“moms Problem 41 aay | Tey Company provided the following facta regarding pending 2 fon December 3, 2003 ‘The entity is defending against a fret lawsuit and believed. there is a 51% chance it will lee in court. The entity ‘estimated the damages from the lawsuit at P1,000,000, ‘Tho entity is defending against a second lawsuit for which ‘management believed it is virtually certain to lose in court fit loses the lawsuit, management estimated damages will fall somewhere in the range of P3,000,000 to 5,000,000 with each amount in that range equally likely ‘The entity is defending against a third lawsuit but the relevant Joss will only occur fat into the future. ‘The resent values of the endpoints of the range are 1,500,000 and P2,500,000. ‘The management believed the effects of time value of ‘money on these amounts are material but alao believed the timing of these amounta is uncertain, * The entity is defending against « fourth lawsuit and believed there is only a 25% chance it will love in court. Af the entity loses, management believed damages will fall somewhere in the range of P3,000,000 to 4,000,000 with each amount in that range equally likely to occur, Required: Indicate how the entity would disclose or account for the four lawsuits under IFRS in tho financial statements forthe xyear ended December 31, 2022, ua Problem 4-2 (AA) Mourne Company. provided the following selected transactions related contingencies. The focal sear ends fn December 31; 2022 and financial statements are osued tah March 31, 2033 * Bourne is involved in a Jaweuit resulting from « dispute With a customer over 2022 tranaaetion. On DesetRber 31, 2022, attornoye advised that it was probable that olume would Tone P3,000,000 in an unfavorable outoome On February 15, 2023, judgment was rendered againat Bourne inthe amount fP4,000,000 plus interest P500,000. Bourne didnot plan to appeal the judgment Since August 2022, Bourne had been involved in labor dispute. Negotiations between the entity and the union have not produced a settlement. Sines January 2022 strikes have been ongoing at these facilities, Ie is virtually certain that material costs will be incurred but the amount of resultant costs cannot be adequately predicted Bourne isthe defendane ina lawsuit filed in January 2028 Jn which the plaintiff seeks 25,000,000 as an adjustment to the purchase price related to the sale of Bourne's hhardvood division in 2022, The lawsuit alloged thet Bourne misrepresented the division's ateets and labities, Legal counsel advivod that it is reasonably possible that Bourne could lose P2,000,000 ut that it fv extremely unlikely it could lose the 8,000,000 asked for * On March 1, 2023, the provineial government is in the rocess of investigating the possibility of environmental Violation by Bourne but has not proposed a penalty Management believed an assessment is reasonably possible and ifan assessment ie made, a setloment of up {0 P4,000,000 is probable Required: Prepare journal entries that should be recorded as a result of the contingencies ua43 (IAA) Bastern Company provided the following information on December 31, 2022, * ipl ik estes ease ‘The attorneys believed it ie probable that the assessment ‘ean be reduced on appeal by 50%. The appeal is expected ‘take atleast « year * In July 2022, Pasig City brought action against Eastern Company for polluting the Pasig River with Its waste products, It is probable that Pasig City will be successful but the amount of damages the entity might have to pay should rot exceed I, 500,000. Eastern Company signed as guarantor for a P1,000,000 loan by First Bank to Northern Company, a principal supplier to Eastarn Company Atthis time, there is a only a remot likelihood that Eastern Company wil have to make payment on bebalf of Northern Company. * Bastorn Company owned a manufacturing site that had now been discovered tobe contaminated with tonic waste ‘The entity had acknowledged its responsibility for the contamination, ‘An initial lean up feasibility study has shown that it ‘ill cost at least P500,000 to clean up the toxic waste * Eastern Company had been sued for patent infringement fan lost the case, A preliminary judgment of P300,000 was ‘sued and is under sppea ‘The entity's attorneys bolaved that itis probable that the ‘entity wil lose this appeal. Required: Prepare journal entries to recognize any provision at the fend of earent your m4 Problem 4-4 (IFRS) ‘Troy Company decided on November 1, 2022 to restructure the entity's operations * Mindanao Branch would be closed dawn November 80, 2022 to concentrate on Manila operations. * 200 employees working in Mindanao Branch would be retrenched on November 30, 2022, and would be pai their accumulated entitlements plus three months! wages ‘The remaining 50 employees