1) Bull's Eye Department Stores, Inc.

records $180,000 in gift card sales and receives

cash in year 1. Customers redeemed 20% of the gift cards to purchase merchandise in
year 1. The company estimates breakage as 12% and uses the proportional method. What
is the proper treatment for redemption of the gift cards and recognition of breakage?
GC Sales= 180,000
20%= redeemed by customer

180,000 x 20%= 36,000 redeemed

12% x 180,000= 21,600 breakage

36,000/180,000-21,600= 22.73%

Breakage revenue= 22.73% x 21,600= P4,909

2) A company gives each of its 80 employees (assume they were all employed
continuously through 2018 and 2019) 12 days of vacation a year if they are employed at
the end of the year. The vacation accumulates and may be taken starting January 1 of
next year. The employees work 8 hours per day. In 2018, they made $17.50 per hour and
in 2019 they made $20 per hour. During 2019, they took an average of 8 days of vacation
each. The company's policy is to record the liability existing at the end of each year at the
wage rate for that year. Under U.S. GAAP, what amount of vacation liability would be
reflected on the 2018 and 2019 balance sheets?

2018: 80 employees x 12 vacation days x 8 hours/day x P17.50/hr = P134,400

2019: 80 employees x 12 vacation days x 8 hours/day x P20= P153,600
Availed: 80 employees x 8 vacation days x 8 hours/day x P17.50/hr = P89,600
134,400+153,600-89,600= P198,400

3) Lifeline Biofuels built an oil rig at a cost of $4.5 million. The company estimates the
oil rig will have a useful life of 20 years (with no salvage value), after which Federal
regulations require that the oil rig must be dismantled and the land area restored at an
expected fair value of $1.3 million. The present value of these asset retirement costs is
$400,000 based on the 6% after-tax discount rate.
a. Prepare the journal entry prepared at the completion of construction to value the oil rig.
Oil Rig 4.9M
Cash 4.5M
Asset retirement obligation 400k

b. Prepare the journal entry to record the annual increase in the carrying value of the
liability.
 Accretion Expense 24,00
0
Asset retirement Obligation 24,000

c. At the end of 20 years, the company dismantles the oil rig and restores the land area at
a cost of $1.5 million. Prepare the journal entry to record payment of the settlement costs
in cash.

Asset retirement obligation 1.3

M
Loss on settlement of ARO 200k
Cash 1.5M

4) Big Dots provides a one-year warranty with all its products it sells. It estimates that it
will sell 350,000 units of its product for the year ended December 31, 2018, and that its
total revenue for the product will be $105,000,000. It also estimates that 75% of the
products will have no defects, 5% will have major defects, and 20% will have minor
defects. The cost of a minor defect is estimated to be $6 for each product repaired, and
the cost for a major defect cost is about $21. The company also estimates that the
minimum amount of warranty expense will be $1,500,000 and the maximum will be
$6,000,000.

Prepare the journal entry for 2018 under the warranty.

Minor: 350,000 x 20% x P6= P420,000

Major: 350,000 x 5% x P21= 317,500
Total= P787,500

Warranty Expense 787,50

0
Warranty Payable 787,500

5) On October 1, 2018, Super Soup Corp. began offering customers a Super Soup Spoon
in return for 20 soup can labels. This offer expires on March 31, 2019. The cost of each
soup spoon is $1.50. Based on past experience, the company estimates that only 40% of
the labels will be redeemed. During 2018, the company purchased 13,000 soup spoons
and sold 600,000 cans of soup at $1.20 per can (the company uses the periodic inventory
method). From these sales, 180,000 labels were returned for redemption in 2018.

a. Prepare the journal entry to record the purchase of 12,000 soup spoons.
Premium Inventory 19,50
0
 Cash 19,500
b. Prepare the journal entry to record the sale of 600,000 cans of soup.
Cash 720,00
0
Sales 720,000

c. Prepare the journal entry to estimate the premium expense for 2018.
600,000 x 40%= 240,000
240,000/20 = 12,000x1.50 = 18,000

Premium Expense 18,000

Estimated Premium Payable 18,000

d. Prepare the journal entry to record the redemption of 180,000 labels.

