Scribd
Upload
131 views2 pages

7265 - Premium and Warranty Liability

M

Uploaded by

kyhn.beyca
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
131 views2 pages

7265 - Premium and Warranty Liability

M

Uploaded by

kyhn.beyca
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/SANTOS


MAY 2024 CPALE BATCH 95

PREMIUM AND WARRANTY LIABILITY


1. During the current year, an entity sold 500,000 boxes of cake mix under a new sales promotional
program. Each box contained one coupon which entitles the customer to a baking pan upon remittance
of P40. The entity paid P50 per pan and P5 for handling and shipping and estimated that 80% of the
coupons would be redeemed, even though only 300,000 coupons had been processed during the year.
I. The estimated premium expense should be reported at P6,000,000 for current year
II. The estimated premium liability is P1,500,000 at year-end.
a. Only statement I is true
b. Only statement II is true
c. Statements I and II are false
d. Statements I and II are true

2. In an effort to increase sales, an entity inaugurated a promotional campaign on June 30, 2024. 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 would be redeemed. For the six months ended December 31, 2024, the entity
reported number of packages sold 800,000, coupons redeemed 200,000 and premiums purchased 60,000.
I. The premium expense should be reported P800,000
II. The estimated premium liability should be reported at P1,120,000 on June 30, 2024.
a. Statements I and II are true
b. Statements I and II are false
c. Only statement I is true
d. Only statement II is true

3. An entity included one coupon in each box of laundry soap sold. A towel is offered as a premium to
customers who send in 5 coupons and a remittance of P10. Distribution cost of premium is P5.
Experience indicated that only 40% of the coupons will be redeemed.
2024 2025
Boxes of soap sold 1,000,000 1,500,000
Number of towels purchased as P40 each 90,000 130,000
Coupons redeemed 350,000 500,000
I. The premium expense should be reported at P2,800,000 for 2024.
II. The premium liability should be reported at P400,000 on December 31, 2024.
III. The premium expense should be reported at P4,200,000 for 2025.
IV. The premium liability should be reported at P1,050,000 on December 31, 2025
a. All statements are true
b. All statements are not true
c. Only two statements are true
d. Only three statements are true

4. In 2024, an entity began selling new line of products that carry a two-year warranty against defects. Based
upon experience, the entity estimated warranty cost as a percentage of sales, 2% in the first year of
warranty and 5% in the second year of warranty. During 2024, the entity reported sales of P5,000,000
and incurred warranty cost of P100,000.
I. The warranty expense for 2024 should be reported at P350,000
II. The warranty liability on December 31, 2024 should be reported at P250,000
a. Statement I is true
b. Statement II is true
c. Statements I and II are true
d. Statements I and II are not true

7265
Page 2

5. An entity started business in 2024 and sold refrigerators with a two-year warranty. The entity estimated
its warranty cost as a percentage of peso sales. It is estimated that 4% will be repaired during the first
year of warranty and 10% will be repaired during the second year of warranty

In 2024 and 2025, the entity realized sales of P5,000,000 and P6,000,000, respectively. The entity also
incurred actual repair cost of P140,000 and P300,000 in 2024 and 2025, respectively. Sales and repairs
occurred evenly throughout the period. On December 31, 2025, the entity tested the adequacy of the
estimated of warranty liability.
I. The unadjusted warranty expense should be reported at P840,000 for 2025.
II. The unadjusted warranty liability should be reported at P1,100,000 on December 31, 2025
III. The adjusted warranty expense for 2025 is P525,000.
IV. The adjusted warranty liability on December 31, 2025 is P785,000
a. All statements are true
b. All statements are false
c. Only statements I and II are true
d. Only statements II and IV are true

January 1, 2024 sales


First contract year 2024 ( 2,500,000 x 4%) 100,000
Second contract year 2025 (2,500,000 x 10%) 350,000
July 1, 2024 sales
First contract year July 1, 2024 – June 30 2025 100,000
Second contract year July 1, 2025 – June 30, 2026 250,000
Warranty expense for 2024 - recorded 700,000

January 1, 2025 sales


First contract year 2025 (3,000,000 x 4%) 120,000
Second contract year 2026 (3,000,000 x 10%) 300,000
July 1, 2025 sales
First contract year July 1, 2025 – June 30, 2026 120,000
Second contract year July 1, 2026 – June 30, 2027 300,000
Warranty expense for 2025 - recorded 840,000

End

7265

You might also like