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Ricarte Corporation manufactures television components and sells them with 6month warranty under which defective components

will be replaced without


charge. On December 31, 2005, Estimated Liability for Product Warranty had a
balance of P918,000. By June 30, 2006, this balance had been reduced to
P144,450 by debits for estimated net cost of components returned that had been
sold in 2005.
The company started out in 2006 expecting 8% of the peso volume of sales to be
returned. However, due to the introduction of new models during the year, this
estimated percentage of returns was increased to 10% on May 1. It is assumed that
no components sold during a given month are returned in that month. Each
component is stamped with a date at time of sale so that the warranty may be
properly administered. The following table of percentages indicates the like
pattern of sales return during the 6-month period of the warranty, starting with the
month following the sale of components.
Month Following Sale
First
Second
Third
Fourth through sixth 10% each
month

Percentage of Total
Returns Expected
20%
30
20
30
100%

Gross sales of components were as follows for the first 6 months of 2006:
Month
January
February
March
April
May
June

Amount
P6,480,000
5,940,000
7,380,000
5,130,000
3,600,000
3,240,000

The companys warranty also covers the payment of freight cost on defective
components returned and on the new components sent out as replacements. This
freight cost runs approximately 10% of the sales price of the components returned.
The manufacturing cost of the components is roughly 80% of the sales price, and

the salvage value of returned components averages 15% of their sales price.
Returned components on hand at December 31, 2005, were thus valued in
inventory at 15% of their original sales price.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The total estimated returns for the six-month period ended June 30, 2006 is
a. P2,678,400
b. P2,541,600
c. P3,177,000
d. P2,859,300
2. The warranty expense for the six-month period ended June 30, 2006 is
a. P2,382,750
b. P2,468,880
c. P2,008,800
d. P1,906,200
3. The Estimated Liability for Product Warranty as of June 30, 2006 should have
a balance of
a. P1,147,680
b. P855,900
c. P955,126
d. P764,100
4. The adjusting entry on June 30, 2006 will include a debit to Warranty Expense
of
a. P711,450
b. P810,676
c. P888,462
d. P619,650
5. In evaluating an entitys accounting estimates, one of an auditors objectives is
to determine whether the estimates are
a. Not subject to bias.
b. Based on objective assumptions.
c. Consistent with industry guidelines.
d. Reasonable in the circumstances.