working in Mindanao Branch would be transferred to Manila, which would continue operating. * Five executives would be retrenched on December 31, 2022, and would te paid cheir accumulated entitlements plus three months’ wages * The 200 retrenched employees have left and their accumulated entitloments have been paid. However, an amount of P1,500,000, representing portion ofthe three ‘months’ wages for the retrenched employees, has sull not been paid, * Costs of P400,000 were expected to be incurred in ‘transferring the 50 emplayees to their new work in ‘Manila, The transfer is planned for January 19, 2023, * Four of the five exccutives who have been retrenched hhave had their accumulated entitlements paid, including the three months’ wages. However, one remaine in order to complete administrative tasks relating to the closure ‘of Mindanao Branch and the transfer of staff to Manila, ‘The executive is expected to stay until January 31, 2023, His salary for January will be P50,000 and h retrenchment package wil be P200,000, al of which wil be paid on the day he leaves, He estimates that he would spend 60% of hie time administering the closure of ‘Mindanao Branch, 30% on administering the transfer of staff to Manila, and the remaining 10% of general administration. Required: Prepare journal entry to record the provision for restructuring. AV45 (AA) Western Company provided the following selected transtetions related t9 contingencies, ‘The fiscal year nde December 31,2022 Financial statements are issued on April 1, 2023, * No customer accounts have been shown to be uuncollectible ns yet but Western Company estimated that 396 of credit sales may eventually prove uncollectible Credit sales amounted P30,000,000 for 202% Western Company offered a one-year warranty against manures deft for alte poste ay apericnce indeated chat warranty costs approximate 2% of credit sales. ee Actual warranty yenditures totaled 360,000 in 2022 and wore recorded ‘warranty expense when incurred. In December 2022, Western Company became aware of fn engineering flaw in a product that poses 8 potential Fink of injury, Asa result, a product reeall appears inevitable. This move would likely cost the entity 1,500,000, * In November 2022, the City of Mapita filed suit against Western Company asking civil penalties and injunctive relief for violations of clean water laws, Western Company reached 2 settlement with the city government authoritos t9 pay’ Pa, 200,000 in penalties on February 15, 2025, * Westorn Company i the plaintiff in « P4,000,000 lawauit filed against customer for costs and lost profit from eontracts rejected in 2022, ‘The lawsuit sin final appeal and attorneys advised that it is probable that Western Company will be awarded 008 Required: Prepare the appropriate journal entries that should be recorded ay a result of each of these contingencies, If no Journal entry is indicated, state the reason why, 6 Problem 4-6 (IAA) Baron Company is involved with several situations about contingencies. The fiscal year ends Decomber 81, 2023 and the financial statements are ietued on Murch 31, 2023. * On Mare 1, 2023, the city government ia inthe proces of Sfrerteating ponte chen! lenis n Baron Companys {atts but as not proposed decency sasesetnen Management believed an aa reasonably poseible and if an assessment ie made an unfavorable ‘Settlement of up to P4,000,000 is reasonably possible, * Boron Company inthe paint a P3000 000 lvaut filed against Faye Company for damages due to lost profit ‘om rejected contracts and for unpaid accounts receivable ‘The cae isin final appeal and legal counsel advised that it is probable that Baron Company will prevail and be swared P2500000. * Ip July 202, the pron government il ut agunat fron Company seeking civil penalties and injunctive gels for lation ef govironmental law regulating hazardous waste. On February 15,2028, Baron Company reached a settlement with state authorities, Baked upon diseus Company believed required t9 cover Baron Company believed that the ultimate settlement ‘of this claim wll hot have a material adverse effect. ms with legal counsel, Baron ‘robable that P2,000,000 will be 2 coat of violation. Baron Company was invelved in « lawsuit resulting from a dispute with a customer, On January 5, 2028, judgment was rendered against Baran Company in the amount of P1 900,006 plas Intereat of P00 000. Baron Company planned to appeal the judgment but was unable to predict st outcome though itis not ‘apected to have'a material advere elect onthe entity. Required: Propare any necessary journal entries to recognize the situations involving contingencies. at* Qadanuae 2022 Paton Company purchased oni tanker ‘ta cost of P6,000,000. The entity is expected to operate the depot for 5 years after which itis legally required to inmantle the depot and remove the underground storage tanks. The oil tanker depot is depreciated using straight line with no residval value, tis reliably. estimated that the cost of decommissioning the depot will amount to P1,500,000. The appropriate Aiscount rate is 10%. The present value of 1 at 10% for 5 periods is 0.62, ‘On December 31, 2026, after 5 years of operating the depot, tho entity paid a demolition entity to dismantle the depot at ‘8 price of P1,700,000. Required: 1. Prepare all journal entries for 2022. 