IA2 Provision
IA2 Provision
IA2 Provision
Worksheet
Problem 4-1
Toy Company provided the following facts regarding pending litigation on December 31, 2020:
* The entity is defending against a first lawsuit and believes there is a 51% chance
it will lose in court. The entity estimates that damages will be P1.000,000 Recognize and accrued a
* The entity is defending against a second lawsuit for which management believes it
is virtually certain to lose in court.
if it loses the lawsuit, management estimates damages will fall somewhere in the range
of P3,000,000 to P5,000,000 with each amount in that range equally likely to occur. Recognize and accrued th
* The entity is defending against a third lawsuit but the relevant loss will only occur far
into the future. The present values of the end points of the range are P1,500,000 and P2,500,000
The management believes the effect of time value of money on these amounts are material
but also believes the timing of these amount is uncertain.
* The entity is defending against a fourt lawsuit and believes there is only a 25% chance it will lose in court.
if the entity loses, management believes damages will fall somewhere in the range of P3,000,000 to P4,000,000
with each amount in that range equally. Likely to occur. Disclosure to notes in Financial Statement
Required:
Indicate how the entity would disclose or account for the four lawsuits under IFRS in the financial statements
for the year ended December 31, 2020.
Recognize and accrued a liability P1,000,000
financial statements
Intermediate Accounting - Provision
Worksheet
Problem 4-2
Bourne Company provided the following selected transactions related to contingencies. The fiscal year ends
on December 31, 2020 and Financial statement are issued on March 31, 2021
* Bourne is involved in a lawsuit resulting from a dispute with a customer over a 2020 transaction.
On December 31, 2020 attorneys advised that it was probable that bourne would lose P3,000,000
in an unfavorable outcome.
On February 15, 2021, Judgment was rendered against bourne in the amount of P4,000,000 plus
interest P 500,000. Bourne does not plan to appeal the judgement.
* Since August 2020, Bourne has been involved in labor dispute. Negotiations between the entity and
the union have not produced a settlement. Since January 2020, strikes have been ongoing at these facilities.
it is virtually certain that material cost will be incurred but the amount of resultant costs cannot be adequately predicted.
NO ENTRY
* Bourne is the defendant in a lawsuit filed in January 2021 in which the plaintiff seeks P 5,000,000 as an adjustment
to the purchase price related to the sale of Bourne's hardwood division in 2020. The lawsuit alleges that Bourne
Misrepresented the division's assets and liabilities.
Legal counsel advised that it is reasonably possible that Bourne could lose P 2,000,000 but that is extremely unlikely
it could lose the P5,000,000 asked for.
NO Entry - Contingent Liabilty (Disclose to Finacial Statement)
* On March 1, 2021, the provincial government is in the process of investigating the possibility of environmental
violation by Bourne but has not proposed a penalty assessment.
Management feels an assessment is reasonably possible and if an assessment is made, a settlement of up to P4,000,000 is probable.
Required:
Problem 4-3
* A personal injury liability suit for P500,000 was brought against Sunrise Company in March 2020.
The management and legal counsel of sunrise Company concluded that it is not probable that
Sunrise Company will be responsible for damages and that P150,000 is the best estimate of the damages
* In july 2020, Sunrise Company became involved in a tax dispute with the BIR pertaining to 2019 Income tax.
In December 2020, a judgement for P400,000 was assessed against Sunrise Company by the tax court.
The Tax advisor and legal counsel of Sunrise Company believed it is probable that the assessment can be
reduced on appeal by 50%
* Sunrise Company signed as guarantor for P200,000 loan by PNB to Sunset Company, a principal supplier
of Sunrise.
By reason of financial difficulties, it is probable that sunrise Company shall pay the P200,000 loan with only
60% recovery anticipated from Sunset Company.
A/R - Sunset 200k x60% 120,000
Loss on Guaranteed 80,000
Notes Payable - PNB 200,000
Required
Prepare journal entries to recognize any provision on December 31, 2020.
Intermediate Accounting - Provision
Worksheet
Journal Entry
2020
Problem 4-10 Oil Tanker Depot (6M + 930K)
Cash
On January 1, 2020, Petron Company purchased on oil tanker depot at cost of P 6,000,000 Decommisioning Liability
The entity is expected to operate the depot for 5 years after which it is legally required to
dismantle the depot and remove the underground storage tanks. Depreciation Expenses (6,930,000/5)
Accumulated Depreciation
The oil tanker depot is depreciated using straight line with no residual value.