180k/20= 9,000 x1.50= P13,500

Estimated Premium Payable 13,500

Premium Inventory 13,500

22) On September 1, Dondra purchased $9,000 of inventory items on credit with the
terms 1/15, net 30, FOB destination. Freight charges were $500. Payment for the
purchase was made on September 18. Assuming Dondra uses the perpetual inventory
system and the net method of accounting for purchase discounts, what amount is recorded
on September 1 as accounts payable from this purchase?
A) $9,500
B) $9,410
C) $9,000
D) $8,910

6) Pegasus Corp. signed a three-month, zero-interest-bearing $323,000 note on

November 1, 2019 for the purchase of $250,000 of inventory. If Pegasus makes adjusting
entries only at the end of the year, the adjusting entry made at December 31, 2019 will
include a ________.
A) debit to Note Payable for $24,333
B) debit to Interest Expense for $48,667
C) credit to Note Payable for $24,333
D) credit to Interest Expense for $48,667

7) Pegasus Corp. signed a three-month, 6% note on November 1, 2019 for the purchase
of $260,000 of inventory. If Pegasus makes adjusting entries only at the end of the year,
the adjusting entry made at December 31, 2019 will include a ________. (Do not round
any intermediary calculations. Round your final answer to the nearest dollar.)
A) debit to Note Payable for $2,600
B) debit to Interest Expense for $2,600
C) credit to Note Payable for $15,600
D) debit to Interest Expense for $3,900

8) Pegasus Corp. signed a three-month, 10% note on November 1, 2019 for the purchase
of $246,000 of inventory. If Pegasus makes adjusting entries only at the end of the year,
the entry made at January 31, 2020 will include a ________. (Do not round any
intermediary calculations. Round your final answer to the nearest dollar.)
A) debit to Note Payable for $246,000
B) debit to Interest Expense for $4,100
C) credit to Note Payable for $246,000
D) debit to Interest Expense for $6,150

9) On June 1, 2018, Superior Insurance Company collected $490,000 for a 2-year

insurance policy beginning on the same date. The company has a December 31 year end.
What is the balance of the unearned revenue account after adjusting entries on December
31, 2018? (Do not round any intermediary calculations. Round your final answer to the
nearest dollar.)
A) $347,083
B) $142,917
C) $245,000
D) $102,083

10) On June 1, 2018, Superior Insurance Company collected $490,000 for a 2-year
insurance policy beginning on the same date. The company has a December 31 year end.
What is the balance of the unearned revenue account after adjusting entries on December
31, 2019? (Do not round any intermediary calculations. Round your final answer to the
nearest dollar.)
A) $347,083
B) $142,917
C) $245,000
D) $102,083

11) On June 1, 2018, Superior Insurance Company collected $490,000 for a 2-year
insurance policy beginning on the same date. The company has a December 31 year end.
How much Insurance Revenue will be recognized in 2018? (Do not round any
intermediary calculations. Round your final answer to the nearest dollar.)
A) $347,083
B) $142,917
C) $245,000
D) $102,083
12) Kool's Stores made cash sales during the month of May of $79,000. The sales are
subject to a 7% sales tax that was also collected. Which of the following would be
included in the summary journal entry to reflect the May sales transactions?
A) debit Cash for $79,000
B) credit Sales Tax Payable for $73,470
C) credit Sales for $73,470
D) credit Sales Tax Payable for $5,530

13) A company gives each of its 50 employees (assume they were all employed
continuously through 2018 and 2019) 12 days of vacation a year if they are employed at
the end of the year. The vacation accumulates and may be taken starting January 1 of the
next year. The employees work 8 hours per day. In 2018, they made $17.50 per hour and
in 2019 they made $20 per hour. During 2019, they took an average of 9 days of vacation
each. The company's policy is to record the liability existing at the end of each year at the
wage rate for that year. what amount of vacation liability would be reflected on the 2018
and 2019 balance sheets, respectively?
A) $84,000; $117,000
B) $96,000; $108,000
C) $84,000; $24,000

2018: 50 employees x 12 vacation days x 8 hours/day x 17.50/hr = 84,000

2019: 50 employees x 12 vacation days x 8 hours/day x 20/hr = 96,000
Availed: 50 employees x 9 vacation days x 8hours/day x 17.50= 63,000
84,000 + 96,000 – 63,000= 117,000

