FOR INTACC 3-NON-FIN’L LIAB. PROV.

CONTINGENCY

MULTIPLE CHOICE QUESTIONS

1. Which of the following situations may give rise to unearned revenue?

a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.

2. Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating
cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing
new products against defects for three years that has resulted in material but rather stable
warranty repair and replacement costs. Any liability for the warranty
a. should be reported as non-current.
b. should be reported as current.
c. should be reported as part current and part non-current.
d. need not be disclosed.

3. Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements

at December 31, 2015. Because of a recently proven health hazard in one of its paints, the
government has clearly indicated its intention of having Ortiz recall all cans of this paint sold in
the last six months. The management of Ortiz estimates that this recall would cost P800,000.
What accounting recognition, if any, should be accorded this situation?
a. No recognition
b. Note disclosure only
c. Operating expense of P800,000 and liability of P800,000
d. Appropriation of retained earnings of P800,000

4. Information available prior to the issuance of the financial statements indicates that it is probable
that, at the date of the financial statements, a company has a present obligation related to product
warranties. The amount of the expense involved can be reasonably estimated. Based on the above
facts, the estimated warranty expense should be
a. accrued.
b. disclosed but not accrued.
c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.

5. Espinosa Co. has a provision to accrue. The amount can only be reasonably estimated within a
range of outcomes. No single amount within the range is a better estimate than any other
amount. The amount of the accrual should be
a. zero.
b. the mid point of the range.
c. the minimum of the range.
d. the maximum of the range.

6. Accounting for product warranty costs under an assurance-type warranty

a. is required for income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. charges an expense account when the seller performs in compliance with the
warranty.
d. represents accepted practice and should be used whenever the warranty is an
integral and inseparable part of the sale.

7. Which of the following best describes the accounting for assurance-type warranty costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.
 8. Which of the following is a characteristic of an assurance-type warranty, but not a service-type
warranty?
a. Warranty liability.
b. Warranty expense.
c. Unearned warranty revenue.
d. Warranty revenue.

9. What condition is necessary to recognize an environmental liability?

a. Company has an existing legal obligation and can reasonably estimate the amount of
the liability.
b. Company can reasonably estimate the amount of the liability.
c. Company has an existing legal obligation.
d. Obligation event has occurred.

10. Which of the following is not to be 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. The ability to make a reasonable estimate of the amount of the loss.

11. A contingent liability

a. always exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not probable.
c. is always the result of a loss contingency.
d. is not reported as a liability if not probable.

12. Provisions are contingent liabilities which are accrued because the likelihood of an unfavorable
outcome is
a. virtually certain.
b. greater than 50%.
c. at least 75%.
d. possible.

13 . Neer Co. has a probable loss that can only be reasonably estimated within a range of outcomes.
No single amount within the range is a better estimate than any other amount. The loss accrual
should be
a. zero.
b. the maximum of the range.
c. the minimum of the range.
d. the mid point of the range.

14. Hatcher Corporation sold 10,500 dishwashers for P1,100 each during 2015. The dishwashers are
under warranty for one year following the sale. Maintenance on the dishwashers during the
warranty period averages P90 each. Actual warranty costs incurred during 2015 for units sold that
year were P296,000. The statement of financial position at year end will report a related liability
of:
a. P296,000.
b. P649,000.
c. P945,000.
d. P1,030,900.

15. During the year 2015, XMEN Corporation sold 10,500 units at P550 each, product which is under
warranty for one year. Maintenance on the product during the warranty period averages P45
each. Actual warranty costs incurred during 2015 for units sold were P148,000. The statement of
financial position at year end will report a related liability of:
a. P148,000.
b. P324,500.
c. P472,500.
d. P515,450.
16. LG CO. provides extended service contracts on electronic equipment sold through major retailers.
The standard contract is for three years. During the current year, LG CO. provided 21,000 such
warranty contracts at an average price of P81 each. Related to these contracts, the company
spent P200,000 servicing the contracts during the current year and expects to spend P1,050,000
more in the future. What is the net profit that the company will recognize in the current year
related to these contracts?
a. P451,000.
b. P1,501,000.
c. P150,333.
d. P367,000.

17. During 2015, Stabler 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 400,000 P 6,000
2015 1,000,000 30,000
2016 1,400,000 90,000
P2,800,000 P126,000
What amount should Stabler report as a liability at December 31, 2016?
a. P0
b. P10,000
c. P136,000
d. P210,000

18. Nance Company estimates its annual warranty expense as 4% of annual net sales. The following
data relate to the calendar year 2015:

Warranty liability account

Balance, Dec. 31, 2015 P5,000 debit before adjustment
Balance, Dec. 31, 2015 35,000 credit after adjustment
Which one of the following entries was made to record the 2015 estimated warranty expense?
a. Warranty Expense ........................................................................ 60,000
Retained Earnings (prior-period adjustment) .................... 10,000
Warranty Liability .............................................................. 50,000
b. Warranty Expense ........................................................................ 50,000
Retained Earnings (prior-period adjustment) ............................... 10,000
Warranty Liability .............................................................. 60,000
c. Warranty Expense ........................................................................ 40,000
Warranty Liability .............................................................. 40,000
d. Warranty Expense ........................................................................ 60,000
Warranty Liability .............................................................. 60,000

19. In 2014, Payton Corporation began selling a new line of products that carry a two-year warranty
against defects. Based upon past experience with other products, the estimated warranty costs
related to dollar sales are as follows:
First year of warranty 2%
Second year of warranty 5%
Sales and actual warranty expenditures for 2014 and 2015 are presented below:
2014 2015
Sales P300,000 P400,000
Actual warranty expenditures 10,000 20,000
What is the estimated warranty liability at the end of 2015?
a. P19,000.
b. P29,000.
c. P49,000.
d. P8,000.
20. Electronics4U 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 statement of financial position at the end of the current year?
a. P2,500,000.
b. P3,500,000.
c. P9,000,000.
d. P10,000,000.