It is reliably estimated that the cost of decommissioning the depot will amount to P1,500,000 Interest Expenses (930,000 x 10%)
Decommisioning Liability
The appropriate discount rate is 10%. The present value of 1 at 10% for 5 period is 0.62
On December 31, 2024 after 5 years of operating the depot, the entity paid a demolition entity to 2024
dismantle the depot at a price of P1,700,000
Accumulated Depreciation - Oil tanker Depot
Oil Tanker Depot (6M + 930K)
Required:
Decommisioning Liability
1. Prepare the journal entries in 2020 in relation to the depot and the decommissioning liability. Loss on Settlemet of Decomissioning
Cash
2. Prepare Journal entries to record the derecognition of the depot and the settlement of the
decommissioning liability on December 31, 2024
6,930,000
6,000,000
sioning Liability 930,000
es (6,930,000/5) 1,386,000
ted Depreciation 1,386,000
1,500,000
Decomissioning 200,000
1,700,000
Intermediate Accounting - Provision
Worksheet
4-13 (IFRS)
24. Toyo Company owns a car dealership that is uses for servicing cars under warranty.
In preparing the financial statements, the entity needs to ascertain the provision
for warranty that it would be required to provide at the end of the year.
The entity experience with warranty claims is:
60% of all cars sold in a year have zero defect, 25% of all cars sold in a year have normal defect,
and 15% of all cars sold in a year have significant defect.
The cost of rectifying normal defect in a car is P10,000. the Cost of rectifying normal defect in a car is P14,000.
The cost of rectifying a significant defect in a car is P 30,000.
The entity sold 500 cars during the year.
What is the expected value of the warranty provision for the current year?
a. 3,500,000
b. 1,750,000
c. 1,400,000
d. 4,000,000
a. 83,460
b. 84,360
c. 83,640
d. 89,880
2. What is the measurement of the provision for lawsuit on December 31, 2020.
a. 95,000
b. 79,800
c. 53,200
d. 85,386
Normal Defect (500 x25% x10,001,250,000
Major Defect (500 x 15% x 30,00 2,250,000
Expected vale of the warranty 3,500,000
e out of court.
e to reflect the
1. Chato Company sells electrical goods covered by one year warranty for any defects.
of the sales of P70,000,000 for the year, the entity estimated that 3% will have major defect,
5% will have minor defect and 92% will have no defect.
The cost of repairs would be P5,000,000 if all the products sold had major defect and P3,000,000
if all had minor defect.
What amount should be recognized as a warranty provision?
a. 8,000,000
b. 5,600,000
c. 300,000
d. 190,000
a. 1,382,400
b. 1,280,000
c. 1,036,000
d. 1,620,000
3. What is the measurement of the provision on December 31, 2020?
a. 1,139,200
b. 1,335,000
c. 1,230,336
d. 922,752
4.Electro Company gives warranties at the time of sale to purchasers of its product. The entity undertakes to make
good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale.
Sales of P 5,000,000 were made evenly throughout 2020. the expenditures for warranty repairs and replacements for
the product sold in 2020 are expected to be made 50% in 2020 and 50% in 2021.
The 2021 outflows of economic benefits related to the warranty will take place on December 31, 2021.
The entity estimated that 75% of products sold require no warranty repairs, 15% of product sold require minor repairs
costing P100,000 and 10% of product sold require major repairs costing P400,000.
An appropriate risk adjustment factor to reflect the uncertainties in the cashflow estimates is an increment of 6% to the
probability weighted expected cash flows.
The appropriate discount factor for cash flows expected to occur on December 31, 2021 is 0.94.
What is warranty expense for 2020?
a. 500,000
b. 498,200
c. 514,100
d. 530,000
a. 265,000
b. 249,100
c. 250,000
d. 235,000
6. During 2020, Thor Company was sued by a competitor for P5,000,000 for infringement of a trademark.
Based on the advice of the entity's legal counsel, the entity accrued the sum of P3,000,000 as a provision
in the financial statements for the year ended December 31, 2020.
Subsequent to the end of the reporting period, on February 15, 2021, the supreme court decided in favor
of the party alleging infringement of the trademark and ordered the defendant to pay the aggrieved party
a sum of P 3,500,000.
The financial statements were prepared by the enitity's management on January 31, 2021, and approved by
the Board of Directors on February 20, 2021
What amount of provision should have been accrued on December 31, 2020?
a. 5,000,000
b. 3,000,000
c. 3,500,000
d. 0
7. On November 5, 2020, a Dunn Company truck was in an accident with an auto driven by Bell. The entity received
notice on January 12, 2021 of a lawsuit for P700,000 damages for personal injuries suffered by Bell.
The entity's counsel believed it is probable that Bell will be awarded an estimated amount in the range between
P200,000 and P500,000. the possible outcomes are equally likely.