14) Bull's Eye Department Stores, Inc. records $170,000 in gift card sales and receives
cash in year 1. Customers redeemed 25% of the gift cards to purchase merchandise in
year 1. The company estimates breakage as 13% and uses the proportional method. How
much breakage revenue should be recorded at the end of year 1? (Round any
intermediary percentages two decimal places, X.XX%. Round your final answer to the
nearest dollar.)
A) $22,100
B) $42,500
C) $5,525
D) $6,352

170,000 x 25%= 42,500

170,000 x 13%= 22,100

42,500/ 170,000-22,100= 28.74%

22,100x 28.74%= 6,352
15) National Refuse requires customers to pay $40 for each toter used for trash collection
and charges this amount when delivered. When toters are returned, the amount is
refunded to the customer. If a customer cancels the trash collection contract, but does not
return the toter, the amount is forfeited by the customer. During the current year, 30
customers cancelled their contracts and failed to return their toter, while 105 toters are
returned upon cancellation. Which of the following would be included in the journal
entry to reflect the forfeiture?
A) debit to Deposit Liability for $4,200
B) debit to Deposit Liability for $1,200
C) credit to Deposit Liability for $4,200
D) credit to Deposit Liability for $5,400

16) Lifeline Biofuels built an oil rig at a cost of $10.5 million. The company estimates the
oil rig will have a useful life of 20 years (with no salvage value), after which Federal
regulations require that the oil rig must be dismantled and the land area restored. The fair
value of the costs of this asset retirement project is $900,000. The present value of these
asset retirement costs is $280,000 based on the 6% after-tax discount rate. Under U.S.
GAAP, what is the initial capitalized carrying value of the oil rig at the completion of
construction?
A) $10,500,000
B) $10,220,000
C) $10,780,000
D) $630,000

17) Lifeline Biofuels built an oil rig at a cost of $4.5 million that it places into service on
the first day of the current year. The company estimates the oil rig will have a useful life
of 20 years (with no salvage value), after which Federal regulations require that the oil rig
must be dismantled and the land area restored. The expected fair value of this asset
retirement project is $845,000. The present value of these asset retirement costs is
$126,000 based on the 10% after-tax discount rate. Under U.S. GAAP, what is the
company’s accretion expense for the first year?
A) $12,600
B) $42,250
C) $6,300
D) $0

18) Lifeline Biofuels built an oil rig at a cost of $4.5 million. At the time that
construction was complete, the company estimated the oil rig would have a useful life of
20 years (with no salvage value), after which Federal regulations would require that the
oil rig be dismantled and the land area restored. The fair value of this asset retirement
project was $815,000 and the present value of these asset retirement costs was $307,000
based on the 5% after-tax discount rate. At the end of the 20 year life, the company
dismantles the oil rig and restores the land at a cost of $890,000. Following U.S. GAAP,
the journal entry to record the completion of the restoration process would include:
A) credit Loss on Settlement of Asset Retirement Obligation for $583,000
B) debit Loss on Settlement of Asset Retirement Obligation for $75,000
C) credit Asset Retirement Obligation for $75,000
D) debit Loss on Settlement of Asset Retirement Obligation for $583,000

19) Onopea Inc. considered two contingencies at the end of 2016:

** a probable loss in the range of $200,000 to $800,000

** a reasonably possible loss of $150,000

Under U.S. GAAP, what is the balance for contingent liabilities at the end of 2016?
A) $200,000
B) $500,000
C) $350,000
D) $650,000

20) Onopea Inc. considered two contingencies at the end of 2016:

** a probable loss in the range of $200,000 to $900,000

** a reasonably possible loss of $150,000

Under IFRS, what is the balance for contingent liabilities at the end of 2016?
A) $200,000
B) $550,000
C) $350,000
D) $1,050,000

21) During 2017, Blevert Co. introduced a new line of machines that carry a three-year
warranty against manufacturer’s defects. Based on industry experience, warranty costs
are estimated at 1% of sales in the year of sale, 3% in the year after sale, and 5% in the
second year after sale. Sales and actual warranty expenditures for the first three-year
period were as follows:

Sales Actual Warranty Expenditures

2017 $100,000 8,000
2018 1,100,000 30,000
2019 2,000,000 100,000
$3,200,000 $138,000

What amount should Blevert report as a liability at December 31, 2017?

