Intermediate Accounting 2 Chapters 1 and 2

CHAPTER 1

A C TG 2 5 – I N T E R M E D I AT E A C C O U N T I N G 2

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INTRODUCTION
Most Indebted Companies in US (2019)

RANK COMPANY LOGO ST DEBT LT DEBT TOTAL

1 AT&T INC. 12.6 178.5 191.1

2 FORD MOTOR COMPANY 54.9 104.9 159.7

3 VERIZON WIRELESS 11.6 124.6 136.2

4 COMCAST CORPORATION 5.3 108.5 113.8

5 APPLE INC. 10.2 90.2 100.4

SOURCE: https://wolfstreet.com/2019/07/26/the-most-indebted-companies-in-america/

LIABILITIES, DEFINED
LIABILITIES are present obligations of an entity to transfer an economic resource as a
result of past events.

1. Present obligation
• LEGAL or CONSTRUCTIVE
2. Transfer of an economic resource

3. Past events

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EXAMPLES OF LIABILITIES
Accounts Payable

Amounts withheld from employees

Accruals
Dividends

Deposits and advances FROM customers

Borrowed funds
Income tax payable

Unearned revenue

MEASUREMENT OF LIABILITIES

CURRENT NONCURRENT

PRESENT VALUE
PRESENT VALUE
AMORTIZED COST

AMORTIZED COST FACE VALUE

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CURRENT VS NONCURRENT

CURRENT NONCURRENT

Operating Cycle

Held for Trading

If it’s NOT current, then
Settled Within 12 Months it’s NON-current.

No Unconditional Right to Defer

LONG-TERM DEBT FALLING DUE WITHIN ONE YEAR

• Previously, noncurrent, but the CURRENT
due date is already within 12
months
• Refinancing was completed after CURRENT
the reporting period but before FS
are authorized for issue

W h a t i s r e f i n an c i n g ?

“ROLL OVER”
AFTER DECEMBER 31

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• Refinancing was completed on or NONCURRENT

before the end of the reporting
period

• The entity has the discretion to NONCURRENT

refinance

• The entity has an unconditional NONCURRENT

right to defer settlement

ON OR BEFORE DECEMBER 31

BREACH OF COVENANTS
COVENANTS are RESTRICTIONS

When these restrictions are breached, the liability becomes PAYABLE ON DEMAND.

EXCEPTION: The lender has provided a grace period.

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DEFERRED REVENUE
DEFERRED REVENUE or unearned revenue is income already received but not yet earned.

ILLUSTRATIVE PROBLEM
An entity sells equipment service contracts agreeing to service equipment for a 2-year
period. Cash receipts from contracts are credited to unearned service revenue and
service contract costs are charged to service contract expense. Revenue from service
contracts is recognized as earned over the service period of the contracts. The ff.
transactions occurred in the first year.

Cash receipts from service contracts sold 1,000,000

Service contract costs paid 500,000
Service contract revenue recognized 800,000

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Cash receipts from service contracts sold 1,000,000

Service contract costs paid 500,000
Service contract revenue recognized 800,000

Cash 1,000,000
Unearned Service Revenue 1,000,000

Service Contract Expense 500,000

Cash 500,000

Unearned Service Revenue 800,000

Service Revenue 800,000

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GIFT CERTIFICATES PAYABLE

Cash xx
Gift Certificates Payable xx

Gift Certificates Payable xx

Sales xx

Gift Certificates Payable xx

Forfeited Gift Certificates xx

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BONUS COMPUTATION

BASED ON NET INCOME BEFORE BONUS & BEFORE TAX

BASED ON NET INCOME AFTER BONUS BUT BEFORE TAX

BASED ON NET INCOME AFTER BONUS & AFTER TAX

BASED ON NET INCOME AFTER BONUS BUT BEFORE TAX

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ILLUSTRATIVE PROBLEM
Income before bonus and before tax 4,400,00
Bonus 10%
Income tax rate 30%

