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CURRENT LIABILITIES

1. To increase sales, Adversity Company inaugurated a promotional campaign on June 30, 2008. Adversity
placed a coupon redeemable for a premium in each package of cereal sold at P300. Each premium cost
P200. A premium is offered to customers who send in 5 coupons and a remittance of P50. The
distribution cost per premium is P10. Adversity estimated that only 80% of the coupons issued will be
redeemed. For the six months ended December 31, 2008, the following is available:
Packages of cereal sold
Premiums purchased
Coupons redeemed

50,000
8,000
30,000

What is the estimated liability for coupons on December 31, 2008?


a.
320,000
b. 1,500,000
c.
400,000
d. 1,280,000
2. Advisory 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 P5. Data for the premium offer are:
2007
1,000,000
40,000
35,000
3,000

Boxes of soap sold


Number of towels purchased at P50 per towel
Number of towels distributed as premium
Number of towels to be distributed as premium next period

2008
1,500,000
65,000
58,000
5,000

In its 2008 income statement, Advisory Company should report premium expense at
a. 3,000,000
b. 2,700,000
c. 2,610,000
d. 2,835,000
3. Destination Company launched a sales promotional campaign on June 30, 2008. For every ten empty
packs returned to Destination, customers will receive an attractive food container. The company
estimates that only 30% of the packs reaching the market will be redeemed. Additional data are as
follows:
Sales of food packs
Food containers purchased
Prizes distributed to customers

Units
3,000,000
60,000
37,000

Amount
9,000,000
1,800,000

At the end of the year, Destination should recognize a liability equal to the estimated cost of potential
prizes at
a. 1,800,000
b. 1,590,000
c.
900,000
d.
690,000
4. During 2008, Luciana Company introduced a new product carrying a two-year warranty against defects.
The estimated warranty costs related to peso sales are 3% within 12 months following sale and 5% in
the second 12 months following sale. Sales and actual warranty expenditures for the years ended
December 31, 2007 and 2008 are as follows:
2007
2008

Sales
40,000,000
50,000,000

Actual expenditures
1,000,000
4,000,000

At December 31, 2008, Luciana would report estimated warranty liability of


a. 2,500,000
b. 2,200,000
c. 1,500,000
d.
0
5. Loyola Company issued a P5,000,000 notes payable on April 1, 2007 bearing an interest rate that is
compounded annually on March 31, 2009. If the principal and the interest is payable on maturity date,
what is the accrued interest to be reported on Loyolas December 31, 2008 balance sheet?
a. 1,200,000

HO # 23

b. 1,272,000
c. 1,104,000
d. 1,000,000
6. Included in Ingenuity Companys liability balances at December 31, 2008 were the following:
10% note payable issued on October 1, 2007, maturing October 1, 2009
12% note payable issued on March 1, 2006, maturing on March 1, 2009

3,000,000
5,000,000

Ingenuitys 2008 financial statements were issued on March 31, 2009. On January 31, 2009, 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, Ingenuity has the discretion to
refinance the obligation for at least twelve months after December 31, 2008. What amount of the notes
payable should be classified as current on December 31, 2008?
a. 8,000,000
b. 5,000,000
c. 3,000,000
d.
0
7. Patio 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, Patio recognizes
the unearned revenue as realized. Data for 2008 are as follows:
Unearned revenue, 1/1/2008
Gift certificates sold
Gift certificates redeemed
Expired gift certificates
Cost of goods sold

2,500,000
6,000,000
6,500,000
500,000
60%

At December 31, 2008, Patio report unearned revenue for gift certificates of
a. 1,500,000
b. 2,000,000
c. 1,000,000
8d. 500,000
7. Horner Company requires advance payments with special orders for machinery constructed to customer
specifications. These advances are nonrefundable. Data for the year are:
Customer advances
Advances received with orders in 2008
Advances applied to orders shipped in 2008
Advances applicable to orders canceled in 2008

6,800,000
9,000,000
8,700,000
2,600,000

The December 31, 2008 balance sheet should report current liability for advances at
a. 4,500,000
b. 7,100,000
c. 6,400,000
d. 4,400,000
9. On November 5, 2008, a Breakthrough Company truck was in an accident with an auto driven by
McAllen. Breakthrough received notice on January 15, 2009, of a lawsuit for P4,000,000 damages for
personal injuries suffered by McAllen. Breakthroughs counsel believes it is probable that McAllen will be
awarded an estimated amount in the range between P2,000,000 and P3,000,000, and no amount is a
better estimate of potential liability than any other amount. The accounting year, ends on December 31,
and the 2008 financial statements were issued on March 31, 2009. What amount of provision should
Breakthrough accrue at December 31, 2008?
a. 4,000,000
b. 3,000,000
c. 2,000,000
d. 2,500,000
- - END - -

HO # 23