ACCOUNTING 4 PROVISIONS AND CONTINGENCIES

1. An entity includes one coupon in each box of laundry soap it sells. A towel is offered as a premium to
customers who send in 10 coupons and a remittance of P10. Distribution cost of premium is P5.
Experience indicates that only 30% of the coupons will be redeemed.

2019 2020
Boxes of soap sold 2,000,000 2,500,000
Number of towels purchased at P50 each 50,000 80,000
Coupons redeemed 400,000 700,000

1. What is the premium expense for 2019?

a. 2,500,000 c. 1,800,000
b. 2,400,000 d. 2,700,000

2. What is the estimated premium liability on December 31, 2019?

a. 1,000,000 c. 800,000
b. 1,100,000 d. 900,000

3. What is the premium expense for 2020?

a. 3,000,000 c. 3,375,000
b. 3,750,000 d. 4,000,000

4. What is the estimated premium liability on December 31, 2020?

a. 1,000,000 c. 1,125,000
b. 1,250,000 d. 1,375,000

2. An entity, a grocery retailer, operates a customer loyalty program. The entity grants program
members loyalty points when they spend a specified amount on groceries. Program members can
redeem the points for further groceries. The points have no expiry date. During 2019, the sales
amounted to P7,000,000 based on stand-alone selling price. During the year, the entity granted
10,000 points. But management expected that only 80% or 8,000 points will be redeemed. The stand
alone selling price of each loyalty point is estimated at P100.

On December 31, 2019, 4,800 points have been redeemed. In 2020, management revised its
expectations and now expected that 90% or 9,000 points will be redeemed altogether. During 2020,
the entity redeemed 2,400 points.

1. What amount should be reported as sales revenue including the revenue earned from points
for 2019?
a. 7,000,000
b. 6,125,000
c. 6,650,000
d. 7,525,000

2. What is the revenue earned from loyalty points for 2020?

 a. 700,000
b. 175,000
c. 210,000
d. 200,000
3. During 2019, an entity introduced a new product carrying a two-year warranty against defects. The
estimated warranty costs related to peso sales are 4% within 12 months following sale and 6% in the
second 12 months following sale. The entity reported sales of P5,000,000 for 2019 and P6,000,000 for
2020. The actual expenditures incurred and paid amounted to P150,000 for 2019 and P550,000 for
2020.

1. What is the warrany expense for 2020?

a. 650,000 c. 500,000
b. 600,000 d. 550,000

2. What is the estimated warranty liability on December 31, 2020?

a. 260,000 c. 240,000
b. 400,000 d. 100,000

4. During 2019, an entity is the defendant in a patent infringement lawsuit. The lawyers believe there is a
30% chance that the court will dismiss the case and the entity will incur no outflow of economic
benefits.

However, if the court rules in favor of the claimant, the lawyers believe that there is a 20% chance that
the entity will be required to pay damages of P200,000 and an 80% chance that the entity will be
required to pay damages of P100,000.

Other outcomes are unlikely. The count is expected to rule in late December 2020. There is no
indication that the claimant will settle out of court.

A 7% risk adjustment factor to the probability-weighted expected cash flows is considered appropriate
to reflect the uncertainties in the cash flow estimate. An appropriate discount rate is 5% per year. The
present value of 1 at 5% for one period is 0.95.

1. What is the undiscounted provision before risk adjustment on December 31, 2019?

a. 200,000 c. 150,000
b. 100,000 d. 84,000

2. What amount should be reported as provision for lawsuit on December 31, 2019?

a. 79,800 c. 89,880
b. 95,000 d. 85,386

5. On January 15, 2019, an explosion occured at an entity plant causing extensive property damage to
area buildings. By March 1, 2020, no claims had been asserted against the entity but management and
counsel concluded that it is likely that claims had been asserted and that it is probable that the entity
will be responsible for damages. Management believed that P1,250,000 would be a reasonable
estimate of the liability. The entity’s P5,000,000 comprehensive public liability policy would be a
 reasonable estimate of the liability. The comprehensive public liability policy has a P250,000
deductible clause. The financial statements for 2019 were issued on March 31, 2020.

What amount of provision should be reported on December 31,2019?

a. 5,000,000
b. 2,500,000
c. 1,250,000
d. 0

6. During 2019, an entity filed suit against another entity seeking damages for patent infringement. On
December 31, 2019, the legal counsel believed that it was probable that the entity would be
successful against the other entity for an estimated amount of P1,500,000. On March 31, 2020, the
entity was awarded P1,000,000 and received full payment thereof. The 2019 financial statements
were issued on March 1, 2020. How should this award be reported in the 2019 financial statements?

a. As receivable and revenue P1,000,000

b. As receivable and deferred revenue P1,000,000
c. As disclosure of contingent asset P1,000,000
d. As disclosure of contingent asset P1,500,000

7. An entity sells magazine subscriptions for a 1-year, 2-year or 3-year period. Cash receipts from
subscribers are credited to unearned subscription revenue and this account had a balance of
P1,700,000 on January 1, 2019. The entity provided the following information for the year ended
December 31, 2019:

Cash receipts from subscribers 2,300,000

Subscription revenue credited on December 31, 2019 1,500,000

On December 31, 2019, what amount should be reported as unearned subscription revenue?

a. 1,100,000
b. 2,500,000
c. 1,500,000
d. 2,300,000

8. An entity sells equipment service contracts that cover a two-year period. The sale price of each
contract is P800. The entity sold 1,000 contracts evenly throughout 2019.

The past experience is that, of the total pesos spent for repairs on service contracts, 40% is incurred
evenly during the first contract year and 60% evenly during the second contract year.

1. What is the contract revenue for 2019?

a. 320,000
b. 160,000
c. 400,000
d. 640,000

2. What is the unearned contract revenue on December 31, 2019?

a. 480,000
 b. 640,000
c. 240,000
d. 560,000

3. What is the contract revenue for 2020?

a. 480,000
b. 240,000
c. 400,000
d. 500,000