CASE 1 – BONUS IS BASED ON NET INCOME BEFORE BONUS & BEFORE TAX

B = 0.10 (NI)
B = 0.10 (4,400,000)
B = 440,000

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CASE 2 – BONUS IS BASED ON NET INCOME AFTER BONUS BUT BEFORE TAX

B = 0.10 (NI-B)
B = 0.10 (4,400,000 - B)
B = 440,000 – 0.10B
B + 0.10B = 440,000
1.10B= 440,000

B = 400,000

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CASE 3 – BONUS IS BASED ON NET INCOME AFTER BONUS & AFTER TAX

B = 0.10 (NI-B-T)
B = 0.10 [NI – B – 0.30 (NI – B)]
B = 0.10 [4,400,000 – B – 0.30 (4,400,000 – B)]
B = 0.10 (4,400,000 – B – 1,320,000 + 0.30B)
B = 440,000 – 0.10B – 132,000 + 0.03B
B + 0.10B – 0.03B = 440,000 – 132,000
1.07B = 308,000
B = 287,850

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CASE 4 – BONUS IS BASED ON NET INCOME BEFORE BONUS BUT AFTER TAX

B = 0.10 (NI-T)
B = 0.10 [NI – 0.30 (NI – B)]
B = 0.10 [4,400,000 – 0.30 (4,400,000 – B)]
B = 0.10 (4,400,000 – 1,320,000 + 0.30B)
B = 440,000 – 132,000 + 0.03B
B – 0.03B = 440,000 – 132,000
0.97B = 308,000
B = 317,526

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REFUNDABLE DEPOSITS
REFUNDABLE DEPOSITS are cash or property received from customers, but which are
refundable after compliance with certain conditions.
ILLUSTRATIVE PROBLEM
A deposit of P10,000 is required from the customer for returnable containers. The
containers cost P8,000.
Cash 10,000
Containers’ deposit 10,000
Containers’ deposit 10,000
Cash 10,000
Containers’ deposit 10,000
Returnable containers 8,000
Gain on sale 2,000

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EXERCISES
A C TG 2 5 – I N T E R M E D I AT E A C C O U N T I N G 2

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PROBLEM 1-8
Burma Company disclosed the following information about liabilities at year-end:
Accounts payable, after deducting debit balances in
4,000,000
suppliers' accounts amounting to P100,000
Accrued expenses 1,500,000
Credit balances of customers' accounts 500,000
Share dividend payable 1,000,000
Claims for increase in wages and allowance by employees of
400,000
the entity, covered in a pending lawsuit
Estimated expenses in redeeming prize coupons presented
600,000
by customers

What total amount should be presented as current liabilities at year-end?

a. 6,700,000
b. 6,600,000
c. 7,100,000
d. 7,700,000

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SOLUTION 1-8

Accounts payable 4,000,000

Deducting debit balances in suppliers' accounts 100,000

Accrued expenses 1,500,000
Credit balances of customers' accounts 500,000
Estimated expenses in redeeming prize coupons presented
600,000
by customers
TOTAL CURRENT LIABILITIES P6,700,000

ANSWER: A

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PROBLEM 1-11
Achilles Company reported the following liability balances on December 31, 2020:

12% note payable issued on March 1, 2019, maturing on March 1, 2021 5,000,000
10% note payable issued on October 1, 2019, maturing October 1, 2021 3,000,000

The 2020 financial statements were issued on March 31, 2021. On January 31, 2021, the entire
P5,000,000 balance of the 12% note payable was refinanced through issuance of a long-term
obligation payable lump sum. Under the loan agreement for the 10% note payable, the entity has the
discretion to refinance the obligation for at least twelve months after December 31, 2020. What
amount of the notes payable should be classified as current on December 31, 2020?
a. 8,000,000
b. 5,000,000
c. 3,000,000
d. 0

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SOLUTION 1-11

12% note payable issued on March 1, 2019, maturing on March 1, 2021 P5,000,000

ANSWER: B

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PROBLEM 1-12
Eliot Company reported the following liabilities on December 31, 2020:

Accounts payable and accrued interest 1,000,000

12% note payable issued November 1, 2019 maturing July 1, 2021 2,000,000
10% debentures payable, next annual principal installment of P500,000 due
7,000,000
February 1, 2021

