 7-7 (AICPA Adapted)
On November 1, 2013, Mason Company issued P8,000, 000 of 10-year, 8% term bonds dated October
1, 2013, 2013. The bonds were sold to yield 10% with total proceeds of P7, 000, 000 plus accrued
interest. Interest is paid every April 1 and October 1. What amount should be reported for accrued
interest payable on December 31, 2013?
A.175, 000
B.160, 000
C.116, 667
D.106, 667
Problem 7-9 (AICPA Adapted)
On June 30, 2013, Huff Company issued at 99, five thousand of 8%, P1,000 face value bonds were
issued through an underwriter to whom the entity paid bond issue cost of P425, 000. On June 30,
2013, what amount should be reported as bond liability?
A.4,525, 000
B.4, 950, 000
C.5, 000, 000
D.4, 575, 000
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