The accounting year ends on December 31 and the 2020 financial statements were issued on March 31, 2021
What amount of provision should be accrued on December 31, 2020?
a. 0
b. 200,000
c. 500,000
d. 350,000
8. During 2020, Manfred Company guaranteed a supplier's P 500,000 loan from a bank.
on October 1, 2020, the entity was notified that the supplier had defaulted on the loan and filed for bankruptcy
protection. Counsel believed the entity will probably to pay P250,000 under its guarantee
As a result of the supplier's bunkruptcy, the entity entered into a contract in December 2020 to retool its machines
so that the entity could accept parts from other suppliers. Retooling costs are estimated to be P300,000
What amount should be reported as accrued liability on December 31, 2020?
a. 250,000
b. 450,000
c. 550,000
d. 750,000
9. During 2020, Beal Company became involved in a tax dispute with the BIR. On December 31, 2020, the entity's tax advisor
believed that an unfavorable outcome was probable and the best estimate of additional tax was P500,000 but could be as
much as P650,000
after the 2020 financial statements were issued, the entity received and accepted a BIR settlement offer of P550,000
What amount of accrued liability should be reported on December 31, 2020.
a. 650,000
b. 550,000
c. 500,000
d. 0
10. On February 5, 2021 an employee filed a P 2,000,000 lawsuit against steel company for damages suffered when a plant of
the entity exploded on December 29, 2020.
The entity's legal counsel believed the entity will probably lose the lawsuit and estimated the loss to be P500,000
The employee has offered to settle the lawsuit out of court for P900,000 but the entity will not agree to the settlement.
On December 31, 2020, what amount should be reported as accrued liability.
a. 2,000,000
b. 1,000,000
c. 900,000
d. 500,000
11. On December 31, 2020 Mith Company was a defendant in a pending lawsuit.
In the opinion of the entity's attorney, it is probable that Mith Company will have to pay P500,000 and it is reasonably
possible that Mith Company will have to pay P600,000 as a result of lawsuit.
a. An Accrued liability of P500,000 only
b. An Accrued liability of P500,000 and disclosure of a contingent liability of P100,000
c. An Accrued liability of P600,000
d. No Information about the lawsuit.
12. On November 25, 2020, an explosion occurred at a Rex Company plant causing extensive property damage to areas building.
by March 10, 2021, claims had been asserted against Rex Company.
The management and counsel concluded that is probable Rex Company will be responsible for damages and that P3,500,000 would
be reasonable estimate of the liability.
The entity's P10,000,000 comprehensive public liability policy has a P500,000 deductible clause. The Financial statements for 2020
were issued on March 25, 2021.
What amount of loss from lawsuit should be reported in the income statement for 2020?
13. What amount of liability from lawsuit should be reported on December 31, 2020?
a. 3,500,000
b. 1,750,000
c. 1,500,000
d. 750,000
Intermediate Accounting - Provision
Worksheet
14. A legal obligation is an obligation that is derived from all of the following, except
a. Legislation
b. A Contract
c. Other Operation of Law
d. An established pattern of practice
16. it is an event that creates a legal or constructive obligation because the entity has no other realistics
alternative but to settle the obligation.
a. Obligating Event
b. Past Event
c. Subsequent Event
d. Current Event
a. The probability that the event will occur is greater than the probability that the event will not occur.
b. The probability that the event will not occur is greater than the probability that the event will occur
c. The probability that the event will occur is the same as the probability that the event will not occur
d. The probaibility that the event will occur is 90% likely.
18. Where there is continuous range of possible outcomes, and each point in that range is as likely as any other, the range to be used is the
a. Minimum
b. Maximum
c. Midpoint
d. Summation of the minimum and maximum
19. When the provision involves a large population of items, the estimates of the amount
20. When the provision arise from single obligation the estimates of the amount
21. Which statement is incorrect when the expenditure required to settle a provision is expected to be reimbursed by another party?
a. The reimbursement shall be recognized only when it is virtually certain that the reimbursement will be received if the entity settles the obligation
b. The amount of reimbursement shall not exceed the amount of provision.
c. the reimbursement shall be "netted" against the estimated liability for the provision
d. in the income statement, the expense relating to the provision may be presented net of the reimbursement.
22. An entity did not record an accrual for a present obligation but diclose the nature of the obligation and the range of the loss. How likely is the loss?
a. Remote
b. Reasonably Possible
c. Probable
d. Certain
23. The likelihood that the future event will or will not occur can be expressed by a range of outcome. Which range means that the future event occurring is very sligh
a. Probable
b. Reasonably possible
c. Certain
d. Remote
24. An expropriation of assets which is imminent and for which the amount of loss can be reasonably estimated should be
a. Accrued
b. Disclosed
c. Accrued and Disclosed
d. Ignored
25. A Present Obligation that is probable and for which the amount can be reliably estimated should
a. Definitely exist as a liability but the amount and due date are indeterminable.
b. Is accrued even though not reasonably estimated.
c. is the result of a loss contingency
d. is not recognized in the financial statement
a. realized.
b. Occurrence is reasonably possible and the amount can be reasonably estimated
c. Occurrence is probable and the amount can be reasonably estimated.
d. The amount can be reasonably estimated
30. Which is the proper way to report a contingent asset receipt of which is virtually certain?
a. As an asset
b. As unearned revenue
c. As a Disclosure only
d. No Disclosure and no Accruals
ttles the obligation