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    Ia 2 Finals Answers

    Uploaded by

    Erica Villaruel
    1. The legal counsel advised Martinah Company to accrue a provision of 3.2 million for a patent infringement lawsuit in 2020. After the 2020 financial statements were approved, the court ruled in favor of the complainant for 2.5 million. 2. For an accident claim, Minorka Bus Company should accrue a provision of 3.5 million as of December 31, 2020 based on the estimated possible outcomes and their probabilities. 3. For a lawsuit against it, Sushmita Company should accrue a provision of 1.927 million as of December 31, 2020 based on estimated damages amounts and their probabilities discounted at the company's rate.

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    Ia 2 Finals Answers

    Uploaded by

    Erica Villaruel
    95 views1 page
    1. The legal counsel advised Martinah Company to accrue a provision of 3.2 million for a patent infringement lawsuit in 2020. After the 2020 financial statements were approved, the court ruled in favor of the complainant for 2.5 million. 2. For an accident claim, Minorka Bus Company should accrue a provision of 3.5 million as of December 31, 2020 based on the estimated possible outcomes and their probabilities. 3. For a lawsuit against it, Sushmita Company should accrue a provision of 1.927 million as of December 31, 2020 based on estimated damages amounts and their probabilities discounted at the company's rate.

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    1. The legal counsel advised Martinah Company to accrue a provision of 3.2 million for a patent infringement lawsuit in 2020. After the 2020 financial statements were approved, the court ruled in favor of the complainant for 2.5 million. 2. For an accident claim, Minorka Bus Company should accrue a provision of 3.5 million as of December 31, 2020 based on the estimated possible outcomes and their probabilities. 3. For a lawsuit against it, Sushmita Company should accrue a provision of 1.927 million as of December 31, 2020 based on estimated damages amounts and their probabilities discounted at the company's rate.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    95 views1 page

    Ia 2 Finals Answers

    Uploaded by

    Erica Villaruel
    1. The legal counsel advised Martinah Company to accrue a provision of 3.2 million for a patent infringement lawsuit in 2020. After the 2020 financial statements were approved, the court ruled in favor of the complainant for 2.5 million. 2. For an accident claim, Minorka Bus Company should accrue a provision of 3.5 million as of December 31, 2020 based on the estimated possible outcomes and their probabilities. 3. For a lawsuit against it, Sushmita Company should accrue a provision of 1.927 million as of December 31, 2020 based on estimated damages amounts and their probabilities discounted at the company's rate.

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    Assignment 6.

    1 Contingency (Group Activity)


    Related data:
    During 2020, Martinah Company was sued by a competitor for 8,000,000 patent infringement.
    The legal counsel of the entity advises that the entity shall accrue 3,200,000 as a provision in the financial statements for
    the year 2020. Subsequently, on February 28,2021, towards the end of the 2020 reporting period, the Superme Court decided in the favor of the
    complainant and ordered the defendant to pay 2,500,000 The entity prepared financial statements for 2020 on January 31, 2021
    and BOD approved it on February 20, 2021.

    Requirements:
    1. How much is the provision on December 31, 2020?
    2. What is the related journal entry?
    3. How much is the contingency liability and what is the related treatment?

    Answer:
    1. The answer is ₱3,200,000 because the Supreme Court have decided AFTER the date that the legal councel adviced the entity meaning, the
    decision of the Supreme Court that in favors the complainant came after the date of the BOD's approval which is February 20, 2021.

    2. Related journal entry


    Debit Credit
    Loss on contingency 3,200,000
    Provision loss on contingency 3,200,000

    3. There is no contingent liability to be recognized, as such no disclosure is necessary.

    Assignment 6.2 Provision and estimated liability


    1. On Novemeber 3, 2020, Minorka Bus Company had an accident. On January 12, 2021, the entity received a notice of lawsuit for 7,000,000
    damages for personal injuries suffered by the passengers.
    The entity's legal counsel believed it is probable that Minorka will pay the complainant between 2,000,000 and
    5,000,000 . The possible outcomes are equally likely.
    How much is the provision on December 31, 2020?

    Solution:
    2,000,000 50% 1,000,000
    5,000,000 50% 2,500,000
    ₱ 3,500,000.00

    2. In 2020, Sushmita Company was sued by a competitor.


    The lawyer believes there is a chance of 75% that the court will not dismiss the case and the entity will incur and outflow of benefits. If the
    court rule in favor of the complainant, the lawyer believed that a 75% chance of paying 3,000,000 damages and a
    25% chance of paying 1,500,000 . Other amounts of damages are unlikely.
    There is no indication that the claimant will settle out of court.
    A risk adjustment of 10% is considered to appropriately reflect uncertainties in the cash flow estimates.
    The court is expected to rule in late December 2021.
    The discount rate is 12% and the PVF of 1 is 0.89
    How much is the provision on December 31, 2020 (round-off answer to the nearest peso value)?

    Suggested solution:
    Amount Probability % Chances % Expected Value
    3,000,000 75% 75% 1,687,500
    1,500,000 75% 25% 281,250
    Total expected value (Weighted probabilities) 1,968,750
    Risk adjustment 1,968,750
    10% 196,875
    Adjusted expected value (Undiscounted cash flows) 2,165,625
    PVF 0.89
    Provision, December 31, 2020 ₱ 1,927,406.25

    3. In 2020, Dublin Company began selling new line of products that carry a two year warranty against defects.
    Based upon past experience with other products, the entity estimated warranty costs as a percentage of peso sales.
    First year of warranty 2%
    Second year 5%

    2020 2021
    Sales 5,000,000 7,000,000
    Actual warranty cost 100,000 300,000

    How much is the estimated warranty liability at December 31, 2020?

    Suggested solution:
    Sales - 2020 5,000,000
    Warranty percentage - total 7%
    Warranty expense, 2020 350,000
    Less: Actual warranty cost - 2020 100,000
    Estimated warranty liability, December 31, 2020 ₱ 250,000.00

    Estimated warranty liability, January 1, 2021 250,000


    Estimated warranty liability for 2021 sales:
    Sales - 2021 7,000,000
    Warranty percentage - total 7%
    Warranty expense, 2021 490,000
    Less: actual warranty cost - 2021 300,000 190,000
    Estimated warranty liability, December 31, 2021 ₱ 440,000.00

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