On December 31, 2020, the entity consummated a noncancelable agreement with the lender to
refinance the 12% note payable on a long-term basis. On December 31, 2020, what total amount
should be reported as current liabilities?
a. 3,500,000
b. 3,000,000
c. 1,500,000
d. 2,500,000

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SOLUTION 1-12

Accounts payable and accrued interest 1,000,000

Next annual principal installment of P500,000 due February 1, 2021 on the
500,000
10% debentures payable
TOTAL CURRENT LIABILITIES P1,500,000

ANSWER: C

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PROBLEM 1-16
Cobb Company sells gift certificates redeemable only when merchandise is purchased. Upon
redemption, Cobb Company recognizes the unearned revenue as realized. Information for the current
year:

Unearned revenue, January 1 650,000

Gift certificates sold 2,250,000
Gift certificates redeemed 1,950,000
Gift certificates unredeemed for a long time 100,000
Cost of goods sold 60%

What amount should be reported as unearned revenue at year-end?

a. 510,000
b. 570,000
c. 850,000
d. 950,000

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SOLUTION 1-16

Unearned revenue, January 1 650,000

Gift certificates sold 2,250,000
Gift certificates redeemed (1,950,000)
Gift certificates unredeemed for a long time (100,000)
Unearned revenue, December 31 P850,000

ANSWER: C

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PROBLEM 1-17
Regal Company sells gift certificates, redeemable for store merchandise. The gift certificates have no
expiration date. The entity has the following information pertaining to the gift certificate sales and
redemptions:

Unearned revenue on January 1 750,000

2020 sales 2,500,000
2020 redemptions of prior year sales 250,000
2020 redemptions of current year sales 1,750,000

What amount should be reported as unearned revenue on December 31, 2020?

a. 1,250,000
b. 1,125,000
c. 1,000,000
d. 500,000

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SOLUTION 1-17

Unearned revenue on January 1 750,000

2020 sales 2,500,000
2020 redemptions of prior year sales (250,000)
2020 redemptions of current year sales (1,750,000)
Unearned revenue, December 31 1,250,000

ANSWER: A

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PROBLEM 1-18
Greene Company sells office equipment service contracts agreeing to service equipment for a two-
year period. Cash receipts from contracts are credited to unearned contract revenue. Service contract
costs are charged to service contract expense as incurred. Revenue from service contracts is
recognized as earned over the term of the contracts.

Unearned revenue at January 1 600,000

Cash receipts from service contracts sold 980,000
Service contract revenue recognized 860,000
Service contract expense 520,000

What is unearned service contract revenue on December 31?

a. 460,000
b. 480,000
c. 490,000
d. 720,000

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SOLUTION 1-18

Unearned revenue at January 1 600,000

Cash receipts from service contracts sold 980,000
Service contract revenue recognized (860,000)
Unearned service contract revenue, December 31 720,000

ANSWER: D

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PROBLEM 1-21
Cobra Company sells appliance service contracts agreeing to repair appliances for two-year period. The
past experience is that, of the total amount spent for repairs on service contracts, 40% is incurred evenly
during the first contract year and 60% is incurred evenly during the second contract year. Receipts from
service contract sales are P500,000 for 2020 and P600,000 for 2021. Receipts from contracts are credited
to unearned service revenue. All sales are made evenly during the year.

1. What is the contract revenue for 2020? 3. What is the contract revenue for 2021?
a. 100,000 a. 240,000
b. 200,000 b. 360,000
c. 250,000 c. 370,000
d. 500,000 d. 250,000

2. What is the unearned revenue on December 31, 2020? 4. What is unearned revenue on December 31, 2021?
a. 300,000 a. 360,000
b. 400,000 b. 470,000
c. 200,000 c. 480,000
d. 150,000 d. 630,000

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SOLUTION 1-21
2020 2021 2022 2023
2020
• 500,000 x 40% x ½ 100,000 100,000 - -
• 500,000 x 60% x ½ - 150,000 150,000 -
2021
• 600,000 x 40% x ½ - 120,000 120,000 -
• 600,000 x 60% x ½ - - 180,000 180,000

1. 100,000 2. 400,000 3. 370,000 4. 630,000

ANSWERS: A, B, C, D

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PROBLEM 1-25
Farr Company sells products with reusable and expensive containers. The customer is charged a deposit for
each container delivered and receives a refund for each container returned within two years after the year
of delivery.