2 Prepare all journal entries on December $1, 2026 Problem 48 (IAA) On January 1, 2022, Stanford Company purchased a ining site that will have to be restored to certain specifications ‘when the mining production ceases. "The cost of the mining site is PS,000,000 and tho restoration coat is expected to be 2,000,000. It is estimated that the ‘mino will continue in operation for 10 years. 8%. The present value of 1 "The appropriate discount rate at 8% for 10 periods is 0.4692. ‘On December 81, 2031, the entity contracted with another ‘entity for the restoration of the mining site in accordance ‘with specifications ata cost of P1,800,000. Required: 1. Prepare all journal entries for 2022. 2 Prepare journal entry to record the settlement of the ‘decommissioning liability on December $1, 2081 us Problem 4-9 (IAA) On January 1, 2022, Camille Company purchi Aetoxification facility for P8,000,000. ed a gas ‘The cost of cleaning up the routine contamination eaused by the intial location of ga om the property is estimated to be 1,500,000. ‘This cost will be incurred in 10 years when all ofthe existing stockpile of gas is detoxified and the facility is Aditional contamination may occur in succeeding years that the facility is in operation, On January 1, 2024, additional contamination clean up cost i estimated at P200,000 ‘The appropriate discount rate is O%. ‘The present value of 1 at 6% is 0.63 for 8 periods and 0.56 for 10 periods, On December 81, 2081, the entity paid contractor an amount of P2,000,000 for the decommissioning of the detoxication facility, Required: 1. Prepare journal entries in 2022 in relation to the ‘detoxification facility and the decommissioning Liability 2 Prepare journal entries in 2024 in relation to the detoxification facility and decommissioning lisbility. 18. Prepare journal entries on Docomber 81, 2081 to record the derecognition of the detoxification facility and the sottloment of the decommissioning lability. 19Problem 4-10 (IFRS) ‘Toyo Company owns a car dealership that it uses for servicing ears under warranty. In preparing the {mmancial 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's experience with warranty claims 609% of all cars sold in a year have zero defect, 25% ofall cars ‘old ina year have normal defect, and 15% of all ears sld in ‘year have significant defect. ‘The cost of rectifying a normal defect in a car is P10,000. The cost of rectifying a significant defect in a eat is P3000, ‘The entity sold 500 cars during the year. What amount should be reported as expected value of the warranty provision for the current year? @ 3,500,000 %. 1,700;000 Problem 4-11 (IFRS) Chato Company sells electrical goods covered by a one-year warranty for any detects Of tho sales of P70,000,000 for the year, the entity eatimated ‘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 tho products sold had major defect and 3,000,000 if all had minor defect. What amount shouldbe recognized as warranty provision? 000000 5is0900 @ 300,000 1.000 120 Problem 4-12 (IFRS) During 2022, Odyesey Company isthe defendant in a patent infringement lawsuit ‘The entity's lawyers believed there ism 30% chance that the court will dismiss the case and the entity will incur no ‘outflow of economic benefits However, if the court rules in favor of the claimant, the lawyers believed that there is @ 20% chance that the entity will be required to pay damages of P200,000 and an 80% chance that the entity will bo roquired to pay damages of 100,000. Othor outcomes are unlikely The court is expectod to rule in late December 2028. There is no indieation that the claimant will etle out of court A 7% risk adjustment factor to the probability-weighted expected cash flows is considered appropriate to reflect the ‘uncertainties in the cash flow estimates, An appropriate discount rate is 6% per year. The present value of Tat 5% for one period is 0.95 1. What amount should be recognized as undiseounted cash flows for the provision? rp ar ieee ese 2 What amount should be reported as provision for lawsuit ‘on December $1, 2022? 8. 