PROBLEM 1

Gladness Co. guaranteed a loan of P400,000 granted to Timothy C. At the date when the directors approved the financial
statements of Timothy, there is no reason to believe that the guarantee will be invoked. Assuming that the amount of the
guarantee is a material amount for Gladness Co., what proper accounting this guarantee is in the books of Gladness Co?
a. The amount of the guarantee is not accounted for in Gladness books.
b. The amount of P400,000 should be recognized as a provision.
c. The amount of P400,000 be recognized as a liability with necessary disclosure in the notes to the financial statements.
d. The contingent liability should be disclosed by way of note to the financial statements.

PROBLEM 2
One of Clarions production plants is located on the shores of Lake Taal. The lake has been rising for a number of years, and
the company has installed dikes to prevent flooding. The dikes are currently operating at or near capacity. Weather
forecasters have predicted that the lake will rise likely result from stressing the dikes beyond capacity. Clarion Company
estimated a P4,000,000 to P6,000,000 amount of loss should the flooding will not be prevented. In its 2014 financial
statements, Clarion Company should report
a. An accrued liability of P4,000,000 only.
b. An accrued liability of P5,000,000 only.
c. An accrued liability of P6,000,000 only.
d. Only a note disclosure is required.

PROBLEM 3
Day Care Company offers payment plants on its 12 month contracts. Information on the 3 plans and the number of children
enrolled in each contract plan starting September 30, 2014 follows:
Initial payment
per child
5,000
2,000

Plan
1
2
3

Monthly fees
per child
300
500

Number
of children
15
12
9

Day Care collected the total initial payments on September 30, 2014, except for four contracts under plan 2. The initial
payment pertaining to the four contracts will be collected in two installment on December 15, 2014 and January 15, 2015.

Monthly fees applicable for the current month are collected in advance on the 29th of the preceding month. Monthly fees
were collected properly starting September 29, 2014, the first month of monthly fee payment.

Required:
1. Compute for the deferred revenue as of December 31, 2014.
2. Compute for the revenue earned in 2014.
SOLUTION:
A

B
Fee

Plan
1
2
3

Initial
75,000
20,000
95,000

Monthly
14,400
18,000
32,400

C (A+B)
Total
Collections
75,000
34,400
18,000
127,400

D
E
Revenue earned
Initial
Monthly
18,750
6,000
10,800
13,500
24,750
24,300

F (D+E)
Total
Revenue
18,750
16,800
13,500
49,050

G (C-F)
Unearned
Revenue
56,250
17,600
4,500
78,350

PROBLEM 4
Fell Company operates a retail grocery store that is allowed by law to collect refundable deposits of P5 on soda bottles. The
soda bottles are refundable only in a year. Information for 2014 follows:

Liability for refundable deposits - January 1

Number of soda bottles sold
Cash refund for returned soda bottles
Gain on unreturned soda bottles recognized in 2014
Soda bottle inventory - January 1
Number of soda bottles in ending inventory

P150,000.00
100,000.00
P350,000.00
P30,000.00
P175,000.00
75,000.00

The soda bottles cost the entity P3.50 per bottle. Soda bottles inventory is increased by its annual purchases
of bottles and is only reduced for every unreturned soda bottles for more than a year.

Required:
Prepare the necessary journal entries in 2014 and compute the following:
1. Number of soda bottles purchased in 2014.
2. Number of soda bottles unreturned for more than a year.
3. Liability for refundable deposits, 12/31/2014.
4. Number of soda bottles returned
SOLUTIONS:
Liability for unreturned soda bottles
Beginning
Add: Sold
Less: Returned
Unreturned
Ending

Units
30,000.00
100,000.00
(70,000.00)
(20,000.00)
40,000.00

@ 5.00
Amount
150,000.00
500,000.00
(350,000.00)
(100,000.00)
200,000.00

Gain on unreturned soda bottles recognized in 2014

Gain per soda bottle
Number of soda bottles unreturned for more than a year.

Soda Bottles Inventory

Beginning
Add: Purchases
Less: Unreturned
Ending

P30,000.00
1.5
20,000.00

Units
50,000.00
45,000.00
(20,000.00)
75,000.00

@ 3.50
Amount
P175,000.00
157,500.00
(70,000.00)
262,500.00