A) $8,000
B) $9,000
C) $17,000
D) $1,000

22) During 2017, Blevert Co. introduced a new line of machines that carry a three-year
warranty against manufacturer's defects. Based on industry experience, warranty costs are
estimated at 2% of sales in the year of sale, 3% in the year after sale, and 6% in the
second year after sale. Sales and actual warranty expenditures for the first three-year
period were as follows:

Sales Actual Warranty Expenditures

2017 $400,000 7,000
2018 1,800,000 23,000
2019 2,000,000 100,000
$4,200,000 $130,000

What amount should Blevert report as warranty expense for 2017?

A) $7,000
B) $44,000
C) $51,000
D) $37,000

24) During 2017, Blevert Co. introduced a new line of machines that carry a three-year
warranty against manufacturer's defects. Based on industry experience, warranty costs are
estimated at 1% of sales in the year of sale, 3% in the year after sale, and 5% in the
second year after sale. Sales and actual warranty expenditures for the first three-year
period were as follows:

Sales Actual Warranty Expenditures

2017 $500,000 8,000
2018 1,600,000 20,000
2019 2,300,000 100,000
$4,400,000 $128,000

What amount should Blevert report as a liability at December 31, 2018?

A) $144,000
B) $124,000
C) $161,000
D) $181,000
25) During 2017, Blevert Co. introduced a new line of machines that carry a three-year
warranty against manufacturer's defects. Based on industry experience, warranty costs are
estimated at 2% of sales in the year of sale, 4% in the year after sale, and 6% in the
second year after sale. Sales and actual warranty expenditures for the first three-year
period were as follows:

Sales Actual Warranty Expenditures

2017 $200,000 7,000
2018 1,400,000 29,000
2019 2,400,000 100,000
$4,000,000 $136,000

What amount should Blevert report as a liability at December 31, 2019?

A) $288,000
B) $139,000
C) $156,000
D) $344,000

26) ShoSho Manufacturing. is being sued for illness caused to local residents as a result
of negligence on the company's part in permitting the local residents to be exposed to
highly toxic chemicals from its plant. ShoSho's lawyer states that it is probable that
ShoSho will lose the suit and be found liable for a judgment costing ShoSho anywhere
from $1,500,000 to $4,800,000. However, the lawyer states that the most probable cost is
$4,100,000. As a result of the above facts, what accounting recognition, if any, should be
accorded this situation under IFRS?
A) ShoSho should accrue a loss contingency of $4,100,000 and disclose an additional
contingency of up to $700,000.
B) ShoSho should accrue a loss contingency of $1,500,000 and disclose an additional
contingency of up to $3,300,000.
C) ShoSho should not accrue a loss contingency but disclose a contingency of up to
$1,500,000.
D) ShoSho should not accrue a loss contingency or disclose any contingency.

27) Mingle, Inc., a manufacturer of cleaning products, is preparing annual financial

statements at December 31, 2018. Because of a recently proven health hazard in one of
its cleaning products, the U.S. government has clearly indicated its intention of having
Mingle recall all bottles of that product sold in the last six months. The management of
Mingle estimates that this recall would cost $800,000. What accounting recognition, if
any, should be accorded this situation?
A) expense and equity restriction of $800,000
B) expense and contingent liability of $800,000
C) note disclosure only
D) no recognition
28) E-Z Electronics is running a video game promotion. For every 15 video games
purchased, the customer receives a coupon upon checkout to receive a free game. The
coupons expire in one year. E-Z estimates that about half of its video game customers
will qualify to receive a coupon. In the past, the store has recognized a gross profit
margin of 20% of the selling price on video games. What would the expected redemption
percentage be to calculate the premium expense and related contingent liability?
(Remember to use the gross profit margin to arrive at cost.)
A) 4.33% of total video game sales
B) 2.67% of total video game sales
C) 6.67% of total video game sales
D) 15% of total video game sales

29) In December, 2018, Shooger Candy Company began including one coupon in each
package of candy and offered customers a Stuffed Shooger Bear in exchange for $5 and
five coupons. The stuffed bears cost Shooger $5.10 each. Eventually, it is expected that
30% of the coupons will be redeemed. During December, Shooger sold 230,000 packages
of candy and no coupons were redeemed. In its December 31, 2018 balance sheet, what
amount should Shooger report as estimated liability for the coupons?
A) $69,000
B) $70,380
C) $13,800
D) $1,380