95,000 79.800 53200 CY 85.386 anProblem 4-13 (IFRS) During 2022, Libya Company is the defendant in a breach of patent lawsuit ‘The lawyers believed there js an 80% chance that the court ‘vill not dismiss the cdse and the entity will incur outflow of benefits If the court rules in favor of the claimant, the lawyers believed that there is a 60% chanco that the entity will be ‘required to pay damages of P2,000,000 and a 40% chance that the entity will be required to pay damages of P1,000,000. Other amounts of damages are unlikely. ‘There is no indication that the laimant will settle out of court The court is expected to rule in late December 2023, |A.7% risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow centimates ‘The appropriate discount rate is 10%,"The PV of 1 at 10% for fone period is 91 1. What amount should be recognized as undiscounted cash ows for the provision? ® 1389,600 1,280,000 1,600,000 ‘4. 1,712,000. 2, What amount should be reported ‘on December 81, 20227 a 2.730000 138.000 @ tate 1164800 provision for laseuit ane Problem 4-14 (IAA) Nemton Company involved in itigationrepirding a fault product sold in a prior year. cites eee The entity bas conse wth a storey and determined thas th entity my lve te che Th trey esa that there is a 50% chance of losing. ms FY If this is the ease, the attorney eatimated that the amount of any payment would be P5, 000,000, What is the-required journal entry as a result of this Ligation? 4 Debit tkgntion expense and credit tigation P5,000,000. . ee No ouenl entry is rquired Debit litigation expense and credit litigation lab Sean ae tigation Liability abit litigation expense and credit litigation liabit -P3, 000,000. : = nara bility Problem 4-15 (AICPA Adapted) ‘On March 1, 2022 a suit was filed against Dean Company for patent infringement, Dean Company's logal counsel believed an unfavorable ‘outcome is probable and estimated that the entity will have ‘tw pay between P850,000 and P900,000 in damages However, Dean Companys legal counsel was of the epiion ‘hat P600,000 would be a betta estimate than any thaother Amount inthe range ‘The situation was unchanged when the December 31, 2022 Sinancial statements were Feleased on February 15, 2023, What amount soul be asrued a bility on December 2022 in connection with this suit? me A a, 90,000 Berto © sinono ioe 12aProblem 4-16 (AICPA Adapted) During 208%, Manfred Company guaranteed » supplier's 500,000 loan from a bank ‘On Ostober 1, 2022, the entity was notified that the supplier Jhad defaulted on the loan and filed for bnkruptey protection. ‘Counsel believed the entity will probably have to pay P250,000 ‘under its guarantec. ‘As result ofthe supplier's bankruptcy, the entity entered into ‘contract in December 2022 to retool its machines eo thatthe entity could accept parts from other suppliers. Retoling costs are estimated to be P300,000. What amount should be reported as accrued liability on December 31, 2022? @ 250,000 ‘60,000 ©. 550,000 4, 750,000 Problem 4-17 (AICPA Adapted) During 2022, Boal Company became involved ina tax dispute ‘with the BIR. On December 31, 2022, the entity’ tax advisor believed that an unfavorable outcome was probable and the best estimate of additional tax was P500,000 but could be as ‘much a8 P65O,000, ‘Afver the 2022 financial statements were issued, the entity recoived and accoptod a BIR sottloment offer af P550,000, What amount of accrued liability should be reported on December 31, 2022? a. 650,000 ‘360,000 500,000 ° 134 Problem 4-18 (AICPA Adapted) On February 5, 2028, an employes fled P2,000,00 lawsuit ‘nat Seat Company for damages sllered when «lant ofthe entity exploded on December 29, 2093 ‘Tho enttys legal counsel believed the eusity will probably Tove the lawoit and eatimated the lose tbe P5000 ‘Tho employee has offered to settle the lawsuit out of court for P90G,000 but the entity wil not sgree to the eetilomnent On Descinber 31, 2022, what amount should be reported ae sccrued babiity? 2,000,000 & Toan}o00 em eons ane ane a eas Qn November 25, 2022 an explosion occurred at a Rex Company plant causing extensive property damage to area buildings. By March 10, 2025, claims had been asserted againat Rex Company ‘The management and counsel concluded that it is probable Rex Company will be responsible for damages, and that 3,500,000 would be a reasonable estimate of the ibility. Rex Company had a P10.000,000 comprehensive public lint peliey with P00, 000 deductible clause: ae firancial statement for 2022 were tamed on March 20, 2033 1. What amount of loss from lawsuit should be sported in the income statement for 2022? cones ee 2 What amount of liability from lawsuit should be roparted on December 31, 20237 3,500,000 177500000 = 1'300,000. 