LIABILITIES

QUIZ: THEORIES
1. The accrual approach in accounting for product warranty cost
a. Is required for income tax purpose
b. Is frequently justified on the basis of expediency when warranty
cost is immaterial
c. Finds the expense account being charged when the seller performs
in compliance with the warranty.
d. Represents accepted practice and should be used whenever the
warranty is an integral and inseparable part of the sale.
QUIZ: THEORIES
2. Which best describes the accrual approach of accounting for
warranty cost?
a. Expensed when paid
b. Expensed when warranty claims are certain
c. Expensed based on estimate in year of sale
d. Expensed when inccured
QUIZ: THEORIES
3. Which best describes the expense approach of accounting for
warranty cost?
a. Expensed based on estimate in year of sale
b. Expensed when liability is accrued
c. Expensed when warranty claims are certain*
d. Expensed when incurred
QUIZ: THEORIES
4. When an entity has a continuing policy of guaranteeing new products
against defects for three years, the liability arising from the warranty
a. Should be reported as noncurrent
b. Should be reported as current
c. Should be reported as part current and part noncurrent
d. Need not be disclosed
QUIZ: THEORIES
5. When an entity issued a note solely in exchange for cash, the present
value of the note at issuance is equal to
a. Face amount
b. Face amount discounted at the market interest rate
c. Proceeds received
d. Proceeds received discounted at the market rate
QUIZ: THEORIES
6. An entity borrowed cash from a bank and issued a noninterest-
bearing note payable. The bank discounted the note at 10%. What is
the effective interest rate?
a. Equal to the stated discount rate of 10%
b. More than the stated discount rate of 10%
c. Less than the stated discount rate of 10%
d. Independent of the stated discount rate of 10%
QUIZ: THEORIES
7. If the present value of a note issued in exchange for aproperty is less
than face amount, the difference should be
a. Included in the cost of the asset
b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset
d. Included in interest expense in the year of issuance
QUIZ: THEORIES
8. The discount resulting from the determination of the present value
of a note payable should be reported as
a. Deferred credit separate from the note
b. Direct deduction from the face amount of the note
c. Deferred charge separate from the note
d. Addition to the face amount of the note
QUIZ: THEORIES
9. When a note payable is exchanged for property, the stated interest
rate is presumed to be fair when
a. No interest rate is stated
b. The stated interest rate is unreasonable
c. The face amount of the note is materially different from the cash
sale price for similar property
d. The stated interest rate is equal to the market rate
QUIZ: THEORIES
10. At issuance date, the present value of a note payable should be
equal to the face amount if the note
a. Bears a stated rate of interest which is realistic
b. Bears a stated rate of interest which is less than the prevailing
market rate for similar notes
c. Is noninterest bearing and the implicit interest rate is less than the
prevailing market rate for similar notes
d. Is noninterest bearing and the implicit interest rate is equal to the
prevailing market rate for similar notes.
11. M Co. sells washing machines that carry a three-year warranty against
manufacturers defects. Based on entity experience, warranty costs are
estimated at P300 per machine. During the current year, the entity sold 2,400
washing machines and paid warranty costs of P170,000. What amount should
be reported as warranty expense for the current year?

a. 170,000
b. 240,000
c. 550,000
d. 720,000
12. On April 1, 2025, A co began offering a new product for sale under a one
year warranty. Of the 5,000 units in inventory at April 1, 2025, 3,000 had been
sold by June 30, 2025. Based on its experience with similar products the entity
estimated that the average warranty cost per unit sold would be P80. Actual
warranty costs incurred from April 1 through June 30, 2025 were P70,000. On
June 30, 2025 what amount should be reported as estimated warranty
liability?

a. 90,000
b. 160,000
c. 170,000
d. 330.000
13. B Co estimated annual warranty expense at 2% of annual net sales. The
net sales for the current year amounted to P4M. On January 1, 2025 the
warranty liability was P60,000 and the warranty payments during the year
totaled P50,000. What is the warranty liability on Dec. 31 2025?

a. 10,000
b. 70,000
c. 80,000
d. 90,000
On January 1, 2025 J co. borrowed P500k 8% non interest bearing note due in
four years, The present value of the note on the date of issuance was P367,500.
The entity has elected irrevocably the fv option in measuring the note payable.
On December 31, 2025 the fv of the note is P408,150.
1. What amount of gain on the note payable should be reported for 2025?
a. 132,500
b. 172,500
c. 91,850
d. 29,400
2. What amount should the discount on note payable be presented on Dec. 31,
2025?
e. 132,500
f. 103,100
g. 91,850
QUIZ:
1.D
2.C
3.D
4.C
5.C
6.B
7.B
8.B
9. D
10. A
Solution
11. Warranty expense 2,400 x 300 = 720,000
12. Warranty expense (3,000 x 80) 240,000
Less: Actual warranty cost 70,000
Warranty liability (ending) 170,000

13. Warranty liability (beg) 60,000

Add. Warranty exp 80,000
Total 140,000
Less: payments 50,000
Warranty liability (ending) 90,000
Solution
14. C
15. D