Intermediate Accounting 2 Quiz #1 Instructor: Ray Patrick S.

Guangco, CPA
Coverage: Chapter 1, Chapter 2, Chapter 3 and Chapter 4
CASE ANALYSIS
INSTRUCTION: Answer the following problems below. 2 points per question. SHOW YOUR SOLUTION. NO SOLUTION, NO POINTS.

Submission: You may submit online through this email ckcgcbsa@gmail.com in .doc or .docx file entitled Intermediate Accounting 2 Quiz
#1 or you may submit a hardcopy to my office.

Deadline: June 15, 2020, Monday 12:00 Noon

Problem 1 (Bonus)
Miguel Inc. has a contract with its president, Nan Santos, to pay here a bonus during each of the years 2009, 2010, 2011, and 2012. The
income tax rate is 40% during the 4 years. The profit before deductions for bonus and income taxes was P250,000 in 2009, P308,000 in 2010,
P350,000 in 2011, and P380,000 in 2012. The president’s bonus of 12% is deductible for tax purposes in each year and is to be computed as
follows:

a) In 2009, the bonus is to be based on profit before deductions for bonus and income tax.
b) In 2010, the bonus is to be based on profit after deduction of bonus but before deduction of income tax.
c) In 2011, the bonus is to be based on profit before deduction of bonus but after deduction of income tax.
d) In 2012, the bonus is to be based on profit after deductions for bonus and income tax.

Required: Compute the amounts of the bonus and the income tax for each of the 4 cases above.

Problem 2 (Refinancing & Covenants)

Rajon Co. has the following liabilities on December 31, 2018:
8% Note payable P2,000,000
10% Note payable 1,500,000
11% Note payable 1,250,000
10% Loan payable 1,000,000
12% Loan payable 750,000
15% Loan payable 500,000

Additional information:
1) The 8%, P2,000,000 Note payable is due on January 1, 2019 and is to be settled by delivery of merchandise to the holder.
2) The 10%, P1,500,000 Note payable matures on June 30, 2019. Interest on the loan is due every June 30 and December 31. On
December 15, 2018, Rajon Co. entered into a refinancing agreement with a bank to refinance the note on a long-term basis. The
refinancing and roll over transaction was completed on December 31, 2018.
3) The 11%, P1,250,000 five-year Note payable was obtained by Rajon from a bank. The agreement requires Rajon to maintain a current
ratio of 3:1. If the current ratio falls below 3:1, the note becomes payable on demand. As of December 31, 2018, Rajon’s current ratio is
1.5:1. On December 31, 2018, the bank agreed not to collect the note in 2019.
4) The 10%, P1,000,000 loan payable is payable on demand. However, on December 31 2018, there is no indication that the payee on the
loan will demand payment over the next 12 months.
5) The 12%, P750,000 Loan payable is maturing on July 1, 2019. Interest on the loan is due every July 1, 2019. Interest on the loan is due
every July 1 and December 31. On January 15, 2019, Rajon Co. entered into a refinancing agreement with a bank to refinance the loan
on a long-term basis. Both parties are financially capable of honoring the agreement’s provisions. Rajon has the discretion to refinance or
roll over the loan for at least twelve months from December 31, 2018 under an existing loan facility.
6) The 15%, Loan payable is due on June 30, 2019. Interest on the loan is payable every June 30 and December 31. On December 15, 209,
Rajon and the creditor agree to settle the obligation by giving the latter Rajon’s long-term investment in another corporation.
Rondo’s financial statements were authorized for issue on March 15, 2019.

Required: Classify each transaction whether it is a current or noncurrent liabilities and explain why the transaction is classified as such.

Problem 3 (Contingencies)
During 2018, Smith Company filed suit against West Company seeking damages for patent infringement. In Smith’s December 31, 2018
financial statements, how should this be reported? The choices are:
a. Accrue and disclose b. Disclose only c. Accrue only D. Neither accrue nor disclose

Assume the following independent cases:

1) It is virtually certain that Smith would be successful against West for an estimated amount of P1,500,000.
2) It is probable that Smith would be successful against West for an estimated amount of P1,500,000.
3) It is probable that Smith would be successful against West for an estimated amount of P1,500,000. Before the financial statement was
issued, Smith was awarded P1,000,000 and received full payment thereof.
4) It is probable that Smith would be successful against West for an estimated amount of P1,500,000. After the financial statement was
issued, Smith was awarded P1,000,000 and received full payment thereof.
5) It is reasonably possible that Smith would be successful against West for an estimated amount of P1,500,000.
6) During the year 2018, Smith 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. Counsel is unable to estimate the outcome of
this appeal.

