SAMPLE PROBLEMS

ABC Company launched a new promotional program. For every 10 product box tops returned to the company, customers receive an attractive toy that costs P8 each. This toy may be sold
separately for P12. The company estimates that only 60% of the product box tops will be redeemed from the customers. Additional information are as follows:

Units Amount
Sales of products (in boxes) 2,000,000 90,000,000
Purchase of premiums (prizes) 100,000 800,000
Premiums distributed from the customers 82,000

Compute the following:

1. Journal entries
2. Premiums expense 960,000
3. Estimated premiums liability 304,000
4. Premiums (asset) 144,000

Cash/Account receivable 90,000,000

Sales 90,000,000
To record sales

Expected box tops to be redeemed 1,200,000

Number of box tops to be exchanged 10
Expected premiums to be distributed 120,000
Actual premiums redeemed 82,000
Remaining premiums to be redeemed 38,000

Premiums 800,000
Cash 800,000
To record purchase or premiums

Premiums expense 656,000

Premiums 656,000
To record premiums redeemed

Premiums expense 304,000

Estimated premium liability 304,000
To record additional estimated premium liability

No redemption during the year

Expected box tops to be redeemed 1,200,000

Number of box tops to be exchanged 10
Expected premiums to be distributed 120,000

Year of sale
Premiums expense 960,000
Estimated premium liability 960,000
To record estimated premium liability

Year of claim
Estimated premium liability 656,000
Premiums 656,000

Palmer Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Palmer Flakes boxes and P10.00. The company estimates that 60% of the boxtops will be
redeemed. In 2020, the company sold 675,000 boxes at P50.00 each and customers redeemed 330,000 boxtops. The bowl costs P25.00 each.

Compute the following:

1. Journal entries
2. Premiums expense
3. Estimated premiums liability
SAMPLE PROBLEMS

Bald Company estimated the annual warranty expense at 2% of annual net sales. The net sales for 2020 amounted to P4,000,000. On January 1, 2020, the estimated warrenty liability was P60,000
and the warranty payments during 2020 totaled P50,000.

Requirements:
1. Journal entries
2. Warranty expense 80,000
3. Estimated warranty liability 90,000

Warranty expense:
1. As a percentage of net sales
2. Specific cost

Warranty expense Estimated warranty liability:

Net sales 4,000,000
Percentage 2% Estimated warranty liability, beg 60,000
Warranty expense 80,000 Warranty expense during the year 80,000
Actual warranty cost during the year - 50,000
Warranty expense 80,000 Estimated warranty liability, end 90,000
Estimated warranty liability 80,000
To record warranty expense during 2020

Estimated warranty liability 50,000

Cash 50,000
To record actual repairs during 2020

In 2021, Donald Company began a new line of products that carry a two-year warranty against defects. Based upon past experiencee with other products, the entity estimated warranty costs as a
percentage of peso sales.

First year of warranty 2%

Second year of warranty 5%

2020 2021
Sales 5,000,000 7,000,000
Actual warranty costs 100,000 300,000

Compute the following: 2020 2021

1. Journal entries
2. Warranty expense 350,000 490,000
3. Estimated warranty liability 250,000 440,000

JOURNAL ENTRIES FOR 2020

Warranty expense during 2020:

Sales during 2020 5,000,000

Percentage of warranty 7%
Warranty expense during 2020 350,000

Warranty expense 350,000

Estimated warranty liability 350,000
To record warranty expense in 2020

Estimated warranty liability 100,000

Cash 100,000
To record actual warranty cost during 2020

JOURNAL ENTRIES FOR 2021

Warranty expense during 2020: Estimated warranty liability

Sales during 2021 7,000,000 Estimated warranty liability, 2020 250,000

Percentage of warranty 7% Warranty expense in 2021 490,000
Warranty expense during 2021 490,000 Actual warranty cost in 2021 - 300,000
Estimated warranty liability, 2021 440,000
Warranty expense 490,000
Estimated warranty liability 490,000
To record warranty expense in 2021

Estimated warranty liability 300,000

Cash 300,000
To record actual warranty cost during 2021

An entity sells refrigerators that carry 2-year warranty against defects. The sales and warranty repairs are made evenly throughout the year. Based on past experiences, the entity projects an
estimated warranty costs as a percentage of sales as follows:

First year of warranty 4%

Second year of warranty 10%

2021 2020
Sales 5,000,000 6,000,000
Actual warranty costs 140,000 300,000

Compute the following: 2021 2020

1. Journal entries
2. Warranty expense 700,000 840,000
3. Estimated warranty liability 1,100,000 540,000
4. Test of reasonableness of estimated warranty liability

JOURNAL ENTRIES FOR 2020

Warranty expense during 2020:

Sales during 2020 6,000,000

Percentage of warranty 14%
Warranty expense during 2020 840,000

Warranty expense 840,000

Estimated warranty liability 840,000
To record warranty expense in 2020

Estimated warranty liability 300,000

Cash 300,000
To record actual warranty cost during 2020

JOURNAL ENTRIES FOR 2021

Warranty expense during 2020: Estimated warranty liability

Sales during 2021 5,000,000 Estimated warranty liability, 2020 540,000

Percentage of warranty 14% Warranty expense in 2021 700,000
Warranty expense during 2021 700,000 Actual warranty cost in 2021 - 140,000
Estimated warranty liability, 2021 1,100,000
Warranty expense 700,000
Estimated warranty liability 700,000
To record warranty expense in 2021

Estimated warranty liability 140,000

Cash 140,000
To record actual warranty cost during 2021

Estimate reasonablenes of estimated warranty liability

Estimated warranty liability, 2021 1,100,000

2020 SALES
2020
First contract year of January 1, 2020 sales Sales 3,000,000
End on December 31, 2020 Percentage 4%
120,000

First contract year of July 1, 2020 sales Sales 3,000,000

End on July 1, 2021 Percentage 4% Then multiply by 6/12
60,000

2021
First contract year of July 1, 2020 sales Sales 3,000,000
End on July 1, 2021 Percentage 4% Then multiply by 6/12
60,000

Second contract year of January 1, 2021 sales Sales 3,000,000

End December 31, 2021 Percentage 10%
300,000

Second contract year of July 1, 2021 sales Sales 3,000,000

End July 1, 2022 Percentage 10% Then multiply by 6/12
150,000

2022
Second contract year of July 1, 2021 sales Sales 3,000,000
End July 1, 2022 Percentage 10% Then multiply by 6/12
150,000

2020 sales: Expire

January 1, 2020 3,000,000 December 31, 2021
July 1, 2020 3,000,000 July 1, 2022
6,000,000

2021 SALES

2021
First contract year of January 1, 2021 sales Sales 2,500,000
End on December 31, 2021 Percentage 4%
100,000

First contract year of July 1, 2021 sales Sales 2,500,000

End on July 1, 2022 Percentage 4% Then multiply by 6/12
50,000

2022
First contract year of July 1, 2021 sales Sales 2,500,000
End on July 1, 2021 Percentage 4% Then multiply by 6/12
50,000

Second contract year of January 1, 2022 sales Sales 2,500,000

End December 31, 2022 Percentage 10%
250,000

Second contract year of July 1, 2022 sales Sales 2,500,000

End July 1, 2022 Percentage 10% Then multiply by 6/12
125,000

2023
Second contract year of July 1, 2021 sales Sales 2,500,000
End July 1, 2022 Percentage 10% Then multiply by 6/12
125,000

2021 sales: Expire

January 1, 2021 2,500,000 December 31, 2022
July 1, 2021 2,500,000 July 1, 2023
5,000,000

Estimated liability 1,100,000

2022 Second contract year of July 1, 2021 sales 150,000

2022 First contract year of July 1, 2021 sales 50,000
2022 Second contract year of January 1, 2022 sales 250,000
2022 Second contract year of July 1, 2022 sales 125,000
2023 Second contract year of July 1, 2021 sales 125,000
Estimated liability - December 31, 2021 700,000
Estimated liability 1,100,000
Decrease in estimated warranty liability - 400,000

Estimated warranty liability 400,000

Warranty expense 400,000
To recognize decrease in warranty liability
SAMPLE PROBLEMS

On November 5, 2017, a Dunn Company truck was in an accident with an auto driven by Bell. Dunn received notice on January 15, 2018 of a lawsuit for P700,000 damages for personal injuries
suffered by Bell. The entity's counsel believed it is probable that Bell will be awarded an estimated amount in the range between P200,000 and P450,000, and no amount is a better estimate of
potential liability than any other amount because each point in the range is as likely as any other.