4 "750,000Problem 4-20 (IAA) Winter Company ia boing sued for illness caused to local residents asa result of negligence on the entity’s part in permitting the local residents to bo expoood to highly toxie ‘hemicala from its plant. ‘The entity's lawyer stated that it is probable thatthe entity will lose the suit and be found liable for a judgment costing the entity anywhere from P1,200,000 to P6,000,000. “However, the lawyer estimated that the most probable cost ‘is P3,600,000, What amount should be aceruod and disclosed? ‘4. A loss contingency of P1,200,000 and disclose an ‘additional contingency of up to P4,800,000. {A lose contingency of P3,600,000 and disclose an ‘additional contingency of up to P2,400,000. ‘e. A loss contingeney of P3,600,000 but not disclose any ‘additional contingency. 4. No loss contingency but disclose a contingency of 1,200,000 to Pe, 000,000, Problem 4-21 (AICPA Adapted) [At yearend, Mith Company was a defendant in a pending lawsuit. In the opinion of the entity's attorney, itis probable that ‘Mith Company will have to pay P500,000 and its reasonably possible that Mith Company will have to pay P600,000 as a ‘onult ofthis lawsuit. ‘What should be reported in year-end financial statements? a, An acerued lability of P500,000 ony. Ba scored lability of P500.000 and digslosure of ontingent lisilityof 100,000 An accrued liability of P60, 000 only. 4. No information about this laweuit. 16 Problem 4-22 (AICPA Adapted) In May 2022, Caso Company filed suit against Wayne Company seeking P1,800,000 damages for patent infringement. A court verdict in November 2022 awarded Caso Company 1,500,000 in damages but Wayne Company appe verdict and the appeal is not expected to be decide 2023. ‘The legal counsel believed itis probable that Caso Company will be successful against Wayne Company for an eatimated amount in the range between P800,000 and P1, 100,000, with 1,000,000 considered the most likely amount What amount should Caso Company record as ineame from the lawauit for the year ended December 31, 2022? ‘1,800,000 1,100,000 1000,000 ) 0 Problem 4-28 (AICPA Adapted) During 2022, Smith Company filed suit against West Company seeking damages for patent infringement, On December 31, 2022, the legal counsel believed that it was probable thet Smith Company would be successful against West Company for an estimated amount of P1,500,000, ‘On March 31, 2028, Smith Company waa awatded P1,000,000 and received fll payment thereof, The financial statements wore issued March 1, 2023 In Smith Company's 2022 finencial statements, how should this award be reported? 1. As a receivable and revenue of P2,000,000. 1. As a receivable and deferred revenie of P1,000,000, As a disclosure of a contingent asset of P1000, 000, ‘Asa disclosure of @ contingent ascet of P1500, 000. 427Problem 4-24 (AICPA Adapted) Haze Company won a litigation ch was tripled to P4,500,000 to include punitive damages. ‘The defendant, who is financially stable, has appeeled only ‘the 3,000,000 punitive damages, Haze Company was awarded 5,000,000 in an unrelated suit it filed, which is being appealed by the defendant. Counsel is unable to estimate the outcome of these appeals ‘What amount of pretax gain should be reported? & 1,500,000 41500,000 ©, 5,000,000 4. 9'500,000 Problem 4-25 (AICPA Adapted) ‘Tone Company was the defendant in & lawsuit filed by Wit Company in 2021 disputing the validity of copyright Held by ‘Tone Company. Qn December 31, 2021, Tone Company determined that Witt Company would probably be successful for an estimated ‘amount of P 400,000. Appropriately, a P400,000 oss was acerutd by Tone Company bby acharge to income for the year ended December 31, 2021 On December 31, 2022, Tone Company and Witt Company iagreed to a setilement providing for cash payment of P250,000 by Tone Company to Witt Company and transfer of ‘Tone Company's copyright to Witt Company. ‘The carrying amount of the copyright of Tone Company wa 50,000 on December 31, 2023, What would be the effect ofthe settlement on Tone's income before tax in 2023? 150,000 incres 128 Problem 4-26 Multiple choice (IFRS) 1 Which is the correct definition of a provision? ‘A possible obligation arising from past events DA ikeitg of uncertain ming or uncertain emount © A liability which cannot be easily measured 4 An obligation to transfer funds to an entity 2.A provision shall be recognized when 4. Anentiy ha present bation ga eu ofapastevent is probable that an outow of resuree tnbodying secnom nea wl be required to sce se iat gy Thoamountof the obigation can ve meured eiably @ Alvot these are required for the recognition of « Provision hibit 8. legal obtigotin isan obligation that is derived from all of the following, except Adasen rey Outer pera oie & Av soeabithed pater of pase 4. An entity has an established pattern of practice or stated policy that has created valid expectation that it will Accept certain financial responsibility. @ Constructive obligation Legal obligation. © Onerous obligation «d. Possible abligation 5.