Containers held by customers on January 1, 2020 from deliveries in:

2018 75,000
2019 215,000 290,000
Containers delivered in 2020 390,000

Containers returned in 2020 from deliveries in:

2018 45,000
2019 125,000
2020 143,000 313,000

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What is the liability for deposits on December 31, 2020?

a. 247,000
b. 292,000
c. 337,000
d. 367,000

SOLUTION 1-25
Containers held by customers 680,000
Containers returned (75,000* + 125,000 + 143,000) (343,000)
Liability for deposits, December 31, 2020 337,000
*All containers held by the customers in 2018 were deemed returned in 2020 (i.e., actual returned
containers = 45,000, forfeited = 30,000). This is because of the 2-year return policy cited in the problem.

ANSWER: C

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PROBLEM 1-31
Christian Company has a bonus agreement which provides that the general manager shall receive an
annual bonus of 10% of the net income after bonus and tax. The income tax rate is 30%. The general
manager received P280,000 for the current year as bonus.

What is the income before bonus and tax?

a. 4,280,000
b. 4,000,000
c. 2,800,000
d. 3,720,000

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SOLUTION 1-31
B = 0.10 (NI – B – T)
B = 0.10 [NI – B – 0.30 (NI -B)]
280,000 = 0.10 [NI – 280,000 – 0.30 (NI - 280,000)]
280,000 = 0.10 (NI – 280,000 – 0.30NI + 84,000)
280,000 = 0.10 NI – 28,000 – 0.03NI + 8,400)
280,000 + 28,000 – 8,400 = 0.10 NI – 0.03NI
280,000 + 28,000 – 8,400 = 0.10 NI – 0.03NI
299,600 = 0.07NI
4,280,000 = NI

ANSWER: A

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PROBLEM 1-33
Jackson Company has an incentive compensation plan under which the president is to receive a bonus
equal to 10% of income in excess of P1,000,000 before deducting income tax but after deducting the
bonus. The income before income tax and the bonus is P3,200,000.

What is the amount of the bonus?

a. 220,000
b. 200,000
c. 320,000
d. 440,000

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SOLUTION 1-33
B = 0.10 (NI – 1,000,000 – B)
B = 0.10 (3,200,000 – 1,000,000 – B)
B = 320,000 – 100,000 – 0.10B
B + 0.10B = 320,000 – 100,000
1.10B = 220,000
B = 200,000

ANSWER: B

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CHAPTER 2

A C TG 2 5 – I N T E R M E D I AT E A C C O U N T I N G 2

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INTRODUCTION
“LUMAKLAK AKO NG CAFFEINE NANG ILANG BUWAN PARA LANG SA’YO, PERO NAUWI
LAHAT SA WALA…”

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PREMIUMS, DEFINED
PREMIUMS are articles of value such as toys, dishes, silverware, and other goods
given to customers as a result of past sales or sales promotion activities.

Premiums xx
Cash xx
Premium expense xx
Premiums xx
Premium expense xx
Estimated premium liability xx

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ILLUSTRATIVE PROBLEM
An entity manufactures a certain product and sells it at P300 per unit. A soup
bowl is offered to customers on the return of 5 wrappers plus a remittance of P10.
The bowl costs P50, and it is estimated that 60% of the wrappers will be
redeemed. The data for the first year concerning the premium plan are
summarized below:
Sales, 10,000 units at P300 each P3,000,000
Soup bowls purchases, 2,000 units at P50 each 100,000
Wrappers redeemed 4,000

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The entries for the first year would be:

Cash 3,000,000
Sales 3,000,000

Premium – soup bowls 100,000

Cash 100,000

Cash (800 x 10) 8,000

Premium expense (800 x 40) 32,000
Premium – soup bowls 40,000
4,000 wrappers/5 = 800 bowls distributed
Premium expense 16,000
Estimated premium liability 16,000

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Wrappers to be redeemed (10,000 x 60%) 6,000

Wrappers already redeemed (4,000)
Wrappers not yet redeemed 2,000
Premiums to be distributed (2,000/5 x P40) P16,000

FINANCIAL STATEMENT PRESENTATION:

CURRENT ASSET:
Premiums – soup bowls P60,000

CURRENT LIABILITY:
Estimated premium liability P16,000

DISTRIBUTION COST:
Premium expense P48,000

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CASH REBATE PROGRAM

CASH REBATE is an offer given to consumers for a cash discount, when they purchase a
consumer good, hence a cash rebate can be thought of as a discount coupon

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An entity offered P500 cash rebate on a particular model of TV set. The customers
must present a rebate coupon enclosed in every package sold plus the official receipt.
Past experience indicates that 40% of the coupons will be redeemed. During the
current year, the entity sold 4,000 TV sets and total payments to customers
amounted to P450,000.

Rebate expense 800,000

Estimated rebate liability 800,000

Estimated rebate liability 450,000

Cash 450,000

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CASH DISCOUNT COUPON

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CUSTOMER LOYALTY PROGRAM (IFRS 15)

CUSTOMER LOYALTY PROGRAM is an incentive program where an entity grants the
customer award credits often described as points.

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ILLUSTRATIVE PROBLEM
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.

The sales during 2020 amounted to P9,000,000 based on stand-alone selling price. During 2020, the
customers earned 10,000 points. But management expects that 80% or 8,000 of these points will be
redeemed. The stand-alone selling price of each loyalty point is estimated at P100. On December 31,
2020, 4,000 points have been redeemed in exchange for groceries.

In 2021, the management revised expectations and now expects that 90% or 9,000 points will be
redeemed altogether. During 2021, the entity redeemed 4,100 points. In 2022, a further 900 points are
redeemed. Management continues to expect that only 9,000 points will ever be redeemed, meaning,
no more points will be redeemed after 2022.

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ALLOCATION OF TRANSACTION PRICE

Product sales P9,000,000
Points – stand alone selling price (10,000 x 100) 1,000,000
Total 10,000,000
Product sales (9,000,000/10,000,000 x 9,000,000) 8,100,000
Points/Unearned revenue from points (1,000,000/10,000,000 x 9,000,000) 900,000
Total transaction price 9,000,000
2020
Revenue to be recognized from points (4,000/8,000 x 900,000) 450,000
2021
Cumulative revenue ((4,000+4,100)/9,000 x 900,000) 810,000
Revenue recognized in 2020 450,000
Revenue to be recognized from points in 2021 360,000
2022
Revenue to be recognized from points in 2021 (900,000 - 450,000 - 360,000) 90,000

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THI RD PARTY O PERATES LOYALTY PROG RAM (IFRS 15)

The same accounting procedures as if the entity itself is the one directly offering the
incentives.

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EXERCISES
A C TG 2 5 – I N T E R M E D I AT E A C C O U N T I N G 2

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PROBLEM 2-6
In an effort to increase sales, Mill Company inaugurated a sales promotional campaign on June 30, 2020.
The entity placed a coupon redeemable for a premium in 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 will be redeemed. For the six months ended December 31, 2020, the
following information is available:
Packages of cereal sold 160,000
Premiums purchases 12,000
Coupons purchased 40,000
1. What amount should be reported as premium expense for 2020?
a. 640,000
b. 384,000
c. 240,000
d. 160,000
2. What is the estimated liability for premium claims outstanding on December 31, 2020?
a. 169,000
b. 224,000
c. 288,000
d. 384,000

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SOLUTION 2-6
Premiums to be given ((160,000/5 x 60%) x P20) P384,000

ANSWER: B
Estimated liability (384,000 – (40,000/5 x P20)) P224,000

ANSWER: B

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PROBLEM 2-7
During 2020, Day Company sold 500,000 boxes of cake mix under a new sales promotional program.
Each box contained one coupon, which entitled the customer to a baking pan upon remittance of P40.
The entity paid P50 per pan and P5 for handling and shipping. The entity estimated that 80% of the
coupons will be redeemed, even though only 300,000 coupons had been processed during 2020.

1. What amount should be reported as premium expense for 2020?

a. 6,000,000
b. 7,500,000
c. 4,500,000
d. 2,000,000

2. What amount should be reported as liability for unredeemed coupons on December 31, 2020?
a. 1,000,000
b. 1,500,000
c. 3,000,000
d. 5,000,000

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SOLUTION 2-7
Premiums to be given [(500,000 x (P55 – P40)) X 80%] P6,000,000

ANSWER: A
Estimated liability (6,000,000 – (300,000 X P15)) P1,500,000

ANSWER: B

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PROBLEM 2-8
Topsy Company started a promotional program. For every 10 box tops returned, customers receive a
basketball. The entity estimated that only 60% of the box tops reaching the market will be redeemed.

The entity provided the following information:

Units Amount
Sales of product 100,000 30,000,000
Basketball purchased 5,500 4,125,000
Basketball distributed 4,000

What is the amount of year-end estimated liability associated with this promotion?
a. 4,125,000
b. 1,500,000
c. 3,000,000
d. 4,500,000

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SOLUTION 2-8
Premiums to be given (100,000/10 x 60%) 6,000
Cost of premiums (6,000 x P750) 4,500,000
Premiums already given (4,000 x P750) 3,000,000
Premiums not yet given P1,500,000

ANSWER: B

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PROBLEM 2-12
Blake Company mails coupons to consumers which may be presented at a stated expiration date at retail
food stores to obtain discounts on certain Blake products. Retailers are reimbursed for the face value of
coupons redeemed, plus 10% of coupon face value as compensation for handling costs. The entity honors
requests for coupon redemption by retailers received up to three months after the consumer expiration
date. Based on experience, 60% of the coupons issued ultimately are redeemed. The entity provided the
following information with respect to two separate series of coupons issued during 2020:

Series A Series B
Consumer expiration date June 30, 2020 December 31, 2020
Total face value of coupons issued 1,000,000 2,000,000
Total payments to retailers on December 31, 2020 605,000 405,000

What amount should be reported as liability for unredeemed coupons on December 31, 2020?
a. 970,000
b. 915,000
c. 795,000
d. 0

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SOLUTION 2-12
Coupons to be redeemed (2,000,000 x 60%) 1,200,000
Handling costs (1,200,000 x 10%) 120,000
Total amount 1,320,000
Total payments to retailers (405,000)
Liability for unredeemed coupons P915,000

ANSWER: B

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PROBLEM 2-16
Love Company included one coupon in each package of cereal sold. A towel was offered as a premium to
customers who send in 10 coupons.
2020 2021
Packages of cereal sold 500,000 800,000
Number of towels purchased at P40 per towel 30,000 60,000
Number of towels distributed as premium 20,000 50,000
Number of towels to be distributed as premium next period 5,000 3,000
1. What is the premium expense for 2020? 3. What is the premium expense for 2021?
a. 1,000,000 a. 2,400,000
b. 1,200,000 b. 2,000,000
c. 600,000 c. 2,120,000
d. 500,000 d. 1,920,000
2. What is the premium liability on December 31, 2020? 4. What is the premium liability on December 31, 2021?
a. 400,000 a. 320,000
b. 200,000 b. 400,000
c. 600,000 c. 120,000
d. 300,000 d. 520,000

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SOLUTION 2-16
Towels to be given related to 2020 sales [(20,000 + 5,000) x P40] P1,000,000

ANSWER: A
Towels not yet given related to 2020 sales (5,000 x P40) P200,000

ANSWER: B
Towels to be given related to 2021 sales [(60,000 – 5,000 + 3,000) x P40) P1,920,000

ANSWER: D
Towels not yet given related to 2021 sales (3,000 x P40) P120,000

ANSWER: C

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PROBLEM 2-18
During the current year, Jolly Company offered a P20 cash rebate coupon to customers who purchased one
of its newline of products. The entity sold 10,000 of these products during the current year. By year-end,
7,600 of the rebates had been claimed and 7,100 had been paid. The historical experience with such
rebates indicated that 85% of customers claim the rebates.

What amount should be reported as rebate expense for the current year?
a. 142,000
b. 152,000
c. 170,000
d. 200,000

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SOLUTION 2-18
Rebates expected to be given (10,000 x 85%) 8,500
Cash rebate P20
Rebate expense P170,000

ANSWER: C

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PROBLEM 2-19
James Company operates a customer loyalty program. The entity grants program members loyalty points
when they spend a specified amount on purchases. Program members can redeem the points for further
purchases. The points have no expiry date.
During 2020, the customer earned 60,000 points. Management expects that 100% of these points will be
redeemed. The stand-alone selling price of each loyalty point is estimated at P20. The sales during 2020
amounted to P6,800,000 based on stand-alone selling price. On December 31, 2020, 28,800 points have
been redeemed in exchange for purchases.
In 2021, the management revised expectations and now expects 90% of the points to be redeemed. In 2021,
the entity redeemed 9,000 points.

1. What amount of the transaction price should be allocated to the points?

a. 1,800,000 c. 1,020,000
b. 1,200,000 d. 0
2. What is the revenue earned from loyalty points for 2020?
a. 576,000 c. 510,000
b. 489,600 d. 0
3. What is the revenue earned from loyalty points for 2021?
a. 224,400 c. 170,000
b. 714,000 d. 0

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SOLUTION 2-19
Sales P6,800,000 6.8/8 X 6,800,000 P5,780,000
Points 1,200,000 6.8/8 X 6,800,000 P1,020,000
Total P8,000,000 P6,800,000

ANSWER: C
Revenue earned in 2020 28,800/60,000 X P1,020,000 P489,600

ANSWER: B
Cumulative revenue 28,800 + 9,000 / (60,000 x 90%) X P1,020,000 714,000
Revenue earned in 2020 (489,600)
Revenue earned in 2021 P224,400

ANSWER: A

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PROBLEM 2-20
William Company operates a customer loyalty program. The entity grants loyalty points for goods
purchased. The loyalty points can be used by the customers in exchange for goods of the entity. The
points have no expiry date. During 2020, the entity issued 100,000 award credits and expects that
80% of these award credits shall be redeemed. The total stand-alone selling price of the award
credits granted is reliably measured at P2,000,000. In 2020, the entity sold goods to customers for a
total consideration of P8,000,000 based on stand-alone selling price. The award credits redeemed,
and the total award credits expected to be redeemed each year are as follows:
Redeemed Expected to be redeemed
2020 30,000 80&
2021 15,000 90%

1. What is the revenue from points for 2020? 2. What is the revenue from points for 2021?
a. 1,600,000 a. 240,000
b. 1,500,000 b. 200,000
c. 600,000 c. 120,000
d. 480,000 d. 0

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SOLUTION 2-20
Sales P8,000,000 8/10 X P8,000,000 P6,400,000
Points 2,000,000 2/10 X P8,000,000 1,600,000
Total P10,000,000 P8,000,000

Revenue earned in 2020 30,000/ (100,000 X 80%) X P1,600,000 P600,000

ANSWER: C

Cumulative revenue 30,000 + 15,000 / (100,000 X 90%) X P1,600,000 P800,00

Revenue earned in 2020 (600,000)
Revenue earned in 2021 P200,000

ANSWER: B

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NEXT SESSIONS
ACTG25 – INTERMEDIATE ACCOUNTING 2

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CHAPTER 3
MULTIPLE CHOICE PROBLEMS

DISCUSSION ITEMS: 3, 10, 14, 17, 18

ON THESE
MULTIPLE CHOICE THEORIES

ALL ITEMS UNDER PROBLEM 19

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CHAPTER 4
MULTIPLE CHOICE PROBLEMS

DISCUSSION
ITEMS: 13, 16, 18, 19, 20, 24,
25, 26, 29, 32

ON THESE
MULTIPLE CHOICE THEORIES

ALL ITEMS UNDER

PROBLEMS 33 TO 38

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