Requirement:
Amount to be reported as provision in 2017 financial statements of Dunn Company

Lowest point 200,000

Highest point 450,000
Total 650,000
Divide 2
Provision 325,000

Loss on lawsuit 325,000 Statement of comprehensive income as part of other expense

Provision for lawsuit 325,000 Liability
To record liability for lawsuit

During 2017, Odyssey Company is the defendant in a patent infringement lawsuit. The entity's 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 of paying P100,000. Other outcomes are unlikely. The court is expected to rule in late December 2018. There is no indication that the claimant will settle out of court.

Other considerations:
Risk adjustment factor 7%
Discount rate 5%

Requirement:
Amount to be reported as provision in 2017 financial statements of Odyssey Company

If the case is not dismissed 70%

Weighted probabilities

% if not dismissed Amount % of chance

70% 200,000 20% 28,000
70% 100,000 80% 56,000
Weighted cash flows 84,000
Risk adjustment factor 7%
Risk adjustment 5,880
Weighted cash flows 84,000
Adjusted cash flows 89,880
Present value of 1 for one period 0.95 0.95
Present value of cash flows 85,600

Loss on lawsuit 85,600 Statement of comprehensive income as part of other expense

Provision for lawsuit 85,600 Liability
To record liability for lawsuit

An entity sells goods with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first six months after purchase. If minor
defects were detected in all products sold, repair costs of P1,000,000 would result. If major defects were detected in all products sold, repair costs of P4,000,000 would result. The entity’s past
experience and future expectations indicate that, for the coming year, 75% of the goods sold will have no defects, 20% of the goods sold will have minor defects and 5% of the goods sold will have
major defects.

Requirement:
Amount to be reported as provision

Considerations Amount %
Minor defects 1,000,000 20% 200,000
Major defects 4,000,000 5% 200,000
No defect - 75% -
400,000

Warranty expense 400,000

Provision for warranty 400,000
To record provision for warranty

On November 25, 2017, an explosion occurred at a Rex Company plant causing extensive property damages to area buidlings. By March 10, 2018, claims had been asserted against the entity. The
management and counsel concluded that it is probable that the entity would be responsible for damages, and that P3,500,000 is reasonable estimate of the liability. Rex's P10,000,000 comprehensive
public policy has a P500,000 deductible clause. The financial statements were issued on March 31, 2018.

Requirement:
Amount to be reported in the 2017 financial statements of Rex Company

Provision 3,500,000 Liability

Deductible clause 500,000 Loss to be recognized
Reimbursement asset 3,000,000 Asset

Loss on litigation claims 3,500,000

Provision for litigation 3,500,000

Reimbursement asset 3,000,000

Gain on insurance received 3,000,000

Statement of Financial Position:

Provision for litigation 3,500,000
Reimbursement asset 3,000,000

Statement of Comprehensive Income:

Loss on litigation claims 500,000

In March 2017, an explosion occurred at Howe Co.'s plant, causing damage to area properties. By May 2017, no claims had yet been asserted against Howe. However, Howe's management and legal
counsel concluded that it was reasonably possible that Howe would be held responsible for negligence, and that P4,000,000 would be a reasonable estimate of the damages. Howe's P5,000,000
comprehensive public liability policy contains a P400,000 deductible clause.

Requirement:
Amount to be reported in the 2016 financial statements of Howe Co.

Likelihood: Possible

No amount of provision to be recognized.

Disclosure of P400,000 loss on contingency.

Western Company recently moved its operations to new premises. The non-cancellable lease contract for the old premises still has another three years remaining, and Western is not allowed to
sublease the vacant building in terms of its rental contract. On December 31, 2017, the present value of rental payments still due for the old premises is P908,000. The cost to cancel the contract is
estimated to be P775,000.

Requirement:
Amount to be reported in the 2017 financial statements of Western Co.

Onerous contract

Provision = least net cost of exiting the contract

Least net cost of exiting the contract:
1 Cost of fulfilling the contract 908,000
2 Penalties or compensation for the failure to meet the contract 775,000 Provision

Loss 775,000
Provision 775,000