[t is an event that creates a legal ot constructive obligation because the entity has no other realistic alternative but to settle the obligation, GF Obligating event bY Past event © Subsequent event Current event 1296.An outflow of resources embodying economic benefits is regarded as'probable when ee OTSA IN a feet wi eae We Harpeth te Bale patty tut te set nl ¢ anprtlliat oe il cates le eame Dipper inruc se loan 4 epedetlig thaliana s Bay 7. Whe there it cntinui range of ole outa, tnd each point in that range isa likely any other, ange tobe used is the oe « ieioes C4. Summation ofthe minimum and maximum 8. When the provision involves a large population of tems, the entimate of the amount SP @) Reflects the seeighting of all possible outcomes by © their associated probabilities %, Invdetermined aa the individual most likely outoome, ©. May be the individual most likely outcome adjusted. for the effect of other possible outcomes, 4, Midpoint of the possible outoomes ‘9. When the provision arises from a single obligation, the catimate of the amount ‘a. Reflects the weighting of all po their associated probabilities. by, ln determined athe individual most ikely outcome ) Ie the individual most likely outcome adjusted for the effect of other ponsible outcomes «4, Midpotne ‘of the posable outzomes le outcomes by 10. The present value in a range of possible outcomes all discounted using the same rate Would be a. The mostlikely outsome 8. ‘The maximum outcome ‘¢ The minimum outeome 4) The sum of probebilty-weighted prosent value 130 Problem 4-27 Multiple choice (IFRS) 1LA provision shall be recognized for ‘a. Future operating losses 1, Obligations under insurance comeacts cc. Reductions in fair value of financial instruments G Obligations for plant decommissioning costs 2, Provisions shall be recognized for all ofthe following, except 1. Cleaning-up costs of contaminated land when an cil entity has a published policy that it will undertake to clean up sll contamination that it causes b, Restructuring costs after a binding sale agreement. cc. Rectification coste relating to producte sold. @ Future refurbishment costs due to introduction of a row computer system, 8. An entity in closing one ofits operating divisions, and ‘the conditions for making restructuring provision have ‘been met. The closure will happen in the rst quarter of the next financial year. At the current year-end, the entity as announced the formal plan publicly and is ealeulating the restructuring provision. Which of the following costs should be included in the rostructuring provision? ‘4. Retraining staff continuing to be employed 3. Relocation costs relating t staf moving to other GC Contractually required costs of retiring staff boing ‘made redundant from the division being closed 4. Future operating losses of the division being closed upto the date of closure 1a“Ais entity has beon served’ legal notice at year-end by the Department of Environment and Natural Resources to ft smoke detectors iu ita factory on or before middle of the next yoar. Tho cost of fitting smoke detector ean, ‘be measured relisbly. How should the entity treat this in the financial statements at yearend? 4. Reponie a provision forthe current year equal to yeni tt Recognizes proson fr the current year eal to tne half uly of the cxtinated amount. CQ Naorovison o recognize! 9 unread bees thre {eo proven oligaion forthe ftareexpendesre tine the emt ca avoid the fire expendtre by Stocing the wothd of portions, bat danas ee, a eo aha 5.An entity operates chemical plants. The published policies include a commitment to making good any ‘damage caused to the environment by its operations. The entity has always honored this commitment, Which of the following scenarios relating to the entity ‘would give rise to a provision? ‘4. On past experience it is likely that a chemical spill ‘whieh would result in having to pay fines and penalties ‘will our in the next year b, Recent research suggest there is « possibility that the entity's actions may damage surrounding wildlife. ¢. ‘The government has outlined plans for a new law ee ‘all environmental damage to be rectified. ‘A chemical spill from one of the entity's plants has fauised harm to the surrounding area and wid 192 Problem 4-28 Multiple choice (AICPA Adapted) 1.Am entity did not record an accrual for a present ‘obligation but digelose the nature of the obligation and the range ofthe loss. How likely ie the loss? © Probable” 2 The ein thatthe itre evn will or wl not oout can be expressed by a range of outcome. Which ran ‘moans thatthe future event occurring is very sight) a. Probable & Reasonaby posse ©, Certain @ Remote 8. An expropriation of assot which is imminent and for which dhe amount