21. Tender Foot Inc. is involved in litigation regarding a faulty product sold in a prior year. The
company has consulted with its attorney and determined that it is possible that they may lose the
case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their
attorney estimated that the amount of any payment would be P500,000. What is the required
journal entry as a result of this litigation?
a. Debit Litigation Expense for P500,000 and credit Litigation liability for P500,000.
b. No journal entry is required.
c. Debit Litigation Expense for P200,000 and credit Litigation Liability for P200,000.
d. Debit Litigation Expense for P300,000 and credit Litigation Liability for P300,000.

22. Winter Co. is being sued for illness caused to local residents as a result of negligence on the
company's part in permitting the local residents to be exposed to highly toxic chemicals from its
plant. Winter's lawyer states that it is probable that Winter will lose the suit and be found liable
for a judgment costing Winter anywhere from P1,200,000 to P6,000,000. However, the lawyer
states that the most probable cost is P3,600,000. As a result of the above facts, Winter should
accrue
a. a loss contingency of P1,200,000 and disclose an additional contingency of up to
P4,800,000.
b. a loss contingency of P3,600,000 and disclose an additional contingency of up to
P2,400,000.
c. a loss contingency of P3,600,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of P1,200,000 to P6,000,000.

23. Chippy Company’s salaried employees are paid biweekly. Occasionally, advances made to
employees are paid back by payroll deductions. Information relating to salaries for the calendar
year 2015 is as follows:
12/31/14 12/31/15
Employee advances P12,000 P 18,000
Accrued salaries payable 65,000 ?
Salaries expense during the year 650,000
Salaries paid during the year (gross) 625,000
At December 31, 2015, what amount should Chippy report for accrued salaries payable?
a. P90,000.
b. P84,000.
c. P72,000.
d. P25,000.

24. Felton Co. sells major household appliance service contracts for cash. The service contracts are
for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to
unearned service contract revenues. This account had a balance of P480,000 at December 31,
2014 before year-end adjustment. Service contract costs are charged as incurred to the service
contract expense account, which had a balance of P120,000 at December 31, 2014. Outstanding
service contracts at December 31, 2014 expire as follows:
During 2015 During 2016 During 2017
P100,000 P160,000 P70,000
What amount should be reported as unearned service contract revenues in Felton's December
31, 2014 statement of financial position?
a. P360,000.
b. P330,000.
c. P240,000.
d. P220,000.
25. During 2014, Eaton Co. introduced a new product carrying a two-year warranty against defects.
The estimated warranty costs related to dollar sales are 2% within 12 months following sale and
4% in the second 12 months following sale. Sales and actual warranty expenditures for the years
ended December 31, 2014 and 2015 are as follows:
Actual Warranty
Sales Expenditures
2014 P 800,000 P12,000
2015 1,000,000 30,000
P1,800,000 P42,000
At December 31, 2015, Eaton should report an estimated warranty liability of
a. P0.
b. P10,000.
c. P30,000.
d. P66,000.

26. An entity sells goods that carry two-year warranty. If minor repairs were to be required on all
goods sold in 2020, the repair cost would be P100,000. If major repairs were needed on all goods
sold, the cost would be P500,000. It is estimated that 80% of the goods sold in 2020 will have no
defects, 15% will have minor defects and 5% will have major defects.

How much is the provision for warranty repairs for the year 2020?
a. P40.
b. P100,000.
c. P300,000.
d. P500,000.

Use the following information for the next three questions:

ThreeD Company started business in 2015. It sells appliances with a three-year warranty. The
company estimates its warranty cost as a percentage of peso sales. Based on past experience, it is
estimated that 2% will be repaired during the first year of sale, 4% during the 2 nd year, and 6% will
be repaired in the third year.

In 2015 and 2016, the company sold 7,500 units and 8,400 units respectively at a selling price of
P5,000 per unit. For the year 2015 and 2016, the company incurred actual repair costs of P530,000
and P1,176,000 respectively.

27. What amount should ThreeD Company report as warranty expense for the year 2015?
a. P530,000
b. P5,040,000.
c. P4,500,000.
d. P3,970,000.

28. How much is the warranty expense for the year 2016?
a. P1,176,000
b. P5,040,000.
c. P4,500,000.
d. P3,970,000.

29. Assuming that sales and repair occur evenly throughout the period, how much is the estimated
warranty liability at December 31, 2016?
a. P8,790,000
b. P7,834,000.
c. P7,620,000.
d. P6,450,000.
 Use the following information for the next three questions:

For each unit of personal computer sold, Apples Company sells a service contract for P1,000 each.
The contract provides that the personal computers sold will be repaired by the company within a
period of three years from the date of sale. Sale of service contracts and repairs are made evenly
throughout the year.

Based on company experience, 10% of repairs are done in the first year from the date of sale, 30%
in the second year and 60% in the 3 rd year. Information related to the service contracts for years
2014, 2015 and 2016 is as follows:
2014 2015 2016
Number of service contracts sold 800 1,000 1,200
Service contracts expense incurred P50,000 P200,000 P350,000

30. How much is the unearned service contract revenue at December 31, 2016?
a. P2,130,000.
b. P1,930,000.
c. P1,200,000.
d. P300,000.

31. How much is the service contract revenue for the year 2015?
a. P210,000.
b. P600,000.
c. P620,000.
d. P1,000,000.

32. How much is the NET REVENUE from service contracts for the year 2016?
a. P270,000.
b. P520,000.
c. P620,000.
d. P850,000.