BAIACC2X: INTERMEDIATE ACCOUNTING 2

Topic 2: Non-Financial Liabilities, Provision, and Contingencies

PROBLEM A:

Determine the liabilities to be recognized on each independent scenario:

• In September 2020, Howell filed a suit against Blue Company, alleging violation of patent rights and it
is seeking payment for damages of ₱7,000,000. Blue disclaims the charges and the legal counsel advises
that as of the date of the issuance of Blue Company’s financial statements, it is probable that the enterprise
will not be found liable.
• ABC Company operates in a city where there is no environmental legislation. However, the company
has a widely published policy in which it undertakes to clean up all contamination it causes. As of the
date of the issuance of its 2020 financial statements, a reasonable estimate of the cost of this clean up
related to 2020 operations is ₱2,000,000.
• As a result of an uninsured accident during the year 2020, personal injury suit for ₱3,000,000 has been
filed against XYZ Company. It is the judgment of the company’s legal counsel that an unfavorable verdict
will result in a loss ranging from ₱1,800,000 to ₱2,800,000. The lawyer believes that the most reasonable
estimate is ₱2,200,000.
• GHI Company sells goods with a warranty under which customers are covered for the cost of any
manufacturing defects that become apparent within the first year after purchase. If minor defects were
detected in all products sold, repair costs of ₱2 million would result. If major defects were detected in all
products sold, repair costs of ₱5 million would result. The enterprise’s past experience and future
expectations indicate that 60% of the goods sold have no defects, 30% of the goods sold have minor
defects, and 10% of the goods sold have major defects.
• JKL is charged with multiple lawsuits because of an incident that happened in February 2020 causing
death of 8 persons. Management brought the case to legal counsel. Based on analysis of the counsel, it
is probable that the court will find JKL liable for the incident. As of the date of the issuance of the
financial statements, the best estimate of the obligation is between ₱15,000,000 to ₱25,000,000. Each
point within the range is as likely as any other.

PROBLEM B:

Sugar Company, a corporation engaged in food production, reported a profit of ₱2,000,000 before deducting bonus
(B) and income tax (T) for the year ended 2024. According to its incentive plan, officers and managers are entitled
to a 10% bonus on profit and the corporate income tax rate is 30%.

Required: Compute for the bonus based on the following independent cases:
• Bonus is computed before deduction for both bonus and income taxes
• Bonus is computed after deduction for bonus but before deduction for income taxes
• Bonus is computed before deduction for bonus but after deduction for income taxes
• Bonus is computed after deduction for both bonus and income taxes

PROBLEM C:

The following are independent cases related to warranties:

• POGI Company sold 100,000 units of its product during 2025, its first year of operations. It is expected
that 5% of these will have defects that need to be rectified at an estimated warranty cost of ₱500/unit.
Also, actual warranty costs of ₱1,800,000 were incurred during the year.
• At the beginning of 2025, GANDA Company reported estimated warranty liability of ₱350,000. During
the same year, the Company reported total sales of ₱15,000,000. Based on the Company’s past
experience, 4% of the related sales amount will be a reliable estimate of actual warranty costs in the
future. Actual warranty costs incurred ₱650,000.
• In 2025, GALING Company (2nd year of operations) sold 200,000 units. Estimated warranty repairs are
4% within 1 year and 3% beyond 1 year from sale. Warranty cost per unit is ₱200.
o Actual costs incurred: ₱2,550,000
o Beginning warranty liability: ₱750,000
• In 2025, TANGKAD Company sold 250,000 units. Estimated defects: 3% minor and 1% major.
o Repair cost: ₱200/unit (minor), ₱700/unit (major)
o Actual costs incurred: ₱3,100,000
o Beginning warranty liability: ₱800,000
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 • BAET Company offers a replacement product in its warranty program as its products are always beyond
repair when defective. In 2025, the company sold 150,000 units, 2% of which are expected to be replaced.
During the year, 2,700 units were replaced, and the beginning warranty liability was ₱162,500.
o Manufacturing cost per unit: ₱300
o Net realizable value of defective units: ₱50/unit
o Shipping costs (to and from customers): ₱75/unit
• SIPAG Company provides a two-year warranty for the product it sells. The Company started operations
in 2025. The following information was provided:
2025 2026 2027
Sales ₱28,000,000 ₱38,000,000 ₱35,000,000
Actual warranty costs from:
2025 sales ₱750,000 ₱150,000 ₱50,000
2026 sales — ₱900,000 ₱420,000
2027 sales — — ₱880,000
Total actual warranty costs ₱750,000 ₱1,050,000 ₱1,350,000
Estimated warranty costs 4% of sales 4% of sales 4% of sales