of oes can be reasonably estimated shoud a. Aceried i, Disclonea Y Aoerued tind disclosed Ignored 4.4 present obligation that is probable and for which the mount can be rehably estimated should '&. Not be scerued but disglosed in the notes to the fineneial statements, b. Betaccrued by debiting an appropriated retained farnings account and crediting « ability account. e. Be accrued by debiting an expense aeouat and ‘rediting an appropriated retained earni We necrued by debiting an expense a crediting # libiity account 5. Gener oF unspecified contingencies should ‘Be accrued in the financial statements and disclose. Not be aoerwed and need nat be disclosed, fe. Not be acerued but should be disclosed, ‘dL Bo accrued but need not be disclosed. 133Problem 4-29 Multiple choice (IAA) 1, Contingent liability will or will not become actual liability ‘depending on ‘4. Whether probable and measurable. The degree of uncertainty ¢, The present condition @ The outoome of a futire event 2 Accontingentlibility shall be rosogived when Any lawsuit is actualy filed against an entity. 1b Tels certain that funds are available to pay the amount of the claim ¢. tis probablo chat » liability has boon inourzed but the amount cannot he reliably measured. ‘They unt ofthe loss ean be reliably measured and it is probable prior to issuance of nancial statements that a Laity bas been inexred 48 How should a contingent lability be reported in the financial statements when its reasonably possible? a. As a deferred labilicy ‘Ae an accrued liability ‘As a disclosure only 11. As.an account payable 4 Reporting in the financial statements is required for ‘Loss contingency that is probable and meastrable ‘Loss contingency that is remote and measurable © Loss contingency that is possible and measurable 4. All Tose contingencies 5. A contingent liability ‘Definitely exists as lability but the amount and due date are indcterminable be, Is cerued even though sot reasonably estimated. In the result ofa las contingency ‘not recognized in the nancial statements. 134 6. A contngent liability is An estimated liability. G® An event which is not recognized because it is not probable that an outiow wil be required or the amount fannot be reliably estimated ‘eA potential large liability 4. A potential amnalllsbiits 7. A contingent Kiabilty Has a most probable value of zero but may require a payment ifa given future event occurs,” b, Debinitely existe as a liability ‘Is reported as current Labi. 4. Is not disclosed in the financial statements, 8, Disclosure is usually not required for Probable ‘and measurable contingent gain Possible and. measurable contingent loss Probable and immeasurable contingent loss 4) Remote and measurable contingent loss 9. An entity received notification of egal uction. How should the probable and mearurable lose be reported? ‘As a lose recorded in other comprehensive inconie 1. As a lose in the income statement and a contingent liability As loss in the income statement and a pzovision @. In che notes to financial statements 10, Which of the following is not considered when evaluating whether or not to record a ability for pending tigation? ‘Time period of the underlying cause of action ‘The type of litigation involved. ©. ‘The probability of an unfavorable outcome 4. The ability to make a oliable estimate ofthe Las 138 7Problem 4-80 Multiple choice (IAA) 1. Contingent aset is usually recognized when Reali Occurrence is reasonably possible andthe amount can ty reliably measured Occurence is probable and measurable 4. The amount can be reliably measured 2, Which ie the proper treatment of contingent asst? a. An accrued account 3. Deterred income ‘An account receivable ) A ecosure only in contingoncy that is remote and measurable 4 Must be disclosed in note to financial statements, 1b. May be disclosed in a note to financial statements ©. Must be reported in the body of the financial ‘Should not be reported or disclosed. 4A. Which i the proper way to report a contingent asset receipt of which is virtually certain? @aAsan asset “B As unearned evenue ©. As a disclosure only 4 No disclosure and no accrual 5. What is the proper treatment of a patent infringement ‘aze of the plaintiff with probable favorable outcome and, measurable settlement? ag No roporting is required at this time GS Disclosure A gain forthe minimum settlement A gain for the probable settlement 136 CHAPTER 5 BONDS PAYABLE Fair value option TECHNICAL KNOWLEDGE To understand the nature and purpose of a bond. To identify the types of bond. To know the measurement of bonds payable, To understand the concept of bond premium’ and bond discount. : To describe the methods of amortizing bond Premium and bond discount, ‘To apply the fair value option of measuring bonds payable, 137