IRS CPA REVIEW

Iloilo City and Leganes, Iloilo

FINANCIAL ACCOUNTING AND REPORTING

CURRENT LIABILITIES

1. Baghdad Company sells gift certificates, redeemable for merchandise,

that expire 1 year after their issuance. Baghdad has the following
information pertaining to its gift certificates sales and redemptions:

Unredeemed at 12/31/22 P150,000

2023 sales 500,000
2023 redemptions of prior-year sales 50,000
2023 redemptions of current-year sales 350,000

Baghdad’s experience indicates that 10% of gift certificates sold will not
be redeemed. In its December 31, 2023 statement of financial position,
what amount should Baghdad report as unearned revenue?

a. P250,000
b. P200,000
c. P150,000
d. P100,000

2. Negev Co. frequently distributes coupons to promote a new product. On

October 1, 2023, Negev mailed 1 million coupons for P.90 off each box
of the product purchased. Negev expects 240,000 of these coupons to
be redeemed before the December 31, 2023 expiration date. It takes 30
days from the redemption date for Negev to receive the coupons from
the retailers. Negev reimburses the retailers an additional P.10 for each
coupon redeemed. As of December 31, 2023, Negev had paid retailers
P100,000 related to these coupons and had 100,000 coupons on hand
that had not been processed for payment. What amount should Negev
report as a liability for coupons in its December 31, 2023 statement of
financial position?

a. P140,000
b. P116,000
c. P100,000
d. P90,000
3. In an effort to increase sales, Mills Company inaugurated a sales
promotional campaign on June 30, 2023. Mills placed a coupon
redeemable for a premium in each package of cereal sold. Each
premium cost Mills P20 and five coupons must be presented by a
customer to receive a premium. Mills estimated that only 60% of the
coupons issued will be redeemed. For the six months ended December
31, 2023, the following information is available:

Packages of cereal sold Premiums purchased Coupons redeemed

160,000 12,000 40,000

What is the estimated liability for premium claims outstanding at

December 31, 2023?

a. 160,000
b. 224,000
c. 288,000
d. 384,000
4. During 2023 Day Company sold 500,000 boxes of cake mix under a new
sales promotional program. Each box contains one coupon, which
entitles the customer to a baking pan upon remittance of P40. Day pays
P50 per pan and P5 for handling and shipping. Day estimates that 80%
of the coupons will be redeemed, even though only 300,000 coupons
had been processed during 2023. What amount should Day report as a
liability for unredeemed coupons at December 31, 2023?

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a. 1,000,000
b. 1,500,000
c. 3,000,000
d. 5,000,000

5. In packages of its products, Kent Food Company includes coupons

which may be presented to grocers for discounts on certain products of
Kent on or before a stated expiration date. The grocers are reimbursed
when they send the coupons to Kent. In Kent’s experience, 40% of the
coupons are redeemed, and one month generally elapses between the
date a grocer receives a coupon from a consumer and the date Kent
receives it. During 2023, Kent issued two series of coupons as follows:

Consumer Amount disbursed

Issued on Total value expiration date as of 12/31/2023
1/1/2023 1,000,000 6/30/2023 340,000
7/1/2023 1,200,000 12/31/2023 400,000

Kent’s December 31, 2023 statement of financial position should include

a liability for unredeemed coupons of

a. 480,000
b. 140,000
c. 80,000
d. 0

6. Bare Company 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 P20. Data for the premium offer are:

2022 2023
Boxes of soap sold 500,000 800,000
Number of towels purchased
(P 100 per towel) 20,000 25,000
Coupons redeemed 140,000 200,000

Bare Company’s experience indicates that only 30% of the coupons will
be redeemed. How much is the estimated liability for premiums on
December 31, 2023?

a. 500,000
b. 400,000
c. 320,000
d. 80,000

7. Bold Company estimates its annual warranty expense at 2% of annual

net sales. The following data are available:

Net sales 4,000,000

Warranty liability:
December 31, 2022 60,000 credit
Warranty payments during 2023 50,000 debit

After recording the 2023 estimated warranty expense, the warranty

liability account would show a December 31, 2023 balance of

a. 10,000
b. 70,000
c. 80,000
d. 90,000

8. Greene Company sells office equipment service contracts agreeing to

service equipment for a two-year period. Cash receipts from contracts
are credited to unearned service contract revenue and service contract
costs are charged to service contract expense as incurred. Revenue
from service contracts is recognized as earned over the lives of the
contracts. Additional information for the year ended December 31, 2023
is as follows:

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Unearned service contract revenue at January 1, 2023 600,000
Cash receipts from service contracts sold 980,000
Service contract revenue recognized 860,000
Service contract expense 520,000

What amount should Greene report as unearned service contract

revenue at December 31, 2023?

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

9. Hart Company sells subscriptions to a specialized directory that is

published semiannually and shipped to subscribers on April 15 and
October 15. Subscriptions received after the March 31 and September
30 cut-off dates are held for the next publication. Cash from subscribers
is received evenly during the year and is credited to deferred revenue
from subscriptions. Data relating to 2023 are as follows:

Deferred revenue from subscriptions - 12/31/2023 1,500,000

Cash receipts from subscribers 7,200,000

In its December 31, 2023 statement of financial position, Hart should

report deferred revenue from subscription of

a. 1,800,000
b. 3,300,000
c. 3,600,000
d. 5,400,000

10. Seoul Corp. had the following liabilities at December 31, 2023:

Accounts payable P 110,000

Unsecured notes, 8%, due 7/1/24 800,000
Accrued expenses 70,000
Contingent liability 900,000
Deferred income tax liability 50,000
Senior bonds, 7%, due 3/31/24 2,000,000