Required: Answer each independent cases by choosing the letter above and explain.
Acctg 5: Intermediate Accounting 2 Page 1 of 3
Intermediate Accounting 2 Quiz #1 Instructor: Ray Patrick S. Guangco, CPA
Coverage: Chapter 1, Chapter 2, Chapter 3 and Chapter 4
Problem 4 (Unearned Revenue)
Ginobili Company sells gift certificates redeemable only when merchandise is purchased. The certificates have an expiration date two years
after issuance date. Upon redemption or expiration, Ginobili recognizes the unearned revenue as realized. Data for 2018 are as follows:

Unearned revenue, 1/1 P 1,500,000

Gift certificates sold 5,000,000
Gift certificates redeemed 4,000,000
Expired gift certificates 300,000
Cost of goods sold 60%

At December 31, 2018, Ginobili Company should report what amount of unearned revenue? ________________

Problem 5 (Advances from Customers)

Manu Company requires advance payments with special order for machinery constructed to customer specifications. These advances are
nonrefundable. Information for the current year is:

Advances from customers – January 1 P 1,100,000

Advances receive with orders 1,800,000
Advances applied to orders shipped 1,600,000
Advances applicable to order cancelled 100,000

In Manu’s December 31 balance sheet, what amount should be reported as current liability for advances from customers? ________________

Problem 6 (Container’s Deposits)

Garnett Co. requires deposits from customers for the containers of goods sold. The customers are refunded for the deposits received when
the containers are returned within two years from date of sale of the related goods. Deposits for containers not returned within the time limit
are regarded as proceeds from retirement of the containers. Information for 2018 is as follows:

Container deposits at December 31, 2017, from deliveries in:

2016 P10,000
2017 90,000 P 100,000

Deposits for containers delivered in 2018 100,000

Deposits for containers returned in 2018 from deliveries in:

2016 P10,000
2017 40,000
2018 42,000 92,000

How much is the liability for deposits on returnable containers on December 31, 2018? ________________

Problem 7 (Premiums)
To increase sales, Nowitzki Company inaugurated a promotional campaign on June 30, 2018. Nowitzki placed a placed coupon redeemable
for a premium in each box of cake sold at P200. A coffee mug costing P30 is offered as premium to customers who send in 5 coupons and a
remittance of P10. The distribution cost per premium is P5. Nowitzki estimated that only 80% of the coupons issued will be redeemed. For the
six months ended December 31, 2018, the following is available:

Boxes of cake sold 20,000

Premiums purchased 3,000
Coupons redeemed 10,000

What is the estimated liability for coupons on December 31, 2018? ___________________

Problem 8 (Warranty Liability)

During 2017, Dirk Company introduced a new product carrying at two-year warranty against defects. The estimated warranty cost related to
peso sales are 4% within 12 months following sale and 6% in the second 12 months following sale. Sales and actual warranty expenditures for
the years ended December 31, 2017 and 2018 are as follows:

Sales Actual Expenditures

2017 P5,000,000 P150,000
2018 P6,000,000 P550,000

At December 31, 2018, what would be reported as estimated warranty liability? _________________

Acctg 5: Intermediate Accounting 2 Page 2 of 3

Intermediate Accounting 2 Quiz #1 Instructor: Ray Patrick S. Guangco, CPA
Coverage: Chapter 1, Chapter 2, Chapter 3 and Chapter 4
Problem 9 (Warranty Liability)
On April 1, 2018, Carter Company began offering a new product for sale under a one-year warranty. Of the 5,000 units in inventory at April 1,
2018, 3,000 had been sold by June 30, 2018. Based on its experience with similar products, the entity estimated that the average warranty
cost per unit sold would be P160. Actual warranty costs incurred from April 1 through June 30, 2018 were P140,000. On June 30 2018, the
amount to be reported as warranty liability is _________________.

Problem 10 (Warranty – Sales are Made Evenly)

Vince Co. sells computer to various customers. Vince Co. has been offering a special service warranty on computer units it sold. With the
purchase of the computer unit, the customer has the right to purchase 3-year service contract for additional amount of P1,500. Data
concerning sales of computer and warranty contract are as follows:
2017 2018
Computer units sold 2,500 2,800
Sales price per unit 14,000 14,000
Number of service contracts sold 1,000 1,200
Expenses relating to computer warranties 45,000 60,000

Vince Co. has estimated based on the available past records that the pattern of repairs has been:
40% year of sale
36% 1st year after sale
24% 2nd year after sale
Sales of the contracts are made evenly during the year:

Questions:
Based on the above data, answer the following:
1. How much unearned service contract would be earned in the year 2018? ________________
2. How much profit on service contract would be recognized in year 2018? ________________
3. How much is unearned service contract on December 31, 2018? ________________

Acctg 5: Intermediate Accounting 2 Page 3 of 3