• MAPAGMAHAL Service Company offers warranty contracts for computer units that it sells. The
warranty contracts cover a two-year period. The package of the computer with the warranty contract sells
for a total consideration of ₱28,000, which includes a price for the contract of ₱750. If the customer opts
not to buy the warranty, the computer unit is sold for ₱27,250 each. MAPAGMAHAL’s past experience
shows that, of the total pesos spent for repairs in warranty contracts, 40% is incurred evenly during the
first warranty year and 60% evenly during the second warranty year. During 2020, MAPAGMAHAL
sold 1,000 packages of computer units and warranty contracts. Cost of servicing the units (direct labor,
materials, etc.) during 2020 amounted to ₱80,000.

Required: Journalize the said transactions related to warranties.

PROBLEM D:
The following are independent cases related to discount vouchers and premiums:

• Aggressive Company sells Product X for ₱1,000 each. For each ₱1,000 sales, Aggressive gives its
customers 20% discount voucher for the future purchases up to ₱1,000 for the next 60 days. Aggressive
estimates that there is 60% chance that the customers will use the voucher for the purchases within the
period allotted and that a customer will on the average purchase ₱600 of additional products. Sales during
the year amounted to ₱1,000,000.
• A company launched a new sales promotional program. For every 10 product box tops returned to the
company, customers receive an attractive toy that costs ₱8 each. This toy may separately be sold for ₱12
each. The company estimates that only 60% of the product box tops reaching the consumer market will
be redeemed. Additional information is as follows:
Particulars Units Amount
Sales of products (in boxes) 2,000,000 ₱90,000,000
Purchase of premiums (prizes) 100,000 ₱800,000
Premiums distributed to customers 82,000 –

Required: Journalize the said transactions related to discount vouchers and premiums.

PROBLEM E:

The following are independent cases regarding customer loyalty awards/programs:

• During 2023, SMalls Corporation instituted a customer loyalty program wherein for every ₱150 sales
amount the entity will give 1 point. Each point will reduce the customers’ payments for goods or services
in the future by ₱1.00. Based on the Company’s reliable estimate, only 80% of these points will be
redeemed. For 2023, the Company reported gross sales of ₱30,000,000 (before the allocation). During
2023, the customers have used 90,000 points. In 2024, the customers used 30,000 points. In addition,
SMalls changed its estimate of total points to be redeemed at 170,000 points.

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 • ThriftMore, an operator of a supermarket, participated in the customer loyalty program introduced by
Pearl Gas, a gasoline station operator. For each P300 sales, ThriftMore will grant 4 points to the customer.
Each point is equivalent to P0.50, which can be used as a partial or full payment for Pearl Gas’s products.
For every point granted to the customers, ThriftMore will pay P0.40 to Pearl Gas. It is expected that the
customers will only use 90% of the points. During the year, ThriftMore reported P24,000,000 gross sales.

Required: Journalize the said transactions related to customer loyalty awards/programs.

PROBLEM F:

To promote its new milk tea blend called Coffeeine, Buko Company launched a promo: customers get 1 free cup
for every 5 cups purchased. Customers receive a voucher with stamps for each cup bought.

Each cup sells for ₱120. In 2022, Buko sold 50,000 cups, and it is expected that 80% of the vouchers will be
redeemed.

Required: Journalize the said transactions.

PROBLEM G:

Assume the following information for Glorietta Corporation for the year 2025. Glorietta has a pricing policy that
allows 30% profit on the sales price.

Particulars Amount (₱)

Unearned Revenue from Gift Certificates Outstanding, Jan. 1, 2025 500,000
Gift certificates sold during the year 1,800,000
Gift certificates issued relating to sales promotion during 2025 200,000
Gift certificates redeemed during the year 1,800,000
Gift certificates (promo) expired during 2025 25,000
Additional outstanding gift certificates expected to expire 2026 12,000

Required: Journalize the said transactions and determine the balance of unearned revenue.

PROBLEM H:

Assume the following information:

Transaction Description Amount (₱)

Balance of Deposits for Returnable Containers, 01/01/19 250,000
Deposits received for containers of products sold during 2020 800,000
Deposits refunded during 2020 upon return of containers 720,000
Deposits forfeited for containers not returned within prescribed period 60,000
Cost of containers not returned within prescribed period 55,000
Accumulated depreciation on containers not returned 15,000

Required: Journalize the said transactions and determine the balance of ending liability.

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