The contingent liability is an accrual for possible losses on a P2,000,000

lawsuit filed against Seoul. Seoul’s legal counsel expects the suit to be
settled in 2024 and has estimated that Seoul will be liable for damages in
the range of P900,000 to P1,500,000. The deferred income tax liability is
not related to an asset for financial reporting and is expected to reverse
in 2025. What amount should Seoul report in its December 31, 2023
statement of financial position for current liabilities?

a. P1,015,000
b. P1,880,000
c. P2,980,000
d. P3,030,000

11. Nepal Co. requires advance payments with special orders for machinery
constructed to customer specifications. These advances are
nonrefundable. Information for 2023 is as follows:

Customer advances--balance 12/31/22 P236,000

Advances received with orders in 2023 368,000
Advances applied to orders shipped in 2023 328,000
Advances applicable to orders canceled in 2023 100,000

In Nepal’s December 31, 2023 statement of financial position, what

amount should be reported as a current liability for advances from
customers?

a. P0
b. P176,000
c. P276,000
d. P296,000

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12. Ken Company, a division of National Corporation maintains escrow
accounts and pays real estate taxes for National’s mortgage customers.
Escrow funds are kept in interest-bearing accounts. Interest, less a 10%
service fee, is credited to the mortgagee’s account and used to reduce
future escrow payments. Additional information follows:

Escrow accounts liability, 1/1/2023 700,000

Escrow payments received during 2023 1,580,000
Real estate taxes paid during 2023 1,720,000
Interest on escrow funds during 2023 50,000

What amount should Ken report as escrow accounts liability in its

December 31, 2023 statement of financial position?

a. 510,000
b. 515,000
c. 605,000
d. 610,000

13. On the first day of each month, Bell Mortgage Company receives from
Kent Corp. an escrow deposit of P250,000 for real estate taxes. Bell
records the P250,000 in an escrow account. Kent’s 2023 real estate tax
is P2,800,000, payable in equal installments on the first day of each
calendar quarter. On December 31, 2022, the balance in the escrow
account was P300,000. On September 30, 2023, what amount should
Bell show as an escrow liability to Kent?

a. 1,150,000
b. 450,000
c. 850,000
d. 150,000

14. Able Company provides an incentive compensation plan under which its
president received a bonus equal to 10% of the corporation’s income
before income tax but after deduction of the bonus. If the tax rate is 32%
and net income after bonus and income tax was P2,720,000, what was
the amount of the bonus?

a. 272,000
b. 400,000
c. 440,000
d. 299,200

15. Bug Company provides an incentive compensation plan granting its

president a bonus equal to 10% of Bug’s income in excess of
P2,200,000 after the bonus but before income tax. In 2023 Bug’s income
before bonus and income tax was P5,500,000. The amount of the bonus
for 2023 would be

a. 500,000
b. 363,000
c. 330,000
d. 300,000

16. The president of Magalang Company has a bonus arrangement with the
company under which the president receives 10% of the net income
(after deducting taxes and bonuses) each year. For the current year, the
net income before deducting either the provision for income taxes or the
bonus is P4,650,000. The bonus is deductible for tax purposes, and the
tax rate is 32%.

Determine the amount of the president’s bonus.

a. 296,558.32
b. 298,077.42
c. 296,067.42
d. 297,077.32

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17. The following accounts were taken from the books of Apitong Company
as of December 31, 2023:

Accounts payable, net of accounts with debit

balances of P6,750 P 38,250
Notes payable, including a bank loan of
P37,500 due on December 31, 2025 112,500
Miscellaneous accrued expenses 7,500
Product replacement guarantees 12,000
Rent received in advance 4,000
Stock dividends payable 17,000
Total liabilities P191,250

How much is the current liabilities of Apitong Company on December 31,

2023?

a. P139,500
b. P143,500
c. P160,500
d. P198,000

18. Following are data and information of Manila Company on December 31,
2023:

Trade accounts payable, including cost of goods

received on consignment of P15,000 P135,000
Accrued taxes payable 12,500
Stock dividends payable 30,000
Customers deposits 10,000
Manila Company as guarantor 20,000
Bank overdraft 5,500
Accrued electric and power bills 6,000
Reserved for contingencies 15,000

How much is the total liabilities which shall appear in the statement of
financial position of Manila Company on December 31, 2023?

a. P184,000
b. P174,000
c. P169,000
d. P154,000

19. An analysis of Aster Company’s liabilities disclosed the following:

Accounts payable, after deducting debit

balances in suppliers’ accounts amounting to
P4,500 (accounts payable included nontrade
liabilities of P6,500) P21,000
Accrued expenses 3,000
Credit balances of customers’ accounts 2,700
Stock dividends payable 14,000
Claims for increase in wages and allowances by
employees of the company, covered in a
pending lawsuit 25,000
Estimated expenses in redeeming prize
coupons presented by customers 12,000

How much should be presented as total current liabilities on the

statement of financial position?

a. P 1,200
b. P33,700
c. P36,700
d. P43,200

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20. Cabanatuan Company recorded the following liabilities in its statement of
financial position as at December 31, 2023:

Trade accounts payable P212,500

Income tax payable 15,600
Interest accrued 9,600
Other accrued expenses 11,900
Mortgage payable due in equal annual
installments until September 30, 2028 250,000
Stock dividends declared but not yet issued 30,000
Deficiency income tax assessment for 2022,
being contested P 20,000
Claim for damages against the company in a
pending lawsuit 50,000

The current liabilities on December 31, 2023 total

a. P299,600
b. P329,600
c. P